Lean by Design

A posting on NyQuist Capital caught my eye the other day. It elaborated on another post by Paul Kedrosky, that was made in response to MicroSoft boasts over its cumulative investment in R&D. It got me thinking about some of my experiences supporting, and in other cases challenging, some pretty large R&D budgets.

As a former Telecom R&D executive, I resonated with the thrust of his post. It goes without saying that R&D investments are the life blood of any technology business. It is also apparent that not all investments are equally effective, or indeed, effective at all. In fact, one of the greatest challenges facing a maturing tech company is how to ensure that its R&D investments are yielding sufficient returns. This is not as straight forward a question as it may appear to the casual observer/investor. Beyond the need to develop superior market intelligence, as well as the inherent latency between investment and payback, there are many goals that that the modern corporation has for their R&D investment that complicate the assessment of R&D value. By way of some examples, consider:

• Appearances. Investors compare companies based on their balance sheets and income statements (among other tools), and the R&D investment tells the investor a lot about the type of company he is investing in. This in turn, influences the size and and nature of investments that companies make. Being naturally risk averse, established companies will stick with the R&D investment profile that they have developed and is similar to other companies in their category.
• Reassuring Customers. Customer’s of established (high capital cost) product lines like to believe that their investment is secured by an ongoing R&D stream that will keep the technology relevant and viable
• Globalization Objectives: China has perhaps been the best example of this over the past decade. Specifically, as companies compete to grow, or sustain, market share outside their home market, governments and large institutions display strong preferences for companies that maintain high-value R&D jobs within their country. Essentially, some of the R&D investment in this case is being used for business development purposes.

Additionally, an increasing percentage of the R&D $$ spent by a maturing technology company will, by necessity, go towards sustaining existing products. This can eventually dwarf investments in new technology and products causing companies to loose their innovation focus and capability. It is amazing to me, that despite the recent growing interest in how companies drive innovation, most mature technology companies fail miserably to make the connection between innovation and R&D investment, or to even understand the difference. Investment in R&D can assume an incrementalism that is encouraged by entrenched interests within the company, risk aversion, as well as a lack of vision and innovation in the business development and product marketing functions within the company.

It is lunacy in my mind that companies like the big established telecom vendors are spending billions of dollars on R&D when they have utterly failed in most cases to deliver a novel, or even differentiated product offering for years. Yet those same companies, have continued spending hand over fist on R&D, believing it to be the cost of doing business in their industry.

Having been there, I understand the challenges. Companies continue to spend money in order to win the feature ‘check list’ game, and at the same time, large R&D organizations that have fragmented over time, resist any pressure to improve effectiveness by eliminating wasteful duplication, or low value projects. The answer is not painful offshoring exercises that take years to implement and fragment your leadership further. The real answer is both more complicated, and simpler than that. It is more complicated in the sense that it requires some fundamental rethinking of the business of R&D investment. And it is simpler in the sense that it will provide a clarity of purpose and action that will naturally guide actions, and reduce management overhead.

Okay, so what is the answer …? In order to keep posts to byte size chunks, I will follow this article with four more posts that will address elements of driving improved value from corporate R&D expenditures.

• Aligning interests
• Globalization of Engineering
• Creating a culture of innovation
• Simple rules to guide investments