Technology companies are spending a little more than $8 on research and development for every $100 they take in as they jostle to create new products and services to sell to customers.
A survey of 20 prominent technology companies by Baseline magazine found they had spent a total of $35 billion on R&D in their most recent fiscal years, or about 8.2% of sales. The percentage devoted to R&D ranged from a high of almost 19% at Adobe to less than 1% at Dell, which focuses on low-cost distribution, not new product development.
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Not surprisingly, it was the fastest-growing companies that tended to increase their R&D spending the most. Google, the single fastest-growing company on Baseline’s list, pushed its R&D expenditures to almost $600 million in 2005 from $226 million the year before, a 166% increase. CRM vendor Salesforce.com (76% increase in sales, 138% increase in R&D spending) did something similar though on a different scale, as did Yahoo (47% sales growth, 54% R&D growth) and Linux software company Red Hat (42% and 26%). Apple was an exception; even though its sales grew 68%, it raised R&D by only 9.2%, slightly less than average for the group.
Indeed, not every dollar spent on R&D leads to a blockbuster new product—or needs to. R&D can have value if it protects a company’s position in the market, says Simon Szykman, director of the Arlington, Virginia-based National Coordination Office for Networking and Information Technology R&D. Microsoft, which has long been a leader in technology R&D spending, may be one example of this; while the company will pour more than $1 billion into developing new Internet services in the next year, it will likely spend several times that developing and upgrading its core software packages.
In any event, the traditional approach to R&D—a linear pipeline of ideation, development, manufacturing, marketing, sales and support—may be due for an overhaul. Companies like Google and Amazon, because of their huge server farms, can now “experiment with a service overnight,” says John Seely Brown, a consultant who spent almost 20 years as director of Xerox’s Palo Alto Research Center.
And for companies that can’t easily take advantage of electronic distribution, other R&D models are emerging, Brown says. One is to find ideas that have already been created elsewhere in the world, license them, develop them and use a company’s own logistics and sales chains to make them successful. (Procter and Gamble is the poster child for this approach, which it dubs Connect & Develop, and which was the subject of a Harvard Business Review article earlier this year.)
Another model is to offer cash—$50,000, say—to anyone who can solve some technical problem. “Most of the people who respond are from China and India,” Brown says. “It’s a beautiful way of tapping the technical genius of people all over the world.”
As for Google’s much-praised approach to R&D—letting its engineers devote a day a week to pet projects—Brown says there’s not much about it that’s new. Post-it note inventor 3M has done something similar for years. “Google gets huge kudos for having these geniuses work there,” Brown says. “But what are some of the most famous things coming out of Google? Google Earth. Sketchup. There’s a little bit of a funny story here because the things that are really catching on, Google actually acquired.”
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