Podcast  |  Finance,

1.3: MSPs, Here’s Why and How to Regularly Fire Clients

how to fire a client - goodbye message on a typewriter

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“We make player trades… to get to the championship”

Firing clients from your MSP won’t solve all your business problems, but you might be surprised how much it can fix or improve. MSP expert Erick Simpson shares how to grow by cutting clients including:

  • The other critical task you must complete when firing poor-fit clients
  • What getting rid of clients has to do with HR
  • How cutting $50,000+ in gross revenue helped Erick’s company knock 2 other metrics out of the park
  • Whether to fire clients and then replace them, or bring on replacements first
  • What to do when you no longer have poor-fit clients to trim

Who’s on this episode

Host: Jennifer Tribe
Guest: Erick Simpson, MSP author, speaker, and consultant

Erick Simpson, MSP expertErick Simpson built and sold one of the very first MSPs in the industry and co-founded MSP University, where he grew and coached a channel of 30,000 IT solution providers through their MSP transformation. He’s the creator of the MSP Mastered® Methodology for business performance improvement that’s been licensed by many IT channel distributors and vendors. Erick is a technology business expert, influencer, thought leader, speaker, and author with four best-selling books to his credit. He also co-hosts the ChannelPro 5 Minute Roundup Podcast.

Episode transcript

Jennifer: I’m Jennifer Tribe and this is Workflow, the podcast about growing a happier, healthier MSP. More profit, less stress.

Today on the show, why and how to fire your clients.

Not all of them, of course. Just the ones that are holding you back from being a happier, more profitable workplace.

Are you stuck at a growth plateau? Is your profitability dwindling? Are you having trouble hiring and keeping techs? Are you working 80-hour weeks? It’s time to take a good, hard look at your client list.

Letting go of poor-fit clients is obviously not a silver bullet for all your business problems, but you might be surprised at how much it can improve.

Today, we dig into exactly how to grow by cutting, including how to identify the clients you’re better off without, when and how to successfully offboard them, and how to increasingly finetune your offboarding over time so you’re using it as a growth vector.

My guest today is Erick Simpson, a former MSP—one of the early innovators in the managed services world actually—who now spends his time consulting and training MSPs and channel vendors. Erick has written four books for MSPs (links in the resources section below), he’s a frequent speaker, a multi-award winner, and just an all-around wealth of knowledge and experience in this industry.

Now, the idea of firing clients is not uncommon. You’ve probably heard it before. But admittedly it can feel really scary to think about, especially when you’re small and the contracts you have landed feel hard won. You don’t want to let go of them. But shedding clients who no longer serve your business is like pruning your garden of dead growth so that your plants can put all their energy and resources into growing new, healthy shoots.

The analogy that Erick uses is that it’s like building a champion-level sports team.

“Understanding what drives true growth and profitability”

Erick: We want to get to the championship every single year. But as we know, the sports fans among us, we don’t keep the same players every single year for 20 years. We make player trades in order to get the right players to help us get to the championship every year. In my analogy, all of our customers and clients are our players. We need to trade out our underperforming players in order to bring on the right players in order to help us get to the championship. And that’s really the philosophy here is how can we bring on the right clients that value our services, that pay us what we’re worth so that we can continue to grow and add to our staff and compete in today’s very challenging talent hiring and retention market.

Keep in mind, Jennifer, that the more C customers we keep on our client list, the more that’s taxing our existing resources. By replacing an especially noisy C customer, we may be able to take on one or more A or B clients for the same technical debt. What I mean is the resources that we have to serve those clients. This realization comes from maturity, right? Growing your business, understanding what drives true growth and true profitability.

If you’re not spending time firefighting and reacting to these C customers, you have a lot more time to build stronger, more strategic relationships with these A and B clients. And that’s one of the other challenges is the C customers kind of rob you of the time that you should be spending with these A and B clients.

And there’s a morale impact that happens when you start executing on this strategy. Your staff is going to like it. They’re going to say, Wow. Finally. I’m glad. Thank you. And having direct conversation with the staff says, look, from now on, we’re only taking these types of clients on and folks that don’t meet this, we’re going to find a way to exit. That’s going to have a tremendous morale boost and improvement. And you couple that with some succession planning and strategy and you couple that with bringing in more profits so that you can compensate your technicians better. You’re going to keep them a lot longer and you’ll be able to stave off some other offers of folks that want to poach them out of your company, or at least give you a way to negotiate something to try to keep them.

“Can we build a true business partnership together?”

