How do you measure the return on investment of your R&D activities?

ROI is an important metric for evaluating R&D investments, but it is difficult to measure. R&D results are often intangible, uncertain and delayed. Quantifying and attributing benefits to specific projects is challenging. Despite these challenges, understanding and measuring ROI are important to make informed decisions. It is important to consider the long-term impact of this and the intangible benefits. Organizations need to develop comprehensive strategies to optimize R&D ROI, which admittedly is difficult.

To calculate R&D ROI, calculate the present value of project benefits and costs. NPV is the difference between the present value of future cash flows and the original investment. Discount future cash flows when money value and project risk decrease. Increasing discount rates decrease NPV. ROI Formula: (NPV/Initial Investment) x 100%. For example, a $100,000 R&D investment with cash flow of $150,000 over five years and a 10% discount yields an NPV of $76,153 and an ROI of 76.15% .

Calculating ROI on R&D is often seen as a simple financial calculation of NPV. Yes, the value creation of innovation is the barter process of paying for a solution to your problem; however ROI, especially in Research or on Disruptive/Transformative Innovation, must be approached differently. Often learnings in the early stages result in adjacent efforts that end up more innovative or valuable than the initial concept, hence the probabilistic nature of successful innovation (value creation). Thus many small investments in the science & technology phase can increase your probability of success. In the financial calculation of NPV, different discount rates are used to financially adjust for risk. Note that this is also just a guess.

Hi, thank you for the helpful article. Curious how you came up with the $76K answer for NPV - I am getting a different number.

R&D activities must be aligned to the company vision and strategy. Collaboration with customers and strategic partnerships to share knowledge and capabilities provide important resources to improve the solution/product concept. Knowledge sharing improves decision-making and accelerates the innovation cycle. Technology scouting maximizes the opportunity to create/build the 'better' solution to solve a problem. The better the unique solution solves the problem, the greater the value created. In funding the 'next critical go/no go decision' in a R&D project, using critical thinking and disciplined decision-making can optimize expenditures and outcomes. Investment in R&D should always be balanced between short, mid and long term efforts.

Prioritize profit enhancement and cost reduction to improve ROI in R&D. Understand customer needs and market opportunities through research and feedback. Align objectives and manage the R&D portfolio across channels, markets, and technologies, balancing short-term and long-term objectives. Regularly monitor and evaluate your progress, making adjustments when necessary. Work with external resources to conduct research and development, leveraging partners, suppliers, universities, and other organizations to acquire complementary expertise and resources. Look for other sources of funding such as grants, tax credits and crowdfunding. By using these strategies, organizations can increase ROI and optimize their R&D investments.

Tailor your messaging to audiences and goals to effectively address R&D ROI. To executives or investors, emphasize financial and strategic implications along with risks. Visual tools such as charts or graphs show ROI estimates. Focus on the technical aspects and benefits of R&D collaboration with peers or customers. Use stories, testimonials, or demonstrations to demonstrate your accomplishments. Optimizing the communication channel ensures clarity, relevance and engagement. It helps stakeholders understand the benefits and impact of R&D investments and supports decision making and support.

Effective communication, both written and verbal, are imperatives of successful R&D efforts. Communication is the process of providing information, making sure that it has been received AND understood. Understanding the purpose of the communication (sharing knowledge, asking for resources, etc.) and the audience are important in effectively communicating to others. Written communications should concisely and clearly inform the appropriate information. Telling a compelling story is often much more effective than another power-point presentation of graphs and charts.

An example would be cost/benefit of running current process vs an alternative either in house or from an external partner or service firm.

In my experience, the type of R&D projects which are closely related to companies should have an explicit measure of value. Perhaps in the objectives, which should be measurable, or in the methodology, which will generate a sufficient set of relevant data. In order to do this, the definition of the project should involve people from costs, supply chain, sales and anybody who may help value the results of the research. The value created in R&D is usually richer than we researchers see from our technical perspective. Communication and language between engineering and management are key at this early stage.