Terminating toxic customers: enhancing firm profits through customer cultivation

California CPA, June, 2003 by Daniel D. Morris

You know it when you feel it. The customer on the other end of the phone is simply toxic. Nothing is right with the relationship. Not their projects. Not their respect for your services. Not their attitude toward your team members. Not your level of service. Payments are late and invoices are frequently challenged. Their projects are the last to be started and they are finished late. You simply regret the day they walked into your office. You know that you should be professional and terminate the relationship.

Poor customer fit is extremely damaging to your firm. So much so that my colleague, Ron Baker, created Baker's Law: Bad customers drive out good customers, as a corollary to Gresham's Law: Bad money drives out good money. And as professionals, we have this conundrum: We are considered leading business advisers, yet we continue to allow bad customers to almost freely inhabit our firms. They zap our energy and increase the risk of ill financial health for the firm.

Ask a CPA firm partner about his customer misfits and he can name them and why they aren't right for the firm. Ask these same partners why they retain these customers, and they say they don't want to lose the revenue.

Firing customers is difficult. Firms invest intellectual and financial capital into establishing each customer relationship. Additionally, traditional partnership compensation models create barriers to terminating customer misfits via financial punishment for lower billings. Other entanglements, including anger from related referral sources, marketplace opinion, fear of decreased earnings, fear of related customer revolts and fear that they will be judged a failure are just a few of the many barriers to initiating termination procedures.

THE FIXED CAPACITY DILEMMA

Professional service firms have fixed capacities to serve customers in the short, medium and long term. Unless a firm outsources 100 percent of its projects, it is constrained by its ability to produce work from a fixed quantity of in house producers.

This fixed capacity to serve is generated by each profession's necessary lead time to train, educate, develop and immerse team members to the degree necessary where they can perform, supervise and manage projects and relationships.

Professional service firms are like airlines: they are heavily invested in fixed capacity (and fixed costs), with a pre-determined configuration (e.g. firm talents and capabilities are known and fixed). Customers of CPA firms, then, are comparable to airline customers. There are diverse reasons for customers to "fly" with their chosen firm. Some fly with a firm out of convenience, while others fly out of necessity. And like airline customers, not all firm customers are created equal.

Some are willing to pay a premium and demand a corresponding high level of service, while others are willing to forgo luxuries and voluntarily accept a lower level of service and fly in the back of the plane. Still others prefer somewhere in the middle.

Firm leaders must properly identify the differing service levels desired by customers and confirm the following:

* The firm's pricing structure is adaptive enough to capture pricing opportunities for differing levels of timing and service.

* The firm's capacity allocation is consistent with its customer demand curve.

* The firm's customers are consistent with capacity allocations.

* The firm isn't inadvertently "upgrading" customers from a lower level of service to a higher level without a consummate change in price and education of the customer.

* The firm is retaining ample capacity to handle last-minute "flyers"--important customers that are willing and able to pay a premium price for a last-minute project.

IDENTIFYING MISFITS

Several methods can identify what I call "back of the plane" customers--those who you shouldn't be servicing but are because you haven't determined how to show them the emergency exit.

My candor may seem callous, but the health, vitality and morale of your firm is on the line and that is more important.

Here's a process to evaluate and classify your customers:

* Ask each team member of your firm to identify up to two customers they would get rid of. Their decision is absolute. The partner is responsible for the termination within one business cycle. Note that not only will the team help partners with the tough identification issues, the firm benefits doubly because the partners reinforce to the team that they really do value their opinions and place them ahead of any short-term financial matters. Additionally, team members highlight, in advance, problem customers, which helps firms avoid forced customer terminations.

* Each firm member rates each customer to identify the level of customer compatibility on two levels. Level one is on their personality--how well do you like this customer. Level two is on their work--how well do you like their work. Low scores generally mean you shouldn't be working for them.

* Review your customer's financial credibility and measure how well they maintain their financial commitments with your firm. Basically, how timely do they pay?