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The recent announcement by once-high-flying Zynga that it is laying off 18% of its workforce and closing offices world-wide because of slumping revenue caused by an over-dependence on Facebook as a marketing channel, is the high-tech equivalent of a growth trap that can happen to any fast-growing business.
I call it The Wal-Mart Effect. It happens like this:
A young, growing business finally gets the call it longs for – a massive company (Wal-Mart, maybe, or Whole Foods, or whoever the dominant company is in the industry) wants their product or service.
A lot of it. A big, big contract awaits. Heaven on a stick, right?
In fact, most small companies that land mega-contracts with massive companies end up badly damaged and have their growth stunted over the long term as a result.
Here’s how it (usually) plays out:
1. One customer or client contributes more than 20% of revenue.
Apart from the very early days of a start-up (when even just one customer can represent 100% of revenue), it’s important not to allow one client or customer dominate the top line.
Although the numbers vary somewhat from industry to industry, unhealthy things start to happen once one customer reaches 20% or more of total revenues.
Any higher than that and you’re in real danger of falling prey to the Wal-mart Effect.
2. Meetings are dominated with discussions about one customer.
You know you’re in the grip of an over-large customer when practically every meeting begins to center around them.
You notice that weekly management meetings comprise little more than a punch-list of their outstanding production or delivery issues, and even so-called strategic meetings start and end with everyone talking about the 800-lb gorilla.
Doorway and water-cooler chats are about – guess what?
Our single big client, and everyone’s daily agenda is pretty much centered around what they’re screaming for most, today.
3. Key personnel are weary.
When a single large customer buys from a much smaller organization, guess who dominates the relationship?
Right – the customer.
When this happens, over time, your employees lose the ability to work at their own pace, and are increasingly yanked from pillar to post by the powerful large client that “we can’t afford to lose”.
Schedules get burned, internally-set priorities melt like ice on a beach, and everyone’s energy reserves are expended by the middle of the week.
You have an exhausted, unhappy, and increasingly disengaged workforce.
4. Your most creative employees are unfulfilled.
Not only is your workforce exhausted, one of the things you’ll also notice is that after an initial honeymoon period, your most creative employees will become increasingly frustrated.
The reason for this is simple: creative people need an environment in which their ideas and suggestions are heard and acted upon.
In the huge-client / tiny-supplier dynamic, after the initial interaction that secures the business to begin with, there’s usually little room for such a relationship.
Massively large organizations typically operate in ‘broadcast mode’, making their needs known and turning up the volume when they think they’re not getting what they want – not a satisfying environment for highly creative providers to operate in.
5. Your target market definition is blurring.
One of the most painful results of contracting with a customer or client many times larger than your own company is the dangerously distorting effect it has on your market focus.
It happens like this:
MegaCo approaches you to with the prospect of a major contract to supply green widgets, which is what you manufacture.
You negotiate the contract, during which MegaCo insists on a tweak to your manufacturing process so that you can make the widgets in plastic, rather than wood, as you have done in the past.
To get the lucrative contract, you accept.
Three months later, they insist you start pre-assembling the widgets before shipping.
To keep the contract, you agree.
"One of the most painful results of contracting with a customer or client many times larger than your own company is the dangerously distorting effect it has on your market focus." - Les McKeown, Founder and CEO, Predictable Success
A few months after that, they start sending you blodgets from another supplier, which they insist you weld on to your widgets before sending on.
Now, a year later, you no longer have a healthy company serving a wide market.
Instead you have a frankenstein of a business who’s only real purpose in life is to meet the precise, unique needs of just one customer – MegaCo.
6. New client acquisition is on the back burner.
Worst of all, as you begin to realize that this once-heavenly prospect of a huge contract with a massive organization is in fact a nightmare of epic proportions, it dawns on you that you’ve developed an in-built dependence on the contract that can’t easily be given up.
Because servicing the 800-pound gorilla has been so all-consuming that it’s been months – maybe years – since you last pursued any substantive new business.
Not only has MegaCo wrapped its giant tentacles around you, it has sucked you into its gravitational pull, preventing you from acquiring other customers and clients at the very time you most need to.
Of course, not everyone’s experience with large contracts with massive companies is like this – some young businesses use them wisely as stepping stones to growth – but if you’re experiencing two or more of the patterns above, it may be time to rethink that contract.