Wednesday, February 24, 2010

A (Really) Big Client Can Be Risky

Over the years I’ve had two client firms that lost large clients with little, if any, warning. By “large clients” I mean a single large client that comprised at least a quarter to a third of the firm’s revenue. The resultant disruption to these firms presented a nightmarish challenge to firm management. Severe and rapid downsizing of personnel, the need to somehow reduce the costs associated with excessive office space, loss of skills as staff departed, the necessity for partners to contribute capital to the firm, staying within bank line covenants, etc., etc. occupied the partners almost 24/7. And, needless to say, all the other clients continued to expect high quality, timely accounting services.

The prospect of acquiring a (relatively) very large, prosperous client is incredibly seductive. For many firms this becomes a crowning achievement, allowing the partners to feel they have finally “arrived.” One partner told me about his human, gut-level reaction: that it was good to be playing on the same field as the bigger firms; that he no longer felt like a small timer. And the financial benefits can be considerable – a significant percentage of the revenue surge falls to the bottom line; cash flow improves, staff is fully utilized, profits blossom, bonuses increase and life becomes good.

That was exactly the experience of the owners of the two firms I noted above. And then the party ended. Suddenly and badly. I wanted to talk with them both about their experiences, but waited until the dust settled and the wounds had at least stopped bleeding. When the opportunity arose I asked, “What would you do differently if faced with the same situation today?”

First, let’s be clear. As a general statement, neither would turn down the client. However, they both would take steps to ameliorate the potential downside should a sudden, similar withdrawal occur. A number of possible actions were mentioned, including temporary and/or part time staff, client-specific staff, temporary extra office space that is available on short term lease or even month-to-month, farming out certain parts of the job to others (one specific suggestion was to outsource any and all personal returns associated with the client), etc.

The bottom line was that they would avoid undertaking an expansion that had the consequences of permanency and/or increased financial commitment (e.g. long term lease of much bigger facility, etc.) until such time as the rest of the firm’s business – excluding the big client – could support it. They would also refuse to take on a large client whose business was not very similar to their current focus and capabilities. It is much easier to upsize or downsize if the skill sets of the staff overlap. For example, a mainstream 1040 and small business practice might think twice about taking on a disproportionately large non-profit.

I’ve encouraged you to expand your business development efforts during this recession because I am aware so many of your competitors are not being aggressive seeking business, instead looking inward and focusing upon cost containment. This represents opportunity for readers of this blog, who clearly are interested in seeking new business. And never doubt for a minute that the process described and taught in the CPA Practice Manual (and the version for ProfitCents subscribers) that most of your have purchased is more than capable of securing these premium prospects as clients for your firm.

So, please, set your sights upward. If there is that guy you see every now and then who owns the industrial crane company at the edge of town with what looks like a hundred cars in his parking lot every weekday, target him for some personal marketing. We’ve talked about it here in the blog and the process is explained in your manual. Trust me, it is worth your time. There is no downside. And, who knows, you may just get the opportunity to take him on as a client.

But if he is suddenly going to be a huge fish in your pond, how are you going to expand your capability to service his needs? How can you do it so if it all turns upside down it won’t destroy your practice?

Well, one way is to get another big client. Or two. Or three. Spread the risk that way. Remember, big clients tend to give you big referrals, so it can happen. So, the point of this post is twofold: a) don’t bet the farm on one big client; instead hedge your permanent commitment(s) and, b) you can land these big prospects, and now’s a good time to go for it.

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