Does your bank pass the 'relationship banking' test?

Feature

posted 2 Oct 2001 in Volume 4 Issue 6

Does your bank pass the 'relationship banking' test?

All law firm management should take a few moments and try to pinpoint when the last time was they saw their bank manager? Or how many times has the manager changed since they started doing business with your bank. In short, firms should be assessing how well their bank knows, and understands, the nature and operations of the firm. Aidan Cullen, senior marketing manager at Allied Irish Bank, explains why your relationship with your bank is critical for a growing law firm.

No law firm can ignore growth

New business is the life-blood of any organisation within the service sector. For small and medium-sized law firms, winning new business is critical, especially in highly competitive areas such as commercial law. Of course, new clients spell increased revenue and usually more profits, therefore putting the firm on a sounder financial footing.

Previously, a firm might have made a conscious decision not to grow. In these instances, firms tended to be characterised by stability: a constant client base that is loyal to the firm; in some instances for generations. Today, this model seems outdated: clients have high expectations and are motivated far more by price. So even though growing the firm may not be a conscious objective, in many cases basic economics mean it is a necessity. Hence there is an emergence of a new generation of partners who have the entrepreneurial flair and business acumen necessary to drive the firm forward.

Understanding growth

That said, growing the firm needs to be underpinned by a sound strategy. So what are the key questions a managing partner needs to ask? The first concern, of course, is ensuring that growth is profitable; that it isn't growth for growth's sake, which is the downfall of many small businesses. Second, are systems such as IT and finance in place to cope with the inevitable growing pains?

A choice needs to be made between organic growth, versus growth through acquisition. Is it best to recruit partners who will bring new clients, as well as injecting further capital into the business, or to develop with existing partners? Acquisition is another option, although in reality the choice is rarely clear-cut.

A clear eye and an informed, objective perspective is often invaluable in these instances. Using your bank as a sounding board and drawing on the experience of its senior people can be invaluable. A good business bank will have account handlers with knowledge, not just of banking, but, of your business and your finances. They will be familiar with the issues and the challenges facing other companies right across the service sector, and will be able to help you scrutinise, challenge and refine your approach to growth.

It is so important to get outside help, because being a managing partner typically involves long hours with many demands on your time. This often means strategic planning is pushed to the boundary.

At Allied Irish Bank (GB), we advise the law firms we work with to make sure they use an accountancy firm with specialist legal knowledge. You can't treat a legal practice like any other kind of business: it is very different and has very specific financial needs. Much of the legal industry's cynicism results from banks mistakenly applying a 'one-size-fits all' approach, treating all businesses in the same way, and thereby failing to recognise the peculiarities of the partnership model.

Time spent researching the major business banks to identify the one that really understands legal industry issues is rarely wasted. Often personal recommendation and referral is the quickest and most efficient route.

To ascertain if a bank really caters flexibly for legal firms there are a number of questions the managing partner needs to be answered:

What would be the bank's attitude towards helping partners buy into a business?
Would it understand your need to extend your overdraft because client fees haven't yet come in?
Beyond the needs of the core business itself, how would your bank support individual partners?

A bank that really understands the partnership model might well offer preferential rates on partners' personal banking, such as borrowing facilities. This extends the business relationship with your bank to the personal needs of the partners.

The trend towards centralised banking

This research should help you identify those banks that believe in and practice so-called 'relationship banking' from those that don't. Often, the key differentiator is having short lines of communication and being able to deliver speedy decisions. This has a major impact on quality of service and, of course, customer satisfaction.

The banking industry has undergone some fundamental changes in the last decade. Branches have been slashed and numbers of local bank managers have dwindled as they are replaced by centralised business banking centres. This means that the crucial 'personal' relationship between bank and customer is becoming rarer by the day.

Clearly, many of the best-known banks are trying to reduce costs by cutting back on face-to-face interaction with customers, preferring instead to use other, cheaper channels such as the internet and telephone banking.

