All eggs in one basket? Being dependent on a single client

The risks of growth are rarely discussed. Landing a larger client can be a way to scale quickly, but it also comes with serious risks. Jan Johansson and Rob McCuaig from Revenues write their second article on the risks of growth.

One of the biggest challenges smaller growth companies may face is becoming too dependent on one or just a few large clients. And it’s easier than you might think to fall into that trap – after all, there are many benefits to a close relationship with a large, paying client.

If your company has a better product or service than competitors, it’s often a good strategy to get in with the leading player in your industry, especially if the industry is dominated by a few strong actors. That client can give you a catapult-like advantage over competing, weaker solutions.

But there are downsides.

When IKEA decided to move much of its production out of Sweden, a large number of subcontractors were hit hard. The wood industry is often located outside major cities, and locally a factory closure can deal a heavy blow to a community. And it’s difficult (if not impossible) to find another client with the same volume needs as IKEA.

Providing key services to large digital companies can work until they realize those services are critical and hire in-house staff to cover them.

Or take the example of a small subcontractor in the metal industry supplying components to a larger industrial company that has grown steadily over the past decade. For the subcontractor’s owners, it’s been a successful period, but the major client has gone from representing less than 10% of annual revenue to over 50% today. The total focus on servicing that large client has left no trained, active salesforce to attract additional customers. Nor are there standardized components to sell to a broader market.

Another strategy was chosen by a small specialized logistics provider to the local dominant exporter. Growth and profitability were good, but the business relied almost entirely on increased deliveries to that one large client. There were already signs that competition could become an issue in future negotiations. The owner realized it was a major risk, even if the situation was favorable at the moment. He used the time and strong cash flow to invest in market analysis, machinery, and training salespeople in new areas – all to build an alternative business independent of the major client. Not an easy journey, but one that was essential in the long run.

A strategy that works in one phase of your company’s life may not be the right one in another. Regular evaluation of the company’s situation is a way to future-proof the business. When times are good is the right moment to invest in renewal.

So what should you do?

Three actions that help reduce the risk:

Set aside time for strategy work. For many business owners, there’s barely enough time to keep up with daily operations. Day-to-day issues drain all energy, and rarely is there a “staff” to handle long-term matters. It’s crucial to regularly step away from operations and create time to focus on the bigger picture. Does the business model need to change to allow growth beyond the major client? Theoretically simple, but in practice very difficult for many companies.

Analyze your client list. Whether you serve 1,000 clients a year or 20, today’s IT solutions make it relatively easy to analyze client data – so use it! Just looking at your data from different angles can reveal the need for change. How many projects are delivered on time and on budget? How long does it take from first meeting to closed deal? Regular evaluations reduce the risk of unpleasant surprises.

Organize for increased sales. If the issue is that your sales team spends more time on customer support for the big client than on new business, the organization needs to change. Separate customer support from active sales, and free your best salespeople from everything that isn’t meaningful sales work. If the problem is that the CEO is also heavily involved in project delivery (e.g., as project manager) while also expected to bring in new clients, the solution may be to delegate the project manager role and step back from operations.

Your company is unique and requires its own diagnosis. But with the right approach, the risks of dominant clients can be turned into something positive.

Good luck!