Six Hidden Benefits of Client Concentration

Every firm will face the possibility of a client concentration challenge, and every client should probably say “yes” to that opportunity in spite of the warnings going off in their heads.

Transcript

Blair: David, here we are again talking about size of client. We've covered various aspects of this few times, right?

David: Yes, they've all been fantastic episodes.

Blair: Fantastic episodes. Some of the best work we've ever done. The ones where you interview me. Some of the best interviewing I've ever done. Because when the content isn't there, it really is on the interviewer.

David: It puts a lot of pressure on the interview.

Blair: I'm pretty punchy because I'm starting Day 10 of isolation. I finally imported my podcast gear into this five-star hall.

David: Wait, the community got together and voted and they decided you needed some isolation, or is this related to COVID?

Blair: Yes, it's related to COVID. I'm going a little crazy, a little punchy. We did one called Big Clients Versus Small Clients or something like that. I've heard you caution, many times over the years, about client concentration problems. That usually starts with one big client. It's fairly common, we'll talk about that, but here you want to talk about the benefits of having this one big client, right?

David: Yes, because who in their right mind is going to say no to a big client? I have not seen it hardly ever. I wouldn't.

Blair: No, that's too much money for us. I don't know what we would do with that all.

David: It's like, "Oh dang, I know this stove is hot, but I'm going to touch it anyway," but it doesn't have that pain associated with it right away, it's more like reaching for a cookie. If you get the opportunity to get a huge client, you're not going to say no. If you're going to go to jail then how would you maximize your time there? I actually think about that quite a bit. If I went to jail, what would I do?

Blair: I'd think about your metaphors. Go on, if you went to jail, you hit the biggest guy first, but then what do you do?

David: I would not. I would build an alliance with the biggest guy first. Although building an alliance, I don't know what all that means so I might not. I just think what would make it bearable in jail? Would I need internet and a laptop? Would I need books? Would I need an iPad? I don't know. Anyway, but if you're going to go to jail, you might as well-- If you're going to take a big client, there are some really good things that can happen when you do that. If you're going to take a good client, and everybody gets a chance to does, then these are the things to think about, make sure you at least take advantage. If you're going to sin, get your money's worth. If you're going to pay the indulgence then, man, go for it.

Blair: Oh, yes, love the way you're talking. If you're going to sin, get your money's worth, people.

David: It's a set punishment.

Blair: Hell.

David: Just do it. If you're going to kick the airline seat in front of you by God, just really knock it out of its rack, none of this half stuff. If you're going to take a big client, then there's some really cool things that can happen to your firm at the same time.

Blair: Let's talk about what do you mean by a big client?

David: Any client that represents more than 25% of your combined fee billing. Let's see, you've got two departments in a Fortune 1000 publicly traded company. You add those together, deduct the external cost of good sold if you can, it's more useful that way, and then if the fee of those combined relationships is more than 25%, you've got a client concentration problem. It's not enough to lose sleep over, but when it climbs to about 35%, that's a watershed. It hurts the firm to lose a client at that size or, bigger, go out of business, not immediately, but eventually and they can trace it back to that and the other half doesn't, they recover.

That's what a client concentration is. A more recent term that's popped up, it only occurs when you're in like a due-diligence phase of an acquisition, is what's called the Quality of Earnings, QOE, Quality of Earnings report. What they're looking at is geographic concentration, revenue concentration, service line offering concentration, and so on. Because more and more PE buyers are toying with the idea of buying firms that are run by principles listening to us today, then that has entered the picture. We don't usually use that phrase in our industry, but that's how somebody outside the industry would think of it, quality of earnings.

Blair: The earnings basically are vulnerable if you've got too many eggs in one basket and you say, "25% is what you would call--" I'll use the term here in your notes, that's a yellow light or an amber light, a warning sign, 35% is a red light.

David: Right. I'm not towing the company line here. I would say most of my competitive advisor friends would be quite a bit more restrictive than me. I'm very loose on this. There will be other people who say never more than 10% or never more than 15%, or they say add your top three, they shouldn't equal more than 50% or whatever. Whatever that number is, you're going to violate it and when it happens do something, take advantage of it.

