The Truth About R&D

Today, Gartner Dataquest estimates that R&D spending at the largest firms fell between $400 million to $500 million in 1999 or 5.2 percent of net operating revenue. However, many  R&D leaders say they can't identify exactly what projects are being thrown into the R&D equation, or measure the profitability of those efforts.
A survey of the profession's top 50 firms by Kennedy Information Research Group — a sister company to Consulting magazine — pegs the average R&D investment closer to 4 percent of net operating revenue and the median investment at 2 percent, compared to marketing, where the average investment is 9 percent and the median is 6 percent.
"It's not uncommon to see R&D expense shrink as a percentage of revenue as firms grow larger and vary their product portfolio. But the question becomes: 'At what percent should firms reengage their efforts?'" says Alden Cushman, Kennedy's vice president of research.
 Today, many charge that the amount of "pure research" being conducted at most consulting firms is appallingly low. The economic imperative is to re-use work already in development — to turn services into cash cows — fast.

"If they're spending that type of money on R&D, then where's the output? Where are the new innovative products and services that that much money should create?" asks Larry Prusak, executive director of IBM Corp.'s Institute for Knowledge Management, Cambridge, MA.  Prusak believes R&D in many of the larger firms has been undercut as they mature from a founding organization into a broadbase partnership, where there exists a transaction mindset. "You can't spend any large dollars on R&D today where you don't face an immediate or provable payout — the partners don't want to do it and it's their money," says Prusak. "As firms grow, the founders leave, making way for the next generation, which is made up more of managers without any academic leanings," he concludes.

Across the consulting industry, "the game is not to do primary research; the game is to be a fast-follower" behind someone else's research and development, asserts Brian Sommer, a former Accenture partner. "This fast-follower strategy is incompatible with what a company that's positioned to be a leader is all about. How can you be a leader and never innovate?"
But with partners more focused than ever on chargeability, firms are now looking for new ways to fund R&D. Some are weaving billable hours into development projects, partnering with clients and academics, or commercializing their inventions to bring in measurable dollars — as the trend moves from individual innovation to shared R&D.

No Textbook Definition

Ask any research leader what defines R&D in a consulting organization, and you won't get a clear answer. While most can agree that it includes the development of business intelligence — in the form of books or papers, methodologies, software, and technology throughout the firm, there's still a cavernous gray area. Some firms include training in their R&D expenses, while others factor in marketing.

In most consulting organizations, the term "R&D" is hardly used at all, according to Chris Meyer, partner and director of Cap Gemini Ernst & Young's Center for Business Innovation in Cambridge, MA. For decades, innovation occurred "at and with the client," and the client's needs led the professional to the new insight that could be applied to other clients.
Most consulting firms still subscribe to this theory and consider all field research done by dozens of industry practices as R&D, as well as development done on specific client projects. They also devote a large portion of R&D funds directly to these projects. In these cases, profits and losses are blended into the "operating expenses" of each industry practice.

While some in the industry say this type of development is reactive, not proactive, firms like Mercer Management Consulting believe it's a cornerstone to its success. "We believe the future has happened, but has just happened somewhere else," explains Hanna Moukanas, head of Mercer's Strategic Capabilities Group in Boston. "Starting from the outside helps us to better understand the trends happening in the marketplace."
But on-the-job R&D is becoming more difficult as clients demand shorter turnaround times and more deliverables. "Often there isn't time to do anything new, and consulting companies are becoming more risk-averse about being innovative during the consulting process" because it would put those deliverables at risk, says Fiona Czerniawska, founder of Arkimeda, a London-based firm that works closely with consultancies.
So, many firms are turning to clients and other academics to subsidize the funding of R&D projects. In 1995, then–Ernst & Young developed an "adaptive systems theory" that they believed would be important to business. They identified 8–10 businesses in the world and a few academic institutions working in this area. But after more research, Meyer's group determined that the firm didn't have the capability of developing software tools to implement the theory. So Meyer proposed that E&Y start a company with scientist Stuart Kauffman. In 1997, the Bios Group, Inc., was formed in Santa Fe, NM. Clients Ford Motor Co. and Procter & Gamble are now working with Bios on supply chain and marketing applications that will become embedded into CGE&Y's software offerings.

