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What happens when customers are naughty, not nice

Andrew King used to think that a punitive clause would be needed to bring clients into line at WebSan Solutions. But now he offers free support agreements at the end of the contract instead.

JENNIFER ROBERTS/The Globe and Mail

Andrew King, managing director of WebSan Solutions Inc., had a problem, and it was spiralling out of control.

Clients of his company, a Toronto-based provider of software for accounting and business planning, often refused to stick to their testing and training schedules. This meant WebSan needed to provide extra training or delay testing because clients weren't ready for implementation. And his employees often couldn't be deployed to new projects on time, which meant WebSan had to compensate other clients for delays.

In addition, WebSan had to defer billings on projects that couldn't start on time, and that created cash-flow problems.

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(Check out the original Small Business Challenge feature on WebSan, "The customer's always right – except when he's ruining your business.")

WebSan had the contractual right to charge customers $1,200 a day for violating terms of their training agreements, but Mr. King feared doing so could hurt customer relations. "How do I manage a positive client relationship while enforcing my contractual terms?" he wondered last spring.

Three experts offered advice to WebSan in the Challenge column in May. Amir Rahnema, co-leader of Deloitte & Touche's national organization design in Toronto, suggested WebSan better communicate with clients the critical importance of adhering to schedules.

WebSan had always done so. But Mr. Rahnema's advice triggered a realization: One detail that hadn't previously been articulated to the client was the budget allotted for training.

"I thought, 'Why don't I just explicitly tell them what the budget is, and then [explain that] if you go over that budget, we're going to charge you'?" Mr. King said. "When I put that in the contracts, it became real to them."

For example, a typical sentence in the contract might read something like, "A firm budget of 96 hours of training has been allocated to this project. Any training requirements above 96 hours will be billed at a rate of $150 an hour."

The clarification has been effective, he said.

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Another strategy, suggested by John-Kurt Pliniussen, associate professor of sales, e-marketing and innovation at the Queen's School of Business at Queen's University in Kingston, was to establish a disincentive clause, in place of a punitive measure, in the contract to cover cost overruns.

Mr. King admits that up until that point, he thought a punitive clause was necessary. But the idea of an incentive spawned the thought, "That's interesting. Let's try that," he said.

WebSan decided to expand its flag system, already used as a performance indicator, to serve as an incentive for sticking to schedule. The company uses green, yellow and red flags – green represents no significant problems or issues; yellow signals that problems or issues exist but recovery steps are being taken; red indicates significant problems, such as in budgeting or scheduling.

"We sell a support agreement of 30 hours for $4,200. Now we say if you don't get any red or yellow flags, we give you a free support agreement at the end of the contract," Mr. King said.

As a result, "they look at the schedule a little more seriously," he added.

That move has saved WebSan both time, from not having to carry projects over or delay new ones, and money. In the past, the firm had essentially lost up to a month on some projects dealing with such overruns, so providing an incentive worth $4,200 is a small price to pay to prevent a problem, he added.

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Mr. King was also reminded by Ottawa entrepreneur Kevin Ford, founder of Parliant Corp., which designs and implements mobile software, that sometimes clients who refuse to be reasonable are not worth retaining.

As a result, Mr. King decided to get tough with one client. A financial executive with that company had previously balked at attending WebSan's training to learn how to write reports, arguing that her team would handle that task should the need arise. Then things came to a head just before a weekend.

"At like 4 o'clock on a Friday, I get a flaming e-mail that her staff had left for the day and she needed a report created by 5, because she had a board meeting Monday morning. And [I'm thinking], 'This is insane. We told you that you needed training. You refused to take it because you said your team would do it. Now suddenly it falls to us at 4 o'clock on a Friday?'" he said.

Mr. King told his contact at the client company that she was being completely unreasonable, and he refused to take the client's calls until they paid off the balance on their account and a meeting could be arranged with the company's chief executive officer to discuss how the firm would adhere to other contractual terms if they were to remain a client.

"They came back apologetic. Now we're good," Mr. King said.

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