The obvious dangers are that you would lose a client and you didn't react fast enough, couldn't replace them. This danger of a client concentration is one of my favorites because it happened so slowly, you don't even see it until later. That's that you become a client-driven firm. You no longer have a strong point of view that doesn't get watered down by client intrusions or opinions. When you have a client concentration problem, you inevitably will become client-driven because you are more nervous than normal about losing them, so you don't push back as much, you don't rock the boat and so on.

The third obvious danger is that you would slide into a heavier implementation mix. You've talked a lot about how the nature of your relationship with a client changes over time. You are at your most strategic at the beginning when they are thinking about the sorry firm they used before they hired you when you're the new person that has-- they're not used to all the things you do. The longer you stick around in a relationship, the more likely they're not going to be listening as carefully to you. There's lots of obvious dangers of client concentration, but it still happens. If it happens, you got to take advantage of it.

Blair: Yes, those last two issues of being client-driven and then sliding into heavier implementation mix, they go hand in hand with each other. One day you wake up and realize, "Well, we used to be this real strategic shop where we were paid for our thinking. 95% of what we do is high volume wrote tactical requests, responding to a client that's just growing and growing." Again, that's not the worst thing that could happen to you, but those are the dangers. We've talked about the dangers of client concentration a little bit but now let's slide into the benefits. Was there another point or two you wanted to make before we list the benefits?

David: Well, I wanted to ask you a question. You've worked with hundreds and hundreds of firms in some capacities, and you've certainly come across firms. Do you usually know that they have a client concentration problem when you're working with them in sales training or does that just not come up?

Blair: Well, in my earlier days, the first decade in the business as a consultant, it was so common. I just assumed it. I just assumed I would see it, and so it was a pleasant surprise. I forget what the numbers are here that I used to refer to, but what percentage of a firm's revenue would be driven by the top three or four clients? It's got to be 75% or higher.

David: It's that way in a lot of typical firms. What interests me is how certain principles accept it. I can name a lot of principles who move from one client concentration problem to the next and don't lose any sleep over it at all. You've seen that. They just talk themselves into it but they just have some magical ability to find another whale when they lose the one they have.

Blair: Yes, and the inability to work with two whales at one time, because everybody in the firm knows and even the client knows that they dominate your thinking, they dominate your day in every way, mentally and in terms of what people are doing with their hands and their feet. You don't have the time. One of the challenges is when you have a client concentration problem, how do you mitigate against that? Well, you go get another big client, but it's really hard to do when you're dominated by one client, go find another client as big as they are. In fact, you can't even imagine taking on another client because that one big client has got you so busy.

David: It's just interesting to see how some people are really freaked out about it. Their whole method of managing the firm is, I've been [unintelligible 00:08:42] this way. I've heard of somebody that did, no client's ever going to be bigger than 5%. Now I've got a client base of 30 different clients.

Blair: Yes, the opposite problem.

David: Yes, exactly.

Blair: Okay. You're going to jail anyway, as you say. We've decided we're going to jail. We're taking on this client concentration problem with one big client. There are six advantages, six hidden benefits. What's the first one?

David: The first one is the opportunity for growth. This seems a little obvious, but when you have a client concentration problem, it's additive. You are not usually representing a big client that you lost sometimes, but not usually. You're not representing six clients that you lost. Now, this is a client that is normal and then all of a sudden explodes and balloons for you. If I'm talking with a principal on the phone that I don't know, and if they are growing quickly, I would hardly ever lose the bet if I said, "I'll bet you have a client concentration challenge," because nearly every firm that is growing quickly has a client concentration problem. If growth is important to you, it's not to me and I'm not sure it should be important to you, but if growth is important to you, then this is your pretty rare opportunity to climb up on a higher level and hopefully, stay there over time. Fast growth hardly ever happens apart from client concentration. It does, but it's very rare.

Blair: Yes, David Ogilvy famously built Ogilvy into a global agency on the backs of one client, Shell, that just demanded more and more of his firm in increasing number of geographic territories. That's fairly common.

David: Right. My point primarily here is that use this as a forcing function. If you are going to grow quickly, and that's almost always because of one client that's growing quickly, then use it as a forcing function to professionalize the organization. This might be the first time that you think about getting some professional HR help, for instance, or maybe you find staff people differently because you can't use the old methods, they're not fast enough, or maybe you need to change some systems, especially on the SaaS side around software.

