Terminating toxic customers: enhancing firm profits through customer cultivation.

• Author: Morris, Daniel D.

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...