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.