Jennifer: You mentioned A, B and C clients. How do you segment your client base? How do you assess what criteria you should be looking at to determine this is an A client for us, this is a B client. This is a C client.

Erick: A couple of the easy checkboxes are, do they fit within our box of services? Sometimes we’re delivering services to clients when we first start our organizations, we’ve said, yes, we do that but really, it becomes kind of this outlier thing. Like we’ll have one client that runs this particular piece of software or they’re in this just unique, weird vertical and we brought them on. So do they fit within our scope of services? Do they align with our strategic requirements? Are they reactive kind of business operators? Are they strategic? Can we have strategic conversations? Can we roadmap with them? Can we add more value than being a reactive firefighter?

What about cultural fit? Do we like them? I mean, I fired clients because they just were mean. They cussed out a technician or two. That’s just unacceptable, right? So are they someone that we would like to go out and have a coffee with or a beer with?

Do they have budget? That’s an important one. And several other things that MSPs and IT providers can adjust for their own checklist of things. Geographic territory, those types of things. Probably the top one is can we build a true business partnership together where we’re not just seen as another vendor. We have to be able to add value to the conversation and to their business to be seen as an irreplaceable part of their business growth strategy.

Jennifer: I get the sense that a lot of MSPs are reluctant to think about letting go of clients or talking to them about changes that need to happen. In your experience, is that true?

Erick: Absolutely. When we first start our MSP practices, a lot of us will take anybody that comes along because, hey, we’ve got to keep the lights on, right? But over time, as we begin refining what our ideal client persona or avatar looks like, then we begin searching to attract those types of clients. And in many cases, some of the clients that we started our businesses with may still be on our client list. And these are the clients that are typically the ones that we have over delivered services, right? We’ve gone way above and beyond and said yes to so many things because we were just excited to have them as clients early on.

And typically they’re enjoying probably our best rates ever, right? Because over time, when we start looking back at our businesses and looking at our client list and we start to see the segmentation between what clients are paying us, it’s typically the legacy clients that are paying us the least because our maturity, operational maturity probably wasn’t where it needed to be when we started our businesses. So we haven’t been truing them up regularly. Or maybe we were just inexperienced at having those more strategic conversations early on that allowed us to say, hey, business costs are going up for both of us. We’re sorry, but we’re going to have to increase our rates just to meet the current cost of doing business and things like that. So yeah, it can become very awkward to have those conversations early on.

Once we begin having those conversations with C customers and helping them find other homes, it tends to get easier over time. So the initial awkwardness and the initial reticence to have those conversations, it’s just like anything, right? The more that we do it, the better at it we get. And then over time, what ends up occurring is we don’t take on any more C customers, we’re really bringing on those A and B clients. And so we tend to have those conversations less over time if we’re doing it correctly.

“Don’t get stuck in that legacy pricing”

Jennifer: How often should an MSP be evaluating their customer base, looking for these C clients?

Erick: Yearly. We should start toward Q4 kind of looking at our client list and segmenting, identify, get your scorecard ready. What are those checkboxes that you’re A clients need to fill and then score every client against those checkboxes. And the ones that come out at the bottom, determine which one of those makes the most sense to exit and do this on a regular basis. This is the way that you continue to perfect your client list and make sure that you’re working with those clients that fit best with your organization, with your vision, and you’re really true strategic partners with.

It’s not only about exiting customers to make room for A clients. It’s also about yearly reviewing of your pricing structure and making those rate increases and fee increases as necessary every single year so that you don’t erode the target profit margin that you established when you first brought that client on. Erosion of profit margin is also an enemy. We’re combating kind of a capacity planning issue as well as a profitability issue when we’re exiting C customers. But we also have more work to do to make sure that our existing clients are trued up and we’re maintaining that profit margin target with those existing clients so we don’t get stuck in that legacy pricing client situation where we’ve got some clients paying us less than what we’re bringing on new clients for.

Jennifer: How do you recommend offboarding C clients?

Erick: I tend to like the ability to help them find another home. So I know a lot of MSPs and IT providers know who their competitors are. You may even be outsourcing some of your work to some of these other providers. They would be happy to take some of these clients as long as you’re not giving them the worst of the worst of the worst. We don’t want that. Right. You know what I mean? There’s a way to handle this so that you’re doing right by those customers and trying to help them find another home and also being helpful in the transition from your services to the other provider services.

Jennifer: What if you’re in a situation where it’s a PITA — pain in the ashcan — client and they’ve not been very nice to you and your team, or they just won’t pay what you want them to pay? How do you pass that over to another MSP saying, We don’t want this client. Do you want them?

