Attend this session and learn how Phyton Consulting got to $3 million per month in revenue before their third birthday, crashed because of a Black Swan event, and executed a world-class recovery emerging stronger than ever. This session will help members identify risk, in all its forms, and develop a risk mitigation strategy to bulletproof their firms.
TRANSCRIPT
Greg Alexander [00:00:10] Hey, everybody, this is Greg Alexander, your host of the Pro Serv podcast, brought to you by Collective 54. If you’re not familiar with Collective 54, we are the first mastermind community dedicated to serving the very unique needs of a very unique audience, and that is founders and leaders of boutique professional services firms. And on today’s episode, we’re going to talk about an issue that plagues small services firms. And this is called client concentration risk. We’ve got a member with us today. His name is Michael Ivie, and Michael recently went through this issue, and he’s going to share a little bit about his story with us today. So, Michael, with that, would you please introduce yourself to the audience?
Michael Ivie [00:01:04] Yeah, sure. Excited to be here. Although in the years I’ve been following you and the Collective 54, I never thought the first time I’d be on your on a podcast would be talking about a negative, thing that I survived, but, I was hoping it’d be a home run, a hit or something, but, you know, nonetheless, here we are. But, Michael Ivey, managing partner, founder at, Python Consulting. We’re a boutique professional services firm based out of New York City with, with its staff and locations across North America. We’re most known for the services that we provide around data management and analytics and AI. Mostly for financial services, I think is what we’re we’re, particularly famous for. And, and we, we really differentiate that is with our subject matter led and execution focused approach, which, you know, it’s kind of code word for just not incubating out of universities and letting our clients train our team for us. But, but doing that and blending, across subject matter domains like risk and regulatory change, financial crimes, core banking, digital transformation, blending that with data management and analytics capabilities as well instead of a more siloed, traditional approach. So, anyway, I, you know, excited to be here today. I thought, I’ll follow your lead on things. I think one thing I’d be very interested to hear from you, Greg, is how you actually define concentration. Risk? Because, you know, my my life working as a, you know, very long time ago worked as a credit officer at a bank, and we won billions to large investment banks. And we used to look at various things. When we talk to these institutions about loaning the money, we look at their, their earnings profile, we look at their liquidity, their, asset quality on their books. But there’s always this the hardest part of doing this was looking at sensitivity to market risk. And, and a big component of that was concentration risk. So we’d ask them who your top ten clients, what are the services they consume from you, and how does that contribute to your earnings? And, and that would have a material impact on our, our ability and willingness to want them. So, vastly different when we talk about concentration risk for fatigue. So I’d love to hear your perspective. Is it do you think of concentration? Risk is the top client, the top five clients? The top ten clients? Yeah.
Greg Alexander [00:03:26] Yeah. Great question. So why don’t we start there? So and and I’ll give you a very precise answer and then I’ll tell you how it came to an answer. So our definition of client concentration risk or high client concentration risk is when 30% of your revenue, 30% or more of your revenue comes from your top five clients. And the reason why we use that as our definition is that we’ve been in business now for a little over four years, and during that time period, we’ve had 28 of our members exit their firms, and we’ve had four times as many of that try to exit their firms who were unable to. And after watching the contrast between the successful exits and the unsuccessful exits, we’ve settled on this definition. More than 30% of your revenue from your top five clients and. The reason why we settled on that is because of deals that didn’t get done. A large reason why they didn’t get done is because of that particular issue. There were other reasons for sure, such as an over dependency on a brilliant founder and a weak management team, etc. etc. but that that’s really the definition. And you know, where it comes up most often is during the exit. But that’s not the only area. For example, in your past, you know, you made lending decisions based on client concentration risk. And we see our boutique browser firms trying to borrow money all the time, and they get asked this question from their bank. And, you know, the answer is different from bank to bank, but that seems to be a good enough working, definition, you know? And the trouble with it, it’s a catch 22, because when you’re a small firm, you know, having an anchor client is a wonderful thing. You can build an entire firm off of the back of an anchor client because there’s a predictable revenue stream, there’s a growing revenue stream, there’s a meaty client with a great project to hire into, etc., etc. but, you know, careful, you wake up one day and you’re really not a firm. You’re a service provider with a single client. And then if that client goes away, you know, all hell breaks loose, so to speak. Which takes me to really what I wanted to get to, which was, you know, you mentioned it was a negative, that you survived this issue. I would tell you it’s a positive because a lot of times what you dealt with puts a firm out of business. And the fact that you, you survived and you’ve restructured and you’re now thriving again after dealing with that is a testament to your resiliency. So why don’t we turn it over to you and just have you tell everybody the story of what happened? I think that would be really instructive.
