Classic Case Study: An effective but risky strategy for late-paying clients

“I still did not receive my payment for month-old work. I’m kind of hesitant to speed up work on your project because I have several projects in progress and my priorities are shifted towards the paid ones.”

So a web developer emailed me the other day. By the way, we (my business partner and I in a web development venture) like her a lot: She is fast, professional, has reasonable rates, and does high-quality work.

Her email was in response to my asking her to give us a sense of when we can expect more project deliverables, as well as to ask if she could devote more time to our project.

Her reply was a bit of a shock to us. We had paid her up front when we began work, and since put two checks in the mail. Apparently she had not received these two checks, which did not make sense. Also, while we knew she was awaiting payment, she never told us that she was on the brink of slowing down work on the project.

The above strategy got our attention, because we really wanted to accelerate progress on our project and, so far, she was our main resource (and design/usability is the bottleneck on this project).

At the same time, it got us frustrated, too, because it came as a surprise given that we thought the “checks were in the mail.”

So, we called her immediately to find out how we could resolve the situation. When we did, we learned that she had moved her office without our knowledge, and so her checks were most likely being forwarded. After our talk, she did accelerate her work, and in fact exceeded our expectations.

I think her approach was in general a good one to deal with clients who are late in paying, with some major caveats. Here are some further thoughts:

WHY IT WAS EFFECTIVE:

- It got our attention. We scrambled to get her on the phone and resolve the problem.

- It used her leverage over us — our need to get work done.

- She responded with an increase in solid production after we talked, thus making up for the tension in the situation and rebuilding any tears in the business relationship. That was a key, smart move on her part, and a great lesson for anyone reading this: Reward the behavior you want to see.

WHY IT WAS RISKY, AND HOW IT COULD HAVE BEEN HANDLED BETTER:

- We needed the project done, and so had some conversations about how to phase her out quickly (after all, we thought the check was in the mail). Her move could have cost her a lot of work.

- She should have sent a warning first, so that we could have resolved the situation without taking it to the brink. After all, honest mistakes on both of our parts led to this problem. The warning should have read: “I still haven’t received payment and am concerned. If we can’t resolve this issue within the week, I will need to focus my time on other, paid projects.”

- We both should have discussed payment terms to know each other’s expectations. We paid her up front to get her started, and didn’t know that she preferred doing business this way. Our normal billing pattern, like most companies, is Net 30 Days. To her, 2-4 weeks post completion of work is a major issue. We have since come to terms.

Interesting case study about payment from both points of view, don’t you agree?

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  • http://www.realityedge.com.au mrsmiley

    It actually highlights another problem, and that is the project owners faith in just the one person. While it is sound practise to put that much faith in the one person or organisation, as I’m sure this developer has proved herself over time, its not always sound to not have a backup “just in case”. If she had of walked, this project would have been stuck in limbo until another developer could be found to finish the job. It is true that it could have cost her a lot of work, but it would have cost you more in terms of time and money lost in obtaining a new developer and getting them up to speed on the project.

    That said, I’ve had this exact same scenario happen to my company, where we had agreed with the client that they would pay up within 14 days, but the guy that we made the agreement with didn’t talk to their accounts department first. If he had of, we wouldn’t have had the hair tearing off sessions wondering why they wouldn’t pay up. We warned them several times they were overdue. In the end, I bypassed the guy I made the agreement with and spoke direct to their accounts department. All I got was “as you can appreciate, we have thousands of creditors, and we only pay up on the last day of the month”. While I have no issues with their payment cycle, I did have issues with the way it was handled. Unfortunately, the big players dont always appreciate what it is like from the other side in that you often rely on that money coming in on time to keep your cash flow healthy.

  • http://www.perezdesigngroup.com PerezDesignGroup

    One major ball was dropped here and it had nothing to do with you, mrsmiley. Developers need to run a tight ship to avoid issues like this. What was missed?

    She should have sent “We Have Moved” notices to all her clients followed with phone calls a week or 2 later. Had she done this, the following benefits could have been reaped…

    -Anyone sending payment would be aware of potential mailing issues. You could even make accounting aware in case the check isn’t cashed in a timely manner. This also prevents potential fraud should the check and account number fall into the wrong hands.

