Previous posts introduced R&D as a moniker for projects that are both exploratory in nature and include an intention to commercialize the results. That is, neither pure research (as in traditional academic research) nor simply development-oriented (as in the iteration or implementation of predetermined product features).
R&D really does have powerful value in all business operations. I may diverge from conventional thought a bit here, in that I’d argue that even a simple mom-and-pop retail store can and should benefit from regular R&D projects. It goes without saying that large organizations with multi-million (or billion) dollar revenues need a coherent R&D strategy to remain competitive.
Who Should Have R&D Programs
In a word, everyone. But on the small-end of the spectrum, one may well ask how R&D can be implemented, let alone afforded, given slim margins, and slimmer resources. Let’s consider first a few characteristics of R&D. Key elements of R&D are:
- Addressing a need for an answer to a product/service question or solve a problem
- Employing an approach to achieve item 1 with structure and focus on achieving a solution
- A commitment to ensuring the results of the project are captured
- A plan to exploit the results of the project to improve the business
These are four core points required to call something an R&D project. Inherent in item 1 is that there is uncertainty. If the problem is needing to buy widgets, the solution is simply finding a source and procuring the part. It might be challenging and specialized, but the lack of uncertainty in direction and solution makes it a non-R&D activity.
Let’s consider an owner-operated small business – say, a coffee shop. Bob’s Roastery simply acquires coffee beans, both roasted and unroasted. The former he sells both by weight and by converting into coffee drinks, the latter he roasts on-site and provides in similar offerings. In the context of Bob’s, an R&D project might seek to answer such questions as
- how to roast a new source of beans to provide the optimal cup of coffee
- is there a new coffee-based drink that will differentiate Bob in the crowded coffee market-place
- what are the optimal brewing conditions for a new espresso machine?
For solving these problems, there are unstructured (and likely unproductive) paths to a solution and there are structured approaches. There are risks involved too. Maybe a new source of beans doesn’t produce a quality beverage that will meet Bob’s expectations. Maybe the new machine cannot produce a better result than what staff are currently producing. Maybe a new drink will be unpalatable to customers and result in a financial loss.
Too often small businesses try piecemeal, on-the-fly, near-random tweaks to solve product problems in a retail operation. Bob’s would best benefit from a structured, side-project to matrix-test alternatives, while adjusting variables. On the new beans project, roasting with a variety of parameters and taste-testing the results against predetermined criteria, with a few qualified tasters might be appropriate. Clearly, the costs can easily be capped to a small amount of unsold product and a few hours of extra employee/owner time.
Not only does a structured, planned R&D project provide better and documentable results, the investment required can often be handled differently in the operation’s accounting. In some situations, tax credits (e.g. Cdn, US) or other R&D-encouraging financial programs may be available to business owners. Sometimes projects can be performed in concert with local college or university classes which benefit from the learning experience.
For larger corporations, investors and even customers are particularly interested to ensure that R&D is part of your plan.
From a customer’s perspective, the presence of R&D operations is a reassurance that there is a future path for products that may look good today but have a rapid obsolescence rate. Without a migration path that preserves a product’s user-learning curve, a customer may look elsewhere for long-term stability, and cost-of-ownership reductions.
From an investor perspective, it’s typical to look for an indication that approximately 15% of revenues are being redirected into R&D. Companies that spend too much on R&D may be neglecting support of current products. Those that spend too little may have only a short-term ability to remain competitive in the market. The fraction of spending on R&D will vary with market segment. Traditional industrial businesses may be able to stay current with a lesser investment, while early-stage or technology-based businesses may required considerably more spending to stay competitive in their market.
Research and development brings many benefits to a business. Some of them are:
- managing evolution of products to avoid obsolescence
- developing product features that differentiate them from competitors
- finding paths to lowered cost-of-production
- expanding the portfolio of products that can be offered to customers in a particular segment
- reassuring customers that the business is forward-looking
- establishing opportunities to grow a business into other market segments
- enhancing the reputation of a product or business, e.g. improved environmental positioning
Again, it is worth highlighting that a key component of an R&D program that addresses such goals is the use of a structured process. Seat-of-the-pants solutions implemented on-the-fly do not constitute R&D. Unplanned incremental changes in business are similarly not R&D. Only with a structured program is either a positive outcome likely or a financial benefit to the business probable.
All R&D projects should include:
- A stated problem or opportunity
- A desired outcome or goal
- A definition of project completion
- A plan of attack to achieve the goal(s)
- Outline of expected risks and their possible solutions
- An outline of resources (people, equipment, supplies) for the project
- A budget of costs to be considered
Upon completion, the project should:
- Capture the actual activities and outcomes of the project
- Describe the path to exploit the outcome for the benefit of the business
- Itemize the actual costs.
Even though benefits to your business are themselves reason enough to engage in R&D, surveying the tax situation to benefit from possible R&D-encouraging government programs is a good idea. Often there are consultants that help to file such claims based on contingency fees, and you may find that doing so on your own is perfectly manageable.