Client Service Agreements – low cost, big returns.

Long known for our inability to communicate effectively either orally or verbally (yes there is a difference) as accountants we’ve found new facades to hide behind. Our communication with our clients is typically limited to brief general conversations, and written communications mandated by professional standards, such as engagement letters. The email / text message / voice mail have supplemented the traditional letter facilitating the anonymity so many in our profession seem to prefer, with the frequent result being misunderstanding or no understanding at all.

In most firms, the engagement letter – conceived / drafted / revised / and re-revised by attorneys attempting to protect us from ourselves – has become the primary, and frequently only, verbal communication with our significant clients prior to performing the engagement. Yet it does nothing to inform the client of their obligations other than to pay, or what our responsibilities or requirements are. It is a legal letter. Not designed to communicate, but rather to provide a defensible legal position.

As a Firm practicing ‘pricing’ – advising the client of the cost in advance of providing the service – we automatically assume the pricing risk of ineffective engagement performance. Of course we can only influence the risk for matters over which we have control, so what happens when the client doesn’t perform as agreed? The scope of the engagement is extended. We refer to this as ‘scope creep’. Without an agreement defining the engagement it is highly likely the service provider, if a pricing firm, will unfairly suffer the financial responsibility.

Poor communication can be even more detrimental to a firm who ‘bills’ – adds up the hours charged and then multiplies the total by some arbitrary rate at the end of the month – and drops an unexpected invoice on the unwary client. (Michelle Golden a national marketing and practice management consultant to service firms referred to this process when speaking with me recently, as ‘bill and duck’.) The frequent result can include non-payment or loss of the client, but at a minimum a deteriorated relationship.  

Does the engagement letter cover either of these possibilities and define the engagement? Contractually, maybe. Operationally, absolutely not.

During my career I’ve noted that when contractual agreements lead to dispute, it is primarily because they were not drafted jointly, but rather unilaterally. One of the fundamental tenets of effective leadership is convincing all parties necessary to a transaction or course of action to take ownership of the process. Undeniably you are more likely to take ownership of decisions you have participated in making than those that have been forced on you. It is no different with written agreements. Unilateral decisions are simpler to make, more convenient and easier to implement, but less likely to be embraced. In other words, they are sometimes more efficient, but typically much less effective.

Engagement letters are unilateral. They are without input from arguably the most important party to the contract. The client. We essentially are telling the client to take it or leave it rather than striving for concurrence. In our Firm, while we obtain engagement letters for every engagement, we’ve also implemented the use of Client Service Agreements.  Ron Baker refers to them as Fixed Price Agreements in his book the Firm of the Future.

We’re primarily an audit firm, and most clients have a very rudimentary understanding of the audit process. The CSA gives us the opportunity to explain the engagement process. Simultaneously, it provides the client with an opportunity to educate our audit team so that we don’t inadvertently or unnecessarily interfere with their work flow. The CSA is not a unilateral agreement. We develop it jointly with the client.

Typically our CSAs cover our approach and what we need the client to do for us to be successful; what the client needs from us to make the engagement tolerable and successful from their perspective; scope of services; timing; responsibilities of all parties; the additional financial cost and potential for missed deadlines if the client doesn’t meet their responsibilities; detailed schedule of payment for services; and our service guarantee. Little of this, if you think about it, is covered in a typical engagement letter but all of which is critical to a successful engagement. Finally, in addition to our service guarantee we include a termination clause allowing either party to void the CSA if they become dissatisfied.

For us, the improved communication embodied by our CSAs has led to significantly improved engagement performance with happier clients. We have completely eliminated invoicing disputes and increased our accounts receivable turnover which has resulted in improved cash flow and profitability.

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