Discover what a 'leaky bucket' can do to you

   photo by peasap 

Leaky buckets aren’t very efficient (and it’s really hard to find a good leaky bucket picture…).  😉

One of my clients has long been having a proverbial ‘leaky bucket’ problem with their revenue and they’ve been unfortunately leaving a lot of it on the floor.  When times were good that revenue leak wasn’t perceived as that big of a deal – they were still making money, still growing…everything was good.  However their business (like most) has been impacted by the economy and when things started to tighten up, those leaks really started to be an impact.

Where were the leaks coming from and what could they do about it?

This particular client does a fantastic job on delivering their product – they are very professional and when it comes to creating what their clients want they have really strong processes and procedures and people that know what they’re doing.

However…(you knew there was a however), when it comes to the business aspect of the transactions, things aren’t quite as polished.  We did a quick review of 3 different jobs that happened in the last couple of weeks and found that they were ‘leaking’ around 20% of their revenue, maybe more – where were they losing it?

Lack of Clear Expectations

Because they enjoy what they do and the love to help their clients, they will often jump into projects with a just a handshake and start doing the work.  They might throw together a quick Statement of Work, but it’s generally not comprehensive and they feel like they know what the client wants.

A lot of times that might turn out fine, but at least in the examples that we reviewed, the clients came up with additions and changes after the work had been delivered.  Since there wasn’t a clear understanding on both sides on what was to be delivered, my clients would go back and do the extra work the client wanted…for free.

Lack of the word ‘No’

In addition to the problem above, there’s a strong culture of wanting to please the customer and do a great job.  If that meant going over budget by 20%, 30% or more, then the people doing the work were okay with that. 

Of course the people doing the work aren’t the ones that are ultimately responsible for the bottom line of the company, overall profitability and the trying to figure out how to keep the lights on during difficult times.

There’s a distinction between great customer service and giving things away inappropriately.  If you’ve got a customer that expects that you should take a loss on their business, then they’re not a good customer – you’re not going to make that up on volume.  You can still do a great job for your customers without giving away the farm.

How to fix the leaky bucket…

Here’s what my client is doing – it sounds simple (and it is) but it’s a pretty profound change that will make a big difference.

Process and Gatekeeper

The first thing they’re doing is putting in a gatekeeper when it comes to starting work.  They are no longer allowed to start a job without having a complete and thorough Statement of Work that’s been signed off by the client and by an officer of the company.  There may still be disagreements on what’s in and out, but it should cut down on a lot of misunderstandings – and ultimately the clients should be more comfortable knowing exactly what they’re getting (and not getting).

Contingency

The second thing they’re doing is to implement a contingency fee on all of the work.  By adding a 10% buffer into the original estimate, the people doing the work have the leeway to do the little things that might have been missed up front and not have to worry about being perfect.  If the contingency isn’t needed, then it goes back to client – who’s thrilled that they’re getting what they wanted and some money back.

Escalation

Along with the contingency, they are also adding in a new process that if additional work is needed / wanted by the client and it’s going to throw the estimate off by 20% or more, then they have to get approval from company management.  This position someone in the company that isn’t working directly with the client to be the enforcer.  The reality is that most customers understand when they’re asking for more and either don’t mind paying for it or agree that they don’t really need it.  However if they can get it for free they’ll take it.  By making it a clear open discussion, then that leak can get plugged pretty easily.

Communication

Finally – the last thing they’re doing is clearly communicating these changes and expectations to their clients up front.  Unfortunately they’ve been training their clients for years that all of the extras are ‘free’ so there is some risk that this comes across as a negative impact compared to what the clients have been used to.   However by explaining that they don’t want to raise prices but they do want to make sure everyone is getting what’s agreed to up front, most customers should be fine with it.

Profits

The really cool thing about these changes is that all of that recovered revenue will go to the bottom line – it’s found money that they weren’t getting yesterday and it will dramatically help their profitability and at the end of the day it’s not how much you make, it’s how much you keep.

Do you have a leaky bucket?  Have you checked to make sure that you don’t?  I’d love to hear other stories about this – share your thoughts in the comments below.

Shawn Kinkade  Kansas City Business Coach