Don't Cripple Innovation for the Sake of This Quarter's Numbers

When hard times hit and revenues fall, R&D is always a tempting target for corporate cuts, because reductions yield quick increases in profit, and it has always been easy for executives to tell themselves that cutting research a bit today probably won't hurt all that much over the long run.

They can't get away with telling themselves that anymore. A new metric for R&D productivity that I call RQ, or research quotient, lets companies figure out the effectiveness of their R&D investments relative to the competition and enables them to determine how changes in R&D spending will affect the bottom line and the company's market value.

In my May 2012 HBR article "The Trillion-Dollar R&D Fix," which is part of the Spotlight on Innovation for the 21st Century, I show that if the top 20 firms traded on U.S. exchanges had used the RQ method to raise their 2010 R&D investments, they would have boosted their market capitalization by a total of some $1 trillion. The longer-run benefits are potentially even bigger, because the metric allows companies to more closely link changes in R&D strategy, practices, and processes to profitability and value.

Here's a table that accompanies the article. The numbers are pretty eye-opening (click on the table to see a larger image).

R&D is the basic engine of economic health. Ill-advised cuts in research spending for the sake of a short-term bottom-line improvement stifle growth that would otherwise benefit the company — and society — over the long term.

 

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