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One of the biggest risks to an ambitious growing business is becoming too reliant on a single customer. But, in spite of the warnings about the dangers of putting all your eggs in one basket, many founders still find themselves in this position.
In recent years, it has been largely a private-sector issue, with smaller companies left exposed when clients shift suppliers to save costs. However, with severe government spending cuts about to come into force, the problem is set to rise for those who rely on UK public-sector contracts.
In the case of Tarek Nseir, founder of Newcastle-based digital marketing agency Th_nk, the dominant client was Northern Rock. He allowed a large part of his operation to be based on serving the lender. So, when the bank collapsed at the end of 2007, the agency nearly went broke.
It is easy with hindsight to say that Nseir should never have put his business in such a risky position. He replies that, at the time, it was very difficult to say no to a client so willing to pay for Th_nk’s innovations.
“Learning to turn down offers of work is difficult but particularly when saying yes provides a lot of success,” he says. “We were also nervous about losing the account if we said no.”
It was Northern Rock that in 2003 had provided Nseir with his first big break, enabling him to turn a business he had started as a sideline while studying computer science at Newcastle University into an enterprise with significant growth potential.
From small beginnings, building a basic web presence for Northern Rock, Th_nk became a key part of the bank’s core online marketing projects.
When the phone call came in September 2007 alerting Nseir that all was not well at the bank, Northern Rock was providing two-thirds of Th_nk’s £3m annual turnover. Within three weeks, Th_nk’s revenues halved.
Nseir immediately made six of his 65 employees redundant to save costs. The resulting drop in morale led to another 15 people quitting for other marketing agencies.
So Nseir got on the train to London, where there were more businesses still willing and able to pay for online marketing, and picked up new clients, such as the BBC and Bupa.
However, the cost of setting up an office in the capital and recruiting experienced people dragged Th_nk into a £200,000 loss, compared with the £700,000 net profit the business generated a year before.
Th_nk has since recovered and last year it made a profit of about £700,000 again, on a turnover of £5.5m.
Nseir admits that he might have found it easier to say no to new business from Northern Rock if he had paid more attention to the risks.
He now claims to take a more disciplined approach to new business growth, with his board regularly assessing the risks of single customers becoming too dominant, and new business development staff getting better at saying no to new work if it is not using the company’s core strengths in web strategy.
Of course, the pain of losing a key customer is lessened if you operate in a growing market.
This was the case for Mark Needham at Widget UK, a consumer electronics distributor. In 2006, Widget lost £10m of its £23.4m annual sales after the withdrawal of a single contract, to supply GPS navigational devices to the retailer Comet.
“We asked ourselves which part of the market was growing fastest,” Needham recalls. “The answer was e-commerce players.”
As a result, Needham and his team got straight on the phone to the largest players in online consumer electronics, including Amazon.com, eBuyer and Dabs.com.
They were so successful in attracting new business from these companies that Widget’s sales for the following year actually increased – even with the loss of the Comet contract.
“There is little alternative to gritting your teeth and trying harder,” Needham says.
Being small also helped. “A bigger company could take a long time to change its systems,” Needham points out – noting that, even now, his headcount is only 20. “We were in a position to act immediately if an e-commerce player phoned and asked for a particular item.”
Lara Morgan, founder of Pacific Direct, a hotel toiletries supplier, was hit hard by the loss of key customers in 2001 when the September 11 attacks saw hotel occupancy rates among her clients drop from 80 per cent to 8 per cent overnight.
Being a global business helped because Morgan could shift sales teams in the worst affected areas to hotels that were still doing business.
However, she also puts her survival and success down to the painful task of cutting the company’s costs quickly, making a third of her workforce redundant in 12 months.
“The fact that I made any money was a miracle,” she says. “It takes time to pick up new business so the only answer is to cut your costs fast and deeper than emotion allows you to anticipate – unless you take the brave pill.”
Targeting any cuts is important, she adds. In Pacific Direct’s case, this meant cutting 30 per cent of the company’s manufacturing operation in factories in China and the Czech Republic, but being more lenient on the reductions to the sales team.
The move paid off. Morgan eventually sold the business in 2008 for £20m.
“You will not regret making the tough decisions that keep you in business with time made to fight another day,” she says.
“If you lose a major client, cut out the cost and put a clear message out to the team that they need to step up and replace the profit.”