Becoming Dependent on Your Partner Can Be Dangerous in the Long Run

The risk of being dependent on a single partner can be significant. Sooner or later, you may reach a point where that dependence gives your partner far too much influence over your business.

We asked Jan Johansson, consultant and co-owner at Revenues, and Rob McCuaig, also a consultant at the same company, to share some thoughts on how to grow a business. Over the years, we’ve collaborated with Revenues in different ways and gained a lot from their expertise. The idea is that you, as a reader of the blog, should also be able to benefit from some of the input we get. Enjoy:

Are you too dependent on your partner?

A common challenge growing small businesses face is that a single partner accounts for a large part of their growth. For simplicity, we’ve assumed such a partner is either a client or a supplier. We will continue blogging about being dependent on a few (or one) client here on Brath.se. In this case, we’ll focus on being too dependent on a supplier partner.

For example, in a digital business without manufacturing or distribution of physical products, it’s not uncommon to depend on some type of partner that generates “leads” or business opportunities. In the early growth phase, that partner is gold! Your company gains access to a reach within customer segments that would otherwise be extremely difficult to reach as a small company. The partner becomes your ticket to initial success.

Somewhere along the way, however, you reach a point where the partner has too much influence over your business. What happens when your partner (after being acquired by an American company) starts raising prices? Or when your key contact at the partner company leaves and you’re assigned someone new who can’t (or won’t) deliver anywhere near the same level? If your partner is based in the UK, how will a significant currency fluctuation affect your margins?

It’s important to remember that here we use the term “partner” broadly to describe different actors a company has business relationships with on the supplier side. This can include web developers, product suppliers, Facebook, SMS service providers, etc.

On the other hand, if you are the larger company with power over your smaller suppliers, you may run into other problems. Can they deliver the quality your growth requires, without delays? Will they go bankrupt if you stop buying from them?

Take the medium-sized manufacturing company A, which has been in a growth phase for several years. They’re now in a position where their loyal suppliers in some cases are almost completely dependent on company A. The forecast shows continued growth, so management faces some tough choices. Continuing with the same suppliers, where there’s a well-functioning relationship, is the easy option, but then there’s a risk that future orders won’t be fulfilled.

One possible decision for company A is to carefully analyze the situation of all key suppliers and start looking for new ones to secure capacity for the future. This process takes time, especially the practical work of identifying, contacting, evaluating, and testing selected alternative suppliers. In the long run, however, it can provide a much more stable foundation to continue growing from.

So what should you consider?

Every company is unique and needs to understand its own situation and capabilities.

If you’re the digital company, you may need to build an internal sales team as a complement to relying on more than one “lead generation” partner.

If you have small suppliers, you may need to add risk management to your procurement processes.

• Make sure you actually have a dialogue with your suppliers. It sounds simple, but many fail here. The only dialogue is purchase orders, without engaging in discussions about supplier-company development.
* Set limits on how much you can purchase from a specific supplier in relation to that company’s turnover. A maximum of 25% can be a suitable level.
* Some critical capabilities may be best to own yourself – in that case, acquisition or internal development are two possible routes.

It’s important to remember that partnerships don’t necessarily last forever. Small changes in the market or within the partner company (or even conflicts between you) can negatively affect your company’s growth and profitability. The best time to prepare for potential negative future events is when your company is doing well.

A single actor that affects a company’s long-term revenue opportunities or cost structure should be treated as a critical business risk. Address the challenge in time, and there are plenty of opportunities to take your business to the next level.