Blog

Research as an investment - innovation killer?

Over my many years in the chemical industry (and I guess the following will apply to other industries) I have seen a move towards viewing innovation in general, and R&D in particular, as an investment. This has often been driven by the R&D community as a way of getting other functions to take them seriously. In many ways it has been successful and has probably been of benefit overall. However, as companies have become more and more short-term results oriented it has meant that innovation investments have started to be viewed and evaluated in the same way as capital investments - ROI and payback time are critical.

At the same time, there has been a move towards greater business involvement in innovation - it is no longer seen as the sole responsibility of R&D. Again, this is overall beneficial, but there is a downside in that evaluation of proposals now involves many functions and they tend to apply the criteria that they are comfortable with (ROI, market size, profitability etc.).

The overall result of these two trends is that proposed new product development projects are required to demonstrate (1) technical feasibility and (2) market value. For proposals that are incremental improvements of existing products, this is not too much of a problem (if it is then you want to get out of that market). However, for projects that are more stretching either because they use new technology (feasibility difficult to predict) or are aimed at new markets (market value difficult to predict) this ROI approach can be a real killer.

The result is that, as R&D (or innovation) becomes "more professional" it also becomes incrementalised, and more radical innovations are bypassed in favour of the less risky small step improvements. Essentially, lack of knowledge indicates an element of risk and therefore the possibility of failure. Modern management and shareholders show very little tolerance for failure and so people avoid the risk by doing the easy stuff. We tend to ask the question "Will this project be (financially) successful?" and if we cannot answer a definitive "yes", then the project is rejected.

The usual response to this is to recommend incubators and internal, or external, start-ups, but these do not get over the problem of managing risk by evading it, and in my experience, they only really work where the target market is outside the scope of a company's current businesses. As I see it, the real answer is to convince companies that they should take a "statistical" approach to innovation and have a low threshold for starting a project (I would suggest that the only criteria for starting a project is "Does it fit our strategy?"). Start as many projects as possible but kill them as soon as you know that they are not viable. The question then becomes, "Will this project fail?" As soon as we can answer a clear "yes", but not before, the project should be killed.

Is this a reasonable assessment, or am I going entirely in the wrong direction?