Good Revenue and Bad Revenue!

The pressure of financial markets and private investor groups create an atmosphere of revenue at all costs in a lot of firms.  Whether it is making a monthly or quarterly sales goal or a sales rep making his number many times outweighs the rational thinking when choosing to signing new clients. 

I have been around long enough to know a good contract (good revenue) from a bad contract (bad revenue).   When I say bad contract, it does not mean the company will lose money on the contract; to the contrary some of the worst contracts can actually make the company money (in the short term). 

Here are some examples…

The first client was a great fit for the company’s product and implementation was complete in just 4 months.  The client paid several hundred thousand dollars a year for the platform and $150,000 for the installation and configuration.  Following the successful install the client recommended the product to 3 other business units.  Within 2 year the client was paying over a million dollars a year for use of the platform across 4 business units.

The second client was not as perfect fit for the platform but with some additional development would be satisfied with the proposed solution.    Signing the client allowed the firm to meet its numbers for the quarter and got the Private Equity firms off their backs.   In this case the client agreed to pay several hundred thousand dollars a year for the use of the platform and expected the implementation to cost about $250K.  Needless to say the development was more complicated than first thought and the implementation took five (5) times as long as expected and at a cost well over $1M to implement.  While the economics/margin of the client was in line with company’s goals the client was not happy and made that known throughout their firm.  The un-expected negative effects of the deal were as follows:

-          Development resources typically doing product development were used to implement this one-off solution and affected the product schedules as well as commitments to other clients (more unhappy clients).

-          Two additional implementations in the second client were canceled due to delays and loss of confidence in the platform.

-          Project teams could not move on to other implementations…. The calculated opportunity loss was over $1M a year in recurring revenue

-          At the end of the contract term the client canceled their agreement (most clients of this company would stay for 6-8 years)

You can see this company would have been better off not signing the second contract.  I did not even go into the client satisfaction effects of other clients on the overall growth of the firm.  If you are interested in learning more about the effects of customer loyalty on a firm’s growth Fred Reichheld has written a number of books on the subject, all good reads.