“Hey Connor, I’m pretty disappointed with where we’re at.”

I got this email from a client a couple of weeks ago.

We had initially told them that we would do a unit economics analysis for them within two weeks, but it had taken over a month.

Here’s the root of the issue.

We underestimated how hard it would be to consolidate all of the data.

This was a big business, and we were working at the SKU level.

That said, I understood their frustration completely. I gave them the context and told them that we’d already put 60-70 hours into the project. On a time basis, we were losing money. The client didn’t realize that the ask was that in-depth and thankfully understood the delay. Classic case of scope creep.

But this whole exchange got me thinking. At Scalable, the client engagements that have gone the worst have been those that we took without taking a hard look at their data infrastructure first.

We do much more diligence now before working with a new client to avoid running into the same issue as often.

So, in the spirit of sharing my mistakes so that you don’t have to make them as well, this week is all about client diligence: what it looks like, how you can do it—regardless of what your firm does—, and why it’s an absolute necessity for getting and staying on the same page.

Let’s get into it.

The Scoping Process

When meeting with a new client or competing for work, it can be tempting to say yes to everything upfront and ask your questions later. I get it. I really do. But in every case, it’s better to say no and lose the business if meeting expectations either isn’t feasible or will cause you to lose money.

Sometimes, you’ll miss the mark on an estimate and end up with a much bigger project than your team can manage. It happens. But slowing down to ask the right questions and to do your research at this stage dramatically reduces the chances of this happening.

So, what exactly does that entail?

The “what” of good diligence is this: an accurate accounting of what the client’s looking for, how much it’ll cost you to produce, and whether or not it makes financial sense to move forward with the engagement.

If I’ve learned nothing else from running Scalable it’s this.

You need a uniform process for every step of the engagement, and onboarding a new client is no exception. 

So, whatever your firm’s exact process for scoping is, you need to first make sure that it’s consistent across the board.

Alright, I’ll get off my soapbox now.

Here’s how we scope at Scalable.

As always, feel free to take our process and modify it to fit your firm.

I like to break the diligence process into two parts.

1. The client’s request

2. Everything we need to deliver on it

Here’s what that looks like in practice.

The Request

Start by asking a potential client, “What does well-done look like to you?” This phrasing gets at their expectations without them self-censoring too much.

In other words, it doesn’t leave much unsaid.

The benefit of this is threefold.

First, it drastically increases your chances of a happy customer since you don’t need to guess what they’re looking for nearly as much. Second, their answer gives you a much better idea of whether or not your firm can deliver on budget and within a reasonable timeframe.

Third, asking this question in this way reduces the chances of goalposts moving down the line. When that happens, you’ll need to re-scope. More on that later.

If it’s not a fit, either from a feasibility or a financial standpoint, say so and bow out immediately. In doing this you’ve saved both your time and theirs.

Once you’ve done that, it’s time to investigate.

At Scalable, this means first checking out the books and documenting where all their data lives, how many data sources are in play, and whether or not any data quality issues could impact reporting.

Once we’ve done that, we move on to the reporting itself to get a better idea of the client’s overall financial standing.

Doing so not only gives us a more well-rounded picture of what the client needs, but it also allows us to set priorities and make suggestions going forward.

Oftentimes, this exercise also helps us to arrive at a more cost-effective solution to the client’s initial problem. While that might not sound like a good thing, it’s actually our secret weapon for winning business and prolonging client relationships while still remaining profitable on the engagement.

If you run a home services business, this might mean checking out the work site and doing a thorough walkthrough with the client as you ask a list of pre-set questions. Doing so will allow you some uniformity while still providing you with the context you need to complete the individual job.

What We Need

Since we’re a service-based business, most of what we’re doing here is estimating how many hours and at what level of expertise is needed to deliver the work on time—and what client resources will be contributed to the project.

If there’s a significant amount of cleanup that needs to be done before the real work gets started, we make that known upfront and document it in our client agreements.

If you’re a handyman, this part of the scoping process could mean generating a bill of materials and a detailed quote for parts and labor that the client can then sign off on or negotiate further.

Whatever your business, the goal here is to identify and communicate all of the internal factors that could affect your timeline and price.

