If not having customers is bad, having bad customers is worse!!!

As a management consultant, one of the most common business problems I come across that Indian companies face is that of managing their business risks. In quite a few cases when I have asked the management what were their business risks and how were they managed, I have drawn a blank. People talk of revenues, they talk of profits and in the best case, they may talk in broad terms of good customers and bad customers. But, they are not very clear on the business risks. At the onset, let me state that mapping business risks is not rocket science. You don't require a scientist to work out your business risks. (You could probably do with the guidance of a consultant though!)

Managing business risks sounds like ivory-tower strategic thinking done by people who have no bearing on ground realities. Far from that, managing business risks requires a hands-on approach. Understanding risks and managing them is crucial for any organisation.

If business risks are not managed, then you are not maximising your profit potential. Business risk broadly means the risk associated with conducting business with the various constituents: suppliers, employees, or even customers.

Risks associated with employees are, also, fairly controllable and measurements. Almost all companies have a recruitment and selection procedure, have a performance monitoring system, and other such tools to identify such risks well in time and manage them.

Supplier risks are easy to identify, are measurable and are controllable. Most companies have detailed supplier evaluation forms, supplier selection criteria to manage risks associated with this constituent. While it is easy to understand the risk associated with a supplier, just one instance of a delayed delivery that halts complete operations of a business, managers find it a little difficult to digest and understand the risks associated with customers.

When one talks of customers, the old maxim of "CUSTOMER IS KING" applies uniformly and very few are able to distinguish between a good customer and a bad. In some instances, for example, say credit card firms, it is easy to identify a bad customer - one with repeated defaults. It becomes expensive for companies to satisfy such customers, who eat away into the margins through the effort expended on following up with them for debts. Although, it is fairly obvious in the case of credit card firms, often it is a little too late because the customer has already entered the system and has become a burden - sometimes to be written off as bad debts. Understanding the business risks associated with such customers would help such firms in blocking the entry of such customers in the system or atleast ensuring that they are quickly identified and dealt with.

On the other hand, I have observed instances where companies aren't even aware of the 'bad guy' and were bending their back over to please the 'bad guy'.

A classic example is the Polish manufacturer of air-compressors for whom I was working on an export marketing strategy. The management had invited us to explore export opportunities for them in the European market, however, when we visited their factory in Lodz city (Poland), we found the organisation was bleeding. Further investigation revealed that they did not have any management or cost accounting system. Profitability was reported at the corporate level with no breakdown of product-wise or account-wise profitability. So, they were not even aware whether they were making profits on individual orders or not. This resulted in all orders being classified as good orders.

One of the main reasons for the drop in margins was that they were trying to operate on just-in-time without setting other systems in place. We found instances when sales placed orders with production and made delivery commitments to clients without discussing it with the production department. And if parts were not in stock, production department would order them on urgent delivery thereby raising cost. Their single largest customer, by volumes, was actually draining the life out of the organisation. With completely spasmodic orders from the BIG CUSTOMER, they ended up carrying huge inventories to cater to the last-minute demands of the big customer and in instances when parts were not in stock, they would work on the emergency button, thereby raising their costs. On evaluating the profitability of the orders from their largest customer, we found that the company was actually losing money on most of the orders from their biggest customer. They would have actually been better off handing over cash to their customer and asking them to purchase the compressors from outside rather than accepting the orders and manufacturing them. While this was a drastic situation, it really isn't very different from what one observes in many companies in India.

A real estate client of mine in Mumbai has gone to the extremes of offering customisation to all the home buyers. While there is nothing wrong with that, when one realises that the client is catering to the mass-housing segment, it really is not prudent to offer customisation at the individual level. For example, a particular lady does not like the colour of the flooring in her kitchen, and so the client offers to change the flooring. When it is only one such case, it might be okay, but when the numbers add up to 1000 flats, then it can be a nightmare. That is when you are not managing the risks associated with your customers.

Customers can get whimsical and make unreasonable demands. It is in such situations that managers need to apply a framework for managing the business risks. Managers must learn that sometimes it is better to lose an order. The ability to evaluate which orders to accept and which orders to lose will come from mapping the risks associated with the different types of customers.

About the author

Dr. Hanif Kanjer holds an MBA degree from the prestigious London Business School, Europe’s premier business school. He was selected for an exchange program to the Ivy League school, The Amos Tuck School of Business Administration, Darthmouth, USA.

He has 11 years of corporate experience in strategy consulting, business process re-engineering and business development, with leading organizations such as Giordano Fashions, Business Consulting Group, Unilever Gulf, 3M, Ernst & Young and Infosys. He has worked on assignments in USA, UK, France, Germany, Poland, Scotland, Tanzania, Saudi Arabia, Egypt, Kuwait, Bahrain, Oman, UAE, India, and Singapore.

After living abroad for 9 years, he returned to India in July 2002 to head the Rustomjee International School with 3,500 students, in the position of a Director. His group of institutions today houses more than 6,500 students, 425 teachers, and 180 administrative and support staff. He is the founder director of the Rustomjee Cambridge International School established in 2006 to offer IGCSE and A-Level certifications, and he is the founder dean of Rustomjee Business School established in 2008.

His book, “All the Right Answers”, published by MacMillans in December 2005 was on their Best Seller list, and he has authored management articles for leading publications such as Business Standard, Financial Express, Economic Times, and Strategic Marketing.

He was a consulting program director at S P Jain Center of Management, Dubai in its foundation year, 2004. He is a visiting faculty member at S P Jain Center of Management, teaching business strategy and communication.

Besides remodelling homes and offices for better space utilization, and dabbling in the stock markets, he has learnt Tibetan yoga, Indian folk dance, and salsa.