Erick: The PITA clients, I wouldn’t wish them on anyone. It would just simply be, you know what, this doesn’t seem like it’s a fit anymore. Let’s start planning for your transition to another provider. And then at that point, it’s up to them to go find that provider. Just reassure them that you have a process to help them transition smoothly. Clients that don’t have the budget to meet your fees, that’s a little bit different. There may be other providers out there that are smaller that would be happy to take those on. Again, I have heard of other providers out there back in the early days that, you know oh, yeah we’re happy to give our competitors our worst clients and customers. I myself, I want to sleep good at night knowing that I’ve done the best that I could for both my exiting customers as well as the providers that I’m referring them to.

“95% of our customer service issues went away”

Jennifer: Let’s talk a little bit about transition timing, because obviously firing a C client frees up resources to serve A clients, but also to do some sales and marketing to land A clients. But would you recommend firing clients before you have the new ones to bring on or waiting until you’ve got your new clients ready in the wings before you exit the others?

Erick: That’s a great, great question, Jennifer, and I’ll share a story in the way of answering that. I started my practice in ’97. About 2004, 2005 is when we started looking at how can we scale more broadly? How can we take on more clients without having to hire so many staff? Back then it was the time and materials days for us. We did a lot of projects. Everything was based around how many hours we had to give. For us to hit our revenue goals, we would have had to hire about 20 technicians and engineers, just based around how many hours we could bill them out and for what rates and things like that.

And so we started thinking about how can we do this differently? And this is when we came up with this flat fee IT service model. It wasn’t called managed services yet, you know. So we started developing this flat fee IT service model and we introduced it to all of our A clients first. The A clients, they didn’t really understand all of it because we didn’t yet either. But they said, you know what, we trust you, Eric. If you think this is how we should continue working together, we’re happy to sign up. Then we approached our B clients and we found that, yes, there were a lot of B clients in that group but there were some A clients in disguise which was proof positive that we just weren’t spending enough time with them to develop that relationship into an A client relationship.

But we also discovered that we had a bunch of C customers in there. So we transitioned a good percentage of our B clients as well and then we were left with all these C customers. So I think out of a customer list of about 220, we transitioned about 70 or so to flat fee IT services and the rest we had to have a conversation about. We were generating about $50,000 or $60,000 a month in just reactive time and materials work from this pool of C customers. I was loathe to see that revenue go away. But I was convinced by my team to look, either we’re in the pool or we’re out. Either we’re going flat rate or we’re not. This kind of reactive break-fix stuff is working against our strategy.

So I agreed. Okay, let’s exit these C customers. And over time we did that. What I was surprised to find, Jennifer, were two things. Number one, 95-plus percent of our customer service issues went away. It was just like amazing how many challenges we had with these C customers because they weren’t very strategic and all the other reasons we’ve been talking about. The second thing that blew me away that I wasn’t expecting was that once they were gone, along with that $50 or $60,000 a month in top line revenue, we were actually more profitable, more profitable after we exited them. Because what happened was you know, they would be mad. They would want discounts on their invoices. We were writing things off. A technician would be onsite doing work for them, but they’d be on the phone trying to help another client while they were there. And they were angry about that. So they were always negotiating write downs on their invoices or slow paying us and all this other stuff.

Back to your question: When is the right time to release a C customer? Do you sell first and exit them? I guess it really depends how much you’re relying on that top line revenue for operating costs month over month. My advice would be just to evaluate your tolerance for that. If you have some A clients ready to sign up, I say, evaluate what’s going out the door as you’re bringing stuff in. If you just have PITA clients that are taxing your company morale along with slow paying you and not paying you profitably, then you may decide to exit them just because it allows you now to spend more of that strategic time, not only from a sales perspective to bring on A clients, but spending more strategic time with your A and B clients. Trust me, I think you know this, Jennifer, spending more time with those A and B clients will uncover more opportunities and more budget. And it’s a lot easier to get an existing client to pay more money than it is to bring on a new client. So there’s a couple of ways that you can overcome that top line revenue deficit.

“You have to sharpen your pencil”

Jennifer: After a few years of diligently segmenting and offboarding your C clients, I can imagine that your C bucket might get quite small. As your sales criteria tighten up and you mature as an organization, your C bucket might have no one in it potentially.

