Innovation Accounting – Ranges are Key – Podcast Transcript

Innovation Metrics Podcast

Main Episode Page

Episode Transcript

Teaser

What are the principles we should be bringing into early stage prediction? It’s that, you know, first of all, quantification is not bad. The way that we are doing quantitation is bad. And the reason

Intro Speaker

Welcome to the innovation metrics podcast, where we bring you the latest on innovation management, we provide insights on how to measure innovation, innovation accounting, and managing the uncertain process of developing new, sustainable, and profitable business models. You can find links to the main topics covered in this episode and information about the guests and hosts in the show notes, or go to our blog on www.innovationmetrics.co 

Your host is Elijah Eilert.

Elijah

So today we’ve got Tritan Kromer back on the show – hi Tristan.

Tristan

Hi Elijah, how is it going?

Elijah

Going great, thank you. For this time, I thought you could tell the listeners a little bit about yourself, like your background, maybe your company, what you’re doing. Are you happy to share that with us?

Tristan

Sure. My background is pretty haphazard. I have a philosophy degree. I was born in New York city. I was in the music industry for 10 years as a music producer writer. Pretty much anything I could earning a dollar from and transitioned from marketing into the IT security industry, where I stayed for five years, living in five different countries around the world, Taiwan, Germany, Vietnam, Switzerland, eventually landing in San Francisco and moving into the wide and wonderful field of innovation via being a startup entrepreneur. So that’s kind of me a little bit all over the place. My company now has worked with over 25 different accelerators around the world. I believe everywhere from Ramallah to Mexico, we’ve worked with startups in Japan and more focused recently on corporate and large organizational innovation, including working with the civil service in the United Kingdom. Companies, such as Unilever and fast-moving consumer goods and high technology companies as well. So it really just a diverse range of experience, but all focused on how do we get new products into new markets as fast as possible. That’s kind of been the driving force of my career, I think for the past 15, 20 years.

Elijah

Thanks for sharing that. The last time we spoke on this show, we spoke about how to measure teams. Today, we wanna talk about product.

Tristan

Ah, okay.

Elijah

So, basically, we want to talk about innovation accounting. We want to talk a bit about, why we need that. Why do we need anything else? And we’re not happy with what we have, why do we need to change anything? What are the problems,

Tristan

The answer to that should be relatively obvious. Nobody’s happy with what we have. Everybody knows it’s a sham. All of our projections are typically off by a very significant factor.

Elijah

That’s great. Let’s, dive a bit into, into the issues. Maybe we start with the issue of the business case, to have a really good starting point here specifically in the context of a larger organization, if you want to progress your project significantly, any project, but also an innovation project or venture, you need to provide a business case, right?

Tristan

Yes, and business cases, just some language for pitch, right? The business case you provide to venture capitalists is just a different type of business case. The business cases, the thing you have to provide inside a corporation to your boss or your business sponsor that says here, I will make you money. And if you put resources or venture capital funds or whatever the case may be into my organization or my startup, I am going to give you some sort of return on that investment, whether it is dollars or lives saved or actions taken or whatever, the output measurement is that you want is that your organization wants like we will get you stuff.

Elijah

Right. And that can work. I certain, circumstances.

Tristan

It is not an unreasonable request. Let’s just start out by saying that. I think in the last 10 years there’s been so much criticism. I mean justified criticism of give me your business case. And then the entrepreneur, the intrapreneur says well, I have had this idea for five days. It’s too early to speak of that. Or the, the data that I’m getting right now is purely qualitative in nature and nature. Therefore, I can’t give you a coherent business case. And I think that is a reasonable kind of defense and for a time that might’ve been reasonable because yeah, the argument we were having before is kind of dumb, right? Because it would always follow this cycle of somebody in a position of authority to, to grant or deny resources has given me a business case. And then the entrepreneur intrepreneur says, okay, well I think this project, this product is going to make a hundred million dollars and then eventually capitalist or the business sponsor says, well, that’s too small. I only care about things that are a billion dollars and above. Therefore I’m going to deny you money. And then the entrepreneur will turn around and say, oh, well, in that case, I’ve found another aspect of this business model and it turns out it we’ll make a billion dollars. And so there’s this kind of stupid game where everybody knows that the projections are a little bit ridiculous, but nonetheless, there are resources that can only be allocated until you promise to deliver an absurd amount of money. And lo and behold, those business cases are generally inaccurate because they’ve been asked to be an accurate. We have specifically asked the poor entrepreneur to come up with a number larger than they are comfortable with coming up with based on measly qualitative data.

Elijah

Right. So that’s great. I might just take one more step back first. All these tools and the methods in there, they may be very valid if we’re in a non-entrepreneurial non-innovative sphere, let’s say. So when we lots of historical data, I just want to frame that a bit more. It’s just the amount of uncertainty that we need to, or the amount of guesses that we need to pluck into these tools become so vast that as you say, we’re basically forced to make something up.

Tristan

Yeah. If it’s something super predictable like you’re sitting in Australia. So, you know, if you’re, if you’re digging gold out of the earth and yeah, you can shovel, you’re shaking your head at me?

Elijah

Finding gold is actually the perfect analogy. Because the chance of finding a gold deposit is, no even better, not just finding gold. You may find a little bit of gold. You may find a little bit of value.

Tristan

No, no. So let me clarify, right. So if you are digging out gold and last year you produced one ton of gold.

Elijah

Okay. Thumbs up.

Tristan 

Right. This is non-innovative. This is not exploratory, right. If we’re just looking for gold somewhere on the planet. Yeah. There’s a certain amount of risk involved. Right.

Elijah

10000 in from your first idea.

Tristan

Well, if you’re like, huh, I can see that there’s a gold mine here. And it’s just a question of extract again. Right? Like I know the rate at which we dig. I know the rate in which we process oil, there only one variable here. And that is the price of gold or, you know, there’s some variation in the weather and things like that, which might impede my process or something like that. But the fewer variables there are the better, right? So whether it’s, you are carting water from a stream to a local community or something like that and reselling it, or you’re doing something that’s very predictable and that it tends to happen the same. Maybe it’s even commoditized, basically, there aren’t a huge number of variables that are impacting your production. And you’ve done it before. Like you’ve got the data, then business cases tend to not be terrible, but the moment, anything kind of new applies like, well, I’m, I’m not actually digging gold anymore. I’m taking gold and I’m turning it into jewellery and nobody’s ever seen this type of jewellery before. Like now it starts to become a little bit riskier because there’s not only the volatility in the price of gold but there is volatility in terms of, well, does the consumer actually like your jewellery? Is the jewellery crafted to a high degree of precision and beauty? The more variables there are, the more uncertainty there is, the harder it is to make a coherent prediction. And the one variable that always, always, always causes a lot of uncertainty as a person humans, right? So the moment humans are at the end of that supply chain saying, give me the thing. Then inherently becomes a lot more unpredictable because humans tend to be weird. Humans are kind of lower, irrational, tend to vary their preferences over time. And they tend to respond to a lot of really weird dynamics in society. It’s just no longer, so easy to make a simple business case work.

Elijah

Yeah. Fantastic. I thought the other interesting problem with having to come up with Return on Investment or Internal Rate of Return, for example, is that when you have to make a case for creating a new asset and new business model. Maybe you want to create new assets, tangible intangible. If you draw in your case, on existing assets and you come in one case and then the other one you don’t. So you’re including existing assets of the company, basically your number would always, it’s like a bias towards continue working with what you already got, right? Like that we’ll win that case. We’ll win against the other case, always. So looking at this number as a deciding factor, internal rate of return, you basically shielding yourself systematically or you’re making it even harder to come up to do what you actually want to do. Yeah.

Tristan

I think that’s the general innovator’s dilemma that, that Christensen wrote about. If I could spend a dollar in my consistently good money making machine that always returns $2, then why would I ever spend that dollar on something innovative, which could return $2, but it could also return $0, which again is a fair argument. And I think this is, this is a kind of complaint I have with, with Andy Cars from Sweden. Andy was saying like, you should always invest in innovation. And, and my pushback there, even though I’m kind of an innovation person, is that now actually there is, there is sometimes good reasons not to invest in innovation. Like if your organization has lived out its life and has done what it’s needed to do, there’s very good reason not to invest in innovation. I worked for cancer research UK for a little bit of time. And frankly, like I think everybody at cancer research, UK and myself, and probably you, even though I think it would be very sad if they’d lost their jobs, it would be thrilled to shut the company down successfully because guess what? There’s no cancer. We’ve raised all the money and we’ve cured all the cancer. Like that would be a really great outcome. I don’t think you need to invest in like horizon three innovation initiatives in that particular organization because you know, hopefully you’re done and that’s great. Now Andy would make the argument that no, no, no. You’re a successful money. Raising scheme now go raise money for, I dunnoAlzheimer’s that would be good. Maybe you could do that. But my point being is sometimes the organization is a temporary institution and it should be shut down successfully when its purpose has been served.

Elijah

I love that. It reminds me of my aunt. She always said I would love lose my job. She was a nurse.

Tristan

Yeah exactly! People will no longer break their ankles and stumble and all those bad things. That would be great.

Elijah

I’m happy with not having to see that anymore.

Tristan

But then we’re facing a few other issues. If we say that they provide no predictive value, these business cases. They are very ingrained in organizations for many reasons and that’s the only way to release a lot of money. I am just trying to get to the next point of what we’re doing about it. So what else we can do other than that. So sometimes we just don’t do anything. We don’t have any modeling, any prediction of the future anymore. Very often for a certain innovation labs or initiatives or accelerators. So we say, look, just don’t need, just don’t need anything that is quantifiable. Right. Maybe we say, is there a problem? What’s the evidence of a problem? Very little in terms of predicting the actual impact into the future.

So just to better define what we mean when we say a basic business case is that essentially somebody is, is going to predict how much revenue, how much the, the output value of your, your startup or your product is. You’re going to predict dollar figures for year one, year two, year three, year four. And then it’s going to be plugged into a net present value score, which uses the company’s internal cost of capital and all that stuff. And it’s going to output like this number that says, Hey, this is a good investment. Or this is a not investment, a bad investment. It’s going to say something about the ROI, but it’s just based on these really, really arbitrary guesses that don’t seem to have any clear connection to the qualitative data that early stage entrepreneurs or intrepreneurs are coming out with.

Right. So it’s not that the question itself is bad. And I think that’s where we made the mistake. It’s not like it’s a bad thing to say, Hey, how is this business going to eventually generate money? Or how much like that’s, that’s not necessarily a terrible question. It’s just the way that we’re framing it is a way that entrepreneurs can’t answer effectively because they don’t have a good way to project how much money they’re going to have. Just like Twitter when it got started and had no idea how it was going to make money that Facebook didn’t necessarily know it was going to wind up in advertising, but there was a way to look at the business and said, wow, these businesses are growing at a phenomenal rate. They have a huge number of users here. And if this company can figure out a way to make even half a penny on each user here, they’re going to make a lot of money, right?

If they could make a dollar per user, they’re going to make an incredible amount of money, probably more what happened there. At least if they make a penny they’re going to be fine. So, you know, they may not have known