R&D spend critical but no fixed formula

Innovation not proportional with amount allocated to R&D, and flexibility is important in how resources spent to maximize and monetize potential ideas, say industry watchers.
Written by Jamie Yap, Contributor

Investment in research and development (R&D) is crucial for IT companies, but what is more important--though not as clear-cut--is the amount, and how funds should be used, say market observers, who note that there is no proportional relationship between R&D spend and returns on investment.

Les Ball, professor of information technology at Hult International Business School, said it was not easy to track what the typical R&D expenditure of IT companies is, as the numbers are "all over the ball park", and can range from a mere 2 percent to almost 15 percent.

Spending on R&D is necessary to ensure companies have products for the future, but the real issue is how R&D funds are used, he emphasized. "Not all innovation is equal as much money wasted on bad products. How the monies are spent is the key question. One could argue that Apple's 2 percent is much better spent than Oracle's 12 percent, for instance."

Charles King, principal analyst at research firm Pund-IT Inc, concurred, saying one should view R&D budgets with a grain of salt because in the first place, "what vendors [reap] from those investments also varies wildly".

"Despite a massive R&D budget, Microsoft's shares have long trailed the overall market. On the other hand, IBM's yearly R&D spend of US$6 billion, around 6 percent of annual revenue, is in the middle of the pack, but the company has long been an acknowledged leader in patent generation, a common measurement of R&D valuation," King pointed out.

"R&D spending is no guarantee of success, but gauging its impact on a company can sometimes provide a measure of its ability to innovate and to capitalize on those efforts," he added.

When contacted, IBM Singapore's CTO Foong Sew Bun, said the company's US$6 billion annual R&D investment focuses on high-growth and high-value opportunities. "It is with our continued focus on innovation through R&D that has seen our business growth accelerate over the years…translating R&D work into real high value solutions that benefit our clients," he added.

A spokesperson from Microsoft, which R&D spend for fiscal 2011 was US$9 billion or 13 percent of revenue, said: "While others in the industry decrease R&D budgets, Microsoft continues to set the standard by investing billions of US dollars annually. We remain committed to investing in new technologies that will benefit our customers in the future."

Less R&D spend the way to go?
Ross O'Brien, corporate network director at the Economist Intelligence Unit (EIU), said it was "imprecise to equate innovation with R&D spend" as there was no such thing as a right metric or benchmark. His comments follow a Bloomberg report last month that said Facebook allocated just 10 percent of its sales to R&D in 2011, following Apple's footsteps of low R&D expenditure. Cupertino spent 1.6 percent of total revenue on R&D in last quarter of 2011, according to the report.

Facebook and Apple, which are reputed for their innovation, spend less on R&D, but that percentage relative to revenue is an "anomaly", said Michael Yoshikami, CEO and founder of Destination Wealth Management, a U.S.-based investment consultancy.

Both have "huge revenues" to begin with, he pointed out. Apple has "massive sales revenues" and still spends billions on R&D, he said, citing the technology featured in the newest release of the iPad as an example.

Pund-IT's King argued that Facebook and Apple are "technology companies in only the narrowest sense of the term".

"Facebook took a bushel full of common and creative Web and graphics tools, and assembled them into a slick platform. Apple's great success came after it shifted its attention from complex laptops to single-use devices like MP3 players and phones.

"So the bottom line [is] R&D doesn't seem to contribute much to either company's massive success, so why should they bother with large R&D budgets now?"

Business innovation, not R&D innovation
Observers also noted that while IT companies investing in R&D was a given, there was more freedom and flexibility today as to how and where companies want to spend their R&D dollars.

Hult's Ball said some companies may buy innovation through acquisitions. But more notably, the Internet has "changed everything" and meant that companies no longer required in-house R&D since online collaboration tools and sites are readily available to help them innovate, he explained.

He added that being truly innovative is not about having great ideas or products, but the ability to create ideas that generate enough cash to reward shareholders. "[In that sense,] business model innovators, rather than technical innovators have much higher returns. And Amazon, eBay and Facebook come to mind as companies that excel in creating new business models," Ball said.

EIU's O'Brien similarly highlighted that social media and the Internet have caused perpetual feedback loops between customer experience and continuous product improvement, so "throwing money at coders doesn't have to be the only way R&D is done".

"Facebook can crowdsource a lot of its app development; its [own] users are its R&D labs. When Kimberly-Clark ran a successful Huggies (baby diapers) campaign in Hong Kong, Facebook sent a team there to document the success. This is the future of R&D, and it isn't as measurable as something you can record on a balance sheet."

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