There is a business principle that many growth companies in the tech sector are using to create higher company valuations and strengthen company performance. The concept is known as the Rule of 50.
Stated simply, the Rule of 50 is governed by the principle that if the percentage of annual revenue growth plus earnings before interest, taxes, depreciation and amortization (EBITDA) as a percentage of revenue are equal to 50 or greater, the company is performing at an elite level; if it falls below this metric, some degree of refocusing is required.
The Rule of 50 is a simple yet powerful equation that can go a long way in determining future company direction and success.
Rule of 50: (Percentage of annual revenue growth) + (EBITDA as a percentage of revenue) should be ≥ 50
Whether tech organizations are applying this metric or another to their operating performance, the use of a hard measurement such as this is critical. Companies routinely struggle to properly evaluate their performance in the marketplace, often confusing activity with effectiveness.
The idea behind the Rule of 50 is as straightforward as it is simple: Eliminate excuses and focus on objectively measuring and managing the situation as it exists, not how you’d like it to exist.
As legendary football coach Bill Parcells once said, “You are what your record says you are.”
Applying the Rule of 50 to an organization is as much about changing attitudes and refocusing the team as it is about introducing a new business principle. Having spent many years observing some very talented business leaders, I’ve learned some important lessons about instituting organizational change. Anyone who has spent time in a leadership role understands that change can be difficult. It is often unpleasant and hard to separate personal beliefs and feelings from a change in operational focus. But in order to achieve corporate objectives, change is inevitable. Having a clear metric such as the Rule of 50 can help get everyone on the same page and stay focused on a common goal.
When considering implementing the Rule of 50 at your company, consider the following three steps for making the transition as seamless and successful as possible:
1. Get leadership on your side. Educating and rallying company management around the Rule of 50 is critical. A change in business philosophy needs the buy-in and continuous support of leadership. As part of the buy-in process, some organizations may wish to tie management compensation into achieving the desired results.
2. Involve the workforce. Inform each area of the organization where it fits into the business plan and how it can make a difference. Workforces are more motivated when they understand how they are contributing to the common goal.
3. Over-communicate with employees. Be transparent about your current state and your progress. As much as we would like change to be instantaneous, the reality is it is a process and can take time. Creating a series of benchmarks to measure against and keep the employee base informed goes a long way to ensuring the necessary focus and momentum continues.
The concept of being measured or evaluated against a metric isn’t a new one, but it may be uncomfortable to many within the organization at first. However, there is no better way of measuring progress and success than by establishing a record of performance. There are always good excuses you can find for why you haven’t achieved your goals and objectives, so unless you are willing to put those aside and make an honest assessment, you may always find yourself off-course. The Rule of 50 can be a powerful tool in your arsenal for building a winning organization.
Joe Krivickas is CEO of IT tools company Ipswitch. He is a veteran IT industry president and CEO who has led several organizations through various phases of growth and acquisition, including Bluestone Software (sold to HP), Segue Software (sold to Borland), and FAST (sold to Microsoft). Most recently, he served as CEO of SmartBear Software; under his leadership, the firm was selected as Glassdoor’s #2 Best Place to Work for Medium Sized Businesses in the country and received the Boston Globe’s 2013 Best Place to Work Award. He also served as a reconnaissance officer in the U.S. Army National Guard.
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