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Thursday, April 26, 2007

Tech Companies And R&D Spending

Booz Allen Hamilton came with a position recently that absolute levels of R&D spending offer little or now indication of how innovative a company really is, it is instructive every now and then to check out how much companies in the technology sector are spending on R&D. Recently, CIO Insight reported on the R&D spending patterns of the top 81 companies in the tech sector, pointing out that the top tech players like Microsoft, IBM and Intel are far and away the R&D spending champs. The top 10 companies on the list invested $32.5 billion in product development in their 2006 fiscal years. That was almost seven in every 10 R&D dollars spent among the companies. The biggest spender was Microsoft, with $6.58 billion. Hotshot company Google was able to devote just 11.6% of its revenue to R&D. It spent $1.23 billion on R&D. The median R&D expenditure among all the 81 companies studied , was at around 15%. of revenues. Some may see Apple & Google as the most innovative companies - they are not there in the top five spenders list. While these companies are spending a lot on R&D, it doesn't mean one may see these companies launching new products shortly. In fact investments and results may not have a direct correlation though one knows that well made investments in research could prepare a company for a better future.

As I wrote recently, there is no link between R &D, productivity improvements or innovation. One does not need to spend about five billion in R&D to find that the next big thing does not exist. Its clearly organizational interest, result orientation, quality of leadership and the latitude the research team has and the integration that business and research has within the enterprise that matters a lot. Clearly these are the factors that get severely affected when organization grows. It’s time to look at assessment of new product /new revenue streams coming out of enterprises lot more closely as they begin to grow. innovation today is more about services, process, business models or cultural innovation than just product innovation. As Michael Scrage recently wrote brilliantly, the simple fact is that "R&D spending is an input, not a measure of efficiency, effectiveness or productivity. Ingenuity, invention and innovation are rarely functions of budgetary investment & points to the fact that Wal-Mart, Tesco and Dell have miniscule R&D budgets, their quality, procurement and growth requirements have probably done more to drive productive innovation investment than any competing initiatives. Growing market competition, not growing R&D spending, is what drives innovation".

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