Each week, we seek out expert advice to help a small or medium-sized company overcome a key issue.
Most businesses will say they need more customers. But what if your customers are the problem?
Andrew King, managing director of WebSan Solutions Inc., a Toronto-based provider of accounting and enterprise planning software, recalls the devastation that one client dropped on his business, which provides new systems to its customers and then assists with implementation and training until it is operational.
“The project went on for three months longer than it should have because [the clients’ employees] didn’t take the online training courses and were bad about getting their testing done on time,” Mr. King said. As a result, WebSan had to defer billings of $30,000 to $60,000 on projects that couldn’t start on time, and that created cash-flow problems.
Also, when it came time to switch over to the new system, the client asked that a WebSan employee come and retrain and assist their finance department for an extra week. “The budget was for 40 hours but it took 80. We ultimately lost $8,000 of revenue,” Mr. King added.
In fact, many of WebSan’s clients don’t adhere to their testing or training schedules as per their contracts. This is costly for WebSan, an 11-year-old company with 15 employees and annual revenue of about $4.5-million, Mr. King said.
WebSan’s average billing rate is $150 an hour, so if a client requires extra training, or delays testing, the costs add up. Assuming an average project budget is $50,000, the overruns could cost $5,000 to $15,000, he added.
WebSan’s internal scheduling also suffers, Mr. King said. “This can impact our ability to roll consultants off one project and start another.”
His company has never lost a client directly because of these delays, but WebSan has had to provide discounts or additional work at no charge to appease customers, he added.
Sometimes clients take the requisite training but the demands from their regular jobs take precedence and they don’t get to test the system immediately. “Training they receive before the testing is typically forgotten, even though manuals and videos are provided,” Mr. King said.
WebSan has the contractual right to charge customers for violating terms, at $1,200 a day, but this can be damaging to customer relations. Mr. King asks, “How do I manage a positive client relationship while enforcing my contractual terms?”
The Challenge: How can WebSan persuade its clients to take training and implementation more seriously while preserving good business relationships?
THE EXPERTS WEIGH IN
Amir Rahnema, co-leader of national organization design, Deloitte & Touche LLP in Toronto
Mr. King identified a punitive approach that probably isn’t great for business. I’d start to reframe the issue away from one that lays fault at the doorstep of the client to one that’s more about shared outcomes.
WebSan should spend time with the leadership of the client to reinforce the importance of things like training and change management. Communicate why the training is essential and how it will help employees in their day-to-day jobs.
A common occurrence in systems implementation is to place too much emphasis on the technology between the keyboard and monitor, rather than investing in the human being who sits on the chair. WebSan needs to get leadership of its clients to champion the notion that the system they’re buying is only as good as the skills and competencies that interact with it.
WebSan could also compute the price of potential delays and charge a premium, then commit to pass the savings back to the client if they meet their end of the schedule.
John-Kurt Pliniussen, associate professor of sales, e-marketing and innovation, Queen’s School of Business at Queen’s University, Kingston
WebSan has a right to demand compensation if their client is unreasonable about supplying the resources they agreed to supply. However, an alternative to a punitive clause would be to establish what is known as a “cost plus, plus” disincentive clause in the contract to cover cost overruns.
Say that extra cost amounts to 50 hours, plus new machinery. WebSan needs to say to its client, “Because we have to put in an extra 50 hours it will cost us another $5,000 on this other project that we are now putting on hold. ... We’ll take care of it, but it’s not our fault, and you have to pay for it.”
Another thing WebSan should consider: If this is happening with so many of their clients, perhaps they are part of the problem. Perhaps they are underestimating the project requirements.
Sit down with your customers after projects are completed and conduct a post-mortem. If there were target overruns, ask whether either side could have done anything differently. Sometimes there can be unforeseen consequences, such as a key project manager leaving for another job, or an illness in the family, that will affect the outcome of a project.
Kevin Ford, entrepreneur and founder of Parliant Corp., which designs and implements mobile software solutions, Ottawa
I’ve walked a mile in Mr. King’s shoes on certain occasions, and there’s no single right answer. The customer should have been educated that if they cause delays, that will cost WebSan money and therefore there will be compensation costs.
But some people just can’t deliver or meet the schedule. They know they can’t meet it for reasons out of their control, and they’re apologetic. Most will stand up and pay the penalties. But some aren’t reasonable and will ask the firm to absorb the cost as the price of doing business with them.
The latter situation should cause concern. If it’s not a mutual respectful relationship between two organizations, sometimes you just can’t afford to have that customer. And if they are going to threaten, “This is the end of the relationship” because of some minor costing increases that they caused … you’ve got to make a judgment call. No one can ever deliver 100 per cent on both sides of a relationship, but if WebSan is always being asked to take or absorb such financial costs, they should have the right to “fire” the customer or not take renewal of that contract in the future. Otherwise, their demands can become a form of indenture.
WebSan didn’t go into business to become a slave of customers who would make agreements and then ignore them. So they should spend their time and money on finding new customers.
THREE THINGS THE COMPANY COULD DO NOW
Make a case
Spend time with the senior management of its clients to press the importance of both sides adhering to the original training schedule.
A different financial solution
Consider alternatives to the punitive clause, such as an incentive-laden contract where the client pays a premium, but savings can be passed on to the client if all goes well.
Conduct post-mortems of your work and make sure you are not underestimating the project requirements.
Facing a challenge? If your company could use expert help, please contact us at firstname.lastname@example.org Join The Globe’s Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT Our free weekly small-business newsletter is now available. Every Friday a team of editors selects the top picks from our blog posts, features, multimedia and columnists, and delivers them to your inbox.