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3 posts from March 2013

Design Business by the Numbers: Extending Zero Credit

Net Zero

This is a post in an occasional series I'll be running on ChangeOrder about the benchmarks that design businesses use to help maintain their long-term success. These benchmarks are drawn from the research that I conducted when writing Success by Design: The Essential Business Reference for Designers.

When starting up a design studio, it can be tempting to do whatever it takes to win project work with new clients. A common mistake, however, is to extend credit to new or existing clients rather than require payment up-front for project work.

It's never a good idea to extend credit to a brand new client, and minimal credit should be extended only for long-term clients that have a strong track-record of deposits, on-time payments, communicate about honestly money, and have asked you for the privilege.

In our laissez faire, credit-saturated culture, it can seem as easy to use credit cards as it is to provide credit to others. However, as a business owner, taking on debt in order to fulfill a service isn't wise. Take a deposit on the work that you'll be completing, with a signed contract in place that outlines a payment schedule tied to your project milestones. No work should start until the first payment is received and deposited.

Running a credit check on a client isn't enough. You may discover that a client has ample income at their disposal to pay you, but that isn't the only issue. You want assurance that, as the project progresses, there will be a fair balance between what compensation you receive and the you've created that is shared with the client.

Imagine in your head an old-fashioned scale. This is the kind where you place objects on one side of the scale, then various weights on the other to assess how heavy the objects on the other side are.

Let's say the client has one side of the scale, and you have the other. On your side, you pile up your expertise, which they've hired you for. It's invisible and weightless—you haven't created anything tangible yet. On the other side, the client places their money. Oh, wait—they haven't paid you yet. So right now, the scale has nothing on it. It's in balance, right?

Wrong. Your side is burdened with your studio's operational overhead, the hours that you'll be spending working on the client's work, and the projected value of each deliverable that will be provided in return for due compensation. If you aren't paid up front, the scale is always tipped in the favor of the client. With each hour that you plan to bill and each deliverable that you provide without compensation, things are further and further out of balance. You're beholden to the payment terms you'd set up in the contract: all the time you've spent working on the client project, plus all the time it takes for them to pay you back.

The larger the client or project, the harder it is to make this happen. They may have a blanket policy for how they handle vendors, or for how payment up front should be handled. They may be under the gun and want to start the project as quickly as possible, no matter what due processes must be followed. And in some cases, they may believe that since they have the money, they have the leverage. Believe it or not, some companies have unspoken policies to drag out payment for vendors as long as possible, as they can earn interest on that large amount of money in the short term before it's disbursed.

The right way to handle the situation is to make what's on the scale even. When you start the project, the client has place a deposit on their side of the scale, and on your side, you're placing a hold on the time and materials necessary to get the work done equivalent to that deposit. If you aren't paid up front for that first chunk of work, you're the one bearing the full onus and risk.

Instead of offering Net 30 payments on invoices for work that you've fulfilled, set up a clear schedule for payment. Depending on the length of the project, split it up 50/50 (half at start, half when you're halfway done) or 33/33/33 (a third at start, a third at the first third, and a third before the final stretch of the project). If the payment doesn't arrive on time, per the terms of your contract, you stop work and there is a fee to restart the project (this is in your contract).

No matter what, ensure that your final invoice is paid before you deliver the final work for your project. This isn’t NET 15 or NET 30. It’s NET 0. Mark the final invoice "Net 0" and circulate it with them well in advance of final delivery, so you don't end up in a situation where you either withhold providing your final deliverables to the client or end up showing a "good faith" measure.

Letting invoices ride out can be "business as usual" if that studio has a strong cash-flow buffer and clients that regularly pay on time or early on those estimates. You may feel like you have little to no leverage in negotiations, especially when it comes to the size of your project fee or when you expect to get paid for the work. But it's your business, and your rules regarding how you run it and how you manage your company's cash-flow. Choose them wisely.

Other posts in this series include:

Design Business by the Numbers: The 80/20 Rule of New Business Development

Eighty Twenty Rule of New Business Development

This is a post in an occasional series I'll be running on ChangeOrder about the benchmarks that design businesses use to help maintain their long-term success. These benchmarks are drawn from the research that I did when writing Success by Design: The Essential Business Reference for Designers.

Do you track how many of your clients come back and work with you again? I hope so. Ideally, 80% of all new business should be repeat business. It should come from your existing clients that you're working with right now, or clients that are returning to you after a successful project in the past. This is the 80/20 rule of new business development. You should aim for an 80% retention rate for existing clients, and diversify your client base with 20% new clients and projects.

I'm not suggesting, however, that 80% of your retained client work is coming from a single source. Many design studios will end up being extremely successful with a single client, and without paying attention that client will command fifty to eighty percent of the studio's portfolio of business. (At this point, the studio needs to diversify and find new clients to help reduce their dependency on that single relationship.)

