No CFO worth his or her stock options doubts the importance of research and development. Common wisdom holds that a company that's six months late with a new product stands to lose a third of its market share. And R&D will only become more critical, as product life cycles shrink and new product development and time to market become even higher priorities.
At many companies, however, the R&D never delivers. According to several recent surveys, roughly 40 percent of all new products never make their target returns. The problem, often, is a disconnect between the two phases of the R&D process. Typically, once a product is developed, marketers focus on sales while the designers go on to the next project, leaving no one with responsibility for overseeing the overall effort. (For a look at a way to value the broader range of a company's knowledge capital, see "A Knowing Glance".)
That problem has plagued Roche Molecular Biochemicals. A business unit of Roche Holdings, the company recently revamped its R&D process because too many new products didn't meet expectations. For example, in 1994, the Indianapolis company developed an innovative process to isolate cells out of solid tissue. Bob McCarthy, director of strategic planning, describes the move as a "preemptive strategy to establish a technology position" in what was expected to be a growth area. But the market was slow to develop. "It's a great technology," says McCarthy, "but there wasn't a clear match with the needs of the business," so funding for the project was cut back.
"We're very process-driven to finish milestones," McCarthy explains. "Yet their relevance to the business never really entered into it. Project teams were deciding the business. People at the project level are too wedded to the project--they live or die by their project. Somebody has to look at the broader issues as a check," he says.
Roche isn't alone in its concerns. Among other companies out to gain more control over R&D are small ones like Rogers Corp., in Rogers, Connecticut, as well as such giants as Deere & Co. and Eastman Kodak Co.
As these and other companies strive to better monitor their R&D, CFOs will be called upon to instill financial discipline into the process. They must do so without extinguishing the flexibility and creativity required for successful research, of course. But clearly there is lots of room for more hard-nosed appraisal of the profit potential of R&D initiatives. According to one study (by Brad Goldense, a consultant based in Cambridge, Massachusetts), most companies fail to establish fundamental metrics that link R&D initiatives to the bottom line. None of the five most widely used metrics do so. While project-oriented metrics, such as time-to- market and product cost, are tracked by 80 percent of the 184 respondents, less than 30 percent use profit-oriented metrics like time- to-profit or break-even time.
Big mistake, says Goldense. "When you take the time to see what turned out," he says, "you're going to be smarter the next time and potentially stop another loser from getting into your pipeline."
The case of Rogers, a specialty-materials manufacturer, is particularly instructive. Once, for instance, it decided to introduce a cushion insole product for the footwear industry that was 10 percent cheaper and included fewer color variations. But customers preferred the premium product, so the company abandoned the cheaper one.
Says Rogers president and CEO Walter Boomer: "We had good products out there. The attitude was, If we build it, they will come. And sometimes they did and sometimes they didn't."
Adds CFO Frank Roland: "The salespeople or customers would [push new ideas] and you would spend a lot of effort on a product, and the market you had anticipated just wasn't there."
In 1998, Rogers set up a system that introduces more marketing insight early in the development time line. Now engineering design specifications more closely reflect the product's potential in the marketplace.
"The process really makes the people working on the projects define the market and what they're working on," says Roland.
It's too soon to tell just how effective the new controls have been. But, Rogers's new product revenues as a percentage of total sales, a metric adopted expressly to monitor R&D's contribution to overall performance, have already increased to 40 percent, up from 15 percent in 1993.
Custom Measures
These days, CFOs often find themselves grappling with new measures that go well beyond such traditional yardsticks as net present value calculations.
Kodak's senior vice president for strategy, Jesse Greene, for instance, wore two hats as he helped deploy a new set of metrics for measuring R&D efficiency. Says Greene: "You really have to separate into two people; one is the policeman, one is the creative role. You have to play both roles to be effective."
Such thinking has landed some finance executives on cross-functional teams that review new projects. They sit on product- approval committees, where they help perform due diligence on R&D efforts as part of a larger effort to develop and manage their companies' product portfolios.
But insinuating finance into a process that generally resists measurement can be daunting, if only because traditional accounting systems are not well suited to the task. To get more out of R&D, experts say, accounting systems must be supplemented by measures that allow an individual product's contribution to revenue and profits to be thoroughly analyzed. "Accounting systems haven't been set up with any understanding of the business," notes Marv Patterson, a Los Altos, California- based consultant at Innovation Resultants International and the former director of corporate engineering at The Hewlett-Packard Co. "Unless somebody takes it upon him- or herself to track [R&D's contribution] manually, it never happens. Even if one business unit cares about it, other business units may not, and you can't combine the results."
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