Ten Percent Dependency Rule
Limit any single supplier, customer, or employee to a tenth of critical exposure
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 99%
Caudwell's rule sets an aspirational ceiling for three kinds of dependency: no supplier should provide more than ten percent of supply, no customer should generate more than ten percent of sales, and no employee should hold more than ten percent of critical responsibility. The mechanism is concentration mapping followed by staged diversification. Leaders calculate current exposure, identify the largest single point of failure, establish alternative supply, revenue, or knowledge paths, and revisit the percentages as the business changes. Caudwell explicitly says the threshold is not always achievable and that he did not consistently achieve it himself. Its value is therefore directional: it makes hidden dependence visible and pushes the organization toward insulation before a counterparty loss becomes terminal.
Origin
Caudwell says Motorola once supplied roughly ninety percent of his mobile-phone business before terminating his distribution agreement. He survived by finding intermediary suppliers and building Nokia volume, then formulated the ten percent rule from that concentration shock.
Core principles
- 01Concentrated dependencies turn one failure into an existential event
- 02Resilience comes from multiple independent sources of continuity
- 03Supplier, customer, and employee concentration all require attention
- 04The ten percent level is an aspiration when the market makes it unreachable
How to run it
- 1
Map supplier concentration
Calculate what share of essential supply, by value and operational criticality, comes from each supplier.
Pro tip Treat technically irreplaceable components as concentrated even when their cash share is small.
- 2
Map revenue concentration
Calculate the percentage of sales and gross profit attributable to each customer or channel.
Pro tip Check related customers that could fail together rather than viewing every account in isolation.
- 3
Map responsibility concentration
Identify critical decisions, relationships, credentials, and operating knowledge held by one employee.
Pro tip Use continuity scenarios: ask what stops if that person is unavailable tomorrow.
Watch out Do not reduce people to percentages; the measure concerns operational dependency, not human value.
- 4
Prioritize the largest exposure
Rank dependencies above the target by the speed and severity of failure, then address the most existential first.
Pro tip A ninety-percent supplier exposure deserves attention before several twelve-percent exposures.
- 5
Build independent alternatives
Add qualified suppliers, broaden customer acquisition, document knowledge, and distribute decision capability until exposure falls.
Pro tip Verify that alternatives are genuinely independent and usable during a disruption.
Watch out Nominal backups provide no insulation if they depend on the same upstream source.
- 6
Recalculate and adapt
Review concentration periodically and after major contracts, hires, departures, or market changes.
Pro tip When ten percent is impossible, record the constraint and the next-best reduction target.
Watch out Do not pretend the target has been met when market structure prevents it.
In the wild
After Motorola ended an agreement that Caudwell says represented about ninety percent of his business, he arranged supply through service providers and made a large deal with Nokia. Nokia volume then grew while his direct dependence on Motorola fell.
→ Multiple supply paths kept the business trading and reduced the concentration that had made the termination potentially fatal.
Common mistakes
Applying ten percent as a fiction
Caudwell calls the rule a goal and admits it may be impossible; unsupported compliance claims hide rather than reduce risk.
Diversifying supply only
The rule also covers customer revenue and employee responsibility, either of which can become a single point of failure.
Waiting for termination
Alternatives need to be credible before a dominant counterparty withdraws, because crisis-time choices are narrower.
Is it for you?
Best for
It is best for businesses whose continuity depends on external counterparties or concentrated operational knowledge.
Not ideal for
It is not ideal as a rigid short-term mandate in markets where only a few viable providers or customers exist.
From the transcript
“never have more than 10 percent of your supplies with any one supplier”
“never have 10 of your sales with any one customer”
“never have 10 of the responsibility with any one employee”
From the episode
Phones 4u Founder: The Pain Of Becoming A Billionaire: John Caudwell