Tag Archives: business models

The End of Cash?

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It’s interesting to see the number of recently introduced products coming to market which are designed to, in effect, remove the need for cash.

One that has garnered particular attention recently is, of course, Square. This comprises a small application that resides on your iPhone (or iPad, iPod Touch) or Android phone, together with a little reader that plugs straight into the audio input jack of the phone and turns it into a personal credit card payment machine that will allow the user to accept credit card payments from anyone for a small fee (typically 2.75% + 15c). With no costs for set-up, application or card reader this is sure to change the game for those tens of millions of small businesses, traders and professionals that have, until now, fallen outside the electronic payment net because they are too small for the card companies to serve cost-effectively.

But Square is not alone – Obopay allows anyone with a  mobile phone to set up an Obopay account and, for just 25-50c (plus 1.5% if you’re using a credit card to fund your account) send money – in other words, make a payment – to anyone else with a mobile phone, whether or not that person already has an Obopay account. Again, there are no setup costs.

And then there’s Intuit with its GoPayment service that also enables credit card payments from a mobile phone – this time with a Bluetooth reader – at a cost of 1.7% + 30c per transaction, although this service does have a monthly service cost of $12.95 attached to it (I wonder for how long, though, given the competition above).

Doubtless there are many others, too, either in stealth mode at present or on the drawing board.

What’s more, these systems allow you to build purchase histories by customers, offer loyalty programs and great levels of service more simply than the straightforward cash systems did – so even the smallest businesses can step up their marketing at little or no cost.

At present, all these products only work for you if you’re a US-resident/business, but it’s only a (hopefully short) matter of time before they go global and the way of transferring value changes forever from cash to electrons. No more looking for change, worrying about how the currency in a new country you’re visiting works, being concerned whether anybody’s watching as you withdraw a large amount of cash from an auto-teller…. And, of course, if you’re a small business, no more concerns about having the right change for those large notes that auto-tellers like to give, about the value sitting in your till, or being worried when taking your cash to deposit it.

It’s going to be interesting to see how society changes over the next generation as we move from cash altogether. Will the nationalistic bonds to a currency (and the resulting issues of payments from/to different countries and with travel) be removed, and could we find a common global currency?

And, of course, we’re seeing the continued drive for the mobile phone to be less a telephone and more a personal digital assistant in every way – clock, alarm, calendar, address book, diary, music player, radio, newspaper, camera, voice recorder and now, wallet. As an aside, it’s interesting to see how many of the Generation Ys don’t wear watches – their phones tell them the time. Has the watch industry got an answer to this, its potentially biggest threat?

We’re at a very interesting point in the 5000 year evolution of money as we know it. Will it disappear completely as a physical object in the next 20 years?

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Can Europe Survive? Life after Katla…

Katla
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The recent chaos surrounding the eruption of the Eyjafjallajökull volcano in Iceland – with effects being felt globally in terms of significant financial losses, disruption to travellers, disruption to food supplies, and so on – needs to provoke some serious discussion as to what actions are needed to prevent even greater, and much longer-term, chaos in the event of a more significant eruption.

After all,  history has clearly shown that when Eyjafjallajökull erupts, it’s very much larger neighbour Katla is generally not far behind, and Katla is overdue for an eruption anyway.

While the size of eruptions can never be accurately forecast, the historical evidence shows that Katla’s eruption is likely to be at least ten times the size of the Eyjafjallajökull eruption – and quite possibly more. This could mean not only significant floods of fresh glacial-melt water into the sea (a volume equal to the combined flow of the Amazon, Mississippi, Nile and Yangtze rivers is estimated to have occurred following its 1755 eruption), but a column of ash rising 20km, or more, into the jet stream and being spread over a much greater part of the Northern Hemisphere.

History has already shown some of the worst effects from major volcanic eruptions in Iceland – that of Laki in 1783 resulted in famine across Western Europe, and as far south as Egypt, one of the longest and coldest winters on record in North America, and the death of tens of thousands of people from gas poisoning and famine. It was even linked to the start of the French Revolution, where the lack of food played a significant role.

Admittedly, these are somewhat extreme examples, but they show what is possible should Katla’s eruption be a big one – and almost all experts agree that with Katla, it’s not a question of “if” but of “when” it will erupt.

So, what are some of the possible effects of a big Katla eruption?

