(Wildebeest bridge picture via Imagen 3)
A few of you know the particulars of this story about avoiding long-term risk for short-term gains. But the particulars aren’t critically important to most readers.
The business risk of new markets
One time a company wanted to enter a new market. This new market would completely change the way the company did business, both from a technological perspective and from a business perspective.
While the technological challenges were daunting, as usual the business challenges were even more so.
The biggest risk to the company was that the new market operated on a different revenue model, one in which revenue was deferred.
- In the company’s current market, revenue started at contract signature.
- But in the new market, the company would have to wait over a year and a half after the contract was signed before it received a dime of revenue.
In a publicly traded company, or even a privately held one, the powers that be are reluctant to undertake an initiative where they won’t get any revenue for 18 months.
“The quarter ends in less than 8 weeks. We want revenue NOW!”
So the company hemmed and hawed about entering the new market, scared of the financial risk. Finally it told its prospect that they’d enter the new market…if the prospect would make an immediate down payment. The prospect was not pleased and went with the company’s competitor instead. And the competitor continued to dominate this market.
For a time.
A few years later, the original company decided to accept the financial risk and, in the words of Devo, “go forward” and “move ahead.” And luckily for the company, it wasn’t too late. The company successfully entered the new market and became a dominant force.
Quarterly gains via risk aversion
We see this today, where a number of companies are struggling to survive. They do the prudent thing, letting go of the employees who don’t provide immediate revenue and concentrating on those who do. The engineers who can code something NOW! The salespeople who can get contract signatures NOW!
This isn’t necessarily the wrong thing to do. If your firm is about to close its doors, you have to do whatever you can to keep the business operating.
But what after that?
Continue to act in a reactive way, chasing the next short term deal?
Good luck.
Bredemarket 