If your firm is organized around service teams, you may find that understanding and managing their contribution is difficult.
It is not easy because it depends on several logic leaps that sound intuitive but are opaque.
For example, you may set goals and even reward them for keeping the clients in their portfolio happy. You may achieve this through a combination of client satisfaction surveys (e.g. “how happy are you with our services?”) and management assessments (“I think clients are happy with Sam”).
However, are you sure you measure the right things? And are you sure the weight of these factors is commensurate with their real importance to your business and your clients?
Intuitively, service teams should make their clients happy (and I am not saying otherwise).
However, how does happiness compare with cross-sales?
To answer these questions, you should take a closer look at the contribution of your service teams.
There are three crucial ways service teams produce financial results to your company:
They provide services to their clients efficiently.
Clients pay for services.
The income produced by these clients for services by the end of a year minus their variable costs is the contribution of that service team to the company.
They also reduce attrition and risk.
By building stable relationships, reducing the number of clients who go into rescue, and improving the effectiveness of rescue efforts, service teams ensure that their portfolio of clients will generate higher contribution over more extended periods.
There are different approaches to estimating this contribution, but the simplest is approximating it with an annuity payment of the NPV of future client contributions.
The same logic applies to risk, but in this case, the quantification is the cost of those risks.
They also generate new business.
The most common mechanisms for that are through cross-sales and referrals.
Over the course of a year, cross-sales contributions impact both the contribution and future contributions and the contribution of referrals are equivalent to the value of clients they generate.
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A client is using this framework to:
Set goals and define priorities.
One advantage of using this is that it becomes clear where you will “get the biggest bang for your buck” (i.e. “should you focus on improving efficiency or improving your referrals machine?”)
Note that the value of reducing risk & attrition and the value of new business depend on your current efficiency. Therefore, no matter how attractive the gains from lowering attrition and increasing growth are, this will never suggest that you neglect your present for future profits.
Likewise, because the value of new business also depends on risk & attrition, this will never suggest that you neglect your current clients.
Define the starting point of the pool for incentives.
Note that incentives depend primarily on your talent strategy and other HR considerations.
However, using this estimate as the starting point allows you to align your incentives with these objectives, has its drivers automatically aligned with their relative importance (more relevance to important drivers) and ensures that incentives will always trail results.
So, as service teams exceed their targets, part of the additional results created can be used for their incentives program.
Understand and manage their KPIs.
Many KPIs are important as guardrails, but – as long as they remain within a specific range – they have minimal impact on actual results.
For example, meeting SLAs is essential for client satisfaction and retention, but, once met, they may offer limited additional upside. Even worse, while you expect that meeting SLAs improves retention and growth, it is possible to have deteriorating retention and growth and improve SLAs.
This model allows you to understand which KPIs are directly impacting your results and which ones are just acting as guardrails, red flags and leading indicators – and manage them.
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So, managing your service teams based on their quantitative impact and improvement in margin contribution, retention, and growth allows you to align your goals and incentives and better understand and manage your KPIs.
