A firm lands a substantial customer. The work is good, the relationship is good, and over six years that customer grows from a quarter of revenue to something over half.
Nobody decided this. Every individual year of serving them well produced more work, and declining it would have been perverse.
What has actually changed
Not the relationship, which may be excellent. The firm’s position.
Below a certain share, a customer is a customer. Above it, the firm cannot walk away from any term they propose, and both parties know it. The terms will eventually reflect that, and they will do so without anybody behaving badly.
A procurement manager arriving in year seven will run a benchmarking exercise, discover a supplier with no alternative, and negotiate accordingly. That is their job, they will do it competently, and the firm’s twenty-year relationship with their predecessor will not enter into it.
Which is the argument to grasp: the exposure is not that the customer will behave badly. It is that the firm’s outcome now depends entirely on their continued goodwill, and goodwill is held by individuals who move on.
The forms concentration takes
Revenue is the obvious one and not the only one, and the others are easier to miss.
A single supplier for something with no ready substitute, particularly where a specification or a certification locks you in.
A single sector. Four customers is not diversification if all four are in construction and construction turns.
A single geography. Entirely rational for a firm serving one valley, and it means one regional event affects everything at once.
A single person. The employee who holds the relationships, the estimating capability, or the licence the firm operates under.
Each arrived by accumulation rather than decision, and each is invisible until somebody counts.
Why it goes unaddressed
The remedies all cost something now against a risk that has not materialised, which is the hardest category of decision to make.
Diversifying means pursuing customers who are less profitable than the one you have. Building a second supplier relationship means paying more for part of your volume. Developing a second person who can estimate means somebody spending time not estimating.
Every one of those shows up as a worse result this year, and the benefit is an event that may not occur. An owner who takes them is accepting a certain cost against an uncertain loss, which is precisely the trade people are worst at.
It is also the trade that determines whether a firm survives its first genuinely bad year.
What to do while the relationship is good
The work has to happen while there is no problem, because after a customer changes terms the firm has no capacity to build alternatives and no time.
Set a threshold and watch it. A stated share above which the firm will not go without a deliberate decision. Reviewed annually, so that drift is visible.
Keep the smaller customers. The instinct is to shed low-margin work to serve the large account better. Those customers are the alternative, and reacquiring them after a loss is considerably harder than retaining them.
Hold relationships at more than one level. If the connection runs entirely between your owner and their manager, it ends when either moves.
Know what the firm looks like without them. Not as an anxiety. As an actual figure: what has to change, what can be reduced, how long the reserves cover it.
Declining work as a strategy
The move that sounds irrational and occasionally is not.
A firm at fifty-five percent with one customer, offered a further expansion, is deciding whether to become a firm at seventy percent. That is a structural change to what the business is, and it should be evaluated as one rather than as a revenue question.
Owners who have declined such expansions generally describe it as among the harder decisions they made and among the ones they are most confident about afterward.
Where declining is not realistic, the alternative is to take it and simultaneously commit to a specific diversification effort with a name and a date attached, so that the increased exposure is at least accompanied by an attempt to offset it.
In a small economy
Concentration is harder to avoid in much of Idaho than the general advice implies, and it is worth saying so.
In a county with one large processor, one major contractor, or one dominant sector, a supplier’s customer base is constrained by what exists. Diversification may require serving customers three hours away, which changes the cost structure, or entering a different line of work.
Where the exposure genuinely cannot be reduced, the response is different but not absent: hold larger reserves than a diversified firm would, keep fixed commitments lower, and be conservative about the capital decisions that would bind the firm through a loss.
A firm that cannot diversify and has not adjusted its balance sheet accordingly is carrying the exposure twice.
Edited by Patrick J. Wolf, PhD