Michael Ivie [00:06:02] Yeah. So Greg and I think that’s a great definition to kind of characterize the scenario. But, you know, I worked at one of the largest consulting firms in the world. And, and, you know, I accidentally started consulting from a very long time ago and learned what I didn’t know. So I wanted to go learn how the best firms are run. And and then so when I went back on the journey to work at boutiques again, we had tremendous success, but then unfortunately got acquired by the same firm I just left to, to. So then I had to start over again. Not too long ago, in 2000, at the end of 2018. So I started, you know, that’s when I started finding consulting and I had to start over at Ground Zero website everything. And and. Yeah, so, we, we got going we, you know, and then we continue to grow 300 plus percent per year all the way through 2022. And, and it certainly, you know, as we scale to a point where we were, you know, doing, you know, over 3 million a month in revenue, it was, a lot of it was driven by our top three clients, the vast majority of it, to be honest. And and part of it is it’s a double edged sword that you alluded to because, it seems like insanity to say, sorry, client, we’re doing too much good work with you at, at that competitive margins. And, and we need to diversify. So turning, you know, turning that revenue down, because we recognize there’s concentration risk forming and our revenue doesn’t make a heck of a lot of sense. And I’ll definitely say having 120 million, our client is a lot easier to manage than $21 million clients. So we didn’t have the infrastructure, the resources, the recruiting power to, to to do it across 20 different clients. I think, you know, looking at today, our revenue is not as low as it did drop as, as these clients, you know, the, the clients I’m referring to being, largely banks. So I think concentration in many forms. So we have financial services at the end of 2020 was 95% of our revenue. Then within financial services, banking was over 80% of it. And by banking I mean commercial retail and investment banking. And and then within that bucket, we had 2 or 3 clients that dominated it. So we had concentration on top of concentration, if you look at it from a layered perspective. And and so we were certainly aware and concerned. But you know, our main client, our largest client was 200 plus year old, organization, form banking organization. And we were the number one, you know, managed services provider in North America for them. And, and so, you know, what are the chances they go bust on your watch? But unfortunately, you know, that is, what we had to deal with, in fact, a broader banking crisis, the worst, you know, crisis since the 2008 crisis for banks. And if you’re watching the news this week, you’ll probably see it looks like wave two of that banking crisis might be coming on us right now. But I’ll tell you, as we go through the story, I mean, why we are we feel like we’re in a vastly different position today than we were even a year ago. And and the, the crisis, while it came to a head when Silicon Valley bank went bust in March of last year and that kind of cascaded a bunch of other dominoes, it really started six plus months before that. You know, when everyone was bent down the hatches, a lot of times the first cuts to go are strategy projects or, or consulting, consulting and, contingent workers. So, so we started feeling the pain well before the crisis came to a head, actually in March. That was our revenue actually bottom. So when the crisis actually was peak, so peak media, that was when we at the bottom was already in that process. And we’ve been up every month since then. So, I what is the silver lining, though? Because we were so busy servicing those largest clients, we were actually able to now pivot some of those calories towards supporting, other clients, adding these other client logos in other industries and other verticals within financial services. So looking at those same concentrations today, now financial services down to less than 20% of our total revenue, less than 80%. So more than 20% now as, as other industries, which is a big step forward in two years, I think, then within banking is now only 30% of our financial services revenues. Now we have insurance and asset management and, other fintechs and other, you know, other category, we’ll call it making up the, the rest. So now, as we come into a potentially round two of a banking crisis, we actually look at it like we can actually grow revenue through a crisis as opposed to having 1 or 2 major clients going down. I’ll pause there for a second. Yeah.
Greg Alexander [00:10:44] I mean, I have great empathy for you. I mean, the big client is 200 year old institution, and they went poof overnight. I mean, the odds of that are so small. So it’s just, I guess a stroke of bad luck that happened. And I don’t want I don’t want the listeners to overreact to that. I mean, that would be the very definition of a black swan event, I guess. But you’ve taken these steps to diversify, which is really the takeaway from today’s call. You know, if you were to look back, you know, with a, the power of retrospection and you could wave a magic wand and you could speak to your former self. You know, when you launched the new firm in 2018 and you were growing 300% a year, and you got it up to $3 million a month in revenue? I mean, things you were rocking and rolling. What would you have told yourself then to do at that moment, to allow yourself to better cope with what did happen?