It also makes it easier to recruit. Even though you have to recruit more, there's a buzz that comes with it. There's a marketing bump. Sometimes you have to move facilities if we're in pre-COVID days. That always translates into more new business because it signifies that, wow, there's a lot of green shoots coming out of this place in April, I want to be a part of the story too. There's just something about the forcing function of getting a client concentration problem that just professionalizes your firm very quickly, doing the kinds of things that you have always realized needed to be done but there wasn't enough leverage, there weren't enough consequences if you didn't do it.

This forces it and it can be a really good thing. You'll probably never look back and think the same way you did after you professionalize your organization. It could also be with staff, like, "Maybe I need a managing director or a CEO or an integrator in EOS language," and so on. That's the big first one.

Blair: The big wave is coming, ride it and know that it's going to take you far. Who knows what happens at the end, it just kind of peters out, or you crash, but you might as well ride the wave while it's here.

David: Yes, exactly.

Blair: Use it to add those layers of management, that depth of talent, et cetera., et cetera.

David: You're remodeling your house, and you already spent all your budget, and then you see the mess and the disruption and you think, "Oh, by God, if we're going to go to jail, then let's really go to jail. If we're going to remodel this house, let's really do everything that we ever thought of." You're never going to have not only the force to push you to do it and the organizational permission from the people that work on your team, but you're also going to have a lot of money to do it. This is cool. I don't think people realize that there is an almost direct connection between rapid growth and client concentration.

Blair: All right. I like that one. Second hidden benefit of a client concentration challenge is around innovation, is it?

David: Yes, service offering design, because here you are becoming slowly what I call a client-driven firm.

Blair: By saying, "Yes, we can do that. We can do that. We can do that." Which is what you should do with your clients, right?

David: Yes, right.

Blair: It's how you expand your expertise is through your existing clients.

David: That's most likely to happen when you have a client that you can no longer ignore. If this is a client that represents 10% of your billings, and they want you to have a paid digital media planning arm, and you're not all that excited about it, you just ignore it. If this client represents 55% of your billings, and they say they want you to play this song at the dance, you better play this song. It's another forcing function that forces you to be innovative.

I think it's great. I think you ought to do more of this. What I don't want is, I don't want your service offerings to look like they were completely designed by your various clients. You still have to think carefully about it. There ought to be some mandate that says you can't offer more than six or whatever the number should be, six things at one time. If you're going to add something, you got to drop something else. You do want it to be intentional and not completely client-driven.

How many of us were in a client meeting-- I'm remembering back to the days when I owned a firm. You're in a client meeting, and the client surprises you with a request, and immediately, a red flag goes up in your head. You say to yourself, "I've never done that," but then you blurt out, "Not a problem."

Blair: Because you're in sales.

David: You start trembling the moment you walk out and you walk back to your car and you get on the phone, or you text a key partner back at the firm and you say, "You'll never believe what I just said we could do." Sure enough, they do believe it because they've been exposed to your silly promises many times. Boom,  that's when the service offering design changes, when you promise something to a client you do not want to disappoint. That happens way more frequently in a client concentration scenario, so take advantage of it. Expand.

Blair: It's a great situation to be in. You've got this rapidly growing client who needs more and more and they don't have time to look around. You've clearly done good work for them to date. They go, "Oh you can probably do this. If you can't, you'll figure it out. Hey, I need this. How soon can you get this?" You think, "We've never done this before, but yes, we'll figure it out." The client believes in you, so you should believe in yourself. The money's there. These are exciting times, I get the appeal.

David: Yes, absolutely.

Blair: All right. What's the third hidden benefit of a client concentration challenge?

David: I think that you get to know each other better both the agency and the client, trust each other a little bit more. There's more allowance for mistakes. There's this foundational relationship underneath things.

The third advantage is just more leeway for mistakes. It's not like we're trying to make them obviously but the clients that are big and that have been with you a long time, they have so many touchpoints with you and they realize how tied you are to them and they are generally going to be more forgiving of these.