The result is 'virtual' banking. Mostly, this trend has been driven by a need to reduce costs in the face of tough competition. While this may have advantages for the consumer, it has serious drawbacks for businesses. Local autonomy to make decisions has been taken from local managers and put in the hands of business centres.

This trend has serious ramifications for your business. Let's take an example. You approach your bank for a loan to fund expansion. You might need larger premises or a new IT infrastructure. Your bank will often base its decision on your current financial situation, taking into consideration factors such as client retention and practice specialism.

The bank, rightly, will examine these issues before reaching its decision. The question, though, is who has the final say? It could well be a manager in a remote business centre, someone who has probably never met you and has little experience of the specifics of legal practice. In fact this is increasingly the case.

But what if, on the other hand, you are able to have a face-to-face meeting with a bank manager you have known for several years; someone who has worked with you through several stages of growth and is therefore attuned to the vagaries of legal work? Clearly, these decision-makers would approach the proposition differently and with significant information and insight into your business. Do not underestimate the importance of your bank and its potential effect on the development of your firm. We have sensed that law firms are reacting negatively to this centralised style of banking. Firms are looking for local bank managers, empowered to make speedy decisions that are critical when your business needs an urgent injection of funds. They are looking for less bureaucracy and greater consistency of service.

Phil Haslop, accountant at Teacher, Stern and Selby, a medium-sized city law firm, has given us feedback on the level of service he expects from his bank. He believes that service consistency from a bank is essential and wants to be able to pick up a phone, get straight through to his branch and speak to someone who knows his business - and him. But this is not always the case and many of Phil's past experiences are not atypical of the service law firms actually receive. There have been times when he has become so frustrated trying to arrange simple things like bankers' drafts, that after holding for ages and being transferred to several different people, none of whom he knew, he just gave up and hung up.

Within a bank, developing and maintaining a strong, people-based relationship with a firm isn't easy. It requires a considerable investment in staff training and development, and even the application of leading edge customer relationship management (CRM) techniques.

To find out how well your bank is doing in terms of customer service, there are several key factors that you should address:

Over the last couple of months has your bank really gone beyond the call of duty?
How has it added value to your business? For instance, does it provide more general business advice such as how you can grow your business?
How good is the account management?
Do you only hear from your bank when you go over your agreed overdraft?
Does your bank pay credit interest on current account balances?

It is only when banks really know their customers and understand their business that they can provide the optimum in advice and customer service. By having a strong, close relationship with your bank they can deliver advice, guidance and support.

What a growing firm is looking for is advice that will make it more profitable and efficient. For instance, a practice might be debating renting premises versus purchasing them. A bank should be able to advise that, with interest rates so low, it is currently much more tax-efficient for a group of partners to buy property under a pension fund, either through a property company or through other tax efficient methods, than it is to continue renting.

Advice, though, isn't everything. Relationships, as we all know, are built on trust. So you will want a bank that will use its knowledge of your firm and your business to grant flexible paying terms during the first vital year of expansion.

So, next time you pick up the phone and speak to a stranger who puts you on hold, brings up your account details because they know nothing about your business, and have to speak to several layers of management before making a simple decision, I would suggest you consider the other options. After all, would your clients tolerate this type of service from you?

Aidan Cullen is a senior marketing manager at Allied Irish Bank and can be contacted via mark.mccartney@grayling.co.uk.

Top tips on developing business

'Press the flesh' - network as much as possible by joining local business groups such as the CBI, chambers of commerce, etc,
Start a local marketing campaign to raise your profile,
Hold jointly - hosted seminars and events with other complementary professional service firms to attract prospects. This will make budgets go further and will broaden your audience,
Put regular time in the diary to focus on new business.

Six ways to take the pain out of growth

When planning expansion, keep costs such as equipment, IT, cars etc, fixed,
You need a detailed business plan, your bank should have the expertise to help you arrive at accurate figures,
Ensure you have controls in place to monitor key indicators like cashflow,
Make sure you record time spent on client work accurately,
Decide who will be responsible for managing the finances, whether it be a partner or a full-time/part-time financial controller,
Don't get caught in the cashflow trap: get your billing right and ensure bills are paid speedily.