by Real Business - Thursday, 30th August 2007

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Ncorp was on a roll. In its first six months of trading, the Cambridge software company had signed up Lastminute.com and several other well-known dot-coms as customers for its e-commerce technology. The future looked bright indeed. But this was 2000, the height of the dot-com boom. It was tempting for firms such as Ncorp to think they’d found the ultimate gold mine.

By the end of 2000, when 31-year-old Nick Bidmead joined Ncorp as CEO, the gold had run out. Sales for the previous three months had been, erm, zilch. Every last bit of the company’s revenue was tied up in the e-commerce sector. And that was going nowhere fast. It was no longer sexy to be in the dot-com market; it was embarrassing. “We even wondered if we should take some of our customer names off the web site,” Bidmead recalls.

Bidmead, a former City analyst, felt like a prophet of doom. “I knew that the slide in the dot-com market had a lot further to go,” he says. “The e-commerce market was going to be dire. When it got really depressing, I thought about going off and being a garden designer.” But he resisted the azaleas and stuck in at Ncorp, and the tide has begun to turn.

So how did the company survive? “I immediately cut 30 per cent of company costs because I could see we needed to spend a good six months redeveloping our products, repositioning the company and taking new messages out to market,” says Bidmead. Fortunately, Ncorp had £5m in seed money from Apax, its private equity investor, which it hadn’t needed to touch in the early days of financial success. Now Ncorp needed to live on it.

Bidmead recalls long, hard meetings with his management team, deciding what to do next. First, they identified new markets for their existing product. “The company was only selling 20 per cent of its intellectual property. What we were selling to the dot-com market was the ability to profile their customers, using pattern recognition technology. But there’s exactly the same requirement in the financial services and telecoms markets,” says Bidmead.

Next they looked at what bits of unused technology they had sitting on the shelf that could be turned into new products. Today Ncorp sells two product lines: customer interaction software, using the old e-commerce technology, and new intelligent automation products for fraud detection and complicated data analysis. Product diversification has also helped Ncorp to widen its customer base, reducing the risk of future dependency.

Ncorp’s biggest market now is selling to customers of Siebel’s CRM software, adding extra analytical capability to this widely used business package. In Bidmead’s view, small companies often wind up being dependent. “Small companies tend to be quite niche. You have a target market and you stick with it. Or it disappears. One way or another you become over-dependent. I think it’s one of the biggest issues that you can face,” he says. He plucks at the “low-hanging fruit” analogy.

“You’ve only got so much time to harvest your tree and it’s easier to pick from the lowest branches – when actually you should be spending time building ladders so you can reach the whole of the tree,” says Bidmead. In other words, too many short-term wins can come at the expense of your future.

Bidmead hopes it will never happen again. “We’re constantly alert to the possibility of getting ourselves into another dependency situation. We keep it in the back of our minds and try to ensure that we have a balanced portfolio and that our markets are making progress,” he says. And if they get offered a huge, juicy contract that would unbalance the business? “We never say never,” smiles Bidmead. “There are lots of good reasons for becoming the preferred supplier. There’s fantastic business in there. But you have to be aware of dependencies as they occur – recognise them and then make a judgment as to where the balance of advantage lies – whether you should stick with it or try to diversify.”

The experience has made Ncorp a smarter business. “By being forced into rapid diversification, we’ve been able to tackle a broad spectrum of business problems and make more of our intellectual property,” says Bidmead. A single, dominant client can lead to dependency – or it can finance profitable diversification. The question is, how to achieve the latter while avoiding the former.

KPM Turnkey
When Birmingham car parts manufacturer KPM Turnkey was awarded a big contract to supply Ford with metal castings, MD Jules Morgan was cock-a-hoop. KPM had already seen a dip in the company’s die-casting and paint injection business. In the circumstances, “dependency” came as a welcome relief.

“If you’re drowning and someone throws you a life jacket, you take it,” says Morgan. “It’s easier said than done to turn down a big contract when you’ve had a shock to the system.” But when changes in the exchange rate made it much cheaper for automotive companies to make parts abroad, KPM hit trouble. “We got a phone call at 7pm one evening saying ‘stop all work. Ford has pulled out of metal castings in the UK’. The news hit us like a bombshell. My company secretary and I sat down and asked ourselves what we were going to do,” says Morgan.

To add insult to injury, a pending supply contract with Land Rover was cancelled, too. Morgan was suddenly left with a production facility containing expensive machinery, with nothing to run on it. Overnight, his forecast revenue went from £1.3m to £300,000. Inevitably, he had to make most of his staff redundant. He shudders at the memory. “It was the hardest day of my life.”

But Morgan did have an escape route. In the good times, he had bought a Lotus Elise. He’d taken it into a dealer for servicing, who was moaning about the poor-quality window winders that came as standard. Realising that Morgan was in the metal-working business, the dealer challenged him to make something better. Over the weekend, Morgan designed new aluminium window winders and made the first samples. He got an initial order from his own dealer and then sent a sample to every other dealer in the Lotus market. Lotus soon got wind of what was going on. It asked KPM to supply window winders as standard for the Elise Mark II and Vauxhall VX220. More parts and accessories contracts followed.

KPM has used the profits from the Lotus supply contract to diversify into the marine market, making aluminium engine parts for power boats – 11 speed records have been set by boats containing KPM parts, Morgan proudly announces – and jet-ski steering systems. The marine business kept KPM stable when Lotus was hit by financial trouble last year. Even the Lotus business has had its tough moments. The car company tried to persuade KPM to cut its prices by 40 per cent. Although Morgan persuaded Lotus to back down, it has left him wary of taking on tier-one contracts with the major automotive companies, who could apply even greater discounting pressure. “If Rover came along and offered us a big supply contract, I’d say no because I don’t want to be that dependent again,” he insists.

