You have to spend money to make money

Reluctance to invest in innovation could threaten companies’ competitive advantage. Sally Flood reports on the quandary facing UK businesses.

Corporate research and development (R&D) into new technologies has an impressive history. Researchers at Lucent Technologies’ Bell Labs came up with a range of inventions, from lasers and Unix to the first voice over IP network.

Meanwhile, it was technology researchers at the Ford Motor Company who developed everything from gasoline to the first automatically inflating airbags.

But despite such successes, spending on research and development by businesses has never been lower.

A recent survey conducted by the European Commission found that Europe’s R&D spending has been declining since 2000, standing at just 1.9 per cent of GDP – almost half the rate that is devoted to R&D in China.

The figure does not surprise Dan Shillum, head of IT at Vismedia