Babylon Health. How $1.1 Billion of Revenue Ended in a £500,000 Sale.
Autumn Term, Lesson 5. If the price is fixed when you sign and the cost isn’t, growing faster only makes it worse. Babylon Health found that out on $1.1 billion of revenue, and it’s the clearest case I know for measuring client profitability, not just client revenue.
Autumn Term is a weekly series from WrightCFO, a UK fractional CFO practice, on what the numbers were saying in well-known businesses, the ones that went wrong and the ones that got it right.
The short version
- Most founders know their revenue by client. Very few know their client profitability, and the gap between the two is often where the money goes.
- The danger is any contract where the price is fixed at signing but the cost of delivering it is not: fixed fees with open scope, “all reasonable requests” retainers, per-user pricing with heavy support users, or a big name priced keenly.
- Babylon Health, the company behind GP at Hand, grew revenue three and a half times to $1.11 billion in 2022, yet made an operating loss of $369.8 million. Most of that revenue came from US contracts that paid a fixed amount per patient while leaving Babylon exposed if care cost more.
- By August 2023 its US business had filed for bankruptcy and its UK business was sold for £500,000.
- The fix for a £2 to £10 million business: put a real margin on every client, stress-test each one, find out who pays when scope grows, and run a 13-week cash forecast.
Which of your clients makes you the least money? I don’t mean the smallest one. I mean the one where, once you’ve counted the time of everyone who works on it, including yours, the margin is closest to zero.
Most founders I work with can tell me their revenue by client straight away. Very few can tell me their profit by client, and the gap between the two is often where the money is going.
Usually the client is perfectly pleasant and the trouble is in the contract, because the price was fixed when you signed and the cost wasn’t. It might be a fixed-fee project where the client can keep asking for changes, a retainer that covers “all reasonable requests”, software sold per user where one customer produces half your support tickets, or a well-known name you priced keenly because it would bring in others.
The sales figures look fine, because they only show what the client pays. What the work actually costs turns up somewhere else, in overtime, freelancers, the evenings you spend on it yourself and, eventually, the bank balance.
Why does growth make unprofitable clients worse?
One contract like that is irritating. A business that grows by signing more of them is in real trouble, because every new one makes the revenue line look better and the bank balance worse. If you’re getting ready for a raise, the revenue line is the one everyone wants to talk about.
That is more or less what happened to Babylon Health, the London company behind the GP at Hand app. In 2022 it grew its revenue three and a half times, to $1.11 billion, and told investors it had beaten its own guidance. The following August its UK business was sold for £500,000.
What happened at Babylon Health?
Ali Parsa founded Babylon in London in 2013, offering an AI symptom checker and video appointments with a GP. In the UK, GP at Hand took one Fulham surgery from about 2,500 NHS patients to around 48,000 by 2019. Investors were keen, and in October 2021 Babylon listed in New York in a deal announced at a $4.2 billion valuation.
Most of the growth after that came from America, through agreements with US health plans. The plan paid a fixed amount for each patient, and Babylon took on some or all of the cost if the actual care came in higher. The bet was that its technology would keep patients well and costs down. Former staff told Sifted the savings never arrived. By the first quarter of 2023, those agreements produced $287.5 million of Babylon’s $311 million of revenue.
In 2022 it made an operating loss of $369.8 million on its $1.11 billion of revenue. That year Parsa said the UK GP service lost money on every member who joined, and Babylon ended two NHS partnerships in the Midlands as no longer economically viable. Those made up less than 1% of its UK revenue. The US membership, where most of the money and most of the risk sat, kept growing.
In April 2023, with less than thirteen weeks of cash left, Babylon called in restructuring advisers. In August the US business closed and filed for bankruptcy, and at the end of that month the UK holding company went into administration, with assets of £28.4 million against liabilities of more than £305 million. GP at Hand was run separately and carried on seeing patients.
None of this means the idea was daft, and a lot of doctors and staff put years into it. But Babylon’s own results showed the problem to anyone who read past the first paragraph.
Who is going to say it out loud?
The maths is the easy part. Babylon’s results were written to show growth, because growth was what its investors had paid for. A founder getting ready for a raise feels the same pull, and so does anyone in the finance team who reports to that founder. Someone needs to be able to look at the biggest contract in the business, say it’s losing money, and still be invited to the next board meeting.
One of our clients, a games and puzzles manufacturer, wanted to take on its first £1 million customer. Before that order went through, we designed the funding to carry it, combining trade finance, invoice financing and credit insurance, so a customer that size wouldn’t drain the cash. The business has since grown from £400,000 to £20 million in revenue.
Five things to look at this week
- List your ten biggest clients or contracts and put a gross margin next to each one, after the time of everyone who delivers the work, including yours.
- For each of them, work out what happens to that margin if the work takes a quarter longer than planned. Any that go negative are the first to look at on price or scope.
- Go through every fixed-fee or all-inclusive arrangement and write down who pays when the scope grows. Babylon’s agreements made it responsible when costs ran over, so check which of yours do the same.
- Work out what share of your revenue comes from your biggest client, and what you would do the month after they left.
- Build a thirteen-week cash forecast and update it every Monday. Babylon called in restructuring advisers with less than thirteen weeks of cash left, and you want to be able to see that coming a long way further out.
If the first two were harder to answer than you expected, it’s usually because the finance function reports revenue by client but not profit by client. We can put a real margin on every client and contract, test the next big one before you sign it, and give you a cash forecast you can rely on.
Thirty minutes, and nothing for you to send me beforehand. You can book a slot directly with me here.
Sophie
Frequently asked questions
What is client profitability?
Client profitability is the margin each client or contract actually produces once you deduct the full cost of serving it, including the time of everyone who works on it, freelancers, support, and the founder’s own hours. It often differs sharply from revenue by client, and a handful of large clients can turn out to be the least profitable.
How do I calculate profit by client?
Start with the revenue from each client, then subtract direct costs: staff time at a realistic hourly cost, subcontractors, materials and any client-specific support. Time-tracking data makes this far easier. Then test each result by asking what happens if the work runs 25% over, as fixed-fee contracts often do.
Why did Babylon Health fail?
Babylon grew rapidly through US value-based care contracts that paid a fixed amount per patient while making Babylon responsible if care costs ran higher. Revenue reached $1.11 billion in 2022, but the company made an operating loss of $369.8 million. With cash running low, its US business filed for bankruptcy in August 2023 and its UK holding company entered administration, with UK assets sold for £500,000.
What is the risk of fixed-fee contracts?
With a fixed fee, the customer’s price is certain but your cost is not. If scope grows, delivery takes longer or the client uses more support than expected, the margin shrinks or turns negative. The risk is manageable if the contract defines scope tightly, prices changes separately, and you track actual cost against the fee as the work progresses.
Why use a 13-week cash flow forecast?
A 13-week forecast looks at cash in and out week by week for roughly a quarter ahead. It is short enough to be accurate and long enough to give time to act, for example by chasing debtors, renegotiating payment terms or arranging finance before a shortfall arrives.
Sophie Wright is the founder of WrightCFO, a fractional CFO practice of eleven Chartered Accountants founded in 2014. We work with founder-led and private equity-backed businesses across the UK, mostly between £1 million and £10 million in revenue, in technology, creative, media, professional services and not-for-profit, on client and contract profitability, cashflow forecasting, board reporting, exit readiness and post-acquisition integration.
Related reading: Carillion counted the profit before it arrived; Wilko made a profit almost every year and still died; Plastic Elves. Software Margins.; Next. The Retailer That Won’t Trust a Good Summer.
Sources: Babylon Holdings, results for Q4 and full year 2022; Fierce Healthcare (June and September 2023); Forbes (August and September 2023, including the administrators’ report); TechCrunch (August 2022 and August 2023); Pulse (October 2022); Digital Health (August 2022); Byline Times (May 2019); Sifted (2023); INFORMS Analytics Magazine (November 2023).
Photo by Cancer Research on Unsplash.
