A "client concentration" problem refers to having a single related source of work representing more than 25% of your gross profit (fees + markup income). That's usually the point at which the yellow light should blink on your financial dashboard. That same light should blink red if it moves to 35%, because my research shows that to be the median at which one-half of firms fail. In other words, one-half survive the loss of a client that represents ca. 35% and the other one-half fail. Maybe not immediately, but they can usually trace it back to that point if they were not prepared for it. This is meant to prepare you for it.
You either had, have, or will have a gorilla client. Don't be afraid of it, and don't say "no" to the work. A problem like this almost always comes from something great you've done and you deserve the accolades in the form of even more work. Don't get a huge head, though, because unusually high spikes in your top line revenue typically stem from a client concentration issue and not unusual and sudden strong new business skills.
First Step: Honesty
When I talk about this to clients, the first thing they always say is this: "Yes, but all this related work is coming from different departments, and even different contacts in the same department. In fact, they hate each other and we'd probably get more work if we lost one department!"
That's bullshit, if you'll pardon me, because it assumes that you'll lose the client because you don't treat them well or something. The truth is that you'll bend over backwards to treat them well and do good work for them (until you start to get to the point when they take you for granted and you become a tad passive-aggressive in return). No, the real reason you lose all of them at once is one of these three:
- There is a vendor consolidation. The average publicly traded company has seventeen specialized agencies working for them. I worked with the in-house department of one, recently, where they had more than sixty firms! At some point it gets ridiculous, because spending is out of control or brand standards aren't being enforced, and someone steps in and calls for the process. You may or may not make the cut.
- Your client is acquired by or merged with another large entity and all relationships are under review. You'll read about it in the paper.
- There's a change in your high-level contact(s) and the new ones aren't all that excited about inheriting the relationship with you.
The Hidden Dangers
In thinking back through all the unique situations I've worked through with clients, there are six hidden dangers that come with a client concentration issue, either during the relationship or immediately after it is severed:
- You suffer significant financial loss as the income disappears faster than the expenses do.
- Employees are bored when you have the client and nervous when you don't.
- You move from a properly profit-driven company to an improperly client-driven one where the client is really running your firm.
- You slowly quit giving them "against the grain" advice (which helped you win the account, by the way) because you are afraid to lose them. That's why smart prospective clients ask in advance how much of your business they will represent. Trust me: a qualified client is looking for a smaller percentage, not a larger one.
- If your firm is sold to an outsider, a partner, or an insider, a severe penalty will apply to the valuation amount or the terms.
- You'll be too consumed keeping a gorilla client fed (more urgent) than doggedly pursuing new business (more important).
Losing a Client Well
You're just as likely to lose a monster client as to land one, so here's how to do it well in a way that puts you on offense rather than defense.
- Admit that you will lose this client, and the only uncertainty is how and when. Never fear data and honesty.
- Go ahead and start to lose them, but slowly and on your terms. There are three great strategies for this. First, turn down the lower level work you shouldn't have been doing anyway. It kills your positioning, turns you into Kinkos, and makes you appear too insecure to let anyone else dance with your girl. Second, train them to do some of the work themselves (I've been working through this process with many clients, using MarcomCentral's PTI). Here might be a good place to note that in-house hiring is on a permanent upswing. Third, each time your contact changes, hand deliver a resignation letter that states, in brief: "We don't WANT to lose the work from you, but don't want you to feel like using us is an inherited decision." Then proceed to explain how you could have been doing so much better work if they had listened. Yes, I'm serious. Get your man pants on and quit being so solicitous.
- Enact a "Gorilla Tax" either by charging them a few percentage points more or shaving a few percentage points off when each check arrives. Set it all aside.
- How much? At least three months of overhead expenses, but preferably four to six. If you have to take it out of the corporation for tax purposes, set it aside in a separate personal account, ready to be loaned back if necessary.
- Build a strong positioning so that when future clients are tempted to dismiss you, they will find it a lot more difficult to replace your "expertise" working for them. This could be inside your current firm or a new DBA alongside it, but it has to be up and running with an active marketing plan for at least nine and hopefully fifteen months to pick up the slack fast enough.
- Build two plans in a spreadsheet (with a password). One for a mild catastrophe and one for a major one. This will detail the employees to let go, and how much that will save. Concentrate on the middle layer and not the lower layer of employees. Add other expenses that can be cut. You'll find that it's too emotional in the moment when you lose a client to think clearly. This way, all you have to do is open, review, modify, and implement it. The single biggest mistake principals make in any downturn is to not cut staff quickly enough, lamely countering that they have spent so much time putting this team together. Well, I don't know about you, but I'd rather die from working hard building it again than from starving. And do it in fell swoops, too, like ripping a bandaid off. If you cut someone's leg off one inch at a time, they never know when you're done.
- Don't borrow money at all, for anything, period. It's better to close your firm and walk away from it than incur debt.
- Maybe you cut your salary (and even the salaries of other top people), but that step should only be temporary. Set the reversal date ahead of time, too, before you cut them.
Keep a log or diary. It's therapeutic and it'll give you more meat to share with others that need it.
Keep employees in the loop. However bad the news is, at least it's the news, and they want it.
I have a number of clients who move from one huge client to the next, somehow finding a new one just at the right time. I don't have the stomach for that. But here's some great news. If you have a gorilla client now, losing that client will be an important step in moving your firm to the next level.