“Yes, let’s move forward with your proposal.”
For consultants (like me!), few sentences are sweeter to the ear than this one. In addition to boosting next year’s revenue forecast, new clients help you hedge against uncertainty. After all, you never know when an existing client will decide to unexpectedly change course.
As great as new clients can be, there are also a few tradeoffs to consider. In this post, we’ll discuss the costs and risks associated with adding new clients.
Preliminary Sunk Costs
Before you ever bill your first hour, you’ve already dug yourself into a hole. Allow me to explain.
Let’s say that you own and operate a growing IT consulting business. Your company specializes in network and web security, and most clients are within driving distance of your office. About one month ago, a new prospect filled out a form on your websiteand requested a free consultation.
It turns out that this lead (a well-respected software company) represents a very large opportunity for your firm. That’s the good news. The bad news is that they’ve been putting you through the wringer – with no end in sight. You’ve already visited their headquarters on multiple occasions, pulling your top IT minds off important projects to attend the meetings. After several rounds of proposals, you feel no closer to a closed deal than on day one. To make matters worse, you have a bad feeling that even if you do win the contract, it’s going to be a very one-sided arrangement (in their favor).
The last thing you want to do is pass on the opportunity (especially this far into it), but you can’t help acknowledging your sunk costs:
Lost billable hours: Time is money. Had this lead never requested info, you could have freed up additional billable hours. Instead, your team invested substantial effort in preparing proposals, brainstorming solutions, and engaging with the prospect (for free).
Switching costs: Jumping from one thing to the next increases mistakes and decreases productivity. With so much attention being paid to a single lead, your team must work even harder to keep everything balanced.
Administrative costs: Each meeting brings the inevitable set of follow-up activities. You’ve smartly organized all of your contact records, meeting minutes, tasks, and project milestones in Insightly. That helps out, but there’s still a quantifiable amount of administrative work to go around. Things don’t get done on their own.
Legal review fees: A wise man once said, “The only thing worse than no deal is a bad deal.” Being the prudent business owner that you are, there’s no way you’ll sign something without having legal counsel look it over. That’s smart, but it’s also going to cost you something.
Now, you might be thinking to yourself, “Yes, Matt. These are indeed sunk costs, but that’s just part of doing business. You win some, and you lose some.” I wholeheartedly agree with you. I’m not saying you shouldn’t pursue new business. I’m simply pointing out that there is a real cost that’s associated with any pre-sale process – especially when you’re doing complex deals. Surprisingly, some business owners never consider how much their sales pipeline is actually costing!
Finally, you receive the email that you’ve been waiting for: the software company is ready to move forward. Considering it’s Friday afternoon, you decide to take the crew out for ice cream and celebrate the victory. Everyone is very excited about the outcome.
Then, Monday morning rolls around…
As you stroll into the office at 8:02, you can immediately tell that it’s going to be a stressful day. You glance down at your phone, and you’re surprised to see several texts from various contacts at the software company. Your inbox isn’t much better. The first email is from the client’s accounts payable department, asking you to fill out a ton of paperwork. Another email, from their legal department, is asking you to complete something called a “new vendor due diligence packet” – before the close of business, of course. And, to complicate matters, your IT manager won’t be coming in to the office today – or the rest of the week, for that matter. His wife just went into labor a few weeks early.
The next thing you know, your office clock strikes 7:00 pm. What a day! As you walk toward your car, another reality hits you: this new client is already changing your company’s work patterns.
Incremental staffing costs: Your IT manager’s absence is a stark reminder of your team’s fragility. Should you hire additional staff to support new and existing clients? Doing so could be a wise move, but it also comes with a big price tag.
Non-billable requests: Some aspects of your client relationship simply aren’t billable. Submitting the vendor due diligence packet is the perfect example. On the other hand, failing to submit the packet would probably result in an unhappy ending for your firm. There’s an opportunity cost to fulfill these types of requests.
Other administrative “stuff”: If you want to get paid on time, invoices must get generated. Overdue invoices must be pursued by your accounts receivable team. Paid invoices must be reconciled in your general ledger. And, at year end, you hope that your 1099 will match up with your books. If not, there’s more work to be done. All of this has a cost.
We’ve discussed the hard costs associated with servicing new clients. But, what about the unknown risks? Here are just a few to watch out for:
Nonpayment: Most customers pay on time. Some customers are forgetful and occasionally require a gentle reminder. Others aggressively push the envelope on payment terms in order to optimize cash flow. Remember, you’re not a bank. An occasional past-due invoice will happen, but a pattern of delinquency is detrimental to your own cash flow and stability.
One-and-done: The client’s work agreement has you locked in for a twelve-month period. That’s great for your current P&L, but what about future years? There’s no guarantee of renewal, which is all the more reason why you need a best-in-class CRM system. You essentially have a twelve-month window to lock in renewals and identify upsell opportunities. A tool like Insightly can help you manage such opportunities, reducing the likelihood of “one-and-done” clients.
Refunds (or worse): While most clients are very easy to work with, some can be quick to point the finger when things go wrong. You’re not planning on anything going wrong, but nothing is 100% certain in business – especially when it comes to the IT world. Until you establish a better relationship with the customer, refund requests are a possible outcome that you want to avoid.
Bad relationships: Consulting engagements are more than just the exchange of services and cash. Lasting engagements are built upon an interpersonal relationship between vendor and client. Like any relationship, however, some are better than others. Both parties must proactively work on the relationship. Otherwise, it’s destined for failure.
Balancing Cost vs. Reward
Clearly, there are many costs and risks associated with taking on new clients. In fact, at this point in the article, you’re probably tired of thinking about them all. I sure am.
So, should you dwell on all the downsides? Absolutely not! On the contrary, the smart consultant simply acknowledges them and creates systems to drive profitability. A platform such as Insightly can be invaluable for doing exactly that. Here’s how.
Efficient Pipeline Tracking: The moment a new lead enters your pipeline, Insightly can bring clarity to every aspect of the sales process. How many team members (and hours of work) have been dedicated to closing the deal? Where is the most recent proposal deck? Insightly integrates with the industry’s most widely used document systems, allowing you to quickly attach and link cost estimates, tracking files, quotes, and proposals. The built-in opportunity tracker brings key dates and milestones into the forefront, such as the forecasted close date, time spent in each stage, probability and deal size, and much more.
Effective Service Delivery: Unlike some CRMs that only track the sales process, Insightly provides a seamless transition from sales to delivery. Converting an opportunity to a project ensures your pre-sales information remains intact throughout the customer’s journey. No more jumping between your CRM, project system, and document system. Insightly brings it all together, ensuring a more cohesive client experience.
Upsell Management: Turn your “doers” into your best sales reps. As clients share their frustrations, challenges, and goals, your team can easily add new opportunities on the fly. They’re already using Insightly to coordinate tasks, projects, milestones – why not turn them loose to also identify upsell opportunities?
360-Degree View of Profitability: At the end of the day, you’re not a charity. You need to know if each client is contributing (or detracting) from your overall profitability. Insightly can help you get the answers you need. The library of prebuilt and customizable reports brings life to your CRM data. Pull together client project information, revenue forecasts, and booked business to make more informed business decisions.
Are New Clients Worth It?
If you find yourself routinely asking this question, it might be time to implement a more robust client management system.