Friday, July 22, 2011

Time to Revenue, Time to Market

Time to revenue describes the length of time from contract execution before the purchase begins to provide revenue or return on investment for the purchase.  On a major contract you could have two proposals where Supplier A offers a price that is less than Supplier B. The hitch is that Supplier A’s proposed time for completion greater than Supplier B’s time.  If time had no value you would most likely select the Supplier A as long as the value both provide are equivalent.  The problem is that time can have a significant value and that needs to be taken into in the decision process.  When there is significant value to that time to revenue it can easily outweigh the difference in the price. It may also have you change your contracting approach, the terms that you use and the risks you may be willing to take to expedite the work.

I learned about time to revenue early in my career. I managed construction contracting for a company and was going to be managing the contracting for a new production plant located in Hong Kong.  The vice president in charge of that production business called and asked me to meet with him to both go over the project and review our plans. The meeting was informative and then he asked me how long everything would take. I provide an estimate based upon our standard process.  His response was simple but firm “too long”.  Then he explained to me that with that production plant in operation he would make enough profit in six months to pay for the entire cost of the building.  The faster we could get it built, the more profit we would make. He was concerned about the time to revenue and the profits that would result from the completion.  Based on that information we got management approval to take as many steps as possible to fast track the project.  In some cases there were cost tradeoffs that had to be made but every time you compared the difference in cost versus the difference in schedule and the impact to time to revenue its was an easy decision.

Time to Market describes the length of time from contract execution before the item purchased can be used or sold in the marketplace on its own or as part of another product or service.  If you ever worked in a product or service development organization you would know that time to market is one of their key objectives.  There are reasons why time to market is important. The first is profitability.  If you are first to market with a product having specific functionality that existing products on the market don’t have, you can charge a higher price.  If you are late coming to market you probably will have to discount your price to take market share.  The second thing that being first to market can do is it can help you lock in customers that use that product or service as part of their product or service.  A classic example of this occurs in the semiconductor business where if you are first to market the customers will lay out their circuit card design to accommodate your specific form factor, mounting approach and other requirements. Once they do that, if another Supplier comes out with a competing product, it probably won’t be plug and play compatible. This means that to use the other Supplier the customer would need to go through the cost and expense of relaying out the circuits and sometimes the card to fit the different product.  Doing that can help you lock in that customer and charge a premium that is not so much that the customer would be willing re-layout the card, but enough so you can charge more than the competition. When there is significant value to that time to market it can easily outweigh a difference in the price. It may also have you change the terms that you use and the risks you may be willing to take to expedite the work.

Sometimes time to revenue and time to market are difficult concepts for procurement to accept. That’s because most procurement groups get measured and rewarded based upon cost reduction so its foreign to them to want to pay more simply to get things performed earlier.  In reality its not a lot different than going to a distributor to purchase a product because they have it and you need it now nor is it much different that paying an additional charge of fee for expedited processing. Any procurement person that wants to build a strong relationship with the business they support should, for any new procurement of any substance, always ask the customer whether there is a Time to Revenue or Time to Market issue with the purchase.  When you do that you are speaking their language.

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