Don't Let Your Biggest Victory Cause Your Biggest Failure
Why you might want to say no to the biggest client you've ever had.
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Here’s a situation which may arise in your consulting career.
You sign a new client and the project goes well. The client asks you to take on a much bigger project - perhaps a project which will take up the majority of your time.
The obvious answer is to say yes. It’s more work with a major client who presumably enjoys working with you.
But the smarter answer is probably to say no.
That’s because it would create a huge revenue concentration risk.
What Is Revenue Concentration Risk?
As you can guess, revenue concentration risk is when you rely on a single client/project (or, for larger organisations, a handful of clients) for your income.
It’s always better to have a number of smaller clients (and earn a little less) than earning more with a single big client. In the short term, you will earn less. But in the long term, you will earn more with a diversified client base.
The dangers of revenue concentration risk are obvious but worth reiterating.
Your Success Is Tied To The Client’s Success. If the client has a bad year, decides to work with a competitor, or otherwise faces turmoil you suffer. You’re no longer in control of your future. Likewise, you’re not just exposed to one client but to one industry. Any change in that industry impacts you.
Financial Collapse. If you’re counting on revenue from a single client, losing that client can suddenly put you in the red and make it difficult to pay yourself, your employees, and other bills. You have no stability in your revenue the way you would from working with multiple clients.
Limited Negotiating Power. If the client recognises they’re your sole source of income, your negotiating power crashes to zero. They can demand more, create unfavourable payment terms, or negotiate your fee down. Supermarkets are known proponents of this approach.
Limited Growth Opportunities: If you dedicate most of your resources to serving one client, you miss out on opportunities to attract new clients in new sectors. Serving this one client puts money in the bank today, but limits your ability to develop sustainable revenue streams for the future.
Stagnation. If you work with one client, you don’t get the same growth of expertise (or case studies/testimonials) as you do from working on many. You might fail to develop new services, products, etc...
This isn’t a comprehensive list, but hopefully, it makes the point that it’s dangerous to rely on a single client for the vast majority of your income.
I learned this from a harsh experience in 2015. The contracts of our two biggest clients ended in the same month. We went from earning $15k in profit per month to losing $20k per month overnight. This forced me to downsize the firm and rebuild the consultancy with more sustainable revenue streams.
Aside: Another potential risk is the IRS/HMRC might consider your relationship with a single client to be closer to that of an employee than a consultant.
Sustainability Is More Important Than Revenue
Your goal as a consultant is to build a sustainable practice.
This means you need multiple streams of revenue (i.e. you need multiple clients).
If one client is responsible for too much of your revenue, you’re not building a sustainable practice. You’re a contractor…hired help for a short period of time.
Serving that client might bring in revenue in the short term, but limits your revenue in the long term.
This is why if you’re just starting out you shouldn’t go after the big clients. Not only are you unlikely to secure the contract, but even if you did you’re simply delaying the time it takes for you to build a more sustainable practice.
Select a lower price point to begin with and build more sustainable income streams.
No Client Should Represent More Than 40% Of Your Time
The often-cited rule is that no client should represent more than 20% of your revenue.
That feels a little too low for independent consultants, so I’d suggest that no client should represent more than 40% of your revenue.
That’s obviously not possible if you’re just starting out. Your first client will obviously represent 100% of your revenue. But a better way of thinking about it is no single client should represent more than 40% of your time.
This gives you time to develop your skills, attract new clients, and design the processes that will help you develop over the long term.
Aside, if any client demands to represent the majority of your time - you probably need to explain why that’s a bad idea for you both.
But Turning Down Money Is Hard
Believe me, it’s extremely hard to turn down money.
Especially when it’s a lot of money!
In your head you will probably believe something like:
‘I’ll use the money to hire an additional staff member so they can serve this client while I do promotional activities’.
That’s exactly what I thought too. The reality is it’s a huge risk. It might work out fine, but if it doesn’t it put you in a really difficult situation. Far better to grow a little slower and more sustainably.
What Do You Tell The Client?
My advice (as with most things when it comes to clients) is to be honest.
I’d suggest something along the lines of:
Thanks for considering us for this project - I’d definitely love to be involved.
However, we want to be careful that we’re not completely dependent on you for the majority of our revenue. That dependency wouldn’t be good for you or us. We want to work with you in a sustainable way over the long term.
So how about we take on [part of the project] and I’ll bring in a partner I’ve worked with before who can take a terrific job of [other part of the project].
Over time, as my consultancy grows, I’d love to expand our partnership and continue to do great things together.
Let me know if this works for you?
You can adjust the language however you like. The important thing is to be honest.
Your goal isn’t to become an employee of your client, it’s to build a sustainable consultancy. If you succeed, your client succeeds too. Taking on a big project makes that goal more difficult to achieve.
As I said, turning down money is never easy. But it might be the smart move.