Sunday, November 16, 2008
CLIENT BALANCE: Sharks can kill your firm
A friend of mine went from a 12 person firm to three when he lost his biggest client that made up 75% of his annual revenue. It took him over 2 years to recover and get back on track. This is an isolated example of how poor client balance can ruin a design firm. Although not as extreme this is a fairly common problem with many creative service firms. Your client can grow fairly quickly in a short amount of time. You must monitor the amount of work that comes in and measure against your revenue goals. I have written how to classify your current & future clients and provide a guide you can use to monitor your firm's growth.
I've created a guide that allows a design firm to classify a client by the amount of estimated annual revenue the client can provide to the firm. We're going to show what a dangerous client, an ideal client, and a promising client looks like and assign percentages to them.
A dangerous client will be identified as a “Shark”. Sharks provides large amounts of revenue and if for any reason the Shark goes away your company's cash flow can seriously get eaten up by overhead costs. Anything over 25% will be labeled as a Shark. If you work with different divisions of a company the aggregate should still be under 25%.
If a Big Fish becomes a Shark there are several ways to handle the situation. You can increase your sales on other Big Fish, bump up a Guppy or tell the Shark you will have to pass on the project.
An ideal client will be identified as a “Big Fish”. This is your money making client. Every month you should monitor these Big Fish to ensure they don't turn into a Shark. Ideally you want to keep their revenue total to 20% of annual revenue.
Promising big fish clients will be labeled as “Guppies”. These guys are important for they can eventually step up and become a Big Fish when you're ready for them. These fish are usually 10% of annual revenue.
Everyone else we'll call “Bottom Feeders”. This percentage should never exceed 10% of annual revenues. These clients tend to have “champagne tastes with a beer budget”. The only reason you should be working with these clients is for strategic reasons. These Bottom Feeders should have the potential to lead to big profitable work. These should not be friend, family or cross my fingers type of clients that you already know in your heart will lead to another project of the same size or even worse nothing. Please use your best judgment.
So what is the best client balance? Most of your revenue will come from your Big Fish. Typically you want three or four Big Fish and have a couple of Guppies ready for when the Big Fish go. This is a great tool when interviewing new clients. You can quickly identity where you can place your new client or where you have room for them. I suggest to always start slow and place them with the guppies before you hire any new employees or fire any existing clients. Do not accept work unless you know you will be profitable and can service them to the best of your firm's ability.
How is it done? I've used this system for many years and want to share with you what has been successful with my design firm. First you start with your estimated annual revenue goal and multiply by 20%. For example $500,000 x 20% = $100,000. Each of your Big Fish should bring in that much revenue. Everyone else is either a Guppy or Bottom Feeder based on your estimate for revenue from that client. Please review the schematic posted with this blog.
You may not have the three or four Big Fish at this time and you'll need to work at it. This is simply a guide to grow your firm and service your revenue stream versus hoping a bowl full of Guppies and Bottom Feeders will turn into Big Fish.