Does R&D spending deliver results?

Posted by: Steve Hamm on October 11, 2005

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.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Vinnie Mirchandani

October 18, 2005 08:24 AM

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#

macFanDave

October 18, 2005 11:12 PM

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.

RON

October 19, 2005 12:20 AM

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.

Jerrold Winger

October 15, 2006 11:07 PM

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.

Jerrold Winger

November 20, 2007 12:15 PM

Read my new book "The Delta of Technology"(AuthorHouse publisher) by Jerrold Winger for the real story of the impact of R&D on corporate earnings, from a professional in the field. This report by Booz Allen takes the well worn and totally useless path of analysis so often done by analysts and others investigating the impact of R&D on corporate earnings. The booz Allen report is shallow and lacks the understanding of those actual workers in R&D. Can you imagine a university telling its engineering and business majors, destined for careers in R&D, that their efforts will not impact company performance? Can you imagine corporations corporations working in R&D telling their employees the same thing? The impact of R&D on Corporate earnings can be determined by using the Delta Theory. This can also separate the best from the rest so that anyone with skill in subraction can determine which corporations are getting the most from their R&D investment. Lastly any grandmother with a 401k plan, and a Medicare card, who shops at Best Buy or Walmart knows about the miracles of R&D and their impact on corporate performance.
Jerrold Winger

Jerrold Winger

July 18, 2008 12:11 PM

For Readers in R&D Metrics, I have provided a copy of a letter sent to Booz Allen, a well know business consultant company. Their report and conclusion are often cited by researchers and other consultants who work to develop R&D Metrics. Booz Allen never responded.

Booz Allen Corporate Headquarters 10-10-2007
8283 Greensboro Drive
McLean Virginia
22102

Subject: Global Innovation 1000 – Money Isn’t Everything

Dear Sir or Madam:
The conclusion of the above report could not be more wrong. The conclusion that was reached was ‘There is no direct relationship between R&D Spending and significant measures of corporate success such as growth, profitability, and shareholder return. The analysts at Booz Allen by , B. Jarewzelski, K. Dehoff and
R. Bordia have made the same inadequacies in analysis as all others before them back to 1978, when I first began to examine this subject. None of the analysts have a physical sense of what is going on in technology at a level of first principles.

First of all, profitability is the first and foremost measure. That is what all business should be focused upon.

Secondly in your own report it is said that the reduction of R&D can have a negative effect. For those companies, R&D restored must have a positive effect. Booz Allen has missed this clue by reaching the shallowest of conclusions and not questioning to the void.

Lastly, there is a Pareto effect in all the statistics that you have completely ignored due to the simplistic and trite method of analysis. About twenty percent of the top 100 spenders will show an earnings relationship to R&D investment. I am confident that this is true for the top 1000 companies as well. It can be measured by a metric that I have called ÓThe Delta of R&D. The result can be measured through to the market place also, whether it is the stock market or the market of purchased goods and services.

You are just plain not seeing it! “It” requires a paradigm shift in thinking

Significantly, I have just published a book on this very subject, entitled The Delta of Technology –A new Metric For R&D at AuthorHouse Publisher. I would encourage you to buy a few copies and pass them out to your staff for analysis. You have little to lose and much to gain, since I have done the work for you.

Here is a challenge. Send me your list of the top one hundred R&D spenders in the USA for 2004, 2005, and 2006, including their R&D investment, Sales, Earnings and Capital spending in each year and I will provide you with an analysis for the year 2006 to go with your own report. My report will show the top performers ranked by performance and the linear correlation that goes with it. Yes I said linear correlation.


Cordially Yours
Jerrold Winger
JerroldWinger.com

A complimentary copy can be obtained from the publisher, AuthorHouse Inc. Call the Book Order Department at 1-888-280-7715 or email them at bkorders@authorhouse.com.

You need only to confirm that your organization publishes a journal, newsletter or other media device and that you would like to review this new book for your subscribers.

All other copies can be purchased on line at Authorhouse.com or through Amazon, Borders and Barnes and Noble.


Jerrold Winger

August 27, 2008 07:41 PM

To read about my book entitled The Delta Of Technology, My correct website is www.jerroldwinger.com

RickNToronto

July 10, 2009 07:52 AM

Dear Jerrold,

You suggest we, '...Read my new book "The Delta of Technology"(AuthorHouse publisher) by Jerrold Winger.'

Hopefully the writing in it is better than that displayed in these shamelessly self promoting comments.

On the other hand, perhaps I am being less than fully open-minded. Your new book could indeed have been written by someone other than yourself... Ermmm... I guess.

Cheers,


R

Post a comment

 

About

BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

Categories

 

BW Mall - Sponsored Links

Buy a link now!