  • Air travel – the recent 6-day chaos would potentially be dwarfed by one that could last months. This would not only impact passengers, but freight, too. Tourism would certainly be impacted negatively, but so would food imports and general freight movement.
  • Agriculture – the impact of a prolonged cold spell would drastically affect crop production in Europe and, potentially, elsewhere in the Northern Hemisphere. For Europe, this would just add to the difficulties faced by the lack of air transport to bring in fresh produce from elsewhere.
  • Power – of course, a lengthy period of exceptionally cold weather would push up power consumption dramatically. Could Europe cope with a prolonged extra demand for power for heating?
  • Wealth – potentially a significant shift in the wealth of Europe as the combination of food shortages, collapsing tourism, freight reduction and prolonged cold takes its toll. Where would this wealth go, and who would benefit?

Disturbingly, though, little attention seems to being paid to this, in spite of the lessons we’ve learnt from Eyjafjallajökull. And if it’s not Katla, how long before another significant eruption – perhaps in Iceland, or perhaps elsewhere (Yellowstone?)…

European, and other, governments need to get together as a matter of urgency on this: the planning for overcoming the potential problems is not something that can be done overnight in a reactive manner. Rather, they need to start work today on ways to reduce the reliance on current modes of air transport (could the airship make a comeback?), to find additional reliable power sources, determine ways to source sufficient food, and so on.

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The obligations of Airlines to their Passengers

Europe
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The current chaos following the six-day shutdown of almost all European airspace has thrown the issue of passengers’ rights firmly into the spotlight – particularly with the fact that so many airlines are refusing to take any responsibility for assisting stranded passengers.

With my son being among those stranded (he was stuck in England, trying to get home to Dubai) I have been active in understanding this in order to help him, and so post this in the hope that it will help others in a similar predicament due to the massive problems caused following the eruption of Eyjafjallajokull.

The governing regulation behind all this is one entitled Regulation (EC) No 261/2004 of the European Parliament and of the Council. The Regulation is available in full from various sources on the web, while this Wikipedia entry has a good summary, and this BBC post has one too.

The summary bottom line is:

  • All passengers stranded in Europe are entitled to their choice of: rerouting to another airport for onward flight to their destination (difficult for this in Europe at present); accommodation, refreshments/meals and communication services (basically 2 calls) while they are stranded (the most applicable option); or a refund of their ticket (not sure why they would want this as they generally want to get home).
    • This is regardless of the nationality of the airline on which the passenger is flying, as the European rules apply to the airlines while they are operating in Europe.
  • All passengers stranded outside Europe with tickets to a European destination on a European airline are entitled to the same choices detailed above.
    • The key points here are firstly that the carrier must be a European airline (if on a code-share flight, the ticket must have been issued by one of the European airlines on that code-share), and secondly that the destination must be a European one.
    • Unfortunately, if you are stranded outside Europe with a non-European airline, they are not obliged to provide this assistance.

Many airlines are claiming that as the volcanic eruption is an “Act of God” (or “Force Majeure”) they are absolved from any responsibility for such assistance and are turning passengers away. This is patently untrue as the regulation only makes provision in such circumstances for airlines to be excused from paying additional (cash) compensation that they are normally liable for in the event of delays. They are still required to accommodate, feed and provide communications for stranded passengers, regardless of the reason.

Other airlines, such as Qatar Airways (on which my son is booked – so much for the “5 Star Service” they like to advertise!), are saying that they are not required to provide any assistance as they are foreign-owned. Again, this is simply not true. Although they are not obliged to provide assistance for those passengers stranded outside Europe, they are absolutely obliged to do so for the passengers stranded in Europe.

Should your airline have refused you compensation at the time, you should retain all receipts for accommodation, food, etc., while you have been delayed and lodge a claim with the airline on your return home.

I hope this will help clear up the confusion surrounding this issue and enable people to claim appropriate assistance.

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Twitter – The “Next Big Thing” for Business

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With Twitter set to pass the magic 100 Million user mark later this month, or early May, and the company having been valued at around a Billion Dollars last year, it’s moved from the realms of novelty. So, should business sit up and take note; is it the “Next Big Thing” as a business tool?

Speaking with business leaders and marketers, one gets mixed responses – the enthusiastic advocates on the one hand, and those that hope it will fade away as it can potentially damage their company, they believe, on the other.

There’s no question that any public forum can be used by people to disparage, or worse, a company, but is that a reason to abstain from that forum, or should one take the opportunity to embrace it and counter any adverse remarks? After all, unhappy customers that are turned around tend to become the most loyal advocates…

Others look at Twitter and ask whether 140 characters is really enough for any sort of meaningful dialogue with customers and dismiss it on this basis. But in our information-overloaded world, is brevity not a blessing?

Properly used, there is no question in my mind that Twitter really can become a significant business tool:

  • Customer service – probably the first Twitter application area to be embraced, companies like Southwest Airlines, Staples and Zappos have found it invaluable to track unhappy customers, respond quickly and show a great service ethos.
  • Sales leads – of course, great customer service leads to sales, but many more companies, like Dell, Sony and Starbucks are using Twitter to promote products; in fact an article last month reported Sony measuring over £1 Million in sales directly attributable to its Vaio Twitter account.
  • Promotions – an extension of the sales leads application is using Twitter for promoting special offers to followers. As the integration of GPS technology with phones increases, these could even be location and time specific, making them highly targeted.
  • Product feedback – companies are often accused of making products that customers don’t need, or of not including “obvious” features. Twitter can give a window for listening to the needs and views of a very wide customer base.
  • Order tracking – an area I’ve yet to see, but one I think is an obvious one: imagine being able to Direct Tweet to a courier company and get an automated response as to where your special delivery is in the system…

In fact, the possibilities are endless – limited only by imagination. With Twitter, companies have access to an incredible mass direct marketing tool without the dangers of being considered spammers – people would simply unfollow those they consider annoying – and one which can provide real-time, real-person feedback on an incredibly wide range of issues.

Twitter, I firmly believe, is poised to be the “Next Big Thing” for business, and companies that ignore it do so at their peril.

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Does “The Cloud” Make Sense for Business?

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The interest in Cloud Computing has grown exponentially in the past few months with a quick Google search on “The Cloud” and on “Cloud Computing” yielding over 25 million articles between the two phrases.

Suddenly, it seems, this is the panacea for all that ails in the technology space – or is it?

There is certainly a good deal of ongoing investment in giant data farms – although the cost of power required to run, and cool, these massive installations is now causing serious concern. I’ve seen estimates of up to 100MW for a giant server farm under development, with 50MW farms apparently not being unusual. Consequently we’re seeing imaginative schemes to overcome this in advanced stages of investigation – ranging from hydroelectric schemes in particularly cold countries with good water, like Iceland and Finland, to Scottish tidal power, to some companies even investigating building sea-platforms that use wave energy for power and sea water for cooling.

However, there is equally a slow but steady increase in governments wanting to monitor data traffic – apparently for security reasons, although I suspect there may be oversight by the fiscal authorities, too. Even Australia is talking about Internet filtering…

All of this is adding greatly to the conversation, of course, with equally strong lobbies on both sides of the debate – much around whether Cloud Computing is taking us back to the old “mainframe and dumb terminal” computing days or whether it’s taking us forward to an more secure, cost-effective era, albeit with the possibility of less flexibility with systems and information.

In my view, though, the issue of whether to adopt a Cloud architecture or not comes down to individual companies and applications – and for the purposes of this discussion, I mean a public Cloud architecture, rather than one owned by the end-user company.

To my mind, the companies that should strongly look at this approach are the SMEs (Small and Medium Enterprises). The reasons here are straightforward economics – few will have the staff or the capital resources to have a fully secure IT infrastructure, complete with Disaster Recovery. This means multiple servers in multiple locations, interconnected by very high speed links and a significant IT team managing it all, with a strong security system. By adopting Cloud architecture for most applications – including that most critical one of all for most businesses, email – the issues of security, availability, backup and full disaster recovery are outsourced to the experts and the SME gets on with running its business. That’s not to say you dispense with PCs – they will still have a strong place in many areas, from detailed individual analysis of data to creative writing, design, etc.

For large corporates, though, the issue is different. They have large IT teams. They have multiple locations, many servers and, generally, already have high-speed connections between them all. Therefore, ensuring adequate levels of security and availability while having a proper backup regimen and a full set of disaster recovery plans for each location, should be routine and already in place. For these organisations, Cloud Computing makes little sense – except, perhaps, for some specialist applications that are not available in another form.

And, of course, if all the world’s large corporates had all their corporate systems in a few locations, what a tempting terrorist target that would make – SPECTRE, of James Bond fame, would seem tame by comparison with the havoc that could be wrought in such a scenario.

So, to answer the question about whether “The Cloud” makes sense for business, my view is that for most SMEs, certainly. For large corporates, probably not. What do you think?

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Is Offshoring threatened by a return to Onshoring?

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One of the potential side-effects of the global economic slowdown that could have far-reaching financial and political consequences is the question of whether offshore jobs should be brought back onshore.

After all, since the Offshoring model really started to take off in the 90s, a number of economies have become dependent on the revenues generated by their ability to provide such facilities for the historically more costly Western countries. For example, India’s business and technology services companies are estimated to have had revenues of some $58 Billion in 2008, up from just $4 Billion ten years earlier, with that sector’s export earnings (largely Offshoring) reaching an estimated $46 Billion in 2008 – offsetting some three quarters of the country’s oil imports.

The rationale for Offshoring was simple:

  • Consumers were ever-more price conscious, and companies were equally ever more cost conscious.
  • Developing economies had much lower labour rates and so could provide manufacturing and many services at significant lower cost, to the benefit of the consumer and the company.

The effects on local labour were not a serious consideration as it was widely believed that they would find alternate employment – perhaps even at a higher skills level which would earn them more money.

Of course, Offshoring was not without its challenges – issues over the quality/consistency of goods and services supplied, of cultural/language differences (especially in the services sector), of corporate governance (data and information leaks, etc.) and of differing expectations of both parties raised their heads. But these could be overcome while economies remained strong and consumers kept buying.

However, the persistence of the economic slowdown, coupled with the likelihood that unemployment in the Western democracies will remain high for the foreseeable future and the growing public debt are forcing a re-evaluation of the Offshoring model:

  • What impact will weaker Western currencies have on the production cost?
  • Will a move to new models of outsourcing – using a managed-services model with guarantees of performance/quality, as opposed to the classic “staff augmentation” model – enable total delivered cost to be lower Onshore?
  • For manufacturing, to what extent will lower transport costs of finished goods offset the higher manufacture cost of Onshore products?
  • What is the premium that can be attached to national pride (e.g. goods/services from that Onshore country)?

And then there are political considerations for the Onshore country: politicians that are seen to encourage job growth are more likely to be re-elected. What’s more, perhaps this could be done in a way that benefits that country’s fiscus, while being seen to be friendly to business and to the workforce as a whole. To what extent would tax breaks for companies bringing jobs back Onshore be offset by the additional income taxes it would gain from the newly employed, the decrease in unemployment benefits and the additional sales tax/VAT it would gain from the spending of these people?

Although a return to Onshoring may not be suitable for everything – large scale manufacturing of small, relatively low-cost items, for example – it seems to me that the benefits to a country, and to that country’s employers, of adopting a greater Onshoring model could be significant. And, if this trend took hold, the impact on Emerging markets that had come to rely on providing Offshoring could be even more significant. What do you think?

Update:
Great blog article by Derek Singleton: “5 Strategies for Growing as a Domestic Manufacturer

Customer Loyalty – is there a Right Kind?

Your Customer's Emotional Experience
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We talk a good deal about customer loyalty nowadays, but do we really understand it and know how to gain it?

The “1 to 1” gurus, Peppers & Rogers, define three sorts of Customer Loyalty:

  • Emotional Loyalty – this is about how customers feel about your brand;
  • Behavioural Loyalty – the way customers respond, and whether they actively seek to do business with you;
  • Profitable Loyalty – those customers that help you to make money.

Emotional Loyalty was the first level of understanding of the concept of customer loyalty, with early marketing designed to appeal to the emotions and build a bond with customers in this way. However, it became apparent that while customers might feel emotionally close to your brand, that didn’t necessarily mean they would buy from you, or do so on a regular basis.

This led to the concept of Behavioural Loyalty where marketers sought to find ways of bringing the customer to them to do business, and do so regularly. Of course, in many cases Emotional Loyalty was ignored as the focus was on getting the customer to purchase from you.

More recently, with the advent of tools to analyse customer purchases and overall costs more accurately, companies are discovering that on average only around 20% of customers are profitable for a business, with 60% being around break-even and a further 20% losing the company money, so they then focused on trying to find ways to increase the percentage of profitable customers and either remove the unprofitable ones or make them profitable.

However, isn’t the key really to do the first two well and use this to leverage the third? It really is not about focusing on just one aspect of loyalty, but rather about understanding how all three interact and driving your business accordingly.

On the emotional level, you need to be clear about what your brand stands for and ensure that you deliver what you say you will do – never over-promise and under-deliver as that is the quickest way to kill your brand’s emotional loyalty.

To keep your customers coming back – and we all know that repeat customers are best – your marketing must understand their buying behaviour and ensure that you continue to interact with them to capture the maximum share of their wallets. The Lifetime Value concept is key here.

But, of course, you must ensure you do so profitably – and this is not just about margin, but about the total costs of doing business with each customer. A high margin customer can still result in a loss for you if, for example, they are consistently returning items for credit, needing expensive support resources, paying late, and so on, while a low-margin customer who pays cash and never needs support can be nicely profitable. Be clear about where the costs are for each customer.

A great example of a company that does all three well is Amazon: just look at the brand recognition, the fact that you know they it’s a reliable supplier of books, DVDs, etc., at good prices, with a no-quibble replacement policy, and then see how it constantly offers you new items based on your buying behaviour. Amazon’s systems are not only providing its marketing engine with ongoing offers tailored to your likes, but make purchasing easy, so its internal costs are low as there is minimal need for support.

But, after all, if you really think about it, isn’t this what business is all about anyway: getting customers who feel good about doing business with you as you provide a consistently great customer experience, coming back over and over again to make purchases that are profitable for you?

So, to answer the question as to whether there is a Right Kind of Customer Loyalty, the answer is clearly, “No.” To be successful you need to ensure you are focusing your business on all three – Emotional, Behavioural and Profitable. And, in the famous words of a song first made popular in the mid 60s, “Do What You Do, Do Well.”

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Liquidation – a valid way to build personal wealth?

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A friend of mine in another country brought to my attention a company that is currently under voluntary liquidation – an act that reminded me of how often I’ve seen this tactic used as a convenient way of enriching oneself at the expense of others.

And isn’t enriching yourself at the expense of others in this way little more than fraud?

The problem here is that liquidation laws are necessary for a business in trouble to find a way to most fairly compensate all its creditors and close (or, in some cases, restructure) before it incurs further problems, resulting in even bigger losses for the creditors.

However, some unscrupulous people will start a business, build it over a few years to gain the trust of its suppliers and customers, and then at a point where the cash-flow starts to become problematic, put the business into voluntary liquidation and walk away from the debts. In the meantime, of course, they have paid themselves substantially in terms of salaries and bonuses – in effect, living extremely well off their creditors that are then left behind holding the proverbial baby.

While it is possible, in law, to go after these individuals and sue them for their personal assets to cover the delinquent debt, this is extremely expensive and, in order for the action to be successful you generally have to prove some form of wilful intent: always a tough thing to do, even when all the circumstantial evidence might point that way.

So, having accumulated a handy sum from this now-defunct business, they start again – looking for new victims. Mind you, some are brazen enough to start again in the same line, asking the same creditors for credit – and often, these creditors fall for it the second time, thinking that they will somehow be repaid from the profits of the new business…

And yet, these self-same businessmen will tell you that there are no victims here as their suppliers are (generally) covered by credit insurance and so will be paid out, while the credit insurer should be able to recover its money from the receivables (if it was that simple, why are they liquidating in the first place?)!

The fact is that credit insurance almost never covers the full debt, so the suppliers have a significant shortfall. On top of this, the insurance premiums invariably rise – the insurer has to covers its losses somehow, after all – and is also wary of that sector so withdraws/reduces cover for smaller, generally honest, businesses that then face genuine cash-flow crunches and may have to fold as well.

Victimless? Certainly not.

So, my question to you is this: do you believe this sort of action is legitimate, or should laws be framed to ensure that such action results in the forfeiture of assets by the liquidating party to cover the shortfall?

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Are Layoffs Bad For Business?

View of Wall Street, Manhattan.
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“Downsizing is killing workers, the economy – and even the bottom line.”

This direct quote from an article in Newsweek of 15th February entitled “Layoff the Layoffs” rather forcefully makes the point that contrary to conventional business wisdom, the constant cycle of cutting headcount as a primary means of cutting costs is tantamount to long-term economic suicide – not to mention the effects on the health of people.

According to the article, research clearly shows a link between layoffs and lower stock prices, with the negative impact on the stock prices worsening with the size and permanence of these layoffs – in spite of the widely-held view that layoffs will boost stock prices through showing effective cost management.

Another debunked issue is that of productivity – in fact productivity per employee does not rise, no doubt due to morale issues – while a study of companies in the S&P 500 showed clearly that companies that downsize remain less profitable than those that don’t.

Adding to the profitability falls, of course, are the costs of laying off staff – both direct (severance pay, etc.) and indirect (morale, rehiring costs when things pick up, and so on). These are always woefully underestimated, as is the extent to which companies embarking on wholesale layoff programs have to rehire – at inflated cost – key staff who elected to “take the package.”

In fact, McKinsey studies over the years have shown that company executives believe that less than 40% of corporate transformations in their businesses are “mostly” or “completely” successful.
Conversely, companies that choose to find ways to weather the periodic storms are the first to recover, and do so far more strongly that those that have made significant across-the-board cuts.

Of course, there will always be times when cutting staff is unavoidable in a business – it may even be the thing that will save it from total collapse. But when this time does come, all the experts agree that it should be done in a transparent, open manner, with cuts being made in defined areas, rather than simply across the board – the all-too-frequent approach of an uninvolved management team. Getting everybody from the CEO down personally involved will get the best results, as happened with the well documented case of Malaysia Airlines a few years ago.

Hopefully this message of transparency, involvement and engagement will start to get through to company leaders as well as to the stock market and investment analysts that so many company leaders are guided by. As I mentioned in my blog post, “Leadership for the New Business World,” a new set of skills are necessary for the successful business of the future – skills that will rebuild the faith of communities in their leaders. In fact, it’s interesting to see how many of the top-rated companies in Fortune’s “Top 100 Companies to Work For” list this year have weathered the storm without across the board layoffs, with many showing positive growth in staff and even in their businesses, too.

Certainly, companies that retain their staff, and take the opportunity to hire key new ones, retain all the critical “institutional intelligence” and are best positioned for the economic upswing, as I mentioned in my blog post, “Will your business survive the upswing?

There’s no doubt – Layoffs are bad for your business, especially when handled without due care, attention and precision. Conversely, a covenant with your staff to be open, fair and honest with them at all times will go a long way to securing the long-term, profitable future of your business.

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Small Customers – A Neglected Resource

The efficiency focus of the past 18 months may well have added substantially to the risk profile of companies, while simultaneously reducing their profitability.

After all, efficiency for most means focusing on the largest customers – allowing one to reduce headcount (less people, managing fewer customers), reduce transaction costs (fewer, larger transactions) and, in many eyes, reduce risk (bigger customers are more trustworthy).

However, aren’t your biggest customers the ones that demand, and generally get, the best prices? Do your biggest customers not get the longer payment terms they request? Are your biggest customers really less work than others?

And what about the impact on your business of the failure to pay of one of your biggest customers? As we’ve seen, they’re far from invincible.

Conversely, most businesses will find that their smaller customers:
• Deliver better margins;
• Will pay more promptly (if for no other reason than you have more leverage);
• Are no more work than the larger ones, and often less so as they are less demanding;

On top of this, the impact of a failure on your business is far less severe, and you substantially reduce your overall business risk by spreading a given value across a number of customers, instead of concentrating it in one place.

What’s more, as business starts to pick up, the companies likely to grow most quickly will be the small ones – a 20% growth on $1 Million revenue is generally a good deal easier to find than a 20% growth on $1 Billion revenue. So having a good number of smaller customers will improve your growth prospects, too.

Analyse the true profitability (return on working capital, including all costs) by customer segment: you’ll find it a very interesting exercise.

I’m not for a moment advocating that you fire all your biggest customers, but rather that you not just focus on larger customers at the expense of smaller ones. As with all things in life, you need to achieve a balance.

Small customers should be embraced as much as large ones – after all, if you have a ready resource that will help you grow faster than the market average while improving your profitability and simultaneously reducing your risk, shouldn’t you make the best use of it?