The Evaluation Metric that Kills Innovative Ideas
I was speaking with a client recently who reminded me of the metrics her CEO had set out for innovative new ideas. While I think it is important to have clear goals and quantifiable metrics for innovations, I was a bit apprehensive about these measurements. Take a look at them and see if you can guess which one gives me the most concern:
- Concept must generate more than $30M annually in revenue
- Must command at least a 40% margin
- Must be protectable
- and must do all of this in less than five years
As they say, last, but not least.
It’s great that this firm has very clear milestones and evaluation metrics for its new ideas. Clear expectations help teams make decisions. But I have some real concerns with this set of metrics, as reasonable as it may seem.
I don’t have a lot of heartburn with the margin requirement. Clearly a new product should drive more margin than an existing product, or at least attract a larger share of the market. It’s also valuable to have ideas that are protectable, so that your team can defend the concept and hope to prevent new entrants who simply copy the idea.
No, the real concern I have is with the revenue achievement and the timeframe. As a business gets larger it becomes less interested in mucking around with “small” opportunities. They require a lot of overhead and don’t generate enough revenue to warrant the attention they demand. The minimum revenue size of a product in order to achieve thresholds varies from firm to firm, but in this case if a product couldn’t achieve at least $30M in revenue within five years of the launch of the idea, then the executives didn’t want it presented, regardless of the margin it would generate.
How does that work in the “real world”? Can we get some statistics on firms, or products that grow rapidly? In fact, we can. The website linked below examined some of the fastest growing technology firms, from their start to achievement of $50M in revenue and onward to greater growth. Remember these are fast growing technology firms. Go take a look and come back. I’ll wait.
Did you note the message near the bottom? Almost 50% of these fast growing technology firms took more than eight years to achieve $50M in revenues. And these are fast growing firms in a hot sector.
Furthermore, these firms reflect entrepreneurial firms trying to win new business, without any other encumbrances. They don’t compete with other products in a portfolio, don’t compete for resources with other products, don’t have other executives who aren’t sure they want that product to succeed.
Now, think again about $30M in five years. If venture backed entrepreneurial firms in the software and hardware industries found it difficult to achieve this kind of growth, what do you think the odds are of a product in a relatively stodgy industrial or agricultural or even pharmaceutical firm will be able to do the same? That’s right, pretty low. Here’s a question – of all the products that the firm has created and released in the last “x” years, how many have achieved what you’ve now established as the benchmark for innovation and growth?
So, this presents a quandary: while we need goals and metrics, do we risk establishing growth and revenue goals that are difficult for even fast growing, free standing technology firms to beat? And, if so, do we simply doom all our ideas to a quick death on the management decisioning chopping block? What are the right goals, given that these may be a bit aggressive?
imagecredit: voice.be & pincpassion
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Jeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of “Make us more Innovative”, and innovateonpurpose.blogspot.com.
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Congratulations on a brilliant response to the mantra of management metrics which does NOT fit into the world of innovation!!!
When I worked in an innovation team in a Fortune 500 company, I frequently saw business leaders frame the innovation objective in similar language – in fact, scarily similar!
These types of metrics only reinforce the prevailing management ethos which dooms innovations to the dustbin, when they fail to reach an unreachable high!
Rather the metrics need to be completely different. To paraphrase Eric Ries in his book “The Lean Startup”, they need to move from the “vanity metrics” of above to more concrete metrics that indicate whether or not the innovation is moving in the right direction, and if not, know what to change to enable it to get the metrics in the right direction. Only once these are known, then can companies invest behind innovations and expect metrics to be met.
Basically, users of metrics as you highlight, will throw the baby out with the bath water because the metrics measure the wrong things and will never be met.
I would suggest, focus your choice of metrics to help you understand how to build your business model, how to give users & customers what they want and ensure that you understand what the metrics are telling you.
Very interesting article! Metrics and Innovation are two topics that still require further research and supporting reports like yours so practitioners can find interfaces between them. This might demand a new way of thinking in Management, that is, first innovating thinkers and then innovating businesses.
Excellent article Jeffrey which sums up the dilemma of doing new things but passing them through the filters of existing business.
I like the NAF criteria as a broad way of examining novel ideas, as it includes elements that value innovative ideas:
N = Novel
A = Appropriate
F = Feasible
There are sub definitions of each.
There is of course no substitute for the client’s evaluative criteria, unless they are going to kill off all novelty.
Interesting article but we don’t need to reinvent the wheel, we just need to apply basic capital budgeting rules on each innovative project . To sum up, if the NPV > 0 the investment will add value to the firm thus the innovative project must be accepted (even if the project takes 10 years and generate ‘only’ 20% margin…). By using simple and inflexible rules like 40% margin or generate more than $30M annually in revenue will never maximize a company profits and its growth.