The Innovation Dilemma:

How to Achieve High Performance through Superior Research

& Development

Part I: Where and How Much to Spend on R&D

An Accenture paper in co-operation with the Economist

Intelligence Unit.

Introduction
Improving product innovation has become vital for every corporation striving
for high performance—especially given the increasing pressures of low-cost
competition, shorter product life cycles, and investors demanding profit and
revenue growth, sometimes on a quarterly basis. Indeed, Accenture’s survey
into high-performance businesses has revealed that innovation and continuous
renewal is a key element of performance anatomy—one of the building blocks
of high performance. Yet most firms remain caught in a web of complex and
sometimes conflicting realities. Market pressures tend to focus available
resources on existing products and the near term, seldom leaving organizations
enough maneuvering room to develop game-changing innovations. At the
same time, executives seem skeptical about how much they can learn from
the various metrics that attempt to quantify returns on R&D investments.
Communications & High Tech
There is, of course, no formula for
success. To understand better how
companies view current trends in
measuring return on R&D, Accenture
and the Economist Intelligence Unit
surveyed more than 125 executives
in the United States, Europe, and
Asia. All came from companies
with annual revenues greater than
$500 million. Survey data were
supplemented by in-depth interviews
with R&D executives from seven
leading firms worldwide.
This paper is the first of three that
explore the findings of our research.
In this first installment, we discuss
the issue of the R&D budget: how
much to spend, where to spend it,
and when to expect a return.
Figure 1
Amount companies spend on
R&D as percentage of overall
company revenue.
Less than 2% 14%
2-4% 24%
5-7% 21%
8-10% 14%
More than 10% 26%
Don’t know 1%
Total 100%
2
It’s an old adage in research and
development that companies know
half their early-stage projects will
fail; they just don’t know which
half. There was a time when large
corporations could take a laissez-
faire stance toward such uncertainty,
leaving managers to their devices
and sometimes treating research
as an isolated function. Minimal
competition, market dominance and
long product introduction cycles all
reduced the need to change the
system. Those days are gone. R&D
departments increasingly are expected
to create more, with the same or fewer
resources. Efficiency and effectiveness
have become universal mantras. This
change has sharpened the need to
Figure 2
Product development funding allocated toward
improving existing products versus creating new ones.
33%
34%
23%
3%
8%
5%
improve product development and
helped increase returns on R&D
spending. To accomplish those ends,
companies first must address two
critical factors:
• How much to invest
• Where to invest it
Most survey respondents said their
companies devoted a consistent
percentage of annual revenues
to research and development, but
indicated that more budgets should
be allocated. Sixty percent said their
firms devoted at least 5 percent of
annual revenues to research and
development; 85 percent said they
spend at least 2 percent of annual
revenues (Figure 1). But roughly
Less than 50%
51–75%
76–90%
91–95%
96–100%
Don’t know
Communications & High Tech
two-thirds of that money goes to
improving existing products rather
than creating new ones (Figure 2).
And about two-thirds of R&D spend-
ing is allocated to products scheduled
to hit the market in less than three
years. Indeed, increasing returns is
largely influenced by how much is
invested in new products and product
areas and how much is allocated to
keeping current products at the top
of their game. These two areas can
involve different types of personnel,
timelines, and metrics for determining
success. Executives contacted for this
survey clearly prefer to boost creation
of new products while shrinking the
resources used to maintain and
extend existing ones. One-third of
respondents said they devoted more
than half their product development
funding to creating new products;
two-thirds spend at least a quarter
of their budget trying to create
something new.
EMC Corporation, for example,
typically spends between 10 percent
and 12percent of its revenues on
R&D (the company reported revenues
of $11.2 billion in 2006, of which
$1.3 billion went to research and
development). As part of its budgeting
process, EMC identifies five areas
for potential investment: research,
advanced development, new product
development, product development
and sustaining engineering. (See
sidebar, “EMC’s Stages of Research.”)
EMC’s chief development officer,
3
Mark Lewis, hopes to grow the EMC’s Stages of Research
earliest stage, research, from almost Research consists of exploratory
non-existent to between a half- work seeking entirely new products
percent and one percent of the or applications. Advanced develop-
company’s R&D budget. Although ment is defined as early-stage
it has increased its budget slightly, development of prototypes. New
