One of the things I coach young companies to be careful with is the allure of landing that “one huge client that will put them over the hump.” It’s both attractive and very dangerous. Too often young companies focus on only the allure and don’t consider the dangers, which too often push companies over the edge rather than the hump.[Tweet “Often that one huge client pushes new companies over the edge rather than the hump”]
In the past two days, alone, I’ve heard stories from three strong companies dealing with the challenges of servicing that one big client.
One of them is dealing with a series of minor hiccups. None of them were life threatening but they put the company’s growth plans out of reach, as well as depleting its cash reserves putting it in danger as it enters the next fiscal year.
It’s a young CPG company that has enjoyed tremendous growth in the past two years (an expensive effort). It has shelf space in most of the nation’s marque retailers and jumped at the opportunity to sign a contract with the largest of them all. Very exciting stuff.
There were the immediate challenges of dealing with large clients. During negotiations, after the CPG company’s excitement was reaching apex, the large client demanded some minor adjustments to packaging, branding, etc. Nothing significant.
Except they were. During a test run by the CPG everything was fine. It wasn’t until the production run the CPG learned its taping machine could not be lowered enough to tape the boxes. The difference was a mere two inches.
The cost of those nominal two inches was monumental.
There’s no guarantee the CPG will ever recoup the cost. The CPG tried a workaround that didn’t workaround-so-much. They had to buy a new machine that might never be used again. The large client might not place another order. The CPG certainly doesn’t need a second taping machine. It can’t use the new packaging format for its existing clients. And so on. There are ways to mitigate the cost impact, of course (it could put the machine up for sale, etc.), but time is always on the side of failure… entropy is a universal law.
What if the company was cash strapped like too many young companies? If the company couldn’t survive long-enough to leverage those mitigating solutions, death becomes it.
Along came a second problem that put the company in greater danger. The CPG company arranged for shipping to the client’s many locations across the country. Shipping is costly. Cross-country shipping to hundreds of locations is very costly.
The client delayed the order by two days. Now the CPG company has product sitting in the warehouse with a huge truck AND two drivers sitting in the parking lot at a cost per hour I cannot even force myself to say (two drivers were essential to the CPG’s ability to meet its cross-country delivery deadlines, which were also client demands the young company didn’t know would impose significant additional costs; acquiescing to the demand seemed minor).[Tweet “Growing companies are constantly faced with decisions which put the profit model in jeopardy”]
The company was faced with several options all of which put the profit model in jeopardy. Should the company dismiss the truck and the drivers but still have to pay them; should it pay the shipping company to have the truck and the drivers sit around waiting for two days; should it go back to the client and ask it share the expense (the contract didn’t address that issue).
That simple story reveals most of the issues young companies face when pursuing and then servicing behemoth clients.
- Overvaluing the impact the premier client can have.
- Acquiescing to seemingly minor demands in order to close the deal.
- Not fully vetting the minutia involved in meeting the large-client’s demands (a 2” gap wasn’t even considered).
- The company didn’t have the experience to know its contract should address issues the company never faced with previous clients.
That’s not to mention the largest issue faced by so many startups with large clients: they must dedicate all of their resources to keeping that client happy at the expense of (a) selling new business and (b) servicing other, smaller clients.
The most alarming aspect of this story, the part to which young startups should pay special attention, is that the CPG company wasn’t a new entrant to the national market. It had been working with large national clients for more than two years. It was not a rookie in the arena.
If a company with that experience – run by smart, experienced people – can run into those issues, imagine what a startup without that experience could suffer.
Don’t be lulled into thinking there’s a difference between this CPG company (a physical-product company) and a tech company. Tech companies have the same fixed cost issues. They hire new people to meet the large client’s needs. They invest in R&D to retool the platform to match the large clients IT. etc. etc. etc.
Two inches, two days and two drivers put this company in harms way. It was lucky enough to have sufficient cash reserves to survive.
If you’re startup doesn’t have that luxury, be very careful. It doesn’t take much to push a company with great potential into the abyss. I don’t suggest you don’t go after those big fish, just be aware that the big fish can eat you if you’re not careful in the beginning.
Oh yeah… the solutions I’ve seen work the best. I certainly don’t suggest young companies don’t pursue the big fish. Absolutely not. The simplest is bringing in your mentor or another expert who knows your business as well as servicing F1000 clients. I don’t suggest turning to your attorney to understand how the large-client’s demands will impact your operations or your cash flow. Regardless, founders must put aside the allure and pay attention to the dangers.