At the highest level of abstraction lies Outcome or Governance metrics. These measure the results of R&D that shareholders can see and experience. From these stakeholders’ perspective questions like “what is the appropriate amount of money for to spend on R&D?” and “how do we know our investment in R&D is required for shareholder returns?” To see how the whole R&D portfolio is doing the following are examples of Outcome or Governance metrics:
1. innovation contribution to revenue and profits
2. innovation contribution to cost savings
3. revenue from new products developed in the last three years as a percent of total revenue
4. profits from new products developed in the last three years as a percent of total profits
5. innovation conversion rate per stage
6. new product market share
7. new segment market share
8. instant increase shelf space
9. increased share of wallet
10. increased distribution footprint
11. number of patents granted
12. number of registered trademarks
13. customer satisfaction (net promoter score, usability testing)
These are individual metrics aimed at evaluating the success of innovation programs. The more generalized questions to be asked and answered are shown in the “High-Level Innovation Success Criteria by Stage” Figure. Notice that these questions are more qualitative statements than either the in-process or output metrics. Answers to these governance questions are typically done on a scale of 1 to 5. Visualizing the answers to these questions is done by adding up the total score for project, either with or without weighting the individual question answers. A better methodology however has been to use star or spider diagrams to visualize the results of a project’s governance status. Looking at the answers to the questions over a large number of projects using spider diagrams outperforms strictly numerical scales by a wide margin when it comes to an Investment Board’s making a fast high-quality and sticky business decision.
Advocates of R&D spending point out that using metrics to measure the performance of R&D is valuable. This is because the correlation between R&D performance in corporate performance is measured by stock price or shareholder value is positive at the extremes. Studies that use Standard & Poor’s compustat database of financial data often segment the top and bottom performing S&P 500 companies into two groups of top and bottom 50. They then determine the R&D investment by each group. The average return of the top 50 companies is usually over 30% versus only 2 to 4% for the bottom 50 group. Top-performing companies are considerably more research intensive, investing 8.2% of sales versus 4% for the bottom 50. Although blindly investing in R&D is no guarantee of business success, it does appear the long-term commitment R&D and stop performance do go hand-in-hand.
This positive correlation between R&D spending in corporate performance is also true of European based companies. The UK Department of trade and industry creates an R&D scorecard survey which shows strong evidence for positive correlation between R&D intensity and sales growth. In the past they found the turnover expands six times faster in companies with higher than average percentage of sales from new products stunning competitors with a lower than average for Sen. of sales from new products. It is also argue the comparisons between industrial sectors also shows a correlation between R&D intensity and sales growth. The pharmaceuticals, aerospace, IT hardware and software industries spend more on R&D and are expanding faster than the chemicals, engineering and food industries. Additionally when business downturns occur companies that have cut R&D investment have often found that their products and services comparable less well against competitors went up terms come in they find it more difficult to protect market share and value-added.
Critics of R&D spending point out that two thirds of the top 20 R&D spenders have less than average price to earnings ratios. If one looks more closely at R&D intensity versus outright investment in R&D, it’s also true that one half of the top R&D to sales spenders have less than average P/E ratios. Because of these returns critics can forcefully argue that some of the R&D spending should be redirected toward customer centric innovation versus traditional R&D. This criticism has impart brought about the transition from the fundamental stage-gate managed R&D to more agile or lean innovation systems.
Furthering the critics viewpoint are studies which show the relationship between stockholder value and R&D spending have mixed results for the computer / high tech industries. On the one hand, they identify a positive, short-term relationship between stockholder share price movements and firm announcements of plans to increase R&D expenditures, and show that industries with higher R&D intensities grow faster than those with low R&D intensities. However, it is also observed in the computer industry that R&D intensity has a statistically significant negative relationship to future stockholder returns over both one and five year time periods. Such work suggests that computer firms are overspending on R&D at the expense of their stockholders.
To see the effect of various industries, and differing R&D Game Types, the “Share Price / Payoff” figure shows the potential change in share price corresponding to a one unit change in investor perceptions of nonfinancial performance; the scale is from 0 to 10 units, which is less than half a standard deviation, a moderate change. Note that only in the pharmaceutical industry, a Safety Journey R&D game type, is investment in new product development a high payoff investment.