Money can’t buy innovation: R&D’s big spenders don’t convert spending to profit

Jan. 1, 2007
As far as putting the cat among the pigeons goes, the study published Nov. 13 by Booz Allen Hamilton was like loosing a particularly voracious feline into St. Mark’s Square in Venice.

By Annie Turner

LONDON - As far as putting the cat among the pigeons goes, the study published Nov. 13 by Booz Allen Hamilton was like loosing a particularly voracious feline into St. Mark’s Square in Venice.

The long and short of the report’s premise is the potential waste of money in the current research and development (R&D) spending frenzy.

Put another way, companies that spend the most on R&D are typically the worst at turning that spend into profit. Why? “Conventional wisdom often seems to view R&D as a predictable black box that automatically translates today’s innovation investments into tomorrow’s profits,” the report’s authors say. “But the process isn’t automatic. Many companies’ R&D efforts are unfocused. Money is wasted ‘reinventing wheels’ that others have already rolled out.”

The report was not specifically talking about the defense industry, but the cap certainly fits. According to the Government Electronics and Information Technology Association (GEIA) in Arlington, Va., R&D defense spending was at its highest ever in 2006, although, to keep things in proportion, defense and aerospace only account for 4 percent of the overall R&D spend of the world’s top 1000 most innovative companies, as defined by the report: auto, computing and electronics, and health account for around two-thirds of the total.

On the other hand, the total R&D budget of the world’s top 1000 most innovative companies is the equivalent of the Department of Defense’s annual budget, but defense and aerospace companies are not well represented on that list.

Additionally, the report argues that the number of patents owned by a company should not be seen as a measure of innovative success, although patents are regarded by governments and chief executives as an important driver of performance. Rather, the report states, “Very few patents are significant, just as only a handful of books become best sellers.”

All of this is perplexing for Europeans who are forever being urged to band together and jointly fund defense and aerospace R&D projects so that we can close the technology lag with the U.S. Yet here is one of the world’s most respected management consultancies stating that there is no statistical link between R&D investments and financial performance.

To add to the consternation, the findings are hard on the heels of the United Kingdom Department of Trade and Industry’s annual R&D Scoreboard, which came to the opposite conclusion-that R&D spend all but guarantees positive consequences. The conclusions drawn by the Booz Allen Hamilton’s report also undermine the entire philosophy underpinning the aims of the European Defence Agency and the cherished notion (in some quarters at least) of a European Security and Defence Policy.

There is no doubt that this will be popular in some quarters. Europeans are acutely conscious of the cultural, linguistic, and historical differences between themselves and the rest of the continent. Many Europeans also balk at being asked to ape everything American or having the U.S. held up as the paragon of success. Above all, the richer European Union countries fume at how much they are obliged to subsidize French farmers (they are always the villain of the piece) and countries that are still classified as underdeveloped and therefore get concessions, such as Spain, which is not.

However, these deep-seated antagonisms obscure much bigger issues. The first is that a pan-Western Europe plan worked fabulously, demonstrating that it can be done. GSM (for Groupe Spécial Mobile or Global System for Mobile Communications) was born out of work started by the Conference of European Post and Telecommunications Administration (CEPT) in 1982 and was an international, joint-development effort. There are over two billion cell phones based on GSM and derivative technologies in use in 212 countries.

Second, even the Booz Allen Hamilton report acknowledges that bigger can be better because scale provides advantages to R&D spenders. Of the 1000 most innovative companies highlighted by the report, for the largest 500 companies, ranked by revenue, the median R&D spending was 3.5 percent of sales in 2005 compared with 7.6 percent for the 500 smaller firms.

Naturally, the rider to the scale argument is that it is a huge challenge to get a number of experts from different countries to work well together so that their skill and knowledge is truly exploited-rather than frittered away in endless procedures and arguments. Indeed these difficulties of human and technological integration are the main reasons (along with poor management) that the vast majority of mergers fail in every business sector.

Which brings us to the third point. Ostensibly, Europeans have a huge motivation to work together in defense and aerospace projects. As defense platforms become increasingly sophisticated, and their advanced features are reflected in spiraling prices, it makes no sense at all for individual countries to, in Booz Hamilton Allen’s phrase, keep reinventing the wheel. Duplicated effort is wasteful, inefficient, and time-consuming.

Yet the greatest symbol of this, the Joint Strike Fighter program, has been mired in controversy and fears that the U.S. primes will guard the deployed technologies as a state secret, although that technology was funded by all the member countries. You don’t trust the Europeans (not to mention Australians and other involved parties) and we don’t trust you, not least because you don’t trust us. It’s a Gordian knot.

On top of that, Europeans are far from convinced that these huge projects are worth funding. In the first week of December when the U.S.’s closest European ally, the British government, announced it was considering spending $50 billion to replace its Trident submarine-launched nuclear missile system, it was met with jeers from some quarters. In what circumstances would we ever use them? The justification from the government is Iran and North Korea. The disenchanted rejoinder to this is that we would never deploy nuclear weapons without the U.S.’s say-so and nuclear weapons are of no use at all against the U.S. and United Kingdom Governments’ other favorite hobby-horse-the war on terror.

In short, the Booz Allen Hamilton report, rather than clarifying the situation, will be claimed by all sides as supporting their view of this fabulously complex picture.

See for more information on the report.

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