Hewlett-Packard Computes the Value of Bright Ideas

Hewlett-Packard changed the typical formula for measuring a company's investments in innovation against overall sales and profit targets

Business leaders are often vexed by research and development spending. How much money do you put into R&D when it could be 10 years before you see a payoff as products hit the market?

Hewlett-Packard (HPQ) CEO Mark Hurd has pushed hard to take guesswork out of the equation. Since arriving at HP four years ago, he's developed one of the most quantitative approaches to R&D in the tech industry. The strategy has helped HP keep its footing during the economic downturn, even as rivals like Dell have struggled. "They have the gold standard," says James Andrew, head of the global innovation practice at Boston Consulting Group.

The key is linking R&D spending to specific product lines. Of the $150 million that goes into HP Labs, the company allocates the money based on where it expects the biggest payoffs. To standardize across a product line that includes everything from printer ink to giant server computers, HP uses a metric it calls "R&D productivity," which is research spending as a percentage of gross margin. A standard desktop computer with low margins may get one or two innovative features. But a laptop, with fatter margins, would get more flash, such as touchscreen technology and cool design materials. "We try to focus a bigger percentage of our overall budget on game-changing types of technologies," says Hurd.

HP's investments in things like multi-touch technology have helped it surpass Dell as the world's top PC maker. Hurd says more standout technologies are on the way, including gesture-based controls, so you can point at your PC to launch a music or photo program. "We [are] trying to get innovation to the highest level we can," says Hurd.

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