This is part two of a series of six articles focused on organic growth challenges for SME (small-medium enterprise) engineering, consulting and construction firms. Each article will focus on one challenge area and provides some high-level approaches to overcome these challenges.
Client diversification can be broken into two categories, key large client(s) and client segment diversification. If a firm is dependent on a key single client who equals 25% (some would say even lower) or more of their annual revenue, they are at risk. While your performance may be superb and your client happy, your future revenue may drop significantly due to budget cuts, acquisitions or program/project completion.
Many SME’s have client bases heavily weighted in a single client segment (municipal, power utilities, Federal Government, Oil & Gas, etc.…). This focus may even be a key to their past success as they were recognized as the expert for that industry. Unfortunately, most industries go through up and down financial cycles. Client down cycles can be an opportunity for a creative firm but many times can be devastating to the SME who is not prepared.
SME firm executives usually recognize the challenge but find it more difficult to “fix” than it sounds. True specialty firms may choose to not attempt to diversify their client segments because it is their true differentiator. In this case, they need to design their company to be able to weather the cyclic nature of the segment. Low fixed costs and flexible employee arrangements are useful in staffing up or winding down based on the direction of the cycle.
If true diversification is the goal then senior leadership needs to take ownership in the effort. A senior leader will take the lead business development responsibility for entering the new client segment or at least be responsible for choosing (or hiring) the leader, provide mentoring, support them and be accountable for the success of the diversification effort. This should be considered a multi-year effort to achieve the desired results.
A firm should not confuse diversification with chasing everything that moves. The firm should perform a careful market segmentation exercise to determine the best markets for them and focus on just those select choices. Chasing everything is a sure recipe for future disappointment.