When the secret to strength is not concentration
Ralph Waldo Emerson famously said, “Concentration is the secret to strength.”
Indeed, concentration is a good thing. You want it when you are reading or learning. It’s critical when there is an important task to complete. It helps to be able to focus, avoid distractions, mistakes, and mishaps, and get things done. After all, how many times do we encourage and coach people with statements like “just concentrate!”
Yet, concentration isn’t all it’s cracked up to be. In fact, instead of being the secret to strength, it can be a killer. A silent, sneaky, secret killer. Concentrating on the wrong thing at the wrong time can backfire, like focusing on your phone and not realizing you crossed the center line or just stepped into traffic.
In business, I see a trifecta of risks around too much concentration, and this concentration directly impacts the selling price of a company and has the power to derail and kill the business entirely.
I was reminded of this while talking with a colleague recently. He was sharing a story about a business that he works with. The owner was absolutely thrilled that she had a long-term relationship with Walmart for her products. The relationship was over 25 years old, and she had invested a great deal in developing that account so she could pump a lot of volume through Walmart.
The fact that she had a 25-plus year relationship with Walmart is impressive. Walmart is not known for its deep, long-term relationships. When he shared how much volume she had with Walmart, I about choked. Nearly 80% of her revenue was with Walmart.
Yikes! Walmart! That Walmart — the one that has a reputation for driving tough deals and dropping a supplier over a minor delivery bobble. One change in the relationship dynamic with this account could wipe out her business in a blink.
This is an example of when concentration is bad. Really, really bad. Customer concentration, which is a metric for how much your top customers contribute to your overall revenue, is a measure of revenue risk in a business. It is a bellwether data point in valuation analyses and a key factor in how attractive a company might be to a future owner. Ideally, no single customer should account for more than 5% to 10% of your overall revenue. (Basic 80-20 rules would expect 80% of your revenue to come from 20% of your customers.)
Later that week, I was having a conversation with a business owner of a small company. While learning about the business, it was shared that the employee group was less than five people, two of which were owners. One of the owners had key sales relationships, which is not at all uncommon in a small environment. One of the non-owner employees is starting to make some noises about their retirement. The owner group is also looking to transition the company within the next several years. “Houston, we have a problem” — another concentration flashing light went off for me. Relationship or responsibility concentration.
Of course, in a small environment of four, there is always relationship and responsibility concentration risk. There is only so much bandwidth and capacity for cross-training and multiple touch points. But I see this dependency in companies of all sizes. With the aging demographic, more retirements, and the “great resignation,” some of our greatest risk is on two feet. In the case of the company above, their risks are pretty clear. They need to start recruiting, developing, and transferring knowledge, responsibilities, and relationships as soon as possible to ensure the viability and transferability of the company.
Employee and owner concentration risks are present in your company too. It may be time to make a concentrated effort (pun!) to identify and understand them. Take steps to mitigate the damage this concentration risk inflicts when someone leaves or, if selling a company, on the selling price.
The third risk in the concentration trifecta is supplier risk. Examples are all around us. Our supply chain systems have broken down. One client can’t get trucks and/or drivers to get their product to market. Another is dealing with whipsawing lumber pricing. Another awaits the boat from China. From my experience, supplier concentration, where you rely on one supplier for key inputs, is very common. It makes economic sense. The more volume you concentrate with one vendor, the better pricing you get. Yet, if there is a hiccup with that vendor, you are beholden to them and your options may be limited, at least in the short run.
This can set off a chain reaction. Imagine what would happen to our woman working with Walmart. One day, the supplier for her key ingredient curbs their production for a COVID outbreak. She can’t get the inputs. She’ll miss her delivery dates — with Walmart, 80% of her business.
If 2020 taught us nothing, it underscored the importance of self-reflection, review, and action plans. We’re heading into a great time of year for doing just that. Go through a discovery process. Set your goals for finishing 2021 strong and for 2022. In fact, commit the time to concentrate on that for a while.
Concentration can be a good thing. Until it’s not.
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