In the universe of solo, micro, and lifestyle boutique consultancies, there are three recommended indications that can be combined to evaluate financial security:
Today we will focus on the first one of them. While it's true they are all interconnected, client concentration issues are often the source of your most critical financial security problems. If low profitability slowly kills you, losing your biggest client means instant death for many of you.
So let's start by talking about how to measure client concentration, before exploring why it really matters and how you can manage a client concentration issue.
Measuring client concentration should be quick and easy. Open a spreadsheet, list the names of all of your clients, and add your fee billings for each one of them. Make sure you remove the cost of associates, external contractors, or any services you might have hired for specific projects. There's no need to subtract the costs of your internal team (if you have one) since they're likely doing work that serves several different clients. Now, calculate the percentage of your gross profit each client represents.
The most important number here is the relative size of your largest client. If you work with large corporations and have different departments or teams as clients, put them together under one client name. Even if you have multiple contacts who don't speak with each other, any of the following things may happen:
These are some of the reasons why you should count different departments as one single client. Your risk of losing all of the accounts at once is significant.
Now, when exactly do you know you have a problem?
If your consultancy's biggest client represents more than 25% of your gross profit, your client concentration deserves attention. If it represents more than 35%, your client concentration deserves urgent attention.
Where exactly do these numbers come from? Both observational and survey data. Gerald Weinberg argues the rule works simply because "most people can continue indefinitely on three-fourths of their present income." David C. Baker's research shows that 35% is the median at which one-half of firms fail - one-half survive the loss of a client that represents around 35% of their gross profit, and the other one-half of firms fail.
You either had, have, or will have a client that is disproportionally big for your business. That's ok. What you must be aware of, however, are the dangers and risks it adds to your consultancy.
What typically happens when you have a client concentration issue includes:
These are not great. You don't want your practice to go through that. That's why I recommend you measure and check your client concentration at least twice a year - depending on your field, you might want to do it every quarter.
With that said, how do you manage a client concentration problem if you have one? As the saying goes:
"The best way to deal with uncertainty without hiding in a bunker is to save like a pessimist and invest like an optimist."
If you only take immediate corrective actions, the same will happen again in the future. And if you only take the long view, you're counting on luck for this big client to stay and keep you afloat until you see results. That's why I recommend you split initiatives into two groups: Short-term actions, and medium to long-term ones. You need both.
Whenever you find your practice with a client concentration issue, there are three big things you should do as quickly as you can:
If done right, these activities will provide you with three things: More peace of mind, a longer financial runway, and more time. In the medium to long term, you will invest those resources in:
Remember: clients don't care about you, but what you can do for them. Unprepared consultants put themselves in a dangerous spot by overextending the practice and dreaming the big client will forever fund the business. Seasoned partners will use the new revenue to increase their ability to grow without that big account, while being properly prepared for the day they'll say goodbye.
"Some consultants start their business with one client and never seek another. My friend Wesley was billing fifty percent of his time with many small clients when one of them suddenly offered him a doubling his income blinded him to the inevitable consequence of no work two years down the road when the contract expired. As could have been predicted, Wesley lost all other contacts during his full-time stint and was forced to take a job; he has never returned to consulting.
Arnold's experience was even more typical. He had six good clients, with a number of prospects in the background to replace any he lost. But just as one client stopped requiring his services, another asked him for more time. Now he had five clients; a few months later, the same thing happened, and he had four. Eventually, he was down to three. When the one that produced forty-five percent of his revenue dropped out, he couldn't survive. Now he's selling real estate."
One in five boutique consultancies could see revenue halved overnight.
19% of consultancies have a single client that accounts for over 50% of their revenue.
In fact, the vast majority of consultancies are over-reliant on a single client, with 78% having a single client that accounts for more than 15% of their revenue.
Source: Consultancy BenchPress 2023
What's the percentage of revenue or gross profit that your largest client represents?
The smaller your consulting practice is, the more likely it is that you have client concentration issues.
For solo consultants, it’s not unusual to find 50-70% client concentration rates. If that's your case, you are not really leading an independent practice. Your biggest client is the one who's really running the business and can decide its fate at any moment.
Time to get honest with yourself and start planning for their big departure - whenever it happens. Survival comes before growth.