Firms not getting enough bang for R and D buck

Large enterprises here spend around $224 billion a year on R&D. But according to a recent Forrester report, the returns on that investment are nothing to write home about.

One of the more eye-opening business experiences I ever had was taking a day-long tour of Procter & Gamble’s R&D facilities in Cincinnati several years ago. The sheer scope of the operation blew me away — I think they said P&G had more Ph.D.s on the payroll than Harvard and MIT combined.

And that’s not to mention how high tech it was. They asked each of us for a strand of hair to analyze, and by the end of the day produced a detailed report on our individual biochemical makeup, presumably enabling them to recommend individualized skin, hair, and other beauty treatments (as you can see it didn’t work!).

Corporate America spends about US$200 billion a year on R&D. But according to a recent Forrester report based on interviews with big company execs, we’re not getting enough bang for that buck. In fact there’s little relationship between R&D spending levels and business success, says Forrester, and the old “industrial era R&D model” (you know the Bell Labs-type guys in long, white coats) is starting to crumble.

Forrester says traditional R&D organizations simply can’t keep up with the fast-changing consumer. The researchers tend to be clustered in the United States or Europe, rendering them less relevant in faster-growing global markets. They’re focused on incremental improvements rather than disruptive innovations, or they reinvent the wheel and thus have low productivity. And they emphasize yesterday’s skills rather than tomorrow’s. A wholesale indictment. So where’s the real innovation coming from then? According to Forrester, it’s mostly from outside the R&D silo: from entrepreneurial customers and trading partners, from rogue employees throughout the company, and even — get this — from the IT organization!

What can be done to reverse this decline of R&D? Frankly, some of Forrester’s recommendations about better governance, process, and accountability (“run R&D like a business”) sounded like bureaucratic lip service to me, the same stuff we’ve been hearing for 20 years. But others, like doing a better job partnering, make a lot of sense.

Case in point: Last week Netflix announced a $1 million prize (touch little finger to corner of mouth) for anyone who can make an improvement of 10 percent or greater in the quality of his or her movie-recommendation algorithm. And they published a privacy-scrubbed data set of 100 million movie ratings for researchers who wanted to work on the problem.

Rather than just hiring a bunch more Ph.D.s to try to improve the algorithm, Netflix is saying, Lets harness the power of the best minds globally to get the most creative approaches (my guess is that $1 million would have funded six Ph.D.s for a year in San Jose — or three for two years). And here’s the kicker: Netflix claims it’ll publish “a detailed description of the winning approach for the benefit of companies, entrepreneurs, and academicians,” rather than keeping it proprietary. An interesting model.

And while we’re talking innovation… Someone should make a movie about early bicycle manufacturers and the hotbed of innovation that sprung from them. I had dinner with the CIO of Skoda, the Czech car company, who told me his company’s founders had started out with bicycles (like the Wright brothers). It got me thinking: All these guys were tinkering with bikes in the 1890s, and then went on to design cars and planes. They were a launchpad for 20th century innovation. Why haven’t we heard more about them?

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