Why You Should Dump Bad Clients

It's not surprising that most business owners are willing to take on all comers in the quest for success. After all, every customer represents additional revenues and potential profits.

As a result, it is logical to think that a bigger customer base equals a fatter wallet. Unfortunately, there's a dark side to building a business by sheer numbers: It's easy to wind up with customers that drain time and resources, infuriate employees, and undermine profits.

Call it counterintuitive and even crazy, but addition by subtraction - dumping the least profitable and most time-consuming customers - is sometimes the surest way to grow a business. Suddenly, an organization can devote more time and energy to its profitable clients and find new and better customers that help it flourish.

"Firing undesirable customers is part of running a healthy business," says Larry Kesslin, president of 4-Profit, a Riverdale, N.Y., IT-centric consulting firm and solutions provider.

Although CE pros may shudder at the thought, particularly with today's tough economy and highly competitive business landscape, developing a focused client management strategy and understanding who to accept and who to reject can go a long way toward building a more profitable and viable business.

"Devoting an exorbitant amount of time to noisy customers is not a formula for success," explains Erick Simpson, vice president and CIO at MSP University, a consulting services and training provider based in Garden Grove, Calif.

Not All Customers Created Equal

It's a fact of business: Not all customers are created equal. In fact, one of the bitter ironies of business is that the most difficult and demanding customers are often those who don't pay bills on time and demand more for less.

"For most companies, 80 percent of revenues come from 20 percent of the customers. The fact is that the bottom tier is oftentimes unprofitable and undesirable," says Daniel Morris, CPA and senior partner at the San Jose, Calif., accounting firm Morris + D'Angelo.

Getting a handle on the situation is no simple task, however. For one thing, many young or struggling companies feel the need to take on any new customer. "They often approach the business from a position of fear rather than an attempt to understand a customer's value," Kesslin says. For another, many businesses - both fledgling and mature - lack metrics and measures for understanding how different customers or clients fit into the profitability picture.

Unfortunately, those companies that grab every possible customer and hold on for dear life may find themselves expending disproportionate time and resources maintaining certain relationships. In some instances, if they wind up with too many demanding clients they are likely to suffer from low profit margins, employee burnout, and the opportunity cost of juggling unprofitable customers rather than freeing time to find higher-paying clients. Ironically, Kesslin points out, these high-maintenance customers are often quick to sever ties anyway.

A business that's stuck in a low-fee, high-workload ghetto also endangers relationships with good customers, Simpson says. "They wind up not getting the attention they require or deserve." That, in turn, can lead to a downward spiral where more customers run for the exits and the business takes additional hits.

Further complicating matters, a business owner or CEO may not recognize that the situation has deteriorated or that a customer should be fired. An owner may look at the situation completely differently because the customer is paying the bills and he or she doesn't have to deal with late night phone calls, obnoxious comments and constant demands. "An employee may feel as though he or she doesn't get paid enough to deal with all the garbage," Kesslin says.

By the Numbers

Developing a strategy for managing clients is paramount. According to experts, metrics and measurements are the foundation for effective decision making. Among the basic indicators that can be used to determine the value of customers: day sales outstanding (DSO), which tracks the time it takes to receive revenue; utilization vs. realization, which gauges the ratio of billable hours to those actually spent on a project; and simple income-expense ratios, which analyze revenues derived from a customer minus labor and expenses.

Mike Harvath, president and CEO of Revenue Rocket Consulting Group in Bloomington, Minn., says that most problems can be resolved by understanding whether there's a business match up front and then cultivating the relationship over time. "It's important to know whether you can work with a client and have a good customer relationship," he notes. "Many problems occur because of mismatched expectations." In many cases, resetting expectations or redefining the business relationship fixes the problem.

More often then not, "when it gets to the point of firing a client, it's because a business either didn't screen the client and use the right criteria at the beginning, or it simply hasn't managed the relationship effectively," Harvath says

To be sure, understanding and managing customer relationships is no simple task. But organizations that develop a sound strategy and build feedback mechanisms into customer interactions are far more likely to minimize problems and maximize profits. Says Morris of Morris + D'Angelo: "Knowing when to fire a customer is something that no business can afford to overlook."