As a professional service company (lawyers, advertising professionals, architects, accountants, financial advisers, engineers, and management consultants, etc.), it’s sometimes okay to evaluate your client portfolio and cut ties with some clients.
This phenomenon dawned on me one faithful evening some years back after I realized that about 20% of clients were responsible for approximately 80% of total revenue of an enterprise I was involved in.
Surprisingly, the rest of the clients (80%) only contributed 20% of revenue. This revelation made the ‘80/20 Principle’ come alive in real life. I phoned the managing partner and requested for some data in order to do a capacity analysis. To my surprise, the venture was ‘burning’ more capacity to service the 80% clientele that brought in only 20% revenue leaving the few key clients who were responsible for most of the revenue (80%) to receive average or poor service.
Over the years, I have witnessed companies; mostly those with small operation do the same mistake. Speaking with service companies, I realized that they mostly make the mistake of trying to service every client that comes their way thereby ending up providing poor service to all clients in their portfolio. This is due to the fact that these service companies stretch their capacity in order to meet demand hence compromising service quality. For obvious reasons, service companies’ especially new ones are eager to generate sales, secure testimonials and get referrals. These legitimate reasons lead most people to accept any client. Some start-ups even offer free services in order to accumulate experience and track record, as well as referrals for future jobs. It is not a bad move; however, using a Value Ladder approach is efficient comparatively to the former.
The era where it’s clients that rather lay off service companies is a thing of the past. Now, service companies are embracing the idea of having a ‘balanced client portfolio’ hence deciding to release non-performing client.
It may seem crazy but the thing is you should align your clients (demand) to your overall objectives and capacity. For instance, there are clients that put stress on your resources (human, technology, intellectual, etc.) yet contribute less to your overall revenues. There are clients that have complex project scope yet don’t want to pay the actual fee for your service.
A self-employed friend shared an issue with me concerning one of his clients who was very demanding and over stretched him yet the client doesn’t pay on time and always requests for a discount. After our discussion and conducting a capacity analysis, my friend realized he was spending more capacity servicing one low paying client compared to his major clients that contributes significantly to his overall revenue. The worse thing was that the stress from this client was beginning to affect his personal life in terms of his marriage.
The thing is, it is significant to keep building relationship with clients as a professional service provider operating a B2B model and this requires spending extra resources to ensure that your service quality is high and consistent. But you may be unable to do that if you don’t plan your capacity.
To know which clients to cut off is sometimes hard. But it can be as simple as knowing who brings in what and what you spend to provide the service. There is another dimension where cutting off a client is based on intangible reasons like your purpose or values. For instance if a client is involved in unethical or illegal activity, you should drop that client.
I recommend measuring your demand and then your capacity and have a capacity plan based on your demand forecast. In doing this, you would know the resources you spend to service that demand at any given time. Be mindful however that demand can be cyclical or seasonal, predictable or unpredictable.
Stepping it down a bit, you can conduct a stakeholder analysis for your clients with a key focus on power, influence and interest. This will help you analyse which clients to closely manage and which ones should be kept inform. Most importantly, you will be able to know how to allocate your resources.
Another way is to analyse your services (or business units) using the BCG growth matrix in order to strategize. Don’t forget that as a professional service company, you can actually brand your services into products in a way, and this can aid you to use the above matrix to analyse and understand which of your services has high market share, high market growth, low market share and low market growth. With this knowledge you can do a trade-off to determine where, how and what to invest in, etc.
You can also segment customers based on any metrics you prefer such as revenue, capacity, resources required, etc. But don’t forget to use metrics that are relevant to your operation and industry and also captures every necessary data needed to make an informed decision. The idea is to get an idea of how you utilize your capacity to service demand against the amount you generate from each customer. Beyond the aforementioned, there are other tools and ways to adopt to gain consumer insight so you can make an informed decision.
Assuming you identify one or two customers you want to cut off, you can do that in several ways. Don’t just rudely cut clients off. This is because respect is fundamental when handling stakeholders including clients. Some useful ways of cutting off a client includes increasing your unit price, installing systems and insist the client follows, discontinuing the service or selling the account off to another company (this is possible but depends on the client to make it fully work).
In a nutshell, it is sometimes okay to cut ties with some clients as a professional service company. Don’t keep carrying loads that hinders your progress. Always remember to ‘Stay Informed’.
About the writer:
King Adawu Wellington is a business strategist with expertise in executing projects and helping companies achieve their goals in diverse industries.