R&D is a major part of many organizations in terms of success in the marketplace through developing new technologies, services, solutions, products, processes and know-how. The way those type of organizations measure their success is crucial for management because that drives the incentives and the direction of all R&D team members and activities.
It is no wonder that top management is always focused on how to create the right R&D KPI plan and structure.
Here are some examples and major concerns for top management:
1. Research and development ROI is very complex to evaluate. While expenditures can be tracked as they happen, ROI on R&D is usually spread over many years.
2. Defining the way to assign investments and allocate the budget demands clear understanding of the organizational strategic goals.
3. Appropriate reward and appraisal system is needed to shape the focus of the entire R&D team and drive the behavior of everyone.
4. Categorizing your R&D initiatives is a must. It is important to understand the types of research and development. For example, certain competences or technologies developed by the organization can also have enormous impact on other future product/technology developments. On the other hand certain R&D outcomes can be very limited in scope thus treating them in the same way would be misleading for evaluating return on investments.
5. In some initiatives returns on R&D may not be seen for the next 10 years or even more. In terms of risk management this also means that there are high levels of uncertainties with these types of initiatives. As a consequence evaluating the probability of success for each individual project is very important.
6. What is really important in addition to typical R&D metrics is the people metrics. For example, not only knowledge management is critical but employee retention is very high priority since long term initiatives heavily depend on the people skills and they last for years. In addition effective continuity planning must be a major concern for top management.
7. Using the number of initiatives that will convert into new products is a common KPI or metric for R&D management however this metric should be used along revenues since many initiatives translated into new products and technologies don’t necessarily mean high revenue or margins.
8. Similar to #7 some companies focus on the number of patents. For example comparing number of patents against their top competitors’ number of patents. As an illustration, top management that pushes with this metric as a high priority encourages fast patent turnaround which can have an impact on the quality of the work.
9. It is always useful to see the R&D with two different lenses: one is completely new technologies or products and the other one is existing products extensions. A healthy portfolio of research and development activities should always balance the two which diversifies the risks as well as future revenues for the company.
The single most important issue is that no one single metric or KPI can do the job by itself. It is the way all your KPIs are organized and related to each other which creates the right performance management foundation for R&D.
Top management is responsible to set the strategic goals for the organization. This should consider past successes and failures, current market conditions and traditional SWOT analysis to gauge the strengths, weaknesses, opportunities and strengths for the business.
The bottom line is that if you don’t know what the right metrics should be for your organization maybe you should go back to defining the strategy of the company or talk to top management.
If you do not measure the right metrics it is impossible to improve the existing performance.