Are Your Clients Losing You Money?

Source: Ric Payne's Blog -- Confessions of a Lazy Accountant

In this thought-provoking post, Rick Payne discusses the importance of using a costing model to identify unprofitable clients. Here are excerpts, reproduced with permission.

No matter what pricing methodology you decide to adopt you would be wise to know your costs. For the most part, your "time costing" system tells you the cost from the client's perspective rather than the cost of resources your firm uses to service clients. This is why the vast majority of professional service firms are harboring unprofitable customers without even knowing it.

If the cost of servicing a client exceeds the revenue generated, then unless there's a reasonably clear expectation of future profits, it makes sense to implement one or more of these strategies:

• Increase your prices,
• Reallocate lower cost resources to the work,
• Reduce the cost of resources,
• Improve productivity, or
• Stop servicing the client and redeploy the resources to more profitable work.

Other things being equal, if you fire the bottom 20% of your clients the costs they are absorbing would need to be absorbed by the remaining clients so you'll end up with another group of loss-makers and so on. This is the rationale that most people use to justify keeping these loss-makers on their books. I will strenuously argue that this is NOT usually the smart thing to do, because these clients are, for the most part, the most difficult to serve and contribute to 80% of your challenges. They're probably small, have high write-offs, require only low-level services, and are uncooperative.

The gutsy strategy is to refer these clients to a firm that is better suited to their needs and replace them with better quality clients. In my experience this is the fastest way to improve the quality of your client base and I never cease to be amazed at how easy it is to implement. Keep in mind, however, that it makes no sense to look for higher quality clients if you are not simultaneously creating higher quality team members and offering higher quality services.

Editor's note: The blog post also outlines a simple costing model and offers a spreadsheet you can use to analyze your own client base. Notably, the model requires time sheets, which many people consider a negative. In Payne's opinion, time sheets are a waste of time and can even hurt partner income when used for service pricing. But they provide useful management information when used for resource costing purposes. To download the spreadsheet, click here.

To read the entire post, click here.

From Ric Payne's Blog -- Confessions of a Lazy Accountant, http://theconsultingaccountant.com, April 12, 2010, "Are all your clients profitable to service?"