The 80/20 rule is a hard benchmark for a service business to meet, for a number of reasons:

The studio isn't tracking client retention—or retention isn't even a focus. Some design studios are so focused on getting the work or fulfilling the work that client retention is an afterthought. Just beginning to keep a metric of how many clients are retained year-over-year can send a strong message to both studio employees and studio leadership about how important it is to provide great design work AND a great client experience.

The studio isn't seeking out long-term fit when landing new business. A common reason studios don't hit the 80% retention target has to do with how they initiate relationships with any new client. Design studios in general need to put more diligence into vetting client fit when pursuing and winning project work. When submitting a proposal for any potential studio project, you should be looking closely at what long-term potential there is in working with that client.

The studio isn't providing solid client services alongside the work. If you're doing killer creative work, but every deliverable review with your client feels like another round of The Hunger Games, you're not going to build relationships that last outside of your projects and lead to future work. (This should be obvious, but I'm continually surprised to meet designers that harbor an us versus them mentality regarding how you collaborate on a client project.)

The studio isn't staying in touch and directly asking for future work.This may seem like a duh. If a project goes well for a client, you shouldn't be afraid to ask if there are any other potential opportunities to work with them in the future. You should also plan to regularly contact them just to stay in touch. It's possible that if they go to another company, they may be able to bring you business from that company. Keep in touch, and there's a higher likelihood you could start a conversation around a future project.

The studio's work isn't strong enough to stand up to competitors. Usually, we lose clients because of poor client service or project management. But if you start slacking in the quality of work that you deliver across a few projects, you can risk losing the relationship. Take a hard look at what you're delivering, and maintain the quality.

Keep in mind that not every project needs to be about the long term. Truly great projects come along all the time where we do great work, we have a satisfied client, we put the work in our portfolio, and we move on. But be aware that your studio becomes more efficient when securing new projects from return clients. Plus, working with the same clients can help contribute to the profitability of future projects, if they are managed effectively.

Other posts in this series include:

Design Business by the Numbers: 3% Proposal Percentages

3 percent proposal percentages

This is a post in an occasional series I'll be running on ChangeOrder about the benchmarks that design businesses use to help maintain their long-term success. These benchmarks are drawn from the research that I conducted when writing Success by Design: The Essential Business Reference for Designers.

You need to write that proposal to get the project. And you need to do a good enough job of writing the proposal to make sure your client understands why you're the right partner for it.

But that proposal isn't going out the door until it's been finessed within an inch of its life. Right?

As designers, we may be perfectionists at heart. But when crafting a proposal, we can't be carried away and lose ourself in the effort like we're polishing a beautiful design.

A useful benchmark to make sure you're not spending too many hours on your proposal is to hold yourself to a three-percent proposal percentage. This benchmark was shared with me by David Conrad at Design Commission. His studio uses this benchmark to make sure that they never spend more than two to three percent of proposed project budget to secure the project. This includes any necessary negotiation and revisions with the client through the new business process. The time spent on new business is then factored into the hourly rate and overall utilization of the studio, rather than being tied to successful project fulfillment.

Putting the hours used for writing a proposal against the future project budget is a big accounting no-no. This is a common mistake a lot of design studios make.

Why is this a bad idea? Because you are blurring the lines between the expenses your firm bills against the project budget and the expenses that your firm incurs on all the activities acquired independent of staffing those projects. You should be optimizing your new business process to acquire work independent of how efficient you are in fulfilling the projects once they're in your studio. This is the equivalent of trying to keep a monthly budget for your household, only to discover that someone else in the household has been using your credit cards and racking up debts that suddenly you're liable for. This isn't fair to anyone involved.

So get out of this "credit-card spending" mentality. You don't have an incentive to spend weeks on a proposal. You should be spending the minimum necessary effort to generate the best proposal for a potential project that you have a high likelihood of winning.

If you're going to try and keep to this percentage, here are some common issues that stand in the way of successful implementation:

You haven't set up templates to work from on your proposals. If you're generating new or custom proposal elements that can't be leveraged or updated for future proposals, you're burning time that won't make your new business acquisition process more efficient. Even if you're selling bespoke services, you can generate templates for how you sell them.

You aren't pitching a good fit in terms of subject matter or expertise. If you're conducting reams of research to figure out what to say in every proposal, you may not be perfectly suited to win the work. Be selective about where you make these investments at the proposal stage, rather than have those activities become part of the paid work.

There is too much time to write the proposal. It's important that you ask for the appropriate amount of time to craft a quality proposal. However, I've seen proposals drag out in draft after draft because there isn't adequate motivation or pressure to complete it and send it out. This is where bad habits can form. Try to hold yourself to a "shadow budget" and realistic schedule for writing, vetting, and submitting your proposal.

Other posts in this series include bid/win ratios for new business pitching.