EMC is trying to hold down costs, product development is full-scale
chiefly by funding university research development of new products, as
in fields of particular interest to the well as preparing for manufacturing,
company. Development and sustaining testing and so forth. Product
engineering make up roughly 90 development refers to the develop-
percent of EMC’s R&D budget. Lewis ment of the latest versions of
wants to trim spending in those areas existing products and product
and devote more funds to advanced lines. Sustaining engineering refers
development and new product to refining products already on
development—the areas that produce the market, such as security
the company’s highest returns on updates for software.
R&D spending. “If we could get to
5 percent on that, we’d be pretty
good,” he says.
New product development is a
particular focus for EMC, which is
concentrating on new products aimed
at breaking into new markets. To that
end, last year it formed a Technology
Ventures group to foster internal ideas
for new products and new product
areas. Lewis says that to date, the
company has secured most of its new
products through acquisitions, adding
that EMC is trying to generate more
new products internally. HP takes a
different approach to allocating R&D
resources. It creates a two-by-two
matrix with current and emerging
markets on one axis and current and
emerging technologies on the other. It
then apportions its R&D monies into
the resulting four quadrants (Figure 3).
Communications & High Tech
The lower left corner, current
technologies and current markets,
more or less represents maintenance
spending on items such as ink-jet
printers or PCs. The upper right
quadrant represents risky bets on
things like nanoscale electronics
with immense potential for future
growth. Sometimes these bets pay
off: In January, after years of support-
ing basic nanotechnology research,
HP announced it had discovered a
way to increase up to eight-fold the
number of transistors it could fit
on programmable semiconductor
chips, while simultaneously lowering
energy consumption.
Figure 3
Hewlett-Packard’s Approach to R&D Allocation.
Emerging Extending current
Markets technologies to new
markets
Current Maintaining existing
Markets products in current
markets
Current Technologies
4
The other quadrants represent
extending current technologies
into new markets, or using new
technologies to create product
improvements for current markets.
“We parse amounts in those four
quadrants,” says George Dies of
HP Labs. “Everybody wants to drive
more into the new areas—new
markets or new technologies—and
less on maintaining the current.”
Yet despite most companies’ desire
to create something truly new,
organizations tend to focus on
short-term goals. That emphasis on
the here-and-now lowers the odds of
producing a radical, game-changing
Placing bets on
unproven technologies
for new markets
Improving existing
products with new
technologies
Emerging Technologies
departure from what the firm has
done in the past. Few organizations
can afford to support long-term
ventures based on basic science such
as HP’s foray into nanotechnology.
Companies like Siemens all pursue
such work, but even they have scaled
back their efforts in the past 15 to
20 years. At Siemens, for instance,
the “R” part of its R&D portfolio is
conducted by Corporate Research
and Technologies, which employs
1,900 people at 10 labs worldwide
and is responsible 5% of a total $5.7
billion R&D budget. Yet even at this
major research organization, only
about one-third of the work is
devoted to long-term projects
Communications & High Tech
more than five years down the road,
says Reinhold Achatz. Another third
targets today’s products or the next
generation of products just one to
two years out, while the remainder
is focused on generations two to
five years away.
A firm’s ability to sustain investiga-
tions further out depends in part on
its profitability or cash flow. Other
factors are more structural, such as
whether the research arm gets at
least some of its funding from central
coffers, as opposed to contracts with
business units. The more central
funding it receives, the more likely it
is to pursue longer-term, open-ended
investigations. “Having the ability
to differentiate and allocate funding
from a centralized repository to fur-
ther its R&D unfettered by short-term
product requirements is one of the
key drivers of high performance,” says
AJ Gupta, global product innovation
lead at Accenture.
Since financial returns aren’t
expected for years, a company taking
a long-term approach to innovation
also takes a much different view
toward measuring the returns on this
investment than it does with other
products, gauging progress by such
measures as technical milestones
achieved, scientific papers published,
and the like (we will cover measuring
the returns of R&D investment in
more detail in the third installment
of this series).
To a large degree, the time horizon
of a company’s product development
efforts is industry- and product-
dependent. At chipmaker Intel,