Once you’ve considered both the request and your internal needs to deliver, you need to distribute your scope agreement.

This doesn’t need to be a lengthy or overly formal document, but it should include the following, spelled out in plain English.

1. Any assumptions that you or the client have stated about the project

2. Roles and responsibilities

3. Milestones, if applicable

4. Deliverables

5. Pricing and payment terms

Discussing assumptions with the client is your final opportunity to get on the same page about what the final product should look like, so don’t skip this step.

Then, move on to agreeing on who will do what to get the project finished. Who are the key people on the client side, and what information or support do they need to provide to get the work done well and on time?

For more complicated projects or longer-term engagements, identify natural milestones or set a schedule for periodic check-ins. Define what will be measured in these meetings here as well so that everyone in the meeting knows what you’re tracking toward. This will keep the client in the loop and increase your chances of a happy client in the end by giving your team more opportunities to course correct as needed.

When you talk deliverables, your goal should be to walk away with a list of action items that when taken together satisfy the client’s request overall.

Finally, you need to lay out the price, explain the factors that led to that price, and present re-scoping options before discussing payment terms. By re-scoping, all I mean is that you should mention a few specific add-on requests that could come up throughout the project and their corresponding fees. Doing so not only prevents scope creep in the first place, but it also sets clear boundaries with the client upfront.

Discussing payment terms is not just another great way to set boundaries with a new client. It’s also vital for protecting your cash flow by preventing collection problems down the line. All you need to do here is specify what’s due and when, whether or not early pay or other discounts will be offered, and which methods of payment will be accepted.

There you have it. What good diligence is and how to do it. Now let’s discuss why you need to be doing this with every client you take on.

Why You Need to Do Diligence Every Time

If you don’t do your homework on the front end, you risk:

1. Burning out your team

2. Losing money

3. Damaging your reputation

As a boss, one of the quickest ways to lose trust is by over-promising and then leaving your team to deal with it. No contract is worth doing this.

While skipping the diligence phase and quoting the lowest price you can with minimal context can be tempting when you’re in a cash crunch, it’s a more expensive strategy overall. All it does is pull you and your team away from higher-margin work.

Even worse, this sets expectations with clients that can be difficult if not impossible to reset over the life of that relationship. This problem can also easily spill into referrals.

The best strategy is just to not go there in the first place.

While saying yes to everything may please the client on Day 1, failure to deliver will leave them far more upset than setting more reasonable expectations on the front end that you then knock out of the park. The latter will help you retain clients while the former just gets you poor reviews.

Clients need to be able to trust you more than they need yesses to everything on their list.

If you have additional bandwidth at the end of the engagement and want to deliver more value than what was agreed to, more power to you. But this needs to be offered only when you’re more than prepared to provide it without burning out your team or eroding margins.

In sum, you can’t afford to skip client diligence. If you do, one overshot engagement could damage the relationships that you’ve worked hard to build with your team, erode profitability, and compromise your reputation. In extreme cases, poor estimates can do all three to your business at once, so it’s simply not worth the risk.

As I keep at my 10-year plan of running and building Scalable to $65MM, I’m bound to make lots of mistakes along the way.

This is just one of those many.

Hopefully, you can learn from mine and tailor this process to fit your firm.

And if you need any assistance, feel free to reach out. As always, I’m happy to help—even though this week was less of a pure finance post and more of a discussion on running my business.

Putting It All Together

Here are your top takeaways from this week’s post.

1. It can be tempting to say yes to everything when you’re competing for a new contract or facing a down month, but a much better approach is to do your due diligence on every new client before agreeing on a price.

2. Adequate diligence involves checking out the client’s current situation, as well as your internal resources and cost to deliver the work, against their list of project requirements. If you can’t do it profitably, bow out immediately.

3. Once you’ve done your diligence on the client side and internally, it’s time to distribute the scope agreement. This document consists of the following: assumptions; roles and responsibilities; milestones; deliverables; and pricing and payment terms.

4. Poor pricing and scope estimates will burn out your team and damage your reputation while also eroding margins. For this reason, you really can’t afford to skip doing your diligence on every client.

Hungry for More?

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2. Shoot me an email with your questions or requests for what you’d like me to write about next.

‘Til Next Time,

Connor