Michael Ivie [00:11:46] Well, actually it’s interesting. I don’t know, that would change an awful lot. I think they were important lessons that we needed to learn. And and honestly, as a risk person, I mean, we always have to have our risk hat on. So I kind of we always knew those were risks and unfortunately was kind of a worst case scenario with, you know, our top three clients, all, you know, two of them going to zero and you know, the other one massively cutting back. So. So that that was tough. I think it it presented a challenge that really pushed us to exceed it. And actually I, I it’s an interesting concept of, you know, we often say in the investment world that diversification dealing free lunch. And that’s when you’re talking about long term consistent saving and investing. But Warren Buffett was famously interviewed and they asked him, they kind of said in, in a matter of fact way that, you know, diversification so critical. He said, well, yeah, for the average person, diversification is great. But if you really know what you’re doing and you’re really in there, you should take those specific idiosyncratic risks, because that’s where the most asymmetric upside exists. And I think we would have never if if I were, if I told myself like back off on on these biggest clients and really focused on others, I’m not sure, you know. I’m not sure how much how successful we would have been with a lot of other clients. And like I said, you know, we were at full capacity just supporting that $120 million client. So, you know, would we have been able to do what we did and build the team that we did? I guess my answer to that is always be thinking about risk mitigation. So if we know we have concentration risk, it’s part of the stage of any entrepreneur’s journey. Is is at some point you probably have some level of concentration and and organically over time we’re going to continue to add new logos. Some logos are going to go up and down and and the top five, top ten list, you know, there will be some names that are kind of there are commonplace there and others that are, you know, hopping on and popping off of that list. So I think, you know, I look at it like, what are the risk mitigation? So there’s a strategy saying so using EOS brokers. And they are they hyper focus on incentivizing your organization to, be doing the sales efforts needed to have that pipeline of new logos coming from new clients? The next thing, I guess, you know, diversification is easy to say, but it takes years to build diversification, at least in, you know, for us, when we’re working with really large, complex organizations. And, you know, the our saving grace is a risk mitigate was the fact that we used a lot of contractors and contingent workers, so we didn’t really have to do much cutting in terms of, you know, our full time, you know, what we call our franchise players, really almost none. In fact, we grew headcount throughout this whole crisis. So it it really was an opportunity for us to invest because we had the kind of confluence of things happening in 21 and 22 where the great resignation people were asking for three, four, five, six, $700,000 base salaries, and they were getting it in some cases. And, and so, you know, and if you give in to that, then your existing talent, they, you know, all else equal, why aren’t they getting it as well. So, you know, we we stuck to our guns. We’ll pay market rate for a contractor. What we need to at that point in time. But you know we didn’t over hire when the euphoria was going on. That put us in a position to do strategic hiring coming out of it. So just one of the many I think silver linings.
Greg Alexander [00:15:20] Yeah. Great advice. You know, I would I would add, you know, when you think about risk mitigation, you know, having a risk mitigation plan, which is what Michael has and what he’s advising to you, I don’t know if enough of our listeners and members have collected 54, have a formal risk mitigation plan. So that might be the take away. And when we have Michael on for his private Q&A session with the members, we’ll we’ll get into details of what a risk mitigation plan looks like. But just to tease the audience a little bit with what we might discuss, then I always ranked when I had my boutique risk high, medium and low, and I ranked it based on how long would it take to recover. So a very high risk was something that if it happened, it would take me a year to recover from. And therefore I prioritize those risks. And I came up with contingency plans to deal with those first. Then I would say moderate risk might take me six months to recover. And then I would say it like risk might take me a quarter to recover. And I’m not suggesting that that’s the way that you all govern your risk mitigation plan. But a risk mitigation plan starts with not all risks are the same. And ranking them high, medium, low might be helpful. You know, to the audience. And the risk that we’re talking about today is not the only risk that you have as an entrepreneur of a services company, but it is a big one and that is client concentration risk. And as Michael shared with us today, you can’t just flip the switch and diversify tomorrow. I mean, there’s it takes a while to build out a portfolio of clients that are diversified and stable. So client concentration risk is in the high category because, you know, it might take you a year or so to recover from that. All right Michael. Well we try to keep these podcasts short about 15 minutes in length. And we’re at that window here. But I do appreciate you coming on and sharing your story. And I know that when we have our Q&A session with the members, we’ll get into more detail about it. And there’ll be lots of questions regarding this. But congratulations on your remarkable story. You know, you had a huge run up. Unfortunately, you had this black swan event that caused some pain, but you’ve recovered from it very nicely. It’s amazing how levelheaded and non-emotional you are about it. So that’s great, and I’m glad to see that things are turning around for you, and I wish you a lot of luck going forward.
Michael Ivie [00:17:40] Yeah. Thanks a lot, Greg. And always here. If anyone wants to reach out and talk more about the topic. So.
Greg Alexander [00:17:46] All right. Great. So a couple of calls to action for audience members. So if you’re not a member of Collective 54, you want to be go to Collective 54.com and fill out an application. We’ll get in contact with you. If you’re not quite ready to become a member yet, I encourage you to subscribe to our newsletter. Which is Collective 54 insights. You can find that on the website as well. That’s where this podcast gets posted. And if you want to dive in a little bit more and, spend some time with it, I suggest you read my book. It’s called The Boutique How to Start Scale and sell a professional services Firm. You can find it on Amazon. It takes about a three hour read, and our content is organized and our programing is organized as that book is. So hopefully those are helpful. And until next time, audience, I wish you the best of luck as you try to grow, scale, and sell your firms.