5
“there are very, very different half as much and takes us half as long
approaches based on the product,” to get things to market.” Virgin Mobile
says Corporate Vice President Will Australia keeps a separate capital
Swope. For instance, he notes, the expenditure budget from Optus. Less
company is already actively designing than a year into its new role, Virgin
its 2011 microprocessor, which has Mobile Australia successfully launched
a roughly five-year time horizon. an innovative product called Bean
Meanwhile, Intel maintains a shorter Counter. An online-only service for
development schedule for chipsets pre-paid cell phone users, it sells
and graphics engines, averaging about minutes cheaply and lets customers
two years. Virgin Mobile Australia track their usage, top off credit cards
is responsible for all of the firm’s and perform other tasks. Virgin Mobile
telecom efforts in that country. Peter Australia delivered the product in
Bithos, director of strategy and new about two-and-a-half months. “To
markets, says nearly all product get flow-through from network to
development funding goes toward billing system to Web in real time—
efforts that will hit the market in for a major telco to do that, that’s
less than two years. Most of those a major effort,” Bithos says.
products, Bithos notes, should
actually reach the market in less In our next installment in this series,
than one year. we will explore how companies are
tapping into alternative sources of
But these short timelines reflect the R&D, as well as the importance of
rapid pace of the telecommunications standardizing R&D processes to
industry, not an aversion to long-term drive innovation sustainability
product development. In fact, the and repeatability.
thirst for new and improved ways to
create novel products is keener than
ever. As an executive at Australian
telco Optus, Bithos helped engineer
his firm’s acquisition last year of
Virgin Mobile Australia (VMA). He
then moved over to the newly
acquired entity, championing the small
organization as “a low-cost innovation
lab” that could try out new products
more readily than a big telco. “Our
role is now to try new things and to
bring new things to market,” he says.
“Without touching legacy systems
of the mother ship, we can innovate
and try new things with less cap-ex
[capital expenditures]. At a company
level, if you have an entity like that,
that’s a very good thing. It costs us
For further information or to
discuss these survey results
please contact:
A.J. Gupta, Accenture Managing
Director and Global Lead for Product
Innovation and PLM for Accenture
A. J. Gupta joined Accenture in 1996.
The main area of his functional
experience is in Product Development
and Product Lifecycle Management.
Examples of his main clients are:
Raytheon, Harley-Davidson, TSMC,
Motorola, EMC, Siemens, BSC, DLA.
He can be contacted at
a.j.gupta@accenture.com
Copyright © 2007 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
Kevin Prendeville, Senior Executive
in charge of Product Innovation and
PLM for Electronics and High Tech
Kevin Prendeville joined Accenture
in 1994. His main area of functional
expertise is in Product Development
and Product Lifecycle Management
efficiency and effectiveness. Client
work includes Sun, Boston Scientific,
Cisco, Google, Applied Materials.
He can be reached at kevin.p.
prendeville@accenture.com
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company. Committed
to delivering innovation, Accenture
collaborates with its clients to help
them become high-performance
businesses and governments. With
deep industry and business process
expertise, broad global resources and
a proven track record, Accenture can
mobilize the right people, skills and
technologies to help clients improve
their performance. With more than
158,000 people in 49 countries, the
company generated net revenues of
US$16.65 billion for the fiscal year
ended Aug. 31, 2006. Its home page
is www.accenture.com.
Pat Weir, Senior Manager,
Product Innovation Initiative
Pat focuses on engineering process
improvement and application
outsourcing. Examples of his
main clients are: Pratt & Whitney,
Applied Materials, Raytheon, Sun
Microsystems, Cisco Systems Inc.
Email Pat at patrick.e.weir@
accenture.com
Methodology
In February 2007 the Accenture and
the Economist Intelligence Unit
conducted an online survey of 126
senior global executives, asking how
their companies assessed returns
achieved on R&D spending. More
than half of respondents were
C-level executives or held the title
VP, SVP, or Director. More than half
worked in aerospace/defense; computer
hardware, software, media, and enter-
tainment; IT; telecommunications
equipment; and electronic components
manufacturing. Just under 40 percent
were located in Western Europe, while
27 percent were in the Asia-Pacific
region and 18 percent were in
North America. All executives
surveyed worked for companies
reporting annual revenues of more
than US $500 million. In addition
to the survey, we conducted seven
interviews with senior executives
in Europe, the Americas and the
Asia-Pacific region.