While I think that's true, I think at a certain tipping point, they become much less forgiving and they just immediately start looking for your replacement without even telling you. They let five months later that they're really unhappy. You think, "What's this change of tone?" It's because they've already found another possible substitute for you. Until that happens, for most of the relationship, I think you do get more leeway for mistakes. Being married a long time, if you're not giving each other more leeway for mistakes, you're not married for a long time. Let's just say it like that. The same thing happens at business relationships for sure.

Blair: There's this notion of buyer types in the world of pricing, and the obvious ones that are easy to intuit are price buyer and value buyer. Those are the two main ones. There's also this idea of a relationship buyer. I don't know if this comes from Nagle or Holden or one of the original textbook people on pricing. A relationship buyer, the meaning of it isn't as intuitive as the other two. It really means that the client is looking for you to do all kinds of different things.

It's basically, if we're going to do business together, I'm not going to piece off this little thing and have you do this one little thing. You're going to get to know us really. We're going to get to know you really well. In some ways, our businesses will become enmeshed with each other and you will be our go-to source for all kinds of things. To your previous point, some of those things are things that you've never done before. That's the idea of a relationship buyer. I have worked in ad agencies on accounts like that where we were so enmeshed in the client-side, I've talked about this before, we knew where all the bodies were buried. Our communication pipeline from the top of the client organization to our clients was more direct and therefore faster.

Our client contacts would reach out to us, "Hey, what do you know about what's going on higher up in our organization?" It's just really interesting. You really get to know each other and that idea of leeway for mistakes, you have to. You're so enmeshed, you're both on the same team. You have to cut each other some slack. You're also hard on each other but it's not some client-agency relationships where you're always walking on eggshells.

You're so enmeshed, you're so in the trenches together, you learn each other's flaws, you push each other, and it's the same type of leeway for mistakes that you would see on your own team.

David: Yes, exactly. More frequent flare-ups that you would be aghast at if it happened with a normal client but then kissing and making up again and like, yes, this is just what people do. There's almost a little bit of laziness on the client's part too and a craving for control. Here's this firm. I know how to work with them. They've learned my habits. They don't piss me off as much as they used to. It's just easier. Let's do this. Now I've got another big fire I need to put out, so,  okay, I've made that decision.

There's some of that, that's going on, I think, but I know principles who will pick up dry cleaning for clients. That's not happening much anymore, but it's not that far in the past and that's just taking it over the edge. I'd never heard of those different classifications of buyers. That was interesting to listen to because I could really see that relationship thing coming into play here.

Blair: Maybe we'll do an episode on biotypes. For now, we're talking about the six hidden benefits of client concentration challenge. Number one is you're going to get bigger, the obvious one. Number two, it'll drive service offering design innovation. Number three, you'll have more leeway for mistakes in the client relationship. What's number four?

David: Four is just a really significant jump in your level of confidence in the marketplace. You remember years ago when I called you in that snowstorm and I just said, "Man, I just realized I can tell clients how good their work is and what it's worth and really mean it. They are pleased to hear it, but it doesn't really move the needle. It doesn't move the needle until the client marketplace acceptance steps in here." How that applies to this fourth one around being more confident and playing on a bigger stage with fatter fees, is that you have this big client. There are annoying times. Sometimes there's an asshole tax that you might add to an engagement and then you look at your partner and think they didn't even seem to notice that, maybe we should do more of this.

Or more likely it's that, how important this is to the client and they're also probably pressing you on schedule, and so you just think, "Well, I know I have a lot to lose here, but I think I can press the envelope," and you start to charge more. Or you get deeper access to the other firms that they've worked with and you see how much somebody else charged for something and you just have all of those conversations. There's something about an outsider like me that can never really impact how you feel about the value of your work and pricing and just feeling confident.

One of the substitutes for this would be if you hire somebody who has serious agency experience and that's the first person at your firm that does. You listen to them carefully, you'll discover that you've been undercharging for a long time thinking that this is what the marketplace will bear and not listening to anybody else, except for somebody who has direct experience doing it. Even if it has nothing to do with bigger fees, there is something about now we are either agency of record or we're the one that built that app or they took us to this executive meeting.

Things happen when you have a client concentration relationship that just move you to-- the spotlight comes on you, you get more comfortable on a bigger stage. You will probably charge more, hopefully. It doesn't always happen. This is one of those really rare things that there's virtually no substitute for it, except just hiring somebody from another firm that had that confidence already.

