Strategy

Selling: Wooing clients in the age of piety

Entertaining isn't only about having fun on the company dime. It's about building relationships.

The sad, prolonged decline of the three-martini lunch began in 1976, when Jimmy Carter condemned corporate tippling as a sign of social inequity. In the midst of the U.S. presidential campaign, Carter complained the wealthy received tax breaks for their “$50 martini” lunches while truck drivers could not expense their $1.50 sandwiches. Incumbent Gerald Ford responded by portraying lunchtime drinking as an almost patriotic act. “The three-martini lunch is the epitome of American efficiency,” he said. “Where else can you get an earful, a bellyful and a snootful at the same time?”

Carter won the election, Ford retired to his preferred lifestyle of two (sometimes three) martinis at the end of each day, and business lunches became sober affairs. Changing tax laws and social norms meant the three-martini lunch never regained its popularity. Nonetheless, ensuing boom years swelled expense accounts once again, and businesses found new ways to strut success and entertain clients, reaching new heights of excess. In 2002, five bankers in London spent $62,700 on a single dinner, including a $17,500 bottle of wine. In 2005, the CEO of a New York brokerage allegedly spent $40,000 entertaining a client at a strip club. Corporations spent $2.8 million on hospitality tents at a single golf event, the U.S. Women’s Open, in 2006.

But now, three decades after Jimmy Carter’s sermonizing, another president is scoring populist points by railing against “fat-cat bankers,” and a new age of corporate puritanism is upon us. In an era of high unemployment and expense scandals, nobody wants to be seen whooping it up with company funds. Businesses were once expected to wine and dine clients. Now schmoozing is seen as practically criminal. But by abandoning this age-old tradition — and foregoing the very real and often lucrative benefits of client entertaining — businesses risk hobbling themselves. In this rush to piety, some argue, plain good sense is getting lost.

Part of the problem with corporate hospitality is that its value is hard to quantify on a balance sheet. But those who have been in business for decades insist the value is there in building trust and camaraderie between parties. The Bank of America, for instance, estimated in 2006 that it got a three-to-one return on its investment on its hospitality suite at golf tournaments. “Here’s the bottom line: people prefer to do business with people they like,” says Robin Jay, author of The Art of the Business Lunch. “Things don’t happen in business until people see you and know you’re not the devil.”

The fabled three-martini lunch was born of this emphasis on face time with clients. Beginning in the early ’50s, “mad men” would meet with the man in the grey flannel suit to strike deals over steak, stogies and scotch. “It was really about relationships and how we grow together,” says Alan Middleton, a former ad man who now teaches at York University’s Schulich School of Business. “This was not an era of cost conservation. The idea of doing business on a golf course, or over a long liquid lunch, or client dinners in the evening, was very much part of the culture.”

And lest anyone think period films like North by Northwest or recent portrayals like Mad Men overstate the era’s debauchery, veterans confirm the depictions are accurate. “There would be guys who had regular tables,” recalls Arron Barberian, manager of Barberian’s Steak House in Toronto. “Their guests would roll through, but it was an everyday occurrence to see certain guys in the dining room with two, three martinis.” (An interesting fact: The standard lunch martini at Barberian’s was a double.)

Jay, who worked in advertising for decades, recalls taking a pair of clients for lunch at the Palms Hotel in Las Vegas. “They had lobster bisque and lobster salad,” she says. “They would have ordered lobster sundaes if the restaurant had them.”

Lunchtime became far less opulent in the years following Jimmy Carter’s condemnations. In the U.S., the tax deduction for business entertaining was reduced to 80% from 100% in 1986, and then to 50% in 1993. The Canadian government halved its tax deduction for business entertainment to 50% in 1994. Changing social attitudes toward excessive drinking watered down the liquid lunch even further. “It was [once] expected that the cocktails in the evening would be on the company,” says Vince Vitti, CEO of Directravel, a corporate travel management company. “That’s something you don’t see anymore, not only because of the financial impact but because most companies don’t permit their folks to drink during the workday.”

The advent of cellphones, fax machines and e-mail, along with a growing focus on productivity, also changed how business people relate to clients, says Middleton. “We went from a world where I had to sit in front of the customer to one where not every communication had to be personal, so not every communication had to be in an entertaining environment.”

As multiple martinis became less common at lunchtime, businesses found new ways to make their clients feel appreciated, from hospitality suites at the U.S. Open to champagne receptions at the World Economic Forum to Stampede parties at the Calgary Zoo. Over the past two years, however, these events were largely downsized or abandoned. Not only are budgets now tighter, but also the public has shown no tolerance for banks throwing lavish parties while accepting bailouts, or companies offering executive perks while ordinary workers lose their jobs.

Northern Trust, a U.S. bank that received a $1.6-billion government bailout, drew the ire of politicians and the public alike for spending money last February to fly hundreds of clients and employees to a PGA golf tournament in February, where they stayed in luxury hotels and attended a Sheryl Crow concert. Similarly, the Royal Bank of Scotland, which received a $33-billion bailout from the British government, faced an outcry for spending a half-million dollars to entertain clients at Wimbledon this June. “These people are quaffing champagne while making employees redundant,” complained one politician.

But current reforms could be considered equally extreme as companies make considerable efforts to avoid even the perception of indulgence. Goldman Sachs, which received more than $10 billion in taxpayer-funded assistance, last month banned company Christmas parties — even unsubsidized ones held at employees’ homes. To ensure nobody mistook a collegial lunch for a company party, the bank also forbade its employees from gathering outside the office in groups of 12 or more.

Last year, 55% of companies slashed their entertainment budgets, and 69% cut back on expense accounts, according to a survey released by KPMG last February. Restaurant traffic was down 4% in 2009, with fine dining restaurants suffering double-digit losses, according to the NPD Group, a Chicago-based research firm. Morton’s Steakhouse reported a 12.2% drop in revenue for its last quarter; Ruth’s Chris Steak Houses’ revenues were down 21.4%. While recovery is expected in 2010, restaurants’ alcohol sales will likely drop a further 2.5%, and 10.4% for fine dining spots, according to Technomic, a consulting firm.

No one disputes the need to adapt to the current climate, but some argue companies are now careening from austerity into hysteria. The problem was never with the practice of entertaining clients, but with the abuses of that practice. “It’s important you not go overboard…but you have to have that quality face time with your clients,” says Jay.

As North American businesses attempt to expand into emerging markets, the importance of corporate entertaining is only going to increase. “Our meetings are now with the Chinese, with the Brazilians, with India,” says Middleton. “In those societies, eating and drinking together is still a critical part of building relationships. You could no more have a totally online relationship with them than you could think of flying to the moon.”

After all, it is not like the business lunch was invented in the 1950s, says Barberian. “Going back to biblical times, we’ve done deals while breaking bread,” he says. “It’s not just that you’re getting a free meal. You’re getting to understand the person you’re doing business with. You understand them by having a glass of wine and relaxing.”

For restaurants that cater to a corporate crowd, staying in business has meant adaptation. Barberian’s dining room is still circled with phone jacks, an artifact from the days when waiters would bring a phone to the table for an important business call, but its clients now prefer the free wireless Internet. The business crowd now favours fine wine over martinis. And while Barberian concedes the business trade has dwindled at lunch, he says the experienced deal makers still recognize the value of the noon hour sit-down. “I’ll tell you, the big deals are still done over lunch.”