How to Evaluate Client Concentration Risk

By Two Pillars & Co Advisory Group · Sources checked October 2026

What is client concentration risk?

Concentration risk is the vulnerability of a firm to the loss or shrinkage of a small number of clients. It builds quietly: a strong client grows, the firm serves it well and its share of fees rises. Nothing looks wrong until the client changes advisers, merges, cuts its budget or brings the work in-house. The danger is not only the revenue lost but the profit lost, because salaries and premises cannot be reduced as quickly as fees disappear. The effect is largest when the client is also the most profitable one.

Regulators treat the issue as significant. In the SEC’s Regulation S-K, the description of a registrant’s business lists dependence on revenue-generating activities, key products or services, or customers among the topics to cover, and for smaller reporting companies the list includes dependence on one or a few major customers.^[1] Your firm is probably not a registrant, but lenders, buyers and investors ask the same question, and the way they ask it is a useful model: how many customers account for how much of the business?

How do you measure it?

Compute three views for the last twelve months. First, share of fees: the percentage of total fees from the largest one, three, five and ten clients. Second, share of contribution: fees less the direct cost of serving each client, expressed as a share of total contribution. Third, trend: how those shares have changed over three years. Share of contribution deserves special attention. Lake Ridge Bank’s description of customer profitability analysis notes that a company’s largest customers usually fall in one of the two extremes, either very profitable or costly to serve because of special requests, deep discounts and demands on delivery.^[2]

Add qualitative information for each large client: contract terms and notice periods, the number of contacts and sponsors, the health of the client’s own business, whether alternatives are available to them and whether you are on a competitive list. A client that pays 20 percent of fees on a rolling 30-day contract with a single sponsor is a different risk from one on a three-year agreement with several sponsors.

How do you stress-test the loss of a large client?

Model the effect on profit if the largest client left tomorrow, then if it halved its work. Start from your income statement. Remove the client’s fees and the variable costs that would disappear with it, such as subcontractors and direct expenses. Then consider labor: Pragmatic Institute distinguishes fixed costs, which do not change proportionally with volume in the short or medium term, semi-fixed costs, which change in steps when volumes pass thresholds, and variable costs, which move quickly with sales.^[3] Salaries are usually semi-fixed: you can reduce them, but only after a delay and with severance, redeployment and morale costs.

As an invented illustration, suppose a firm earns 3.0 million dollars of fees and 0.6 million of profit, and its largest client accounts for 0.6 million of fees and 0.3 million of contribution after direct cost. If the client leaves and the firm cannot reduce labor for six months, profit falls by the full 0.3 million contribution immediately, which is half the firm’s profit, before any cost-cutting. The exercise shows how a client with 20 percent of fees can account for 50 percent of profit.

Include cash. The Federal Reserve’s 2024 Small Business Credit Survey found that 51 percent of employer firms cited uneven cash flows and 56 percent cited paying operating expenses as challenges, so many firms have little buffer.^[4] Estimate how many months of cash the firm could survive if the client left, and whether it could meet payroll while rebuilding revenue.

How can you reduce the risk?

There are four levers. Diversify: set a target for the maximum share of fees or contribution from any one client, such as 15 or 20 percent, and direct business development toward replacing concentration with a broader base. Deepen: build relationships with several people at the client, in more than one department, so that the relationship does not depend on a single sponsor. Lengthen: seek longer contracts, retainers or minimum commitments, and add notice periods that give time to adjust. Keep costs flexible: use subcontractors or flexible arrangements for the part of the capacity that serves the largest client, so that cost falls when the work does.

Price for the risk. A client that is both large and unprofitable should be repriced or restructured; a large, profitable client that creates concentration deserves protection, including service-level attention and regular executive contact. See our guide on investigating unprofitable client relationships for the method.

What should leadership monitor?

Add concentration to the monthly dashboard: share of fees and contribution for the top three clients, contract end dates in the next twelve months and the pipeline for replacement work. Review each large client every quarter, using a short checklist: relationship health, upcoming changes at the client, competitive threats, satisfaction and growth opportunities. Revisit the stress test each year. Concentration is not always bad; some firms choose to specialize in a few anchor clients, but they should do it knowingly, with the numbers in front of them.

Frequently asked questions

What to do next

1. Calculate share of fees and share of contribution for your top ten clients.
2. Stress-test the loss of the largest client, including cash.
3. Set a concentration limit and a plan to reach it.
4. Add concentration and contract end dates to your monthly dashboard.