- Maximize the long-term return on investment;
- Make optimum use of the available human and physical resources;
- Maintain a balanced R&D portfolio and control risk;
- Foster a favorable climate for creativity and innovation.
Project selection is usually done once a year, by listing all ongoing projects and the proposals for new projects, evaluating and comparing all these projects according to quantitative and qualitative criteria, and prioritizing the projects in "totem pole" order. The funds requested by all the projects are compared with the laboratory budget for the following year and the project list is cut off at the budgeted amount. Projects above the line are funded, those below the line delayed to the following year or tabled indefinitely. Some experienced R&D managers do not allocate all the budgeted funds, but keep a small percentage on reserve to take care of new projects that may be proposed during the year, after the laboratory official budget has been approved.
Evaluating R&D Projects
Since R&D projects are subject to the risk of failure, the expected value of a project can be evaluated according to a statistical formula. The value is the payoff anticipated—but discounted by probabilities. These are the probability of technical success, the probability of commercial success, and the probability of financial success. Assuming a payoff of $100 million and a fifty-fifty rate of technical success, a commercial success rate of 90 percent, and a financial probability of 80 percent, then the expected value will be $36 million -- 100 discounted by 50, 90, and 80 percent respectively.
Consequently, project evaluation must be performed along two separate dimensions: technical evaluation, to establish the probability of technical success; and business evaluation, to establish the payoff and the probabilities of commercial and financial success. Once the expected value of a project has been determined it can be compared with the projected cost of the technical effort. Given a company's usual rate of return on investment, the cost may not be worth the expected value given the risks.
Needless to say, such statistical approaches to evaluation are not silver bullets but as good as the guesses that go into the formula. Businesses use such evaluations, however, when many projects compete for money and some kind of disciplined approach is needed to make choices.
Managing R&D Projects
The management of R&D projects follows basically the principles and methods of project management. There is, however, one significant caveat in relation to normal engineering projects: R&D projects are risky, and it is difficult to develop an accurate budget, in terms of technical milestones, costs, and time to completion of the various tasks. Therefore, R&D budgets should be considered initially as tentative, and should be gradually refined as more information becomes available as a result of preliminary work and the learning process. Historically, many R&D projects have exceeded, sometimes with disastrous consequences, the forecasted and budgeted times to completion and funds to be expended. In the case of R&D, measuring technical progress and completion of milestones is generally more important than measuring expenditures over time.
When to Terminate R&D Projects
Termination of projects is a difficult subject because of the political repercussions on the laboratory. Theoretically, a project should be discontinued for one of the following three reasons:
- There is a change in the environment -- for instance, new government regulations, new competitive offerings, or price declines -- that make the new product less attractive to the company;
- Unforeseen technical obstacles are encountered and the laboratory does not have the resources to overcome them; or
- The project falls hopelessly behind schedule and corrective actions are not forthcoming.
Due to organizational inertia, and the fear of antagonizing senior researchers or executives with pet projects, there is often the tendency to let a project continue, hoping for a miraculous breakthrough that seldom happens.
In theory, an optimal number of projects should be initiated and this number should be gradually reduced over time to make room for more deserving projects. Also, the monthly cost of a project is much lower in the early stages than in the later stages, when more personnel and equipment have been committed. Thus, from a financial risk management viewpoint, it is better to waste money on several promising young projects than on a few maturing "dogs" with low payoff and high expense. In practice, in many laboratories it is difficult to start a new project because all the resources have already been committed and just as difficult to terminate a project, for the reasons given above. Thus, an able and astute R&D manager should continuously evaluate his/her project portfolio in relation to changes in company strategy, should continuously and objectively monitor the progress of each R&D project, and should not hesitate to terminate projects that have lost their value to the company in terms of payoff and probability of success.
Tax Advantages of R&D
In 2008, Congress extended the R&D tax credit for corporations, which allows businesses to deduct R&D expenses from income. The tax credit was initiated in 1981, but expired in 2004 and has had to be renewed every few years. It expired again in 2007, but in October 2008, Congress renewed the tax credit for two years as part of the U.S. mortgage industry bailout. While the tax credit has sometimes come under criticism by those who believe that government subsidies of corporate development are out of place, it's backed by a wide-range of industry groups representing such sectors as technology, manufacturing, chemical, and pharmaceuticals.
BIBLIOGRAPHY
Bock, Peter. Getting it Right: R&D Methods for Science and Engineering. Academic Press, 2001.
Dankbaar, Ben. Innovation Management in the Knowledge Economy. Imperial College Press, 2003.
Ison, C.J., and David R, Jarczyk. "Innovation in Small Businesses: Drivers of Change and Value Use." Sponsored by the U.S. Small Business Administration. March 2009. http://www.sba.gov/advo/research/rs342tot.pdf
Khurana, Anil. "Strategies for Global R&D: A study of 31 companies reveals different models and approaches to the conduct of low-cost R&D around the world." Research-Technology Management. March-April 2006.
Le Corre, Armelle, and Gerald Mischke. Innovation Game: A New Approach to Innovation Management and R&D. Springer, 2005.
Miller, William L. "Innovation Rules!" Research-Technology Management. March-April 2006.
