It is never good to develop strong dependencies in business life, as they can cause enormous difficulties in the long run. The main problem with dependencies is that you can limit or even completely prevent agility, which in the worst case can end in economic ruin.
Dependencies often only become apparent when it is too late and then strike with full force. Here are a few examples.
Dependencies in the business model
You can see that Amazon does not sell some products for which there is a great demand in the market. You decide to start a new company that sells these products as a partner seller through Amazon. Since your assumption was correct, your sales increase rapidly and after one year you even employ 10 people. 90% of your turnover is generated via Amazon at this point. Suddenly Amazon decides to sell the products you have been selling so far at a much lower price that you cannot compete with. From one day to the next, your sales on Amazon drop to zero. You are left with only 10% of the sales that you get through other channels. Moreover, your warehouse is full of goods that you cannot sell fast enough. After a short time your business gets into trouble and you have to close down.
This is a classic situation where you make your business model dependent on a certain company. These dependencies are the most dangerous, because in the worst case they can threaten your existence as an entrepreneur.
Dependence on external service providers
In your company you assign an external freelancer to develop new software which you use for customer acquisition. This freelancer builds up an excellent system over many years and lets all your wishes flow into the system. However, this freelancer is the only one who is familiar with the system. After a few years there is a difference of opinion between you and the freelancer and everything ends in the fact that the cooperation ends overnight. A short time later a new freelancer starts working for your company and takes over the project. It is soon clear that the software has been programmed in a complicated way and that there is no documentation. Because of these reasons the software can only be further developed in a very limited and hourly intensive way, the situation becomes more and more problematic. In the end you decide to have a new software developed, which costs you a lot of money.
It is important that you develop little or no dependency on external service providers within your company and always keep the flexibility to change the supplier. If a software is developed as in the case described, you can protect yourself by letting two independent freelancers develop the software and document everything from the beginning. If one of the developers fails, you always have someone who knows the software and also a documentation of the software which also enables a new freelancer to take over the tasks quickly.
Dependencies on employees
Your company is running stable at the moment, but to be on the road safely in the future you need to expand your business. To do this, for the first time, you hire a person who is responsible for building up new business and taking care of the customers. Within a few years your business will grow and the new customers will make up 50% of your business. Therefore you can also hire new employees in other departments. Over the years your new customers have built a close and good business relationship with your employee. The business is therefore very stable.
Now your employee suddenly gets a job offer from a big competitor and you cannot convince him to stay in your company. You hire a new employee to take over the tasks. Suddenly you see that one customer after the other quits and switches to the competitor where your old employee now works. You lose 40% of your business within half a year and your company quickly gets into turbulence.
This example shows how dangerous it can be to develop a dependency on a certain employee. Such a situation can not only be caused by poaching or dismissal, but also occurs if an employee unexpectedly falls ill for a longer period of time. It is therefore advisable to design the internal processes in such a way that no such dangerous dependencies arise. This also applies to the management. If a company cannot function autonomously without the owner or managing director, this is just as critical.
You are an entrepreneur in the food industry and you get an offer to produce a certain product for a discounter in the future. With this deal you can double your business within a short period of time, but you also have to hire new people and make large investments in new production facilities. This cooperation works out well and after a few years the discounter makes 80% of your turnover. In the future, the head office of the discounter abroad decides to have the product you are currently producing centrally produced by only one supplier in Europe instead of relying on national production partners. The contract is terminated, which means that you have to file for insolvency.
The same scenario also affects many one-man entrepreneurs and freelancers who become dependent on one customer. If this customer breaks away, the situation is catastrophic from one day to the next.
It is therefore important to reduce the financial dependency by spreading the risk. It is a good tactic to always orientate the business in such a way that if you lose any customer, no difficulties whatsoever arise. In fact, it is best if your business can even cope with the loss of some customers.
Dependence on the willingness to pay
Let’s say you have a small agency and implement campaigns for large clients. Among other things, it is also your job to manage the advertising budget and you are a kind of middleman between the advertising media and the customer. The regular procedure is that the client hires you to manage the campaign, you handle the campaign, and you invoice the campaign including the advertising costs afterwards. The advertising customer suddenly has financial difficulties and is suddenly unable to pay the € 500,000 advertising campaign costs. As a result, you can no longer pay the media bills, which amount to €450,000, and get into extreme financial difficulties that a small agency cannot cope with.
Many small entrepreneurs who are still starting out often underestimate the danger of a payment default that threatens their existence. It is therefore important to take out appropriate precautions to ensure that your business does not go down the drain due to the financial difficulties of a client. One possibility is to have certain services (e.g. all external costs) paid in advance. If this is not possible, factoring insurance is also an option – this is not cheap, but it protects you from financial ruin.
Strong dependencies can occur in many areas of a company and can have serious consequences in extreme cases. It is therefore important to remain as flexible as possible in business life, so that your company remains taxable and you can avoid an obstacle if necessary.
This requires that you regularly deal with the mechanics of your business and that you deal with the following questions, among others
- In which business areas are there dependencies?
- What are the risks of this dependencies?
- What can you concretely do to get rid of this dependencies and reduce the risks?