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Does R&D spending deliver results?


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October 11, 2005

Does R&D spending deliver results?

Steve Hamm

Managment consultancy Booz Allen Hamilton just released a new study of worldwide R&D spending by corporations and concluded there's not much evidence that jacking up R&D investment delivers performance results.

Here are the bullet items from their press release:

"--The top 1,000 R&D spenders spent a total of $384 billion on R&D in 2004 – an 11% per year increase since 2002.

--There is no statistically-significant difference between financial results of average and above-average R&D spenders (with a few exceptions like Apple, #148 on Booz Allen’s list).

--Computing & Electronics, Health and Auto make up 63% of total spend on innovation.

--Individual investments in R&D ranged from $39 million to $8 billion (Microsoft)

--Companies headquartered in North America, Europe and Japan make up 96.8% of total R&D spending; China and India are growing at an annual rate of 21.1%, compared with North America (6.6%), Europe (6.2%) and Japan (4.8%)."

The company's conclusion:

"It’s the process, not the pocketbook. Superior results seem to be a function of the quality of an organization’s innovation process—the bets it makes and how it pursues them—rather than either the absolute or relative magnitude of its innovation spending. For example, Apple’s 2004 R&D-to-Sales ratio of 5.9% trails the computer industry average of 7.6%, and its $489 million spend is a fraction of its larger competitors. But by rigorously focusing its development resources on a short list of projects with the greatest potential, the company created an innovation machine that eventually produced the iMac, iBook, iPod, and iTunes."

I think it would be interesting to see if there are strong direct links between IBM's basic research labs and the company's results. CNET's News.com just did a smart piece on IBM Research's 60-year anniversary that brings home just how many of the tech innovations came from Big Blue.

04:41 PM

Innovation

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Steve, I am finding CIOs are able to deliver quite a bit of "applied innovation" with "tiger teams" with $ 1, 5, 10 m budgets ...much better results than teams with similar budgets at Microsoft's $ 6b or SAP$ 1 b R&D budget (at that scale they seem to not be that hungry or focused as your blog suggests). And since the average software company only spends only $ 1 of revs on R&D, there is a compelling case to keep some of that spend internal and give your tiger teams the "full oxygen" of the complete $, not just 15c

see my blog the Innovation Dividend...

http://dealarchitect.typepad.com/deal_architect/2005/10/sap_microsoft_a.html#

Posted by: Vinnie Mirchandani at October 18, 2005 08:24 AM

A lot of what companies say they spend on R & D is actually spent elsewhere. A lot of it goes to day-to-day, routine engineering and trivial product tweaking. Evidently, there is some favorable tax treatment for R & D, so I'll wager that companies are eager to classify any activity done by someone with a technical-sounding title as R & D, no matter how unrelated to true innovation it is.

Posted by: macFanDave at October 18, 2005 11:12 PM

Money spent is no measure of quality. Just look at our education system, or the welfare mess. Great people make great organisations and great products.

Posted by: RON at October 19, 2005 12:20 AM

You need to stop talking to the phlogistonists on this topic. I can separate the best from the rest in any year for the top one hundred spenders in R&D. I only need three numbers; Sales, R&D Sending, and Earnings. Unfortunately Inside R&D has stopped publishing their June listing. The genius who figured out that just spending money on R&D doesnt neccesarily return good performance in earnings needs to read my work.

Posted by: Jerrold Winger at October 15, 2006 11:07 PM


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