    -Follow-ups with existing and past clients are easier over the phone since there is an ice-breaker already present. “Hey our move went great! How’s business been for you?” This would have been an awesome marketing opportunity. Especially if she’s offering new services.

    -Oh, yeah….her! Let’s face it, once the work is done, clients forget about us. Monthly calls and “We Have Moved” notices put you back on their mind. This is very important. If they don’t see you or hear from you, you’re dead to ‘em. And make sure you keep track of Birthdays! Sounds cheesy but it makes a difference.

    Note: I have a buddy that works in Sales for the Florida Marlins and he keeps track of customer’s anniversaries, birthdays, major events and children’s names. Before callins a customer, he studies the list. As a result of his efforts, his commission income last year was in the $60k range because of his superior contact skills. And he’s made tight alliances. Web development is no different. Go the extra d*mn mile already. It’ll come back around.

  • Afro Boy

    This risky strategy can work well when the client is desperate for their project to be completed.

    We’re in a situation at the moment where the client surprisingly isn’t terribly fussed about the delivery date. We are ready to make the site live, they keep saying the cheque’s in the mail, but nothing ever arrives.

    How do you create a sense of urgency in a situation where there is none?

    Af.

  • http://www.perezdesigngroup.com PerezDesignGroup

    Afro Boy, that is a tough situation to be in. I don’t recommend going live until full payment is rendered. If a test site is up, make sure it resides on your own private server and not their’s. But I’m sure you know this already. The only way to avoid this in the future is to place payment milestones in your contract. That is, request 50% at the beginning, 25% more in 30 days and the final 25% after 60 days,etc. That way you’re guaranteed payment after 60 days regardless of how long they take. Clients tend to speed things up once they’ve paid in full. And if they don’t, you’ll at least know 30 days in and have just cause to cease further dealings with them since they breached the contract.

    For now, you may have to somehow “create” a sense of urgency. Sometimes a letter outlining your project completion and requesting payment will assist. After all, written notifications are critical in payment disputes. A certified letter may get even more attention but I would hold off on that as a last resort. In a worst case scenario, you may just have to wait it out.

  • http://www.realityedge.com.au mrsmiley

    PerezDesignGroup, I’m not sure exactly what ball you are referring that I dropped. I actually did everything right in that case. I made an agreement with the guy in charge of the project (I was the developer in this scenario) who promised payment terms that his accounts department was not prepared to deliver. I had no way of knowing this until it became an issue as he had full authority to sign off on the project.

    Afro Boy, in order to create your sense of urgency, you need to restate the goals of the project. You need to remind them why this project is so important to their business and why they went ahead with it in the first place. Once they realise they are missing the vital ingredient to their business, they should change their tune. It’s all about perspective. They have obviously lost sight of the reason behind the project and need reminding again to rekindle the interest in the project.

    If the so called cheque is in the mail, you could ask for proof. It’s possible they have your details incorrect and have sent it elsewhere. Your old office perhaps :D

  • cyngon

    PerezDesignGroup mentioned keeping track of client birthdays, anniversaries, children name’s, and other personal information.

    I think this is a great idea, but how do you get the information to begin with?

    I’d feel a bit akward flat out asking a client what their birthday is.

    Andrew, care to chime in?

  • http://www.warpspire.com Brak

    cyngon> Small talk does wonders :) No, seriously. Just chit chat a bit, maybe mention a birthday or something and ask them if they have a birthday coming up. In the case outlined above, I’m sure his meetings with clients get a lot more personal than most web design projects go. But always remember, if you take the time to get to know the client well – you’re almost sure to be their contact for the rest of their carreer and their reccomendation to their peers. Why not take a big client out to dinner to celebrate their site launch? Things like that go a long way.

    By the way Perez, that advice you gave was very solid and very true. The extra mile is always paved in gold or silver.

  • Afro Boy

    Thanks everyone. Definitely including payment milestones in all my contracts since then (I updated my templates a week after their payment failed to arrive)! They’ve paid now too which is great.

    I think a combination of urgency and business goals (tnx mrsmiley) makes for a great convincing argument. Will definitely keep that in my our their minds.

    Cheers,
    Af.