Rating R&D: How Companies Get The Biggest Bang For The Buck

In most companies, research and development funding seems to become especially vulnerable at the first sign of financial trouble. Largely that's because the value of R&D is hard to pin down. So Pittiglio Rabin Todd McGrath, a high-tech consulting company in Weston, Mass., is proposing a simple benchmark called the Index of R&D Effectiveness. It is calculated by dividing the percentage of total revenue spent on R&D into new-product profitability, which is also expressed as a percentage. PRTM recently applied this measure to 45 large electronics makers--with sobering results.

Just 9 of the 45 companies scored 1.0 or higher, indicating that only 20% enjoyed a positive payback on R&D. One reason that most companies missed breakeven: On average, they squandered 18% of R&D spending on products that never reached market. However, the top nine held such losses to 2.5% by running frequent checks on products vs. market opportunities--and canceling dogs quickly. They also got new products to market in half the time the others did, says PRTM Managing Director Michael E. McGrath. The bottom line: Revenue growth among the top 20% was double the average of all 45 companies.

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