Patterson contends that to analyze R&D results effectively, one must track not just a product's overall results, but also what he calls "vintage-year" revenue, meaning the amount of sales generated over time from a specific year of R&D spending. By charting future revenue from a given year of R&D, says Patterson, companies gain a clearer sense of how new products contribute to revenue growth and, with that, a standard against which to weigh future investment. "If marketing is prognosticating optimistically," he notes, "you can ask, What justifies that incremental [revenue] difference from what we've done in the past?"
A critical component, obviously, is to track projects beyond launch. That's something that Deere's lawn and garden unit had in mind when it deployed a formal feedback loop for R&D two years after the product launch. "The feedback loop is critical," says Hank Martens, the unit's general manager. In the past, says Martens, "once we did it, that was the end of it. Now we're going back in and [asking], If it was an extremely successful project, what made it that?"
Kodak is going even further. It recently added three new metrics: R&D revenue growth rate, pipeline throughput per $1 million spent on R&D, and R&D waste, calling it "unrealized product-delivery spending." And with traditional measures of product cycle time and time-to-market, Kodak has extended the initial conception stage to better capture the full extent of the development process.
"There's a lot of work and time spent looking at when an opportunity appears to be of interest until you make the commitment to do it," says David Dieterich, Kodak's general manager of integrated product delivery.
One of the most difficult aspects of deploying new R&D metrics at Kodak, says Dieterich, was ferreting out information across its half- dozen business units. Finance was instrumental in setting up systems that collect the data.
But consultants say too few companies are following Kodak's example. Besides failing to measure the link between R&D and the bottom line, only 5 out of 30 possible metrics were used by more than 50 percent of the companies surveyed by Goldense. Goldense notes that much the same problem plagued U.S. manufacturing companies until they got religion in the 1980s, and he's confident the same thing will happen with R&D. "By 2010, 75 percent of companies will be tracking the same things, just as we saw in manufacturing," says the consultant.
At a minimum, says Goldense, key metrics should track unit gross margin accuracy; schedule prediction accuracy; and target product cost accuracy, revenues per development professional, and profit per development professional.
Other consultants still favor the old standby, time-to-market. "The amount you spend on development is less significant than how long it takes," says Michael McGrath, a Waltham, Massachusetts-based managing director at management consulting firm Pittiglio Rabin Todd & McGrath. Generally, McGrath says, the product margins are so big and the opportunities so great that "if you can spend 20 percent more and get it to market 10 percent faster, you should do it. If a company cuts its time to market in half, it generally increases productivity by a third."
Speed Bumps
But there's smart speed and dumb. Many companies still cut corners in the early stages, notes Scott Edgett, the director of the Product Development Institute, in Ontario, Canada. Neglecting good initial market research, these companies risk wasting a relatively expensive month in a lab rather than spend a little time and money up front to build a better business case for the product. "The smart companies are spending time up front to save months down the cycle," Edgett says.
Take Deere. The company is targeting the mass consumer market, which demands products faster and with fewer bugs to work out. To avoid altering lawnmowers and other products after they're released, Deere has been refining product development in the early stages. Thanks in part to three-dimensional computer- aided design, says Martens, the company has gone a long way to meeting that goal. "Rather than running thousands of prototypes and testing and testing and testing, we do that up front," he says.
Effective speed, of course, requires an organized process, which discipline backed by metrics can help create. Before revamping R&D, for example, Rogers's pipeline was clogged. "We had many more projects going on than we could adequately resource," says Bruce Kosa, vice president of technology and product development. Typically, the engineers weren't penalized for taking on more projects than they could handle. "What moved were the projects that had a champion," he says. As a result, as Rogers tried to expand its product line, "we were unhappy with the time it took to introduce and commercialize a product."
The solution in Rogers's case was "stage-gate" systems, a term coined by product-development expert Robert Cooper. These call for forming cross-functional teams and breaking down product-development cycles into several phases, such as product definition, development approval, and product sampling.
For projects to move on to the next stage, they have to pass through a review process, or a gate, manned by senior management. The gate provides the opportunity to decide whether to continue the R&D investment. A product may look good in the definition stage, yet may get blocked at the initial development stage for technical or marketing reasons. Results: Rogers wastes less time and money adjusting product specifications along the pipeline, and kills unpromising projects.
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