As the global economic downturn spurs companies to slash costs, many senior executives are intensely scrutinizing research-and-development budgets. In fact, R&D is a perennially attractive target for corporate belt-tightening rituals, since it doesn’t produce cash directly. Now more than ever, many companies are trying to generate quick savings—and to spread the pain of cutbacks in an equitable way—by asking their development groups to cut costs across the board.
Yet such tempting reductions starve and therefore delay promising projects while allowing unworthy “zombie” ones to linger. Worse, wholesale layoffs destroy morale among the remaining staff and can even prod your very best development engineers, who are always in demand, to accept the severance package that may be on offer and move elsewhere. Companies should take a more strategic approach to cutting R&D costs, by using today’s difficult economic environment as an opportunity to upgrade the R&D organization’s focus, practices, and management. That path helps companies not only to cut their costs but also to raise productivity and speed up time to market—while positioning themselves for even greater success in the future.
For most organizations, the first step is to examine the R&D portfolio rigorously to accelerate the most strategically promising projects while canceling irrelevant or moribund ones. It would seem obvious that companies ought to be doing this all the time, but many resist because of the challenges therein. Portfolios often grow organically, for example, with little central oversight, so it can be difficult for senior executives at a large company to get their arms around the totality, let alone the expected value, of its R&D activities. Another challenge: targeting specific projects for elimination means having difficult conversations with the people who lead them. It’s far easier to ask for sweeping cuts—in a particular geography, a product area, or across the whole breadth of a global R&D group.
Many undermanaged and drifting underperformers survive these broad cuts, however. In large companies, such projects may even go unnoticed as changing market conditions undermine them. One leading industrial company, for instance, recently discovered, during a portfolio review, that the technology of a large project launched five years earlier had been eclipsed by the offerings of more nimble competitors.
Nasty surprises like this are common. Our experience in industries such as automotive, energy and basic materials, high tech, and medical devices suggests that all but the most vigilant product developers could terminate one-quarter to one-third of their projects, liberating resources for redeployment. How big is the opportunity? For a typical consumer-focused manufacturer with $5 billion in revenues and $250 million in annual R&D expenditures, the value at stake represents nearly 2 percent of sales. Such a strategic review frees up not only resources but also management attention, which a company can use to tear down silos, boost cross-functional collaboration, and manage R&D actively as a portfolio.
A chemical maker, for example, reduced the time to market of its top R&D project by more than 12 months and added more than $100 million to the net present value of its R&D portfolio. How? It killed three zombie projects, redeployed resources to accelerate the development of its most promising new product, and improved early-stage R&D collaboration between engineers and marketers so that executives could make better decisions about which efforts to finance.
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