When firing a client may be a good thing

Firing a client initially may be considered an oxymoron. In fact, the reason we are in business in the first place is because of our clients. We have worked hard to acquire them, we depend on their revenue, and haven’t we been told, “The customer is always right?”

The truth is the customer is not always right. And not every client is the right fit for your company. Statistically, 80% of your clients likely represent less than 40% of your revenue. And, if examined closely, you may find that not only are some clients not profitable for your business, but they actually create a higher financial exposure than they are worth.

This article is designed to review the potential reasons for firing a client, and specifically, why it is critical to conduct regular Risk Management Assessments (RMA) of your clients in a pro-active effort to avoid costly liability claims.

Some possible reasons for terminating a client relationship

In general, we would break down the potential reasons for terminating a client into four categories, easily remembered by the acronym PACE.

  1. Profitability. On the surface, this appears to be common sense. However, no one likes to turn away a customer, and depending on the financial stability of your business, sometimes it can be several years before we make the determination that a customer is not profitable. In addition, this analysis can be complicated, as some customers may be “lossleaders” whose value is not directly connected to their bottom line.
  2. Alignment. Businesses evolve and sometimes we simply don’t provide —or at least specialize in — the areas that certain clients need. It’s important to be honest with our clients and ourselves when something is simply not the right fit for our business. Otherwise, these customers will end up in category 1 or 4.
  3. Culture. In our company, culture is a priority. We treat our employees and clients with respect and integrity. As such, we expect the same from those with whom we do business. This is not to say that sometimes things go wrong and people get upset. This is understandable and we are empathetic. But, some people are simply unkind and disrespectful by nature. Any client who is chronically abusive to you or your staff is usually not worth it in the end.
  4. Exposure. Finally, there are clients who create a larger exposure for your business than they generate in revenue. If not addressed appropriately, clients from any of the above three categories can fall into this category. Furthermore, there are a number of specific warning signs that can signify a client exposure that should be evaluated (see sidebar).

Warning signs of difficult clients

  • Clients not paying your invoices on time
  • Clients not taking your advice
  • Clients that consistently cause stress in your office
  • Clients that make threats
  • Clients that fail to provide paperwork on a timely basis
  • Clients that you do not trust
  • Clients that do not understand the services you are rendering
  • Clients that do not appreciate your expertise
  • Clients that challenge the need for documentation
  • Clients that are a bad fit for your business model
  • Clients that test your bottom line

Risk Management Assessment (RMA)

One consistent theme that we see in Professional Liability claims is that when a professional services firm is sued, often the principals are not surprised. In fact, in post claim discussions and analysis with principals of the defendant firm, there is often a clear trail of evidence suggesting that the plaintiff was a problem client and should have been fired long before the claim.

In hindsight, it is easy to identify that the client fell into one of the categories referenced above and preemptive action would have potentially avoided a costly issue.

At least once a year professional firms should carve out time to review and rate clients. The analysis should include all of the concerns listed above, and a commitment should be made to consider terminating clients that fail this risk management assessment.

What do we mean by a Risk Management Assessment (RMA)

An RMA is an examination process designed to provide clarity and guidance on the professional liability risk level inherent within the professional services your firm is rendering, and the potential impact those liabilities could have on your firm being sued by a client.

Risk is identified as basically a combination of two concepts: probability and severity.

We decide how risky something is by asking two questions:

  • How likely is this to happen? (Probability)
  • How bad will it be if it does happen? (Severity)

Considerations in a Risk Management Assessment

The RMA needs to be specific to the services, culture, stability, and risk tolerance of your firm. When doing a RMA consider all of the factors below:

  • Has the scope of the professional services exceeded your comfort level or abilities?
  • Has the client outgrown your firm’s skill set, and does it require services beyond your capabilities?
  • Do you trust the client, and believe in their integrity?
  • Has your firm provided guidance on internal controls that are not being followed or ignored?
  • Are your employees reluctant and unhappy to be working with this client?
  • Have you observed bad behavior and/or other questionable relationships that permeate the client’s business?
  • Are there external events or issues that could complicate and impact the quality of the services delivered by your firm?
  • Lastly, what does your gut say? Sometimes it’s just the feeling you have rather than a concrete assessment that you need to listen too. Trust yourself.

New Client Assessment

In addition to an annual RMA, it is essential to bring this learning into the new client assessment and acquisition process.

There is an old adage at our firm that asks, “When is the best time to lose a prospect?” The answer is, “In the beginning.”

If the new prospective client is difficult at the start of a relationship, the are not likely to improve in later dealings. Your firm should establish new client screening procedures with whom all employees are familiar.

Pay particular attention to “red flags” that should be explored closely to identify if a client will ultimately end up in one of the four categories referenced at the beginning of this article.

Does the new client have any of these attributes?

  • Acts dishonestly
  • Pays slowly or not at all
  • Has poor credit or insufficient working capital
  • Is in a start-up mode
  • Does not have the required expertise in their field
  • Operates in a litigious or declining industry
  • Has a history of litigation
  • Has weak internal controls
  • Has high staff turnover
  • Is losing a key partner at work
  • Is going through a divorce

In addition, consider the following questions as part of your new client assessment.

  • Does the new client cause internal conflicts?
  • Does the firm have the staffing and expertise to handle the new client?
  • Has the firm done a risk/benefit analysis on the potential revenue and potential exposures?
  • Does the new client fit your core business model or business plan?

Not all of these are definitive reasons to decline to work with a new client, but they are simply areas for further consideration. In addition, make Google or other search engines part of your formal inquiry, and whenever possible do credit and criminal background checks. Our actual experience has shown that spending five minutes on a search engine can turn up relevant information that should be significant in your assessment.

In some cases, a partner or salesperson may be biased and not able to provide a truly independent analysis. Require feedback from unrelated staff as part of the acceptance process.

Conclusion

The answer to the question when should you fire a client is not an easy one. But after your firm takes a careful assessment and risk analysis, an informed decision based on reliable and critical sharing of information can be made. By incorporating the practice of risk management assessment into your routine, it will become habit for all employees. And, through regular risk management assessment, ultimately, you will create a positive culture focused on profitability while avoiding exposure.

Gary Sutherland of North American Professional Liability Insurance Agency, LLC (NAPLIA).