The most common reason for revenue collapses during the past two years has been market failure.  Clients reduced or stopped buying specific professional services.  As is typical during a recession for reasons I have described elsewhere, this happened suddenly.  One month a firm had more work than it could handle and numerous prospective assignments moving their way towards a sale.  The next, clients were cancelling projects and prospective assignments evaporated.
Now that the worst seems behind us, we would be wise to take lessons from this downturn to reduce the impact of the next one.  Prior to downturns, some professionals feel immune to revenue collapses for three reasons that prove to be unfounded:

1. My market is different:   In the late 1990s professionals selling services to the telecommunications industry argued that with the rate of increase in data communications, demand for their services would keep increasing for the foreseeable future.   They failed to realize that short term imbalances in supply and demand can create a short-term bust in a generally upward market.  Firms selling heavily to the healthcare industry, which had come through earlier recessions unscathed, took a beating in this one, when many hospitals cut their spending.
2. My client is really many clients:   All markets go up and down.  The classic way to reduce the impact of such swings is through diversification.  But we must be wary of false diversification.  Over the years I have heard professionals who were dependent on one client for most of their revenue claim that the client was so big and they were working in so many parts of it that it was the same as having many clients.  When several big financial institutions failed over the past two years, some professionals learned how untrue this was.
3. My firm already has a diverse client base:  Sometimes professionals believe they serve diverse markets, when they don’t.  A dot com consulting firm, whose three biggest clients were an airline, a credit card company and a hotel chain, went belly up after September 11, 2001, when travel nosedived, and all three clients canceled projects.  Management of another firm convinced themselves that their top three clients; a credit card company, an insurance company and a bank; were so different that the firm was effectively diversified.  In this downturn, they learned that a credit crunch crunches all lenders.

Always be skeptical of it-can’t-happen-to-us statements.

This entry was posted on Monday, November 9th, 2009 at 5:05 am and is filed under Phone Calls, Prospective Client, Rainmaking Problem, Selling Professional Services. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.