In the Boardroom convened a national panel of executives and experts to discuss how a company can effectively balance its short-term revenue goals with its long-term investments in growth from new innovations. The results of that roundtable discussion are below.

How does a company arrive at the right level of R&D funding?

Hans Stork, CTO and SVP of Silicon Technology Development, Texas Instruments: The right level depends on the business; the level of investment usually reduces with the maturity of the market. Just as important as the level of investment is the efficiency of your R&D in generating a return. Finally, and perhaps most importantly, in R&D the choice of the people involved is critical. You need passionate scientists that also have a keen understanding of the business and a desire to uncover technology that addresses issues that directly impact that business.

Don Mead, Vice President of Marketing and Development, Design Validation Division, The HON Co.: When determining how much funding to allocate to R&D investment, we consider several things. We look for an appropriate balance between investment in product line extensions, new product platforms or categories and, finally, pure research investment in more game-changing product or material alternatives that could transform how we or our customers lower cost, improve productivity and/or improve workplace effectiveness. It’s hard to quantify the spread, but in general we would target the split to be approximately 20 percent, 50 percent and 30 percent, respectively. How many total dollars that are available is driven by business conditions (current and projected), the economic profit that is projected by each project, and the alignment of each project with our business strategy. Ideally, any project that will generate a positive economic profit is a good investment. However, everyone has internal resource limitations. Return on investment of past projects determines future funding. If we can prove we have gotten results, continued and increased funding of future projects is more likely.

Tom Jensen, President and CEO, PakSense Inc.: Numerous factors are at play that drive a company's roadmap. The roadmap identifies which products to develop, when, and how fast, which leads to planning and budgeting activities that, in turn, establish proper R&D funding levels. Some of the considerations that drive a company’s roadmap and have a direct impact on R&D funding are:

1. Which product and/or service concepts are feasible to develop and bring strong customer benefit?

2. How much capital is available that can be directed by the company toward R&D?

3. [What] existing knowledge about technologies and components (intellectual property) can be utilized?

4. [What is] the rate at which staffing and infrastructure can be built up in order to accomplish the project and work the plan?

Rita Gunther McGrath, Associate Professor, Columbia Business School: The right level of R&D funding is going to depend to a large extent on two factors: 1) the nature of the industry a company is competing in; and 2) the strategy it is pursuing. A fast-moving industry in which new attributes or features are being introduced (think telecommunications) will demand relatively more R&D spending than a slower-moving one (think making elevators). Within the industry, you also need to consider the competitive strategy you are pursuing — a firm that competes on higher-margin innovations (such as Apple) will need to spend relatively more money on R&D than a firm that competes on fast-following or operational excellence (such as Matsushita). Similarly, companies in the blockbuster business (for instance, pharmaceuticals) can easily spend 20 percent or more of sales on R&D, because the process is so highly uncertain.

 How important is R&D’s voice in establishing annual budgets, and how is that voice heard?   

Mead: In our organization, R&D has a seat at the table and is an integral part of planning and executing the business. R&D’s voice is important and is heard through the strategic planning process of our business. Proposed projects and investments are a result of three-year strategic plans. The business paints a clear picture of its customers’ needs and trends and then works with R&D to identify and develop products that will improve our ability to serve those customers and that offer unique competitive advantages to alternative solutions and choices the customers have.

Stork: R&D is not about short-term survival, but consistent and long-term growth and competitive strength. Therefore, R&D must match the ambition and ability of the company. It cannot be set unilaterally. In return, the level of R&D chosen determines a key factor in the budget. The budget should be represented in the process by the R&D managers. They have a responsibility to point out what is needed, not only what the customer is asking for, and that may increase or reduce R&D funding.

McGrath: The importance of R&D’s “voice” will vary with the two factors I mentioned. In general, R&D folks struggle to connect what they are doing to the larger business, so I think it is very important that in addition to R&D having a voice that a senior-level organizational champion with the vision to see where new developments are arising advocates for the R&D budget. Some recent research I’ve just concluded finds that companies with effective cross-organizational networks earn a better payback on their investments in innovation than firms that just leave their ideas in an isolated R&D or venturing organization.

Jensen: R&D must work closely with product management on the marketing side to establish a reasonable roadmap that fits the company's needs and drives a plan and budget. Senior management's intimate involvement in this process can help ensure that R&D's voice is heard.

Do desired projects inform funding, or do funding restrictions scope the projects that can be pursued?

Stork: Again, this is an iterative process. Procedures that measure progress and allow for fast reaction are critical, especially in higher-risk efforts. Call it fast-cycle-time R&D. Choosing the right thing to do at the right time is more critical than the right amount. Good judgment about those questions lets you converge quickly to the right amount.

McGrath: Projects and funding obviously influence each other. I recommend that a company think through these decisions in sequence:

1. What is our strategy? How will we win in the marketplace?

2. What does that suggest for where we need to put resources — in particular what must we stop doing to free resources for the areas we want to focus on?

3. Of the opportunities we have, which are the most attractive, realizing that you have to compare projects with different levels of uncertainty to one another?

In general, you are better off pursuing a focused stream of projects than pouring a small amount of resources into too many opportunities.

Mead: In general, limits on funding don’t scope projects but the lack of strong projects limits investment. Strong projects are those that are driven by effective end-user research and generate positive economic profit to the business. The business is first challenged to drive out all non-value-added cost and complexity in their business to create the opportunity to increase R&D investment. If the business still has annual limits on funding driven by current economic conditions, we have a process by which each business can secure additional investment dollars from the corporation driven by the projected return on investment of the additional funding. We are fortunate to have leadership that always has an eye on the future and realizes that our goal is “sustained” profitable growth over the long term.

In the Boardroom’s executive roundtable advocates a robust but judicious approach to R&D. Here are some conclusions from the conversation:

• Spread funding across a diverse portfolio of projects that extend existing product lines, create new ones, and look out on the market horizon.

• Ensure R&D has a high-level champion at the table during the budget process.

• The inherent value of a project should help guide how much R&D goes into it—but take the long view of the project’s worth.

The roundtable members say an intimate understanding of what your company is trying to accomplish, its mission, will inform your level of R&D funding. Do you know your mission?

For similar discussions on this topic, go to www.intheboardroom.com.