I recently learned how a management consultant I had worked with four years ago (I will refer to him at the New Rainmaker or NRM) brought in almost $20 million in new revenues in one last this year. This was ten times more revenue than he had produced in any other year and at a firm where a million dollar project is considered big. Many factors contributed to the spectacular increase. Let’s look at one.
Over two years ago NRM went to firm management and said he wanted to devote his full attention to one client where he was working on a small matter and where he saw huge potential. He had a number of reasons for assessing it a good opportunity. He saw focusing his attention on one account as his best chance to bring about a major jump in sales. Management cautioned him that if he focused exclusively on this client and it didn’t give him more work soon, it would reduce his bonus. He took the risk.
The prediction came true; his bonus declined for two years. When I saw him a year ago, things weren’t looking good. He had several proposals in to the client and no one was acting on them. Unbeknownst to him, the client was planning a major change that captured everyone’s full attention. He continued to invest time and effort in the client.The client’s big change was announced and work on it completed. Management returned its attention to the issues addressed in NRM’s proposals. They signed these proposals and asked for more. The dam had burst. The bet NRM had made on getting work from this one client had paid off. It had paid off big.
NRM had been able to make this bet, because he recognized that he had crossed a major financial inflection point. Most people are in a poor position to absorb a major drop in income. If you live in an expensive city and earn $80,000, a thirty per cent drop leaves you with $56,000, a sum that would be hard to live on for, say, a family of four. People whose living costs are high relative to their incomes are naturally income risk sensitive. This is where most of us start our careers.
This isn’t true of someone who earns a lot of money and has kept family spending under control. So, a person earning $800,000, who takes a 30 percent cut, still gets $560,000. If she lives on $200,000 a year this results in no reduction in life style. It just reduces the amount she saves. Wealthier people can accept risk that results in a short-term decline in income but offers a huge payoff a few years later. They are more likely to become risk takers with at least some of their income.
NRM had figured this out and realized that (though he earned nowhere near $800,000) the level of his income relative to his living costs had risen to a point where he could risk a decline for a year or two, if he could get a large enough payoff in the end. Though there were unnerving moments, he won the bet and will reap a stunning financial reward. A lot of people never recognize when they no longer need to be so income risk adverse and make bets accordingly. They sometimes miss big opportunities.