Relationship Accounting

“Get closer than ever to your customers. So close that you tell them what they need well before they realize it themselves”

-Steve Jobs

A new year has started, and with it comes the kick-off meeting to settle the goals for 2017. As I was planning the topics of the agenda, I remembered a book I read some years ago. 

“Selling the invisible” by Harry Beckwith deals on the best practices to sell intangible services, comparing them to the industry of products. When a customer buys a product, the simple physical existence of that product acts as a constant reminder of how satisfied they are, and what a good choice they made. But what happen with a service? Services are invisible and finite, which makes it difficult to create a positive and constant reminder to a customer. 

Beckwith states that many purchasers of services aren't even sure what it is that they are buying, since it hasn't typically been delivered yet. They are buying a promise of fulfilling a need. Clients typically cannot evaluate expertise, since they lack the technical skills with which to evaluate the expert. In most cases, they cannot tell whether a doctor's diagnosis was correct, whether a tax return was filed properly, or whether a marketing plan was crafted well. What he emphasizes is that the customer's motivation may be as much or more minimizing the consequences of a bad decision (Risk avoidance) than trying to get the very best service that might be available.

In the middle of the book he shows that it is more cost efficient and effective to keep a customer and increase his or her business with our organization than to acquire a new customer. And here he introduces a new term of RELATIONSHIP ACCOUNTING.

I would like to present the term adapting the example presented in the book of 1997, by using an accounting firm (Paciolli &Co.) in 2017.

The partners of Paciolli believe they are doing an excellent job with their clients: they fill in their taxes on time, deliver a quite reasonable financial statement, process payroll and send a monthly invoice for a fair price. Their clients are growing, as well their personnel. However, one day, just out of the blue, one of the top clients switches firm. How was this possible, if they have been doing their best and the firm did not have a single fine from the IRS?

 Let’s try to crack the code…

1.   Paciolli & Co. gets the engagement: once the client accepts the proposal, the partners of the firm believe they “win” the client. However, the client`s perception is different. In fact, the firm only “wins” the right to render a service. At this point, the client is the one assuming the risks by buying the promise of a service, and believes he is doing a favor to the accounting firm. Paciolli starts its relationship with its client in deficit.

2.    Delivery of services begins: a Senior of Pacciolli starts sending some drafts of reports, but stating in each email “we still have to check some accounts, because we are not sure what the previous accountant did” or “we still need to check if you have any tax exemption”. Some minutes after the secretary send their first invoice. The client is not sure if the information he receives is accurate or not (a “good product”), he is only certain that he has to pay a sum of money for a report that brings no added value. Now the deficit adds up to 2.

3.    The missing call: people makes mistakes…and one day the secretary forgets to tell the manager that the client needs to talk urgently to him. The manager is attending an audit of another client and he does not check his emails or whatsapp regularly. The next day everyone wakes up with an email (CC the partners of Paciolli) on “how can they have no answer of the whole team in 12 hours. Shameless”. The deficit adds up to 3.

4.   The first report: at last the assistants of Paciolli attain to send a proper report! They show their financials, the tax status, the payroll expenses, bank conciliations. They even make graphics and some recommendations. The client is satisfied for the first time, Paciolli marks its first credit in the relationship and the deficit is reduced.

5.   The gift of the partner: Once in a blue moon, one of the partners decide that it´s high time to reach for the client. So, they decide to invite the client to a fancy restaurant, play golf, or send a bottle of whisky. The client feels special, but deep down knows that the firm is trying to compensate for the previous operative mistakes. Besides, as time goes by, it is inevitable to make some errors: a missing deadline, copying the wrong person on an email, a typo, job rotation, etc. Most of the clients may forego this mistakes if Paciolli had a surplus in the credit side of the relationship. Which is clearly not the case…

Everyone is blissfully unaware on how much the debt has risen. It is not simple to keep track on every debit and credit on this relationship accounting, given that there are so many factors (both practical and emotional) that may affect our perception and the perception of our clients . Besides, people tend to avoid conflict and, thus, some clients hide their resentment and employees fail to communicate when they do (or are about to do) a mistake. Under this scenario “silence is NOT gold”: the lack of complaints does not mean we are delivering the greatest service.

Companies must learn to listen to their clients, and managers need to know how to “sense” the balance of these relationships. They must veil for teams which see the real value of their work, and truly understand the vital use of financial information. They can use their accounting methods to adjust some factors and, finally, be able to issue a “fairly reasonable” statement of relationship accounting.