A Balanced Portfolio

This article asks sales reps to consider the differing levels of risk that their clients may represent and how they might balance their client portfolios accordingly. It is also meant to sensitize clients to how much risk they may represent to their reps; a future column will address what they can do to offset this risk.

I have worked with a lot of sales representatives over the years and my sense is that too many look at each client as a unique opportunity that has no bearing on any other client, other than the use of valuable finite time or an obvious conflict. Maybe, however, it's time for them to begin assessing potential and current clients in terms of portfolio diversification. In other words, what impact does each added client have on his or her financial and professional goals?

In assessing a portfolio, one of the benchmarks is determining risk. A strong client portfolio, just like an investment portfolio, needs to be balanced between high and low risk. But what constitutes risk in a client? Well, here are some ways of looking at it.

Obvious risk: If an account has upside potential but is brand new to the market place, it could mean that the representative is investing a good deal of time (which, let's remember, is definitely worth money) with little chance of a payoff. There is risk, but the representative knows that going in.

Moderate risk: This is the client that pays a reasonable commission each month but is late with the checks and is, ominously, getting later. This client may be paying off now but the rep will need to consider the potential for the client to declare bankruptcy. There is risk here, but it is less easy to assess.

Not-so-obvious risk: This may actually be the highest risk of all. The rep has handled an account for many years, the line is mature, and it pays off monthly with a substantial check. In fact, the line is a mainstay of his business. That sounds great unless you consider that sometimes clients become so big (or think they are) that they begin to believe that they don't need reps anymore. They fire their reps and hire their own salespeople. A client that seems to represent a very low risk may in fact be quite the opposite due to the threat of this sudden—and many times unexpected—loss of substantial revenue.

A different kind of risk: Finally, there are those clients that damage a sales representative's reputation. Maybe they don't ship an important order on time; they produce too many defectives, or try to change a price at the last minute. This kind of risk may not be readily quantifiable in dollars and cents, but the loss of reputation to a sales representative is similar to the loss of brand equity. It may mean a weaker relationship or a fall from “preferred representative” status, and this can mean the loss of lines and sales.

A low risk client is one that pays a regular monthly commission, has a solid history of shipping quality products on time and as promised, pays its commissions promptly and has a management team that values its representative relationships.

There are other variables to consider as well. One big one to look at is where a representative is in his or her career. This can have the same impact on calculating an ideal client portfolio as determining investment risk in a stock portfolio—whether one is starting out in one's career, is at the mid-point or is ready to cash out of his or her business soon.

Let's look at each of these in light of an ideal portfolio and the reality of filling it:

A rep who is new to the business will be more inclined, by necessity as much as anything else, to take on higher-risk clients. The challenge for these representatives is to try to find one or two lines that provide some semblance of income (lower risk) while trying to develop his or her future by taking on new emerging companies (higher risk) that may be the cash cow of the future. Due to the challenge of finding sufficient revenue-producing clients, this type of representative is frequently better off working for a mid-career or cash-out rep.

A sales rep at mid-career is looking for some diversification between low-risk, income-producing clients and clients that, though carrying risk, may have a major upside. It is also important not to have a portfolio that depends too much on one “low risk client” for the large percentage of revenue. That “low risk” client may in fact be a “not so low risk” client and, by suddenly dropping the rep, putting what has been a successful rep out of business.

A sales rep who is looking at the end of his or her career may well be thinking about selling his or her business. His or her ideal portfolio, in this case, has to be considered in terms of how it might look to a potential purchaser. A portfolio of low-risk, income-producing clients makes a great deal of sense for this rep.

No matter where a rep is in his or her career, and no matter how one assesses risk, it is not always easy to find the clients that fit the ideal portfolio. It is, however, important to try. It may just mean the difference between having to find a new career and successfully earning a well deserved early retirement.