Blair: Yes, a new opportunity with a perspective new client comes to you and you look at it and think, "Well, it's only a fraction of this size of my monster client," so you throw the prices that your monster client pays and you think nothing about it and you throw it out with confidence. I get it. I was in a meeting yesterday. I can't share the details, but a guy was telling a story of, he had a really big opportunity and was being briefed by the client. The client said, "Our budget is $50,000.' This guy was launching a brand new business and he thought, "Yes, okay. That's pretty a good budget." Before he could say anything, the client finished his sentence with "A day."

David: I thought you're going to say a month.

Blair: A day. I can't tell anymore of the story, but it's an incredible story. The corollary for that is you're talking with a client and giving them the price and it seems a little high to you and you're a little hesitant. Let's say it's 300,000 and they look at you and you realize the look they're giving you is not that it's high, it's that it surprised them that it's that low. Then that's when you say per day. There are many times when we've all said, "Oh shoot, I thought I was pressing the envelope, I really wasn't."

David: The hidden benefit here that we've just talked about, number four, is you're more confident. It gives you confidence to play, as you say, on a bigger stage with fatter fees. This big client becomes the norm and you're very comfortable throwing out these numbers with much smaller, new perspective clients. Number five on our list of six hidden benefits of one big client, building relationships with many more future missionaries for your work. Just hold the laughter a second that I used the word missionary. My parents are medical missionaries, sometimes it just slips in. I haven't really seen any data on this, but my suspicion that your very best clients are the clients that come to you from somebody who left a previous client of yours and went to another firm and took you with them. I don't have data for that, but it's just my sense. Sometimes they'll take you somewhere else two times, and then it's like, wow, this is amazing. When you are working with a client concentration problem, you are almost always, by definition, really deep in the organization.

You have access to impress, not just, say, 3 people, but 20 people, because you are in higher-level executive meetings, you're budget planning. If there's a crisis, you usually get called in. If some department that's not working with you has a pretty big need, their first response is always going to be to ask other people at the company and you frequently might get referred in that scenario from somebody that really has enjoyed working with your firm.

If it's true, and I'm not sure it is, but if it's true that your best clients come from that, one of the biggest advantages of a client concentration problem is that you are building relationships with 20, instead of 4, people, many of whom might take you with them to their next job. You want to be especially thoughtful and think about the decisions you make now that won't just pay off now. They would obviously, but will pay off three or five years from now, too.

I'm not sure I'm saying anything surprising in here because people know instinctively that many of their great clients come from that, but I'm not sure they've drawn the connection between client concentration and this. Because here you are working your level best to get the work done for the client and you don't have time to do new business because these client concentration problems are not just big, they're often long. Meanwhile, people on the client side are cycling in and out of their jobs. Those are the people who are probably your conscripted new business team, the ones that don't even work for you directly. In a client concentration scenario, you've got the opportunity to build relationships with even more people than normal.

Blair: I think you're right. Again, I can't prove this too, but that person on the client-side, and again, there are multiples of them now, and you're so deeply enmeshed with each other so you build all these relationships, they go somewhere else. Now they inherit a relationship with an external marketing firm of some kind. They look at it and say, "Well, this is different. Why are we piecemealing this out to all these different firms?

Or why are we doing so much of this ourselves when I'm used to being so deeply enmeshed with my marketing firm? All this stuff that's currently on my plate, I could just hand it all off to them."

You're going from this type of relationship buyer-type approach into a news organization that doesn't necessarily work that way. They're really struck by how different it is and their experiences. No, I want to work with the firm the way I used to work with your firm, where we could speak directly to each other, we were on the phone, we were connecting, our teams were talking all day long, I would see you guys in the hallways, we would be in the hallways of your firm, et cetera. I want that type of relationship.

I think it's not only a source of new clients. It's a source of good new clients that also have the potential to grow the way this one large client has grown.

David: When you are fired for the next firm, there's often some larger shake-up that's occurring and also impacting some of the employees at that team. It's very fair and stupid not to pursue some of those things when that happens.

Blair: Let's talk about the last issue on the list of six hidden benefits of having one big client. I really like this one. In fact, I've seen it quite a bit in the last two years since the pandemic started.

