When One Client Becomes Too Important to Your Law Firm
By ProfitWise - a Visa Business Plans company
A law firm owner once told us about a client he had worked with for years.
The relationship had started with a few matters, but over time the client began sending more and more work to the firm. Eventually, the client represented a significant portion of the firm’s annual revenue.
From the owner’s perspective, this was a great client. The work was consistent, the relationship was strong, and he didn’t have to spend time or money finding that business every month.
Then the client hired a new general counsel.
Within a few months, much of the work moved to another firm.
The law firm hadn’t done anything wrong. The relationship simply changed, and suddenly the owner had to replace a meaningful amount of revenue he had assumed would continue.
Accountants and financial advisors call this customer concentration, although most business owners don’t think about it in those terms. They simply know they have a really good client.
And having a really good client is certainly a good thing.
The concern starts when your firm's financial health becomes too dependent on what that one client decides to do.
Law firms can be especially vulnerable because relationships often build over many years. A corporate client may begin with one type of matter and gradually send work to several attorneys or practice areas. As the relationship grows, so does the revenue. Before long, that client may account for a much larger percentage of the firm’s business than anyone realized.
Usually, nobody pays much attention while the work keeps coming.
That’s why we look at revenue by client when we review a firm's financial performance at ProfitWise. Total revenue may be increasing every year, and the firm may appear to be doing extremely well. Once you look beneath that number, however, you may discover that much of the growth comes from one or two clients.
That doesn’t necessarily mean there’s a problem. It does mean the owner should be aware of the risk.
Once you understand how much of the firm’s revenue depends on a small number of relationships, you can make decisions with that information in mind. You may decide to invest more in business development, expand another practice area, strengthen relationships with other clients, or simply build additional cash reserves while revenue is strong.
The important thing is having the conversation while the client is still there.
We’ve seen business owners discover customer concentration only after losing a major account. At that point, the conversation changes. Instead of deciding how to reduce the firm’s exposure gradually, the immediate question becomes how to replace the missing revenue.
A great client can help a law firm grow tremendously, and there’s nothing wrong with enjoying that success.
Just make sure that as the relationship grows, you’re also paying attention to how much of your firm is growing around it.
