Hi there, this is Danilo.

When I meet new consultancy founders, many assume the main point of engaging with a growth advisor is to improve financial performance (their compensation). But in many cases, increasing financial security is the real, most important goal. So let's talk more about it, shall we?

Wish you a great reading.

One Idea

In the universe of solo, micro, and lifestyle boutique consultancies, there are three recommended indications that can be combined to evaluate financial security:

  • Client concentration
  • Months of cash
  • Total debt

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:

  • Your client gets acquired or merged with another company and all work with external consultancies is put in review.
  • There's a change in the leadership team, and the new executive is not interested in continuing the relationship with you or other consultancies across the whole group.
  • Procurement decides to start a "vendor consolidation" process to cut costs. Instead of working with 80 external consultancies, they want to reduce it to 20. There's no guarantee you will make the cut.

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:

  • You put your business survival at risk since, when your biggest client leaves, you lose revenue faster than you can cut costs;
  • You find it difficult to dedicate time to business development (bringing in work from other clients), since you feel the pressure to keep your largest client delighted;
  • You find it difficult to challenge and have consultative conversations with your largest client, due to your fear of losing them;
  • You find it difficult to limit out-of-scope work and deny discounting requests for new projects, for the same reason as the previous point;
  • You find it difficult to commit to longer-term decisions (renting a space, hiring people, making a big upfront marketing investment) since your cash flow could dry up at any time.

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:

  1. Be honest with yourself: As David says, "Admit that you will lose this client, and the only uncertainty is how and when." Recognize client concentration is a major risk in your consultancy and something that, if not addressed, will negatively impact your business and current lifestyle. Make a serious commitment to invest time, money, and energy to solve it before it's too late.
  2. Build cash security: As mentioned, there are other indicators that we use to evaluate financial security - the number of months of cash you have in the bank and your total debt. That's why, if your biggest client brings in 40% of your gross profit but you have enough reserves to survive for 6 months without cash, you're situation is not that urgent. If you are also low on cash, aim to quickly set aside at least 3 months of runway - ideally 4 to 6 months of your fixed costs and living expenses. You can do that by increasing prices for your biggest client (see next item), automatically sending to a savings account a percentage of his invoices, or cutting superfluous personal expenses.  
  3. Start losing the client: The moment you recognize your biggest client will not stay with you forever, you can start losing him - but on your own terms. Your goal is not to fire the client and reject the money, but to rebalance the work so that it's sustainable for your consulting practice. Usually, this is done through a mix of diligently saying no to out-of-scope work, training the client to do some of the work themselves (building capabilities, rather than only solving problems), and reducing their access to your time. Your plan of action will depend on your exact context and relationship with the client.

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:

  1. Growth levers: Strengthen your positioning and develop new IP, to make it more difficult for clients to replace you in the future. Review your brand messaging, to increase marketing effectiveness. And slowly implement more and better systems to support growth.
  2. Growth initiatives: Invest more time in planning and doing business development, the right way. Lead generation campaigns will help you acquire new clients, and client marketing initiatives to uncover more and bigger projects from existing clients. The mix of activities will depend on your specific situation.

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.

One Quote

"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."

Source: Gerald Weinberg, "The Secrets Of Consulting"

One Number

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

One Question For You

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.

Thanks for reading. You can get more specialized and actionable growth insights for micro consultancies in our newsletter. Every Tuesday, you get one idea from Danilo, one quote from other experts, one number you need to hear, and one question for you to level up your consulting practice.

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