Today KPM’s official policy is not to reliant on any one customer or market. Morgan’s goal is for each customer to account for no more than ten per cent of revenue. “We’re not there yet, but not far from it,” he says. KPM has also tried to protect itself by only taking on contracts where it owns the intellectual property for product design. This gives added value to their products and keeps them from being replaced so easily as suppliers.

There’s nothing like a dependency crisis to make you focus on diversification, says Morgan. “If you’re comfortable, you stay where you are,” he says. KPM’s recent experiences have also made the company more sensitive – and quicker to respond – to market changes. Is dependency a growing problem? From where Morgan sits, in the recession-prone metal working industry, definitely. “With so many companies worried about going out of business, dependency is a necessity rather than a choice,” he says.

eChem & Fresh! Organics
But there can be an upside to having a single big customer. Two companies – eChem, a speciality chemicals company, and Fresh! Organics, an organic retailer and wholesaler – are deliberately choosing to become more dependent.

“When an opportunity comes along to increase your business level dramatically with an existing client, it’s a brave person who doesn’t take it,” says Ron Bennett, MD of eChem, a Leeds-based spin-off from Henkel Chemicals. eChem is having to decide whether to increase its reliance on a major petrochemical company. This customer already accounts for a big chunk of eChem’s business. Now it’s been asked to supply to the same company in the US. If eChem wins this contract, 50 per cent of manufacturing revenue will be tied to one company.

So why would Bennett want to go ahead? “It would strengthen the business,” he says. “It will show that, even though we’re a small company, we can supply to multinationals on two continents. And it will provide a base for expansion. “A good client will pull you up and give you so much knowledge,” says Bennett. “You can learn a lot by working with the top guys. They will even help you make money – by suggesting a cost-cutting strategy or improving your systems or quality control,” he says.

Bennett’s biggest worry is the unpredictability of his customer’s future. “They may lose business and we suffer because of it,” he says. And if he lost the entire contract? “Hopefully we’re preparing for that anyway by trying to diversify our business. But if you lose major customers or contracts, the only way you can survive is to cut costs,” he says. And what if your customer asks for price cuts and volume discounts? “You protect yourself based on what you can bring to the customer or the technology. This is what allows you to charge a price premium,” he says. “The key is to give value – I won’t adopt a cut-price strategy to gain business.”

Be interdependent, not dependent, advises Bennett. “Major customers should need us. If we do a good job for them, and they acknowledge it, we’re fairly assured of continuing, profitable business,” he says.

Chantelle Ludski, CEO of Fresh! Organics, agrees. “I prefer having a symbiotic relationship with a major customer. You don’t want a relationship where you can’t live without the other,” she says. Fresh! produces organic takeaways for distribution through its retail and wholesale business. Customers include Selfridges, Holmes Place gyms, plus a number of organic supermarkets and delis.

In April, Sainsbury’s asked Fresh! to trial its products in four stores. It was so successful that Fresh! has been asked to supply to 30 more. Ludski isn’t worried. “We have to do it. I can’t say no to Sainsbury’s because it will outweigh everything else. That would be daft, wouldn’t it? And I can’t say, I only want to do Sainsbury’s and not the other guys. You’ve got to do it all,” she says. “And figure out ways in your business to do it all well.” It’s about creating a balanced business.

As Fresh! has lots of other clients, Ludski is sure Sainsbury’s won’t jeopardise that. “Some companies make a mistake when they’ve got a contract with a large multiple that they’ll stop dealing with the small guys,” she says. “But we won’t do that,” Her policy is to have several “anchor clients” to keep the business in synch. To protect her margins, Ludski won’t do own-brand or own-label products. “I’ve turned down lots of revenue. We want people to recognise a Fresh! product as being good quality and good value,” she says.

So how does she avoid discounting pressures? “Don’t go in with a price you can’t afford to begin with because you’ll get screwed later,” says Ludski. And get the big customer on your side, she says. Reach a jointly agreed sales target, before you give away your margins. “Once a company is selling a lot of your products and raising your profile, then they’re justified in asking for more.”

What would she advise others? “I wouldn’t say don’t do it – just try and spread the risk. Where you really need each other [co-dependency] is best. Otherwise you should be looking at a wider portfolio.” And some big customers are definitely not worth the risk. Ludski: “If you’re dealing with a company who treats you badly, who never pays you on time, who sends back your products for no good reason – then you have to think long and hard about whether you want to be dealing with them.”

Kicking the habit Tips from our dependency “victims”.
1. It’s virtually impossible to resist the temptation of taking on a huge contract. Everybody’s going to take the bait.
2. Do as much as you can to be distinctive. That means your customer will really need you and you can charge a price premium. The balance of power will be yours. You’re also much less likely to get replaced.
3. If you’re offering a commodity, you’re going to suffer eventually. By all means take the money but get ready to diversify - fast.
4. Even in the strongest of customer relationships, caution is advisable. You can’t afford to be complacent. Being distinctive may not last forever. Have a replacement waiting in the wings.
Jean Leston is a business journalist who knows all about dependent companies – her husband runs one.

Tags: business problems, client dependency, big customer, kpm, ncorp, single big customer, lotus, fresh organic, nick bidmead, chantelle ludski, small companies, dependency crisis, lastminute, apax, jean leston, dot coms,