How do IT firms get away with asking for upfront funds to start a relationship?
Could you imagine if AT&T or Sprint or your gas company like PG&E or SoCal Gas asked you to provide credit card information before signing up AND charged you 1 year or more worth of fees to establish a relationship? What if Shell, Chevron or the gas station asked you for 1 years worth of gasoline expenses up front to open a revolving line of credit? I can understand a small deposit or something but hey IT folks, cut us small business owners a break, we're the customer here!!! We're paying you!!! Offer us net 30 terms and bill us just like any other real business does in the world. Just send a bill every month and accept a company check, only payment, credit card, etc. WHY DO YOU DESERVE TO BILL DIFFERENTLY THAN ALL OTHER INDUSTRIES WHEN YOU ARE SOME OF THE WEALTHIEST HUMAN BEINGS ON THE PLANET??? You guys aren't running insurance rackets and paying out claims are you???
Answers (6)
Jacques R
Principal & CEO, The Scotcrest Group, Inc
Best Answers in: Telecommunications (8), Web Development (4), Computers and Software (3), E-Commerce (2), Facilities Management (1), Travel Tools (1), Personnel Policies (1), Internet Marketing (1), Customer Relationship Management (1), Personal Investing (1), Computer Networking (1), Software Development (1)
One of my small business clients was recently asked to do exactly what you ask me to imagine: leave his personal credit card on file and pay a deposit of approximately 3 months usage by two of the vendors you list: ATT & SoCal Edison. The IT firm was the least of his problems.
Jérôme P
Entrepreneur, project manager, lead software architect and developer
Best Answers in: Web Development (2), Computer Networking (1)
I own a small IT consulting business a relationship has 2 sides. When I meet a prospect and discuss a project I am selling my expertise. If he is sold and has the confidence in my expertise and my track record and I commit to do a good job and deliver on time, I expect him to commit financially.
As a small business, we also have bills to pay and mostly employees, and salaries are not net 30 days terms. Your office space is due on the 1st of the month, not 30 days later, etc.
The problem - and I've seen it too often - is that for some business, a contract means nothing. I've seen some businesses abandon a project for political reasons and leave the IT firm in the dust with work already done, employees paid for the work, etc. Going into litigation to try and recover your due will cost even more. In these cases, they lose money. Other businesses don't even respect net 30 days terms.
We need to filter out the bad seeds because we do not want nor need a relationship with them.
What we do is we ask a 50% up front non-refundable deposit and the remaining 50% on delivery. For bigger projects, it goes 50% up front, 25% at mid point and 25% on delivery. We show the client the progress of the work throughout this period to reassure the customer he's getting what he's paying for. Usually, even quite small businesses or even startups find our terms reasonable.
We really doubt the seriousness and the financial capabilities of businesses that find our terms unacceptable. For example, for new businesses and entrepreneurs, a lot of success depends on marketing and this is not free or cheap. If a customer is too cheap to advance an upfront deposit, we doubt he'll have the means to make his business a success. We prefer to have long relationships with clients and get recurring business, so we just say NO to these.
Once we have an existing relationship with ongoing customers that respect their word and pay on time every time, then we usually don't ask anything upfront. We have total confidence in them, them in us: we have an excellent mutual relationship and they usually become our friends outside of the business.
But, since you have an MBA and are an entrepreneur, you should already understand this.
Other than that, I am not too aware of billing terms of large IT firms, so I cannot speak for them.
Why does Dell "deserve" to bill up front before they ship their goods? Do they "deserve" to do so?
Well, they clearly are "allowed" to do so, so if people are willing to buy what they're selling on their terms, and they're not breaking any laws, sure, they "deserve" to do it.
And then they pay their suppliers Net 30 or so. Turned the receivables cycle on its head. It was definitely worked out well for them.
There's merit in that method, too.
There's always more firms out there - if you don't like how a particular firm does business, you are always free to find another one if you don't like how firm X does business.
I'm not sure what kind of IT firms you're talking about, but I have experience with Cognos Corporation - and they certainly required their licensing fees and support contract to be paid up front. And that allows me unlimited tech support - but we pay for it whether we use it or not. It is, however, quite convenient compared to "whip out a credit card to continue on the call".
Do they "deserve" to bill differently? Well, do we want their products? Since they answer is yes, then, pragmatically, I'd say they do "deserve" to do it. If that's the way the contract's written - take it or leave it. Caveat emptor.
Or find another source for whatever it is you need.
As an IT Firm in south central Pennsylvania, I would be very concerned of any firm that required "upfront" funds from a client unless they are offering to sell you a block of support hours at a reduced hourly rate.
Most IT firms, reputable ones, do not require a credit card deposit or up front payment. If they are asking for this, it is likely they have done a background check on company and have found it less than credit worthy. The only exception to this is the company wants to take advantage of cheaper per hour rates and buys a block of hours, "up front".
The issue at hand is that small businesses have higher default rates in terms of payment of IT services. Likewise, the notion of missed opportunity also plays into the equation. Consider the fact that large enterprises can guarantee larger sums of money and continuity, there has to be some consideration...
