R&D a game changer in fast-moving IT world

When it comes to spending on research and development, a company is bound to ask what sort of bang it is getting for its buck. During the downturn, many companies cut back on their research and development. The implication was that it was not delivering enough to justify more funds in a tight market.

The 2010 Global Innovation 1000 survey put out by the global consulting firm Booz and Co, found the 1000 companies that spent the most on research and development decreased their total spending on it by 3.5 percent to $503 billion in 2009.

Software, internet and telecommunications companies led the charge. Significantly, a study Booz released back in 2005 revealed there was little evidence to show that jacking up research spending delivered performance results. It found no significant difference between financial results of average and above-average spenders.

Still, it conceded there were some notable exceptions – for example, Apple. And Apple’s extraordinary success suggests research and development should not be written off.

Certainly the tech sector is ahead of the pack when it comes to research and development in Australia, something all resellers should note. Figures released by the Australian Computer Society last year showed the total spending in all research fields in the ICT sector came to $14.3 billion in the private sector. Another $6.7 billion was added by higher education facilities. ICT represented 25.58 percent of all research and development expenditure in the private sector, with higher education research and development spending representing 3.25 percent.

A 2010 study by McKinsey found companies with a higher concentration of knowledge workers, above 35 percent of the workforce, on average create returns per employee three times higher than for those companies with fewer knowledge workers (20 percent or less of their workforce). Yet the returns are variable. There are great differences between competitors in the same industry, which illustrates the importance of innovation and the need to release new products and services.

The real game changer over the next 10 years will be breakthrough innovation created by companies. That means research and development will be a key investment. Industries that are fast moving where new attributes, products and features are being rolled out, such as in the tech sector, will demand relatively more research and development than slower sectors.

The most important questions however are around the company’s strategy. If the business competes on introducing higher-margin innovations, then obviously there has to be more focus on research and development. If the company is focusing on such things as keeping customers happy with its operational excellence, then there is less need to invest in this.

One of the most critical features of any research and development spending is to determine what links it may have to the broader business. Every piece of research needs a business case.

This means two things. It has to work closely with product management to create a road map that fits the company’s needs, plans and budgets. It will also require procedures that measure progress and allow for fast reaction if things don’t go strictly according to plan, something absolutely critical in higher risk projects. The inherent value of the project will determine how much investment is required. It comes down to one thing: choosing the right thing to do at the right time.

The second thing research and development needs is a champion. Successful research and development divisions will always have someone higher up in the organisation supporting it.

An obvious way to measure the productivity of the research and development is to calculate the percentage of sales that come from products introduced over a period, for example, over the preceding three years. The R&D-sales ratio can be critical.

While spending more on research and development doesn’t necessarily help, spending too little will hurt. Research shows companies in the bottom 10 per cent of research and development spending as a percentage of sales underperform competitors on gross margins, gross profit, operating profit, and total shareholder returns.