You're Fired! How to Cut Bad Clients Loose

Every year, Brian Beck sits down with his partners to assess the value of each one of their clients. Those who don’t add up are sent packing.

It may sound harsh, but Beck’s boutique asset management firm, Farmington, Connecticut-based Wealth Management Group of North America, LLC (WMGNA) has deliberately chosen only to serve 100 clients at any given time. “The only way to grow when you have that kind of ceiling is to get rid of the clients that don’t add value,” Beck says.

Getting rid of customers who are mean, frustrating or cost more than they are worth can be a smart business decision, but shouldn’t be done lightly.

Companies must balance the profits such clients bring against expenses associated with them. That analysis includes defining the cost of acquiring and servicing the client. “You need to assess how losing their business will impact you,” says John Martorana, president of Oxford Communications, a 45-employee creative marketing agency in Lambertville, New Jersey.

If a demanding client means your company is constantly redoing work, spending time and money on frequent calls and meetings, or sending overnight express packages for last-minute changes, the expense could offset the value of the business, says Joe Fulvio, director of Third Coast Partners, a mid-sized management consulting firm in Philadelphia. “It’s surprising how many costs that are normally attributed to overhead can actually be pegged to clients,” Fulvio says.

Companies that quantify these costs and benefits usually find a reverse of the 80/20 rule, which says that 20 percent of clients generate 80 percent of the profits, Fulvio says. “Getting rid of low-profit customers lets you focus on finding new clients who fit your 20 percent profile.”

The Cost of Difficult Clients
Once a company understands the value of its clients, it can make better decisions about who to do business with. At WMGNA, for example, Beck and his partners rate every client based on four categories: revenue generated, assets under management, potential future business and likability.

Some categories are easy to assess. For example, WMGNA works with clients that have a liquid net worth of at least $500,000, not including property. If the value of a client’s portfolio drops below that line with no increase expected – perhaps from an inheritance or sale of a business – the firm may decide to end the relationship. They also may end a relationship with a client who rarely takes advantage of their service.

Even more important in the review process is the less easy to quantify “likability” rating. Clients who constantly complain, need hand-holding or lie about their intentions quickly land on the cut list, Beck says. “It doesn’t matter how much money you have. If you are not nice to our people we don’t want to do business with you.”

Beck’s team has a simple process for eliminating difficult clients. When they begin their relationship, customers sign a renewal agreement that is reviewed and re-signed annually. If the partners don’t want to keep the client, they simply decline to re-sign the agreement. They may tell the client that they don’t think they are getting value from their service, or raise their monthly rate to a point that the relationship won’t be appealing. “That’s the easiest way to fire a client,” Beck says.

Conversely, if they like a client who’s fallen below the revenue range they may remove them but offer to help them on a pro bono basis. “In this business you’ve got to give to get,” Beck says. Some of his top clients have come through referrals from his pro bono list. “There’s value in building good will.”

It’s Not You, It’s Me
Three years ago, Steven Randall would have been appalled at the idea of getting rid of customers.

That was before Randall and his partners left other auditing firms to start Vonya Global, a Chicago-based network of risk management and internal auditing firms. By the time the partners’ non-compete contracts with their previous employers had run out and they were ready to ramp up the business, the recession was in full swing. As a result, “We thought any client was a good client,” says Randall, the firm’s managing partner.

But the partners quickly learned that attitude didn’t make good business sense. Some clients were too small to be profitable, others fell outside of the company’s core skill set and were difficult and time-consuming to service, and still others didn’t pay their bills.

At first, the partners ignored the red flags because they needed the revenue. But eventually they had to take a stand. “If you are at the losing end of a profit and loss assessment, it’s time to find new clients,” Randall says.

To get rid of clients that weren’t a good fit, the firm took an “It’s not you it’s me,” approach. They told clients they wanted to drop that the firm appreciated their business but couldn’t properly serve them. As part of those conversations, Randall often suggested another audit firm that might be a better fit.

Taking a friendly approach to ending a client relationship eases the tension and reduces the risk that customers will bad-mouth you to their networks, Randall says, adding that many former clients respected his decision to end the relationship and some even referred other clients to him.

To avoid similar situations, Vonya Global now vets potential clients more carefully. The client assessment process begins during contract negotiations. If a client pushes hard for something that is typically non-negotiable, such as the option to hire away the firm’s employees, longer payment terms, or the right to sue, his team is immediately wary, Randall says.

By avoiding difficult relationships, Randall can spend any extra time securing more profitable customers. “Saying no to new business is painful, especially when you are trying to build a name for yourself,” he says. “But sometimes, it’s just the right thing to do.”