When businesses first start they generally take on every client who contacts them because they’re trying to build their pipeline and grow, making a profit in the first few years isn’t the only goal. Often the new business isn’t quite sure of itself or it’s offering so sells its services at a slightly lower price than the competition, ensuring that they get paying customers in the door.
What tends to happen is that those clients who came to you at the outset are still there a number of years later, still paying the same low fee but expecting the first class service you gave them when they were your only customer. Your business has grown, you’ve expanded your client base and taken on new team members but you are still servicing old accounts which just don’t pay enough now.
The other scenario is that you had great success at the outset and your business quickly grew and grew. You took on new team members, leased some premises, and everything looked great for a few years. Now in a more mature state the business makes a profit but never quite enough to justify the hours you are spending working on it. The phone is ringing with new clients and you have enough in the pipeline to feel comfortable but the business isn’t reporting a good profit and you can’t pay yourself the way you should be able to.
So what’s the problem?
In scenario A you are over servicing accounts that were once good customers for you but the business has outgrown them. You are spending a lot of time on small accounts that don’t pay the fee you want to charge and when those clients don’t feel loved they shout, loudly, so your team spend an excessive amount of time dealing with them rather than spending time on the high value clients.
With complaints about service landing with your team, morale starts to sink as you spend more time making those small customers happy whilst neglecting the larger ones, and that’s the issue. If you lose a large client because they have been neglected you will feel the impact quickly. If you lose a small one, you’d actually free up more time so the loss isn’t felt as keenly.
In scenario B what often happens to a more established business is you take on a number of good clients and get very busy. The world you work in depends on fast delivery and reliable services to clients, clients who expect a ‘fix’ to their issues within a few hours, so your team is flat out delivering the best service they can in the time available. BUT, your team don’t have an eye on what was agreed on the contract, the fee or the profit margin in that job. Good team members will be concerned about doing a good job for the client, meaning they can spend too much time on one particular client and are unlikely to raise a hand if they think that the job needs rescoping. In fact scope creep is one of the easiest ways to lose profit.
Key issues for an IT business that means you lose profit include:
- Client not onboarded correctly and over serviced from the outset
- Productivity isn’t monitored and contract overruns are not spotted
- Fees are too low for the service the client wants
- Project overruns are not re-scoped and re-priced
How to resolve the problems
The best and easiest place to start is to create a list of all your clients and their annual fee. Then list how they pay, do they pay monthly or do you have to invoice and wait to get paid?
Once you have your initial list and some criteria sort the client list into size order. Select your top 10 clients to review first.
Review the contract – what are they supposed to be paying for?
Pull out their contracts and have a look at what you agreed at the outset and then have a look at what your team are actually delivering for them each month. This won’t always be obvious so you may have to do an exercise in reviewing staff timesheets / reports to find how out how much time is being spent. Flag up those which don’t look right then review what has happened on that particular client – any extra hours spent that can’t be billed is lost profit. So if you have budgeted 10 hours a month for a client but your team have spent 20 then there needs to be a review as to why. Maybe the job was misquoted or maybe the client is really needy and calls day in day out asking for support. Either way, assess the reasons and then decide how to deal with it.
Increase prices to match market rates
If your client is still on the same fee that they were 10 years ago then they are definitely enjoying good service and too low a fee.
Benchmark your fees against what they would have to pay in the market place today if they went to another company. If they are really too low then you will have to have a conversation with them about increasing the fee to reflect the current market.
You should expect to lose some clients during this process. It feels uncomfortable, and some might not be particularly pleasant about it, but you have to do the right thing for the business and that is making the right level of profit for the investment you put in.
Communicate with your team
Encourage your team to raise their hand if they think if a particular client needs a review. This means sharing with them what that client pays for so they know what they should do automatically and what they need to flag up to you.
The biggest opportunity for there to be contract overruns is when the client asks your team to do something, rather than asks you. Your team will want to do the best job for the client and so you risk there being a lot of scope creep that you can’t recover at a later date. So clear up what they should and shouldn’t raise with you at the outset.
It has to be profitable or it’s a waste of time
Work your way down the list, taking 10 each time and reviewing the contract, the amount you billed and recovered. If you are not making a profit on it then take action. There’s just no point having loss making or barely profitable contracts. It’s not going to build the business you want or make the profit you need to enjoy the lifestyle you want.