In this case, the pure research was done by Bios, and development was done by the clients.
"In the professional services business, anything that detracts from direct billability of professionals is hard to justify. So, if the idea is good enough, a client should be ready to fund its development at least to some extent. So, R&D really becomes shared development with the client. That's the dominant model," Meyer explains.
"Pure" research efforts can be found in tiny, specialized groups at a few of the largest consultancies, such as Accenture's Institute for Strategic Change in Cambridge, MA.
These groups are classified as "overhead" by the firms, and their projects could take three to five years to develop into a methodology or application that can be used by clients. So partners focused on the bottom line devote the smallest portion of their budget to pure R&D projects.

Investment Strategies

Many firms find it difficult to decide what to invest in. "They're afraid of locking themselves out of emerging markets by being perceived as focusing on too [many] small sectors," says Czerniawska. Instead, they invest small amounts in many different projects without any overall sense of strategy investment, she adds.

Deloitte Consulting holds occasional contests among its employees for their wildest innovations. Its most recent contest brought in 176 ideas, which were whittled down to three competitive teams that compete for a $10,000 prize.
CGE&Y holds low-cost brainstorming meetings with academics, clients, and researchers about an underdeveloped topic like "emotion in business" or "pattern recognition in business."
Firms that have decided what to invest in face a different issue — how to prevent their investment from becoming a white elephant, according to Czerniawska. Firms typically make an investment decision and establish a dedicated team to develop the methodologies or tools, but then have problems integrating the output back into the mainstream consulting practice.
"What's lacking is an established and accepted process by which products are developed by one group, and then taken to market by another group. It goes back to the idea that the professional is the only person who can sell his or her services," she says.
Sommer remembers similar frustrations while a partner at then–Andersen Consulting. "I would be frustrated by technology projects driven by technology personnel without the kind of focus and teams to make things commercially explode. A [research-only] operation in and of itself has no value."

Measuring Profitability

"When you traffic in the currency of ideas, it's difficult to find an audit trail," says Accenture's Ferguson, adding that there are no real R&D failures. Today's fizzle is tomorrow's fodder for the next project. "A good idea always gets improved on by someone else. Then, guess what? It's their idea." This makes accountability for innovations nearly impossible, he adds.

In the last decade, consulting firms can point to a handful of major successes that had their roots in fledgling R&D projects. Business-process reengineering, knowledge management, and repeatable solutions have all been widely adopted.
BPR pioneer Tom Davenport remembers that "that kind of huge hit really legitimized the concept of thought leadership and R&D for a large group of partners" at Ernst & Young. Now the leader of Accenture's Institute for Strategic Change, Davenport expects the same big things for Accenture. "While there is a basic belief [here] that R&D is important, it really hasn't been that huge a hit for us."
But there are hundreds of ideas that have fizzled or wait to be dusted off for another time, another audience.
Deloitte Consulting's Stephen Sprinkle, global director of strategy, innovation, and eminence, recalls one near-miss: his group's "strategic enterprise management" project. The solution was supposed to help clients define their business strategy and metrics at varying levels of detail and create an electronic set of dashboards using computer technology to measure projects against several internal objectives and external indicators, such as inventory terms, customer orders, returns, warranties, and market share. "It didn't sell as much as we thought. If it had, it would've been a competitive advantage for us."

Sprinkle chalked up the setback to bad timing. "We were bringing that out at about the time that e-business was taking off. That's what got management's attention." He maintains that the project will be reintroduced later.

The Intangibles

Though big hits are hard to come by, research leaders agree that there are plenty of intangible benefits to R&D.
Some believe that leading-edge ideas attract high-caliber talent. But consultancy researchers have to be prepared for the stigma of the job. "When I'm hiring, I tell [candidates] there will be people who are constantly telling you, 'You make no measurable impact.' If that's going to bother you, you should probably be working somewhere else," says CGE&Y's Meyer.
There's also the public relations role of R&D — bleeding-edge technology innovations often make the mainstream press and present the consulting firm as a leader in the field.
Most important, bringing leading-edge research back into the practice keeps clients engaged. "On a tactical basis, we're producing first and foremost points of view that give clients a new perspective," says Mercer's Moukanas.

Streamlining

Some industry-watchers contend that R&D decisions could be better made by centralizing and combining overlapping efforts within each firm.
"There could be a lot more synergy in these investments," says Michele Cantara, analyst at Gartner Dataquest. "I don't think that consulting companies are really optimizing their investments in this space. Sometimes, there's duplication of effort and people don't know about it. A certain level of intercompany competition is good — you get the survival-of-the-fittest approach. But that's an informed-decision approach, not 'I didn't know there were competing solution sets.'"

As part of its new strategy to commercialize R&D opportunities, Accenture is combining efforts for some of its projects — like mobile commerce. Davenport's Institute for Business Innovation was exploring usability issues around specific mobile applications to understand how quickly people will actually use the technology regardless of its capabilities. Halfway across the country, Ferguson's Technology Research Center in Northbrook, IL, was working on Mobile Personal Identity applications that instantly monitor and identify individuals who are, for example, arriving at an airport for a flight, or checking into a hotel. The two groups decided that both efforts could be supplemented by the other's work.
But some researchers say centralization is not a good idea. "Everything we've learned about business in the last five years says that you spend more time and money streamlining things than you gain in efficiency," says CGE&Y's Meyer. "Diversity is your friend when it comes to innovation."
Deloitte's Sprinkle says that research overlaps are helpful because they address different market groups. "There are differences in the needs of our largest multinational clients compared to the small to midsize clients," he explains. Research done for the midsize audience streamlines it with focuses on simpler, more cost-effective methods.

Going Forward

To survive in a fast-moving business climate, Czerniawska says that consulting firms must look for external sources of ideas, such as business schools and academic research centers. This may even evolve into firms outsourcing their R&D. She also speculates that the consulting industry will split into two branches — those that innovate and those who become "implementation channels" for innovation.
In the short term, Accenture sees an even greater role for its R&D groups now that commercialization of new products is part of the firm's core strategy. "Today, if we built a brand as powerful [as BargainFinder], we would pursue taking that into a business and capitalizing on the brand," Ferguson says. "We'll have real, hard dollars to point to."

Sidebar: Arthur D. Little Takes R&D to Market

Arthur D. Little, Inc., believes it has found the missing link between research and development and commercial viability. Behind the unassuming doors of its Technology & Innovation Center in Cambridge, MA, and at a similar operation in Cambridge, England, some 600 Ph.D.'s and other scientists ponder heady topics such as fuel cell applications; single-chip, shortwave radio technology; and methodologies for determining the monetary value of intellectual property.
Getting those concepts from the drawing board to a client's doorstep is a challenging task that the firm is determined to address.
"If you really want to have good science, you need to have people directing that science who understand the potential commercial value. So, when you come across a discovery or strategic direction, you're able to guide it in a way that strategically makes sense within an industry context," explains John Collins, ADL's senior vice president and managing director of the technology and innovation group.
So, the group has created a three-pronged organizational structure for all R&D projects. The technology development group creates new science-based technologies to address strategic imperatives. When R&D projects are in conjunction with a client, the technology-based consulting group helps clients leverage the new technology and make business decisions to develop it further. Finally, the product and process development staff identifies the commercial viability of these new products and services and helps bring them to market. As of today, this method has spawned nearly a dozen joint ventures and spin-off organizations.'

Nuvera Fuel Cells, for example, is a joint venture formed in 2000 from the merger of ADL's Epyx fuel cell business and DeNora Fuel Cells of Milan, Italy. The company is creating ways to convert hydrocarbons to electricity. The fuel processing technology, which ADL brought to the table, was hatched 10 years ago in a study it did for the Department of Energy on the future of fuel cell technology.
"It was clear at the time that fuel cells had a tremendous future, but commercially could never get going if they required hydrogen gas stations," Collins recalled. ADL identified the issues that would need to be resolved to make fuel cell technology commercially viable, and went back to the DOE, which funded further research. Today, the new venture is bringing fuel cell applications closer to reality.
ADL brought similar go-to-market skills to a project with Dow Chemical Co. in the late '90s. ADL and Dow developed a methodology for determining the monetary value of intellectual property — a process that consumed valuable time during contract negotiations with clients. The methodology, called Techfactor, is now successfully used at Dow. ADL also codified the methodology in software and is adding a free, "light" version of the software on its Web site. If the prospective customer wants a broader perspective on intellectual property, they can hire ADL for a fee.
Collins says that the company's research and development approach helps weed out unpromising research early on and improves the odds for profitability. "Having those three combinations helps us [and our clients] place our bets on technology much more efficiently."

Sidebar: Power Points

• Certain observers believe the amount of "pure research" being conducted at most consulting firms is very low and the current economic imperative is to re-use work already in development.

• As the trend moves from individual innovation to shared R&D, firms are looking to fund R&D alliances with clients and academics.

• Some industry-watchers contend that R&D decisions could be better made by centralizing and combining overlapping efforts within each firm.