Erick: The more you do it, let’s say the first year you do it, it’s kind of tough. You’re making some tough decisions. You’re kind of working your way through it. You’re feeling kind of bad about it, but you’re going to come out positively. The next year you do it OK you feel a little bit better about it. I think by the third time you’re doing it, you really have to be a little bit more aggressive maybe is the word or more surgical. Like there will be times when you’ll be like, Well, I’d love to keep this C customer, but I think you have to really refine your profile for clients. It may come down to everything, they check every box, but they just aren’t growing.

So as you get down to that type of filtering it’s just a simple growth decision. If they’re not growing and otherwise everything else is cool, then the assessment becomes, well, how many of these clients do we have that are cool that we love, but they’re just not growing? And then you have to sharpen your pencil on saying, well, they are taxing our resources now. We may have to be a little bit more direct in this decision making and say, okay we love them. If things were different, we might keep them. But the job market being what it is and all my staff and capacity planning being what it is, if I exited these three C customers, I might be able to bring on four or five A and B clients.

As you become more mature from a financial maturity level and start looking at margins, it may come down to are we hitting our growth goals that we’re going for? Are we maintaining our margins? Are we growing those margins? And sometimes the more that we do this kind of segmenting of clients and exiting, those decisions become a little bit more difficult if we’re doing it on a yearly basis. But by the third year you’re doing it, you’re probably not going to be having to exit clients because they’re not growing or because they’re not paying because remember, the last couple of cycles you’re bringing on those clients that are meeting those strategic objectives. They are growing, they have budget, they’re more strategic. So hopefully it’ll kind of even itself out over time and you won’t get into a situation where you’re having to do a large scale exiting of clients. Maybe it’s one or two once a year for different reasons at that point.

“You’re going for quality versus quantity”

Jennifer: There’s a professional services consultant named David Maister who’s been around for decades. And and his advice was always, you should just be dropping your bottom 20% every year no matter what, even if they’re not like a problem client, just they’ve fallen to the bottom of your list, bottom 20%. Out they go. What do you think of that?

Erick: I agree with that. And I’ll add to that, if you’re doing that, what you’re doing now is for the new clients that you bring on board, you’re raising your rates. This is how you continually raise your rate. So you’re dropping 20 or 25% of your clients that are paying you the least or the bottom. And then you’re raising your rates beyond what you’re charging your A clients today. So if you’re at $250 per user today, the next time you bring on the next series of clients, it’s $275 per user, right? You’re going for quality versus quantity, right? We’d rather serve 50 clients rather than 150 clients if we’re making the profit that we’re looking for.

You know, I learned that whole A, B and C segmenting and replacing clients from an actual client of mine back in the early days. He ran this accounting firm and I asked him, what is it that you’re trying to achieve with your business? And he says, Well, I want to be the highest paid accountant in Orange County, California. And I had never heard anything like that before. It sounded pretty bold. And I said, Well, how do you plan on doing that? He says, Well, every year I go through my client list, I get rid of, I sell…. He was selling these C customers of his to other accountants, and then he would raise his rates for the next batch. And he did that every single year.

So that’s how he was going to achieve his goal of being the highest paid accounting firm in Orange County. That type of process can be challenging for some folks. To sit there and say, here’s the line, everybody below it, well, we’re just going to build on the next one. But if you’re in a growth mode and you’re strategic about it, you have to make room for these new clients and you have to raise your rates. And guess what, Jennifer, if we’re doing that on a regular basis, we may not have to grow our teams as much as if we didn’t do that.

The biggest challenge I hear from partners all the time is like, man, I need to hire more techs, I need more engineers, I need this and that. And it’s because they’re keeping, I think, a lot of their clients, rather than maybe taking an approach like this that says, look, every year I’m going to exit, it doesn’t have to be 20%. It could be 10%, it can be whatever it is. But again, you’re kind of load balancing your resource capacity needs along with it. So it’s not simply about making more money, it’s about how you utilize that top line revenue to reward and keep good staff and to hire the staff that you need along the way so that allows for controlled sustainable growth.

Jennifer: That was MSP consultant, author, and speaker Erick Simpson.

What did you think of today’s episode? Let us know with a review for Workflow on Apple Podcasts or send me an email at podcast@syncromsp.com. If you do leave a review, take a screenshot of it and email it to me – podcast@syncromsp.com – and I’ll send you your choice of a free Workflow or Syncro t-shirt.

And don’t forget to tell your friends about us. Until next time, this is Jennifer Tribe. Thanks for listening.

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Jennifer Tribe

Jennifer Tribe

Syncro’s director of content. Espresso-fueled Canadian nerding out over plain language, productivity, and podcasts.

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