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

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.