THE AGENCY BUSINESS: Keeping deadbeat clients from draining the life out of your firm

Though not a favorite topic for most in PR, deadbeat clients are a reality of business. Paul Cordasco discovers some of the different tacks firms take to deal with this unseemly, but not uncommon problem.

Though not a favorite topic for most in PR, deadbeat clients are a reality of business. Paul Cordasco discovers some of the different tacks firms take to deal with this unseemly, but not uncommon problem.

Lynda O'Connor's moment of satisfaction came while digging through a garbage dumpster. O'Connor, who runs a boutique PR firm along with her husband in Chicago's northern suburbs, was doing her best to catch up with a deadbeat client - a drapery company that owed O'Connor Communications about $6,000. After conducting some research, O'Connor discovered that the company was a notorious welcher and was delinquent on payments to several other vendors in the area. O'Connor eventually took the company to court and won. Yet that didn't seem to matter because the business claimed to be broke and had a nearly empty bank account to prove it. This seemed to put O'Connor's settlement in flux and made her wonder if she would ever see the money owed to her firm. However, acting on a hunch, O'Connor took matters into her own hands. One Sunday evening after a round of golf, she and her husband decided to dig through the former client's garbage to see if they could find evidence. Blessed by some luck, they came across some bank envelopes from a second bank. They took the envelopes back to their lawyer who worked through the courts to get the drapery company's account frozen. "I felt great afterward. Of course, I'm not sure if what we did was legal, but I felt that we had to go through extraordinary measures to get our money. To a firm our size, $6,000 in fees is not a small amount," she explains. Indeed, deadbeat clients are often a part of doing business. Nearly every firm has had them, but almost none would like to admit it. While few are willing to talk on the record about how to deal with this unseemly problem, nearly every PR executive has opinions on how to handle it. "If you're running a service business and you let payment lapse beyond 60 days without addressing it in some way, you're playing with fire," says the principal of a small New York-based financial communications firm. "There are two reasons why clients don't pay their bills. Either they don't like the service they are getting from you - and that's something you should be on top of before they start withholding payment - or they don't have the money, and that's something to address before their problem becomes your problem." Firms can also be put in the unenviable position of having to sue a client or sic a collection agency on them. Both of those options can be costly, as collection agents will often keep 30% of what they gather, while legal fees can be expensive, especially in light of an often uncertain outcome. For much of the industry, the end of the dot-com and technology boom of the late 1990s was a crash course in dealing with deadbeat clients. It was a tough time for firms with strong technology practices. One midsize PR firm that requested anonymity had its share of technology clients during the bust and now has put in place a strict billing policy. Under this policy, once an account goes two months into delinquency, the agency asks that each following month of service be paid up-front, while it often agrees to accept payment for the previous two months via an installment plan. Unlike during the technology bubble, the firm now also does due diligence on start-up clients to check where the funding for their services will come from. The agency also asks that first and last month's retainer be paid up-front. Nevertheless, for many of the firms owned by large multinational marketing giants, managing an agency's accounts receivables has become a critical function of the firm's CFO. And while nipping deadbeat accounts early may mean confronting and even alienating a client, it often helps ensure that the firm isn't stuck with a mound of bad debt later on. "We have a very strict protocol that we must follow from our parent entity," says the CFO of the aforementioned midsized firm, who asked that his identity be withheld. "I have to report on our receivables every month. CFOs are really under the gun to manage those properly. And it's difficult because that often means I have to go to our CEO and the account people and say that we have to stop work on this account and risk ending a client relationship." ----- Dealing with deadbeat clients
  • Be wary of start-up clients. Though they can often be some of the most rewarding accounts to work on, start-ups are often the most notorious deadbeats.
  • Set a firm policy about how to deal with deadbeats. Firms are often more lenient with longer-term clients, but ignoring a problem for much longer than two or three months is a mistake agencies will regret.
  • Collection agencies are probably among the best means to deal with clients that declare bankruptcy, but don't expect to see much more than pennies on the dollar after the agent takes his cut.

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