David: Isn't it crazy. I've done three of these deals and that's getting absorbed or bought by your client. The problem with that idea, if the client doesn't represent a lot of your business already, let's say that they're 20% or something, they wouldn't necessarily want to buy you because they realize that a week after that the other 80% of the clients you would lose, they might lose some people and so on. These almost always emerge.

In fact, the three deals I've done have emerged from an existing client concentration problem where you're working so closely together and you just joke about it. It's like, "Oh, we should set up an office in your place." Then somebody after two beers says, "Oh, you should just buy us," and it starts the wheels turning. Then some of those things turn into real deals. That don't surprise me as much as what the deals have looked like because I'm just assuming, absent any hard data, that you're not going to get a lot of money for it. In the three deals that I've done, a lot of money changed hands. Most of it was in cash at closing. This is one of those things that would be far less likely to happen if you didn't have a client concentration problem.  If it happens, then at least open your eyes to some other possibility.

Blair: Yes, there seems to be something in the air. I have now seen twice in the last three months, a proposal from an agency to a client. We talked about a three-option high-anchor proposal, where the anchor option, the most expensive one was you buy our firm.

David: Oh, my goodness, that is interesting. I love that.

Blair: As far as I understand, one of those deals is still on the table. I'm hearing this through my team so I don't know the details. I've heard that twice in the last three months, people are putting that forward as an option. Now, you wouldn't put it forward to everybody, I can see circumstances where it would make sense, where it represents such a massive engagement in terms of size and scope and the client just doesn't have the internal capabilities and you're willing to do this deal and you're setting the price in the proposal, or at least anchoring your price expectations. It's actually not a bad idea.

David: It's not. It's been interesting to see how well it's worked afterwards. I know there's been mixed results on this front. If you think about the deals that I had nothing to do with that everybody's heard of, where, "Oh, they just got absorbed, and we don't even know who they are anymore, half of them left and so on." If you get your money, and you're doing it ethically at the transaction boundary, why the heck not wouldn't you consider that? It's not all bad.

I'm not quite ready to say, "Listen, go all in or all out." I'm not necessarily going to say, "If you get a client concentration problem, forget all of the controls, and just embrace it, and then count on getting bought." I'm not saying that but I am saying that a lot of really good things can happen in a client concentration problem and it's not all bad. If you got to have a colonoscopy-- do I need to finish the sentence?

Blair: Yes, you do.

David: The advantage is that you're probably not going to have to be on conference calls, and you're going to get more rest than normal at the beginning. If you're going to have it, you might as well enjoy it. There's lots of things that bring no benefits at all, but this is one that I think does bring some significant benefits so that if it happens to you, not all is lost.

Blair: I think Marcus needs to edit together all of your best metaphors and analogies. We've gone to jail, we're renovating the house, and we're getting a colonoscopy.

David: Not at the same time.

Blair: Our topic today has been The Six Hidden Benefits of a Client Concentration Challenge. Number one, it helps you grow a bigger firm faster. Number two, it drives innovation in your service offering design.

Number three, you'll have more leeway for mistakes in your client relationships. Number four, you'll grow into a more confident firm that plays on a bigger stage with fatter fees. Number five, you are building relationships with many more future missionaries of your work, as you say, and I like that. Number six, you're opening up an interesting door to being bought or absorbed by the client. You've sold me.

David: I want to be your only client and I'm going to buy you. Now, how do you feel about this?

Blair: As soon as you get a client concentration challenge, you mitigate that by going and getting another big client. What I'm often saying to our clients is, "Yes, okay, now more than ever, because you have this client concentration issue, you need to quit pursuing a high volume of new clients at small project size. You need to stop that. You need one big new client to water down the risk that your current large client represents." Then you go get one big client, 'Okay, now go get another one."

It really does force you to put your new business efforts into perspective, because it really is one new client. You're not going to mitigate the risk through three or four different clients, it's go get another big one, then another big one. Now your firm is massive and you've dealt with the client concentration issue.

David: Yes. One of my least favorite things to do in positioning work is working with a firm whose largest client has nothing to do with where they really should position and they cannot muster the courage to do it, which I understand, that'd be the negative side of this, but there are some really interesting positives that are worth pursuing.

Blair: All right. This has been fun, David.