Home > For the Captain: Create an innovation culture > Measuring the ROI of R&D is illusory, but shortcutting Prototyping & Scaling-up will destroy it

Measuring the ROI of R&D is illusory, but shortcutting Prototyping & Scaling-up will destroy it

Return On Investment of Innovation What is the Return On Investment (ROI) of R&D? The question regularly resurfaces but never seems to get a satisfactory answer. Here are two insights, one which explains why we cannot get a proper answer, the other what we can do to avoid destroying the ROI.

Insight 1. Samsung’s rule of thumb for R&D investment is: when spending $1 on R&D, they spend $4 on prototyping & scaling-up. Since all that follows R&D is necessary for the output of R&D to get to market and start generating a return, it becomes clear that the $1 investment in R&D has to be seen in combination with the $4 investment in ‘the rest’. So, calculating a return on the $1+$4 investment makes sense, but calculating a return purely on the $1 investment doesn’t.
Besides, it would take an extraordinarily accurate ABC (Activity Based Costing) system to measure the $4 with less than 10% error. In all likelihood, a 20% accuracy is more realisitc. Even if we try to disassociate the $4 spent on ‘the rest’, the margin of error made on it will be at least half as big as the $1 spent on R&D, rendering any ROI calculation grossly inaccurate.

Wheel prototypingInsight 2. Disassociating the $4 investment in prototyping & scaling-up from the $1 investment in R&D not only makes for inaccurate ROI calculations, but also gives rise to the temptation to reduce dramatically the $4 part by doing prototyping & scaling-up on the cheap. Global leader in nuclear power plant design and engineering Areva made that mistake with its new EPR technology. By shortcutting the prototyping & scaling-up phase, they hoped they would be able to deliver the first EPR (in Finland) for as little as $3bn in 4 years instead of the more traditional $5bn in 7 years. 10 years and $8bn later, the wisdom of that shortcutting sounds rather questionable.

The overall conclusion is therefore: the relative size of the investment in prototyping & scaling-up renders an ROI on R&D calculation meaningless, but over-emphasizing R&D and shortcutting prototyping & scaling-up is a sure way to destroy the ROI.

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