Category Archives: Business Metrics

R&D Spending Formula

R&D SpendingAccording to Anne Marie Knott’s article, The Trillion-Dollar R&D Fix, R&D Spending alone is not a good indicator of profitability, growth or innovation.  R&D spending is merely one of inputs into an organization’s innovation growth engine.  Instead she uses a new formula called the RQ, or Research Quotient to determine how much R&D spending improves an organization’s market value.  (You can look up any public company’s RQ using this tool.)

The formula is straight-forward:  Output = Capitalα * Laborβ * R&Dγ, with the exponents showing the percentage increase in a firm’s revenues resulting from a 1% increase in capital (alpha), labor (beta), or R&D (gamma).

But the article states that organizations need innovation (which is related to R&D) to be successful.  But what is innovation?  According to the article it is “generating a continuous supply of additional value and delivering it sooner so as to delight customers.”

So how do you create additional value?  Build/improve your products, services, and processes

How do you know how to make these improvements?  Listen to your customers

What is the best way to listen to your customers?  Ask the employees who talk with them

How do you ask your employees?  Get them to focus on your organization’s competitive differentiators and ask them how they’d make it better.

What are Your Innovation Metrics?

You’re measuring progress in every major area of your company. How closely are you watching your innovation metrics?

A recent survey of managers in large organizations showed that close to 70% of executives track absolutely NO metrics for innovation on a regular basis.  In a very small percentage, some claimed to manage only three or less statistics in this area. Realistically, this is just not enough benchmarks to get an accurate picture of how you’re doing innovation-wise.

On the other hand there are companies that track FAR too many numbers. An innovation consultant cited an example of a company he’d worked with that were using 85 different metrics in their innovation reports. He admitted it was “mass confusion”; the end result being that none of the numbers made sense to the majority of the management team. Furthermore, it was very difficult to regularly collect this data, so it often went unreported or ignored.

Innovation experts say “make it measurable, but keep it simple”. 8 to 12 metrics seems to be a good sweet spot for consistent, meaningful innovation reporting. That’s about the the correct number for Samsung. On the whole, company leaders there manage things like ‘time to market’ and ‘success vs. failure rates of new products’. Also watched closely are ‘customer sat ratings for new releases’ as well as ‘percentage of revenue from new products’, ‘benefits from internal improvement plans’, and a few more. They stick to these because they’re useful and relatively easy to capture.

Of course, all of these are crucially important indicators of how well your organization is doing from a new product and innovation perspective. It’s just as important, however to NOT get bogged down in too many details. Keep it straight forward, concise, and meaningful and you’ll be able to better allocate and leverage your innovation resources.

Take-away: You can’t improve upon what you’re not even measuring. What are the “go-to” numbers on your innovation dashboard?

Source: BusinessWeek