Yesterday, the Financial Times ran a story with the punchy headline: “R&D spending has little effect on financial performance”.
However, when you look beyond the headline and dig into the research on the world's biggest companies conducted by Strategy& - the consultancy formerly known as Booz & Co, you find a slightly more complex scenario.
The relevance to the digital economy is direct. The Government included this sector in their 'catapult sectors', a broad brush term for technology and innovation clusters where UK businesses are encouraged to collaborate to turn R&D into new products and services.
After analysing 10 years of data the study determined that a company with a higher than normal R&D expenditure to its sector did not see a direct correlation in its financial performance. What also lurks in the study is that larger companies spending at the lower end of the R&D expenditure scale within their sector actually saw a detrimental impact on performance.
For small businesses (who were not part of this study) I think we can draw a few useful conclusions:
• Overall there is a slowdown in R&D spending among big business which could infer that they too are questioning the effectiveness of their investments or are simply becoming more savvy about their investments;
• A more focused and considered approach to investing in R&D as a means to improve the value of your business is a good;
• Before investing a penny in R&D consider what the objectives are and how these will benefit the business longer term. Have a very clear plan as R&D is by nature speculative and can be a money pit if not managed properly. There are lots of unfinished projects out there!
• Lots of agencies have bigger plans to spin off IP created but beware, you may be good at running an agency but do you possess the skills or the time to run a software or SAAS business?
• R&D tax credits make it attractive to invest, once you navigate the qualifying restrictions (see previous blog);
• Think about where real value could lie and how much investment you actually need. There are smart ways to invest in areas that are going to add commercial value. (As always, I’m happy to take readers’ questions on this!);
• Appoint an investment committee, to give you an outside perspective on your R&D activity.
So, in short, the headline from the FT is a little misleading. R&D is good but requires a more focussed approach, a robust plan, some dedicated focus to prevent mothballing when client work increases and a clear set of objectives.
Milestone are non-exec advisors to agencies in the marcoms sector, specialising in board advisory, growth consultancy and preparing for exit. Miles can be contacted at email@example.com