Small Law Firms

Small Firms, Big Lawyers: Beware the Uberclient

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Ed. note: This is the latest installment of Small Firms, Big Lawyers, one of Above the Law’s new columns for small-firm lawyers.

As with love affairs, all lawyer-client relationships must eventually end. If you’re lucky, they won’t end until retirement or death (not the untimely kind; that would be unlucky). More often though, they will end with one of you — usually the client — finding someone new or simply no longer needing the other. The goal, then, is to try to stave off this end for as long as possible. But it will come eventually. And while no one likes to lose a client, it’s not the end of the world.

But there’s one situation where losing a client is a much more serious problem:

When it’s an uberclient.

Let me explain. When I got the offer at my first law firm, I met with one of the partners one last time before accepting. I felt like I was supposed to ask him important questions about the four-lawyer firm, to help me decide whether to accept. The first question I asked was whether the firm had any debt. Someone told me that this was a good question to ask. He said they didn’t, and that seemed like a good answer. Then I had a brain flash, and asked a much better question:

“Is there any one thing that could put the firm out of business?”

This is what he told me.…

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“Yes,” he said. “We have one client that makes up a third of our revenue. If we lost it, we’d be toast.” To their credit, they never did lose that client. The small firm was swallowed up by a much larger firm five years later (the year after I left). In time, the business from that client eventually went away because of industry consolidation. But by the time that happened, the revenue from that client was a tiny percentage of the larger firm’s business.

But this scenario, where one uberclient makes up a huge chunk of a small firm’s revenue, is very common. Articles and discussions abound online. It even happened on “Mad Men” last season. Lucky Strike cigarettes, which made up 70 percent of the fledgling ad agency’s revenue, suddenly announced that it was leaving for another, more-established agency. The departure of the tobacco uberclient put the small firm in danger of going out of business.

Watching this development on TV struck home for me, because my small firm faced a similar situation with an uberclient of our own. Beginning in 2006, we developed a relationship with a billion-dollar service company that had more than ten thousand employees. Around the same time that we got the client, we abandoned hourly billing completely. We developed a comprehensive monthly service plan with the client that covered much of its needs, with litigation and other special projects priced separately. Very quickly, our business with this company grew huge. We ended up billing them over $1.5 million over about two and a half years.

Early on, things were great. We had rock-solid relationships with the company’s key people. They worked with all the firm’s lawyers (at the time, we had six), and they followed our advice. We won or favorably resolved more than 90 percent of the cases we handled for them, and they paid quickly.

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The company quickly rose to 20 percent of our business in terms of revenue. Then a third. Then half. Pretty soon, this single client accounted for 65% of our annual revenue. And from time to time I would remember my first boss’s words about having an uberclient. If the client left us, we’d be toast.

And sure enough, like all good things, this relationship ended. First, management changed at the client, and our key relationships vanished. Then the company hired one of our lawyers to come in house, bringing much of the outside-law-firm work inside. And the work dried up.

Our firm survived the loss of the uberclient, but it was decidedly unfun, and I don’t recommend it.

So what can you do about it? Most of the advice you find online tells you to make sure you pay attention to your big clients so that they don’t get unhappy and leave you. Mmm-kay. Thanks. I don’t really consider that a strategy for avoiding this problem; that’s just basic client relations.

No, the better advice is to avoid getting into an uberclient situation in the first place. But that’s a lot easier said than done. Most lawyers, in small firms and in large firms, chase clients who can provide much-needed revenue. And as in most situations, the Pareto principle (”the 80-20 rule”) controls: 80 percent of your business is likely to come from 20 percent of your customers.

Still, you want to avoid an uberclient situation. Since all client relationships eventually end, the end of an uberclient’s business could be catastrophic to your firm. Plus, an uberclient tends to command an increasing amount of attention and effort from your lawyers, often to the detriment of other clients. And the more time spent on servicing the uberclient, the less time there is to do the marketing necessary to get new clients. As a result, the other clients fall away and don’t get replaced, and the uberclient becomes, well, uberer.

Here’s my advice (and I wish I had followed it myself):

  • Keep track of your top ten clients by revenue. Track them by month, by quarter, and by year (trailing 12 months).
  • If a client approaches or exceeds 20 percent of your total revenue, send up the warning flags and pay very careful attention to them.
  • Step up your marketing for new prospects as well as cross-selling or upselling opportunities for existing (but unflagged) clients.
  • Approach the key people at your flagged clients, tell them how much you enjoy working with them, and press them for referrals to clients like them. Ask them to make introductions.
  • Assume that your relationship with the flagged clients will end sooner than you think, and start looking now for sources of revenue to replace them with.

Then when the relationship eventually ends, you’ll already be in the process of moving on.

Jay runs Prefix, LLC, a consultancy that helps lawyers learn how to value and price legal services. Jay Shepherd has also spent 13 years running the Boston management-side employment-law boutique Shepherd Law Group. He writes the ABA Blawg 100 honoree The Client Revolution, which focuses on reinventing the business of law, and Gruntled Employees, a workplace blog. Follow Jay on Twitter at @jayshep, or email him at js@shepherdlawgroup.com.

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