Do you investigate everything you really need to when a prospective customer approaches you?

This is an unusual question for anyone to ask, after all we are all grateful when a potential new customer approaches us.  So why am I asking this question now?

Many businesses are going through a period of massive change… old style business models are being replaced by what appear to be leaner, faster moving, sometimes digitised models that involve using the services of people and companies you’ve not used before.  Companies are outsourcing more, they are sending goods and services out for external processing by specialists, before sometimes getting them back for further processing – in the past companies often tried to do everything in-house, now it is generally recognised that doing so is a massive mistake, no company whatever its size can hope to have all the skills and resources to keep all aspects of their operations at the cutting edge in an increasingly complex and fast moving world.  We are all being asked to do more work by companies we have never heard of before.  So what’s the problem?

The problem there is no past history of working with that company, and increasingly I’m seeing companies – particularly engineering companies – who are outsourcing to specialists, closing down some or all of their own departments.  And that brings massive risk to the company that accept such work… especially as I have seen several times in recent weeks those companies looking to outsource appear to be very close to insolvency and are merely supplier hopping, leaving a trail of unpaid debts behind them which, if you accept such work, would put the very existence of your business at risk.

So here are a few questions for you to ask / things for you to do before you take on a new customer / client:

  1. Why is the customer looking to use your services / outsource? Really dig down deep on this…is it for valid reasons that should stand the test of time or is it merely an effort to stave off cash flow problems, to get you to do work for which you will struggle to get paid?
  2. Why you?  Why not someone else?  What’s so special about you?  Is it merely because they see you as a easy touch because you need more work?  Or is it because you and you alone have the skills they really need?
  3. Why have they closed down their own department who used to do the work you are being asked to do?  Was it because they lost or made redundant the staff in that department (if so, why?), was it because they couldn’t properly manage the department or manage or control the work flowing through it? (in small industries or in a small area like the Black Country it may be possible to ask former staff for the real reasons, don’t be afraid to seek them out, either using your contacts or even social media).  Same for any previous supplier of such services, do you know who they are, can you speak to them?
  4. What do you know about the prospective new customer’s contract with its customer?  Does it enable such outsourcing?  (I’m seeing instances where work is being passed out where the contract specifically prohibits doing so – this is a very real warning not to get involved because the ultimate customer as and when they find out will not pay, and that means you will probably not be paid either, they will argue that the reason they are not getting paid is your fault).
  5. What do you know about the customer’s history and its finances and its directors’ / senior management’s history?  Do in-depth searches on them.  Not just cursory credit searches.  Do they habitually leave a trail of subcontractor destruction, liquidations or administrations behind them?  Are their finances strong, or not?  – And actually look behind the figures, don’t take them on face value – I’m seeing groups who have recently liquidated subsidiary or associated companies in order to jettison large levels of external debts (this could be you next time they do this!), where their failures will have a massive knock on effect on the remaining group companies which are not reflected in the  accounts or credit ratings – they have delayed filing their current accounts  to hide their true financial position.  Who are the customer’s external accountants / auditors – are they reputable or could they be working closely with their client to orchestrate the eventual failure and rebirth of the business (after writing your debt off)? – again, I’m seeing evidence of this…
  6. What’s the rumour mill saying about them?  Are there any murmurs of under-pricing, suppliers not being paid on time, fabrication of reasons not to pay, non-deliveries, resignations, sudden changes in staff/suppliers, etc?
  7. Who can you talk to whom you can trust, if anyone, to satisfy yourself as to the customer’s motives and reliability?  If they have been involved in any recent failures, pull down the statement of affairs, talk to the suppliers you know who have been left behind.  Think about others – customers, employees, advisers.  If there is no one you can talk to, then you might think about not accepting the work.
  8. Think about what’s the worst that can happen?  Then budget for it because there is a good chance it will happen… would it take down your business or be something that you can simply put down to experience?  What ‘hold’ if any do you have over the customer os its directors once you have started to do your work?  Should you be asking for a personal guarantee from the customer’s directors?

Right now I am seeing good businesses being put at massive risk by unscrupulous companies – yes, as much as it hurts me to say it, by Black Country businesses – who appear to be following the Carillion example of massive subcontractor abuse.  Make sure it’s not you who suffers as a result… and if you are an accountant or lawyer whose client has been asked to take on a big contract which might hurt them if they’re not paid, why not ask me for my thoughts? – it might just be the difference between you losing a client or your client going under themselves, or not.

It was always going to happen at some point…

Did you see the programme on television the other day about the first ascent of Everest?

It was in 1953, less than a lifetime ago, just 6 years before I was born, but a world away in terms of the technology.

You see I’ve got the climb leader, John Hunt’s book ‘The Ascent of Everest’, of 1954… and in it he proudly talks about the equipment that helped them get to the top…all pretty basic by today’s standards.

Some of you will know this, most won’t, but I travel the world going up pointy things. My kit is far, far better, far more technically advanced than theirs was in 1953. There’s no comparison. But does that eliminate risk or just provide false comfort?

A few weeks ago there was a massive upheaval in the forex markets. The events surrounding the removal of the Swiss Franc/Euro peg, and indeed the more recent Greek election, might just tell us a lot about risk management techniques and the human psyche, if we allow them to.

Few anticipated at the right time the Swiss central bank breaking the peg and as a consequence a good many – from small currency speculators to big banks – lost a shed load of money in a matter of minutes. Over a billion dollars was lost – yet everyone thought their risk management procedures were robust.

The reality is the technology didn’t work, people expected it to, but when it was needed, it failed. My view is the Swiss forex losses happened as a result of sloppiness – people chose not to spend any of their time going back to the basics – they were fixated on the profits they’d continue making as long as it didn’t happen and placed far too much reliance on the technology to protect them. They relied on the stuff the computers and mathematicians churned out. Others thought a process, of placing stop-losses, made their trades risk free.

You see people don’t change, people are inherently idle if given the choice – for example the 1920s/30s recession happened for similar reasons – the pursuit of get rich quick schemes – people get complacent, they get used to the status quo, they fail to identify and test their key assumptions because it involve doing some work. People also chose to rely on, or at least hope for, someone helping them out – in this case the Swiss central bank as it’s almost become custom for central banks to help prepare the markets in order to eliminate shocks.

There are two points… Firstly people assume – even though Assume makes an Ass out of U and Me – and because of that they ramped up their leverage, massively and ignorantly increasing their exposure. Secondly – and this is confirmed in the book ‘Manias, Panics and Crashes’ – a book I know is being read by several government ministers – people overestimate just how clever they and their systems are: that somehow this time around they won’t suffer the same disasters their predecessors did: that somehow thus time they’ve cracked it. Technology creep is a dangerous thing.

Shall I tell you what I do in the hills?

I use a combination of the old and the new. I use simple manual techniques like a map and compass, pacing, I make sure I know exactly where I am and anticipate what’s likely next, I keep a GPS close at hand to check things out if I’m uncertain, I have a full safety kit that can cope with almost any eventuality should things go horribly wrong, I keep things simple if I can – I avoid complicated systems. And I’ve practised a lot. The point is it takes hard work to stay in control and for me technology is a tool, not a crutch.

Here are a few questions for you…

What are you or your client assuming which, if it gets turned upside down, could have a major impact on the business? Is that really a Black Swan event or is it common sense that it’s got to happen at some time?

Which of your clients are thinking they’re too clever to be caught out, that their systems and procedures are bombproof?

Turning now to the Greeks…

The thing that has amazed me in the Greek crisis is just how far problems can be pushed down the road before people say enough is enough and do something about it.

To me, voting in a party that is against austerity when the country is in a neverending downward spiral was always going to happen, it was just a question of when. So what’s been going on in the minds of the Greeks that delayed the inevitable?

Fear? Pride? Denial? Uncertainty? Idleness? Lack of drive? Que sera, sera? Absence of commitment? No resilience? Unwillingness to rock the boat? Desire for an easy, uncomplicated life? Uncertainty of getting any outside support? Clinical depression? No animal spirits? Habit over change? – These are the typical things that get in the way of all major actions.

I find that many of these things are going on in the businesses I meet in an insolvency situation. But there is always a tipping point that prompts action – and that is typically when the situation has become so desperate there’s nothing else left to do. In fact it’s not unusual for a major crisis point to have been hit 12, 18 months previously, the person has been living somewhere pretty uncomfortable for a good while until that last straw broke the camel’s back.

The reality is most people will put up with a pretty uncomfortable present rather than choose an uncertain future. They need to be standing on a burning bridge with fire all around them before they’ll jump.

Let me ask you a question …

Is it our job as trusted advisers to create a burning bridge for a client if we believe it’s in their long term interest to do so, even if they don’t quite recognise it at time?

Or should we just hang on in there, support them through each minor crisis, until the client builds the bridge themselves and then support them?

And then another…

With Europe on the brink, debt at unprecedented levels, interest rates only able to go one way, many of the tools in the armoury of the central banks played out, and international tensions high, should you and your client be doing more now to plan for that Black Swan event?

Anyway that’s me for this month…
Paul Brindley
T: 01902 672323

What else have I been getting up to?…

… Some interesting, large, members voluntary liquidations… I really appreciate advisers and their clients putting their trust in me for such assignments! They are certainly not run of the mill!
… Some interesting advisory work – not everyone is doing well right now – and it’s perhaps surprising what options small business owners have that my competitors habitually miss!

Oh… and booking up to climb the biggest mountains in Poland and Africa in coming months!