Community Forum – For every dollar of R&D spend, how many dollars does your company expect to return?

Companies make choices between investments in R&D, productivity, tech service and the plant, or choices between different types of R&D.  To make these choices they balance the risk, return, and resources from each area and compare the rates of return they expect to get from each of these investments.  For R&D, this analysis is complicated because not all projects succeed, not all R&D expenses are devoted towards new products, some projects cannibalize existing sales, and project life cycles vary.   For every dollar of R&D spend, how many dollars does your company expect to return?

Does your organization use a $out/$in return metric for R&D? If not, why not? If yes, what is your favorite metric? What are the pitfalls of using this approach to prioritize projects and between segments?

• Yes, Annual Incremental Profit $/Project Cost.  Easy to calculate, compare across project types and prioritize.  Not as accurate as NPV.
• Yes, new product sales is the primary $in metric.  This metric excludes incremental improvements to existing products, so that gets lost in the calculation.
• There have been many pitfalls with metrics on R&D since the results are so lagging v. leading.  It takes 5 yrs from project start to fully see the value, or lack thereof.  Best metric is if the business segment sees value from new products/tech support/wins with existing products/or mfg support cost savings.  We annually report out on a 3 year look-back.  Also I’m curious if other companies capture tech service and mfg support under the R&D umbrella.
• % of NS from innovation and renovations launch currently year, and % of innovation in a 3-year accumulative. Pitfalls: Lack of accuracy in business estimation for projects and wrong definition of innovation and renovation (not consider what it really means for the consumer)
• Internal Rate of Return (IRR) is the metric used for R&D
• Yes, but caution needs to be employed based on when the $in will be realized, as well as the ongoing demand for $out. Can also ignore one fundamental breakthrough leading to many child products. Better as a portfolio measurement rather than on individual projects.
• Our key metric for product development return is revenue as compared to plan at launch.
• Yes, we look at rorc and %SGM delivered from RD.   We do not have a favorite.  You cannot use the metric to drive the decision. This is only a way to indicate if there is value add.  More important to us is the strategic alignment of the projects with the vision of the business unit.
• No yet but considering.  We currently use 5th year peak annual sales forecasts.  One challenge of the approach is to make sure that all costs are included (I.e. capital)
• No – often we often in new market/new tech spaces where predicting ROI for early stage is difficult.  We use a portfolio approach of diversified investments.
• No, we don’t use $out/$in.  R&D in our company is not responsible for product development.  We provide fundamental knowledge to support NPD in the BU’s.  We also provide technical support, physical testing, material characterization services etc. as well as leading fundamental research.  We measure total value of the organization in terms of tangible benefits.  E.g. New revenue off a recently deployed new manufacturing process.  Cost savings.  Project support vs. using external pay for service options. etc.
• No, systems not in place to capture costs.
• No.  Don’t know why not.
• No (two responses without additional comment)