It is never advisable to develop strong dependencies in business life, as they can cause considerable difficulties in the long run. The main problem with dependencies is that they can limit or even completely prevent agility, which in the worst case can result 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 observe that Amazon does not sell certain products for which there is strong demand in the market. You decide to start a new company that sells these products as a partner seller through Amazon. Since your assessment proves correct, your sales increase rapidly and after one year you employ 10 people. 90% of your turnover is generated via Amazon at this point. Suddenly Amazon decides to sell the products you have been offering at a much lower price that you cannot match. From one day to the next, your sales on Amazon drop to zero. You are left with only 10% of the sales that you generate 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 an excellent system over many years and incorporates all your requirements into it. However, this freelancer is the only one who understands the system. After a few years a disagreement arises between you and the freelancer, and the cooperation ends abruptly. A short time later a new freelancer starts working for your company and takes over the project. It soon becomes clear that the software is poorly documented and overly complex. Because of this, further development becomes very difficult and time-consuming, and the situation grows increasingly problematic. In the end you decide to have 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 maintain the flexibility to change suppliers. If software is developed as in the case described, you can protect yourself by having two independent freelancers develop the system and documenting everything from the start. If one developer becomes unavailable, you have another who understands the software and access to proper documentation, enabling a new freelancer to take over quickly.
Dependencies on employees
Your company is running stably at the moment, but to secure your future you need to expand your business. To do this, you hire a person for the first time who is responsible for developing new business and managing customers. Within a few years your business grows and new customers account for 50% of your revenue. This allows you to hire additional employees in other departments. Over the years your new customers have developed a strong and positive business relationship with your employee. The business is therefore very stable.
Now your employee receives a job offer from a major competitor and you cannot persuade him to stay. You hire a replacement to take over the role. Suddenly you notice that one customer after another leaves and switches to the competitor where your former employee now works. You lose 40% of your business within half a year and your company quickly enters turbulent times.
This example illustrates how risky it can be to depend too heavily on a particular employee. Such situations can result not only from poaching or dismissal, but also when an employee unexpectedly falls ill for an extended period. It is therefore advisable to structure internal processes so that no such critical dependencies develop. This also applies to management. If a company cannot operate independently without the owner or managing director, this is equally problematic.
Financial dependence
You are an entrepreneur in the food industry and receive an offer to produce a certain product for a discounter. This deal allows you to double your business within a short period, but you must also hire new staff and invest heavily in new production facilities. The cooperation proves successful and after a few years the discounter accounts for 80% of your turnover. Eventually, the discounter’s head office abroad decides to have the product centrally produced by just one supplier across Europe rather than working with national partners. The contract is terminated, forcing you to file for insolvency.
The same scenario affects many solo entrepreneurs and freelancers who become dependent on one client. If this client leaves, the situation becomes catastrophic overnight.
It is therefore vital to reduce financial dependency by spreading risk. A sound approach is to structure your business so that losing any single customer causes no difficulties. Ideally, your business should be able to absorb the loss of some customers without major impact.
Dependence on the willingness to pay
Suppose you run a small agency and implement campaigns for large clients. Among other things, you manage their advertising budgets and serve as an intermediary between the advertising media and the client. The typical process is that the client hires you to manage the campaign, you execute it, and you invoice the campaign costs including advertising expenses afterwards. The advertising client suddenly faces financial difficulties and cannot pay the €500,000 in campaign costs. As a result, you cannot pay the media invoices, which total €450,000, and face severe financial hardship that a small agency cannot absorb.
Many startup entrepreneurs often underestimate the danger of payment default that can threaten their survival. It is therefore crucial to take appropriate precautions to ensure your business does not collapse due to a client’s financial troubles. One option is to require advance payment for certain services, such as all external costs. If this is not feasible, factoring insurance is another possibility. While not inexpensive, it protects you from financial disaster.
Conclusion
Strong dependencies can arise in many areas of a company and may have serious consequences in extreme cases. It is therefore essential to remain as flexible as possible in business life, so that your company stays resilient and you can navigate around obstacles when necessary.
This requires that you regularly examine how your business operates and address questions such as:
- In which business areas are there dependencies?
- What are the risks associated with these dependencies?
- What can you concretely do to eliminate these dependencies and reduce the risks?
