The evaluation metric that kills innovative ideas
- 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
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?