Not a Numbers Game

There are no dollars attached to a ‘go’ decision. When you gain club membership+ we set aside more than enough funds for any contingent future needs. You gain access to a line of credit. We expect due diligence when you do your future forecasts: we owe it to our investors. But we recognize tacking and turning means forecasts can go up and down. We set it up so you only use the money you really need, and often that can mean more or less than some forecast made 18 months earlier.

We never consider borrowing from or short-changing one investment to pay for another. It is the responsibility of the funding agent+ to have enough funds to cover discontinuous discovery+, across all our investments. If we have a banner year in pre-game+ recruitment, and everyone does well in mid-game+, then we fund everyone. We only stop funding when we reach limits in our senior management capacity to govern investments. But we’ll know that far in advance of our next recruiting season.

There is no automatic attrition, ‘no-go’ decisions, in mid-game. There are no limits on the number of ‘go’ decisions. There are no forced rankings in team assessments. We look to manage behaviors, but not through quantitative means.

There is no hint of risk management in the numbers. We don’t seek a certain number of investments to jointly ensure a targeted supply of sub blockbusters, adequate funding of the franchise, or any of dozens of other risk mitigation+ games. Safety-in-numbers, the power-of-many, etc. are cheap heuristics+ which are banned from the decision-making process for funding.

There is no counting of prototypes, numbers of graduates, etc. Progress is never measured by numbers of activities, efforts, or ‘named prototypes’. We ensure corporate hotshots don’t get the chance to add together activities across research units. We disallow reporting of ‘named prototypes’ of any kind: it’s a condition of the franchise agreement.

‘Not a numbers game’ means we are much more creative in financing, for example taking advantage of the 30-70 rule. Corporate finance officers are loath to large swings in expenses: they are much more open to changes in the composition of near-cash accounts (i.e., swings between cash and investments).

There are no metrics in R&D (as commonly understood). We cannot come up with numeric generalizations for creativity. There are no units of output per day for inspiration. There are no incorruptible measures for passion or enthusiasm. World Class R&D is a metrics-free zone. We eschew them within our research units. We eschew them in our measurement of progress for our research units. There is no commonality across research units beyond our subjective (comparative) assessment of achievements in the 5 P’s. And as we’ve seen, even our subjective assessments eschew generalization: our Independent Evaluators are on-the-ground and under-the-hood. Assessments are scrupulously personalized: we focus on the particular.

We do measure ourselves quantitatively in our quest for continuous improvement: how much better did we do vis-à-vis last period’s results. For example, we seek a steady increase in sub-blockbuster products to maintain and grow commercial operations+. This is the responsibility of each research unit. We never plan for one unit to cover slack in another. We collectively strive to grow the franchise, the number of research units, but there is no fixed growth rate. Each research unit is responsible for growing the value of its sub blockbuster products moved into commercial, on a period-to-period basis.

Quants inadmissible. They’re everywhere. They pop up frequently in R&D organizations, and in corporate denizens who oversee R&D. It’s hardwired in the psyche of many individuals – the more we quantify, the less effort we need to expend to understand the particulars of an investment. This may be permissible for highly repetitive activities like manufacturing, finance, etc. It’s completely unacceptable for creative activities like R&D. No value is added to our analysis of progress by using quantitative techniques, and much harm is done. Instead we look at each research unit as a stand-alone investment, independent from any other investment we may have made. If any investment still makes sense, then we continue to fund it. This is independent of any portfolio or consolidated view across all our investments.

Numbers are few and far between in our progress assessments and in our decisions to continue funding of a research unit. We rely on the professionalism and independence of our evaluators on-the-ground. We structure the incentives of all involved so they are self-motivated to report progress reliably, and to self-report when the investment is no longer viable. This is a very personalized approach to progress assessments: one that seeks to preserve the passions and enthusiasms of those being measured, while simultaneously reassuring the funding agent that his or her funds are being used judiciously.

Home Page July 2010