R&D Spend not Correlated to Returns – Of Course!

Categories: Innovation Insights

A recently published report from Booz Allen Hamilton found that there is no correlation between R&D investments and financial performance in areas such as profit, sales growth, net margin and shareholder returns. This contrasts greatly with the widely held view that high R&D spend is essential for profitable growth.

In fact, the findings should not surprise at all. The real surprise is that the myth of R&D as the driver for innovation persists so widely.

R&D is a strange function. In many organizations, the function works primarily on developing and improving existing technology and products. In a few firms, it works on advanced R&D, more akin to university projects. In almost no organization does the R&D function operate in accordance with its real objective: to help develop new things that drive profitable growth.

For some reason R&D has become distanced from delivering value. The majority of R&D organizations I have come into contact with do not talk to customers – they let marketing do that. They do not listen to market needs. They rarely even listen to the rest of the company. The prime culprit is senior management in R&D, I believe. They tend to be older, more set in their ways, and less willing to accept that the old model of R&D, one they had to learn through the trenches over the last twenty years, no longer functions.

Most R&D workers are excellent people. They are intellectually nimble, able to hold more than one thought in their head at any one time, and intensely creative when it comes to solving problems that intrigue them. They are also rigorous in their application of method (as opposed to marketers, who often rely on their gut in face of all evidence – but that is another story).

Outside of people and management, the root of the problem of returns is that R&D only ever impacts a small percentage of profitable growth – likely less than 10% tops. Why 10%? Because core new product development counts for little in the entire spectrum of INNOVATION activities. A new product can be murdered by terrible marketing, a lousy price point, or poor handling of a distribution network. An industry may be driven by cost and quality, not fancy dancy new technology. And where is R&D? They hand-off the problem to someone else, or never get involved in the first place.

Now, I am over-stating the problem… slightly. However, few companies have gone as far as Wrigley’s in replacing the head of R&D with an over-arching head of Innovation with an objective to change everything, rather than core product formulations. Some companies cheat – they rename the function to ‘Innovation’ and keep doing the same old thing (a consumer product giant springs to mind).

The best companies innovate – they do not just throw money at R&D (or turn the taps off either). And the best R&D functions morph themselves into innovation groups.

My final thought. I have been researching the history of the R&D function and am coming to the radical realization that the R&D function needs to be completely recast – a massive change from its current shape and role. But that, my friends, is for another session.

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