Reprinted by permission of The Kaplan Group
Just like newlyweds who never imagine divorce, when you first start a relationship with a new client you probably don’t expect to one day be firing him or her. But, it happens and just like with divorce, hurt feelings, misunderstandings, and embarrassment can often get in the way of legalities.
Every situation is different, but one of the most common reasons for firing a client is that the client is simply no longer a good fit for your company. Perhaps the client needs a different expertise, or perhaps your company is now working with bigger clients, or even a competing client. One of the most obvious reasons to fire a client is what a lot of people call, “scope creep.”
Take for example a company that has agreed to build a website for a doctor’s office. The statement of work clearly spells out specifics for the project. However, after the work starts, the doctor’s office decides that they’d actually like to add on a blog to the site. A week later, they change the text they provided to the design house. A week later, they change the text again. A day after the project is completed the doctor’s office decides that their website has to include a patient portal for scheduling.
The design firm, facing deadlines from other clients and becoming increasingly frustrated with the changes and new demands of the doctor’s office, decides to fire the client. However, the client still owes them money for the work they completed. How can the design firm make sure they collect?
As with a lot of situations, preparation is key. Hopefully you have a signed contract or purchase order with a detailed statement of work, payment terms, and provisions to protect you in case your client doesn’t pay. If your paperwork is weak, this may make it more difficult to get paid in full. When creating a contract, having smaller deliverables with payments spread throughout the timeline of the project will allow you to identify warning signs that might mean the client cannot pay you.
Most client relationships don’t get to this point overnight. If you see that the need to fire the client is coming, there are three things you should try to do before the client senses a change is in the air.
- Get paid as much as possible. If you can get even a partial payment while the relationship is still good, that will mean less money that you have to fight for later.
- Try and obtain email acknowledgement that the work you’ve done to date is good and, if relevant, that they are requesting a change in the scope of the project. In the above example the design firm might send an email saying, “I understand your desire for a patient portal. I want to make sure though that you understand the portal was not part of our original agreement, and confirm that we did the original work as described in the contract.” Having written agreement that the original work was completed will avoid the argument that you are not owed money because you did not do the work.
- If you did not have a contract or statement of work to begin with, try and institute one via email. One way to phrase such a request is to say, “I just realized we don’t have our agreement on file. Can we just confirm it here by email?”
If you do find that you need to sever ties there are other issues to keep in mind as well:
- Be aware of emotions. No one likes to be rejected, especially if they feel like they’re being rejected for something bigger and better. If you’re firing a client because you want to work with bigger clients, especially if those clients are in the same field, be aware that there will be hurt feelings.
- Offer an option. If possible, suggest a competitor or former employee who may be better able to serve the client. Helping the client get settled elsewhere may take some time, but it lets the client know that your decision isn’t personal.
- See if the client will fire you. Sometimes it’s easier to be the one dumped than the one dumping. For example, instead of firing the doctor’s office the design firm might have said either, “You know, we don’t have a lot of experience with creating patient portals, would you rather go with a more experienced company for this?” Or, “We’ll be happy to add a patient portal, but we won’t be able to start that work until Q4, and it will cost this insanely high amount more.” If the client fires you and you have emails from them expressing satisfaction with your work, it is hard for them to justify not paying in full and your chance of debt collection success will increase.
- Consider compromising. Regardless of why you are parting ways, if you are struggling to collect from a former client then consider taking less than the full amount due as a compromise. Remember that once an issue goes to collections you’re automatically going to give up 10%-25% for the collection agency’s contingency fee. Ask your client if they would pay immediately if you agreed to a small discount and see if they will suggest a number. Don’t put too much on the table though, once an amount has been suggested it’s very hard to take it back, even if you later decide to pursue the account with a debt collector.
Breaking up is hard to do. You may feel embarrassed about hurting someone’s feelings and still asking him or her for money, but if you’ve fired a client that still owes you money, you owe it to your business to make sure you know how to collect.
Dean Kaplan is Principal at The Kaplan Group. Dean’s expertise is widely recognized in the debt collection industry. His advice has been published in a number of industry newsletters such as Credit Today and InsideARM and he is a frequent speaker at industry events.