Guarding Against Risk Through a Structured Client Selection Process

It has long been an axiom that more industry firms go bankrupt during expansionary periods than during recessionary ones and that firms are more likely to fail due to cash crises than profitability problems.

Mike Clancy 

It has long been an axiom that more industry firms go bankrupt during expansionary periods than during recessionary ones and that firms are more likely to fail due to cash crises than profitability problems. It seems the industry is required to re-learn this rule in painful ways in every business cycle. And even though the economic indicators are pointing toward the likelihood of an industry downturn in the next couple of years, we remain in a period of rapid expansion in many parts of the country today. Which begs the question: How do you prevent your firm from being another cautionary tale in an industry already full of them by choosing the right clients?

Reevaluate Your Relationships
Often the primary challenge facing good trade contractors is that their performance causes their GC and CM clients to “love them to death.” In other words, your ability to deliver on your promises and provide a good service and experience for the prime contractor causes them to prefer you in selection. While this can be a good thing from a sales and business development standpoint, you can very quickly outgrow your ability to deliver the same experience. Not only does this lead to performance challenges, but it can also damage the very reputation for service that won you the enhanced position.

Additionally, some of the prime contractors with whom you may have built an outstanding relationship may not be the best ones to go all-in with. Perhaps they favor you because your strong field leadership overcomes some shortages of their own, or because your accommodating position on “getting things done” in the field means you are less likely to press your rights regarding changes. As you take on more work with these types of clients, you may find it difficult to justify the same behavior financially.

For this reason, you should be evaluating your client pool across several dimensions and making project selection decisions accordingly. Some of those dimensions include:

  • Profitability – How often do we meet or exceed budgeted profit on their jobs?
  • Cash flow – Do they pay in a timely fashion? Do they drag their feet on getting your change orders approved?
  • Liability – What is their contract posture? Do they push unreasonable risks onto you, or are they collaborative?
  • Project diversity – Does their strategy have them unbalanced into any particular markets or segments that may be especially impacted in a recession?
  • Professionalism – Are their managers at all levels effective and professional? Do they treat you fairly?
  • Predictability – As a partner, do you generally know how they will behave and operate? Or is their management posture wildly variable depending on who you are working with?

Tie Client Selection to Strategy
At the end of the day, your ability to thrive for the long term is dependent on how well you focus on the right geographic markets, segments, clients, and projects. Tying this keen understanding of your firm’s strategy (as we discuss in this article) to your knowledge and perceptions about your clients and their various strategic directions allows you to choose the set of focus clients that most closely aligns with where you want to take your business. If you lack clarity about which customers should be preferred on the basis of their alignment with where you are headed, you should at least be clear about which ones make the most sense from a behavioral perspective. By selecting the right clients, it is more likely you that will beat the odds and continue to thrive regardless of where you are in the business cycle.

Mike Clancy is a partner and strategy practice leader at FMI. Steena Chandler, a principal in leadership and organizational development at FMI, also contributed to this story.