Sometimes the simplest lessons are the hardest to learn. For service providers those lessons often include:
- Cancellation policies
- Giving away time and work product
- Protecting intellectual property
- Collecting from clients
- Getting quality product and services from vendors (or any product or service)
- Enforcing policies and procedures
- Late fees
- Premium charges
- Out-of-pocket expenses
- Financing charges
As service providers getting started (or when you provide a product and service combination), the tendency is to want to get the business at whatever the cost. One reason is that you want to have the clients and prove the concept of your business. Another very important reason is that you want the cash flow; covering any of your costs is usually viewed as better than not doing so.
The unfortunate reality is that it is difficult at best and often nearly impossible to increase your hourly rate with your existing client base. There are occasions and clients that will fully understand the need to change pricing on your services. From experience, it is usually easier to get price increases on “tangible” products, say a printer or copier, versus an increase in the hourly rate for servicing a printer or copier.
Certain service industries have “known” business models where every minute (and certainly every hour) is charged – from telephone calls, to e-mails, to meetings about specific issues. Attorneys, CPAs, and physicians are good examples of professions where people are expected to pay for all the time used and unused. If you cancel an appointment with a physician fewer than 24 hours before the scheduled appointment, you can count on a bill for that time arriving in your mailbox.
Time is money to all businesses. For service providers, however, time is the key commodity. Every hour not billed is capacity lost. Each time a client cancels an appointment or just doesn’t show up the service provider is left with time which cannot be filled with another client. That is lost time and lost revenue.
When shopping for physical products from stores and vendors, everyone knows that walking out with the product without paying is stealing from that company. With merchandise, there is at least theoretically an ability to recover the item. Service providers have no way to recover the time not charged. Draw a parallel between taking that merchandise with taking an hour (or more) away from your service providers. It is quite simply sound business practice for a service provider to have costs associated with cancelled meetings and “forgotten” appointments. Those practices may not apply to situations where the client has a significant personal or business emergency. It is important to have an associated cost for the behavior of a “careless” client who is a repeat offender.
The situation can be further complicated by having clients who consistently pay late, pay less than the outstanding balance, and/or “share” your intellectual property. The client who pays late or for less than is owed is similar to the client who has an hourly rate set below “market” These clients are getting your services and you can’t take them back. I’ve heard service likened to magic tricks, once the magician shows you how the trick works, he can’t take it back.
For the service provider, the slow-to-pay client or the client constantly trying to negotiate “I’ll pay this, but not all of it” puts the business in a quandary. You have a client and are providing services, you get some of what you are owed, but not all – but you have a client and cash coming in. What is the “right” action?
It is a tough call to make. Cash flow versus profitability. What is the true cost and trade-off with having the type of clients discussed above? These are some of the costs of those clients:
- Not receiving full revenue for work performed
- Losing time that could be used to produce full revenue in the following ways:
- Working with existing clients who pay on time and in full
- Generating clients who pay for all the time used
- Generating clients who pay at higher hourly rates
- Working on expanding the business through prospecting, marketing, and sales calls
The additional “cost” with some clients is the risk to your intellectual property. You perform work and provide tools to a client for a specific company’s use. The next thing you know your documents and tools have been duplicated and “shared” around the business community. If those documents and tools were your company’s differentiation and “product,” then your business can be significantly impaired or irreparably damaged. It is important to draw clear lines of ownership – what do you retain and rights have you granted to a client for use of your materials. Be sure you take precautions regarding what you share with a client versus what you use to do the work. Most times you are providing a “work product”, which is the result of a process and expertise. If you have been hired for a specific deliverable (report, etc.) and not the development of tools, processes, or other clearly identified items, you do not have to share the proprietary processes used to generate the report, model, or other deliverables –Unless otherwise stipulated, even with tool and process development, for which the client has not paid, the methodology which resulted in the “work product” being delivered.
Finally, collecting payment from some clients can be extremely difficult. Some companies view paying for services and products on-time (or at all) as discretionary. Unfortunately, even utilizing credit references and contracts won’t mean your clients will adhere to the credit terms established. There are options:
- Require retainers or partial upfront payments
- Establish credit card and merchant accounts and have clients “guarantee payment” with a credit card number
- Get formal credit line or other promissory notes signed for significant services or projects as a contingency
- Get a personal guarantee from an officer or owner of a company
- Use small claims court to pursue outstanding balances (learning to do it yourself can save you legal fees)
- Document, document, document
- services provided – dates and times,
- work product provided – copies and who received it
- cancelled meetings, date and time of cancellation, and the original appointment
- late payment notices
- demand letters
- and so on.
There is a story about two men – a king and a general – who jointly ruled a country. The king started out kindly and generous. He easily forgave any person who didn’t perform as expected. He was well-liked, but not well-respected.
The general on the other hand was a disciplinarian and harsh taskmaster. He expected people to do as they were told, to perform well and on time. When anyone failed to perform he took them to task – harshly and publicly. He was respected.
One day the king and the general were talking. The king wanted to be respected and the general wanted to be liked. They decided to switch “styles”. The general began to be more tolerant, while the king began holding everyone accountable.
The citizens began to fear the king and they adored the general. Soon the country wanted to be lead only by the general. When the king and general met, the king asked the general why the general was more popular and the king, well, despised. They decided to ask the people.
When asked the people responded, the general had been respected because people knew what to expect from him. When he “lightened up”, the people felt he trusted them, so his popularity increased. The king, on the other hand, had been kindly and benevolent all those years, then suddenly he was treating everyone unfairly – no one knew what to expect from him – so they feared him.
The bottom-line to the story, if you start tough, you can always “lighten up” – choosing not to enforce the rules in the strictest sense. If you start easy and then change the rules, you may adversely impact the world’s (client’s) perception of you and your business. Start as you intend to go!
Copyright © 2004 F.O.C.U.S. Resource, Inc.