Saturday 23 October 2010

On the Return On R&D

After my last post, where I showed Apple to be the least innovative company around, some words were exchanged on that conclusion (...). Needless to say, after crushing Larry Ellison's suggestimation on Oracle having a way bigger and better R&D than SAP and IBM, only quantitative arguments were brought forth, and by only one person

So, why now? To tell you the truth, the figures on Apple were quite sobering

Research and Development is traditionally measured in a percentage of revenue. For a second opinion, expressing R&D as a percentage of operating profit is quite common too. Here is an overview of that for SAP, IBM, Oracle, HP and Apple, averaged over the years 2004-2009 - I'm picking these companies because I have their numbers already, they're big IT players in a broad sense, global players and have been around for quite a while:
Sorted alphabetically in reverse order, it almost seems as that would exactly determine your R&D. The first column shows R&D as a percentage of revenue, the second shows R&D as a percentage of operating profit. Here's a graph of that:

So, in the traditional way of thinking, Apple ranks at the bottom, only beating HP with R&D. Rephrasing that: Apple is just a little more innovative than HP, but SAP and Oracle are 5 times as innovative. Right?
Taking R&D spend as a percentage of operating profit, Apple is about 20-25% less innovative than SAP and HP, and only 20% more so than Oracle
Update 25th October 21:19 CET: I decided to really make an extraordinary effort and calculate the average R&D spend per employee. After all, I have very fond ideas of drilling down everything to the employee level. So, here it is: the average employee R&D per revenue spend for my Big Five in 2009
(Update 21st November 22:58 CET: I took all figures in dollars, forgetting SAP reports in euros - so SAP's 33K is 43K, really, making SAP the biggest spender on R&D per employee):
  • SAP: $43,713
  • Oracle: $36,047
  • Apple: $35,326
  • IBM: $14,521
  • HP: $9,211
Astonishing, isn't it? Let's not tell Larry, shall we?

That is, if we equal R&D spend to innovation - and there are three words there:
  • R&D
  • Spend
  • Innovation
Four, actually, if you split Research and Development, but hey. Let's just define R&D as the attempt to innovate, Spend as the actual "attempt enhancer", and Innovation as the outcome. Will that get us anywhere? Somewhere, surely, but not everywhere. As you can see, throwing money at anything is no guarantee at all for success, although it always helps a bit of course.

The picture above is Microsoft's R&D centre in  Hydrabad - obviously the money spent on the building isn't going to return anything tangible. SAP spends half of their R&D budget on personnel cost, but most companies keep it a perfect secret what they spend it on. If we don't know what goes into Innovation, how can we measure what comes out?

We can't. We can only simply notice that Apple is a very innovative company, for example. SAP spending 4 or 5 times as much on R&D doesn't make them 4-5 times as innovative (I'm fairly sure even that no one could handle a company being 5 times as innovative as Apple).
Most R&D is window dressing and aimed to please the shareholder - not the stakeholder, that much Larry Ellison did prove in his speech at Oracle Open World

So, how to get to the RO-R&D? We can quickly end the R&D window dressing by making a good habit out of getting rid of the word R&D, and introducing two new words:
  • Innovation Input
  • Innovation Output
And leave it to the companies to qualify and / or quantify that in some way - after all, change takes time. I'll try to help where I can in my next post, where I'll go by the Fortune 500 and report on average operating profit per employee

Because I'm utterly amazed by the fact that no Apple fanboy seems to make a point of the fact that Apple accounts for an average operating profit per employee of $375,000

1 reacties:

MT said...

In SAP's case, most of the R&D is spent on wasted resources, perpetual re-orgs, excessive top heavy management. The products are least innovative, the people are not at all motivated. Speaking from experience.

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