Entrepreneur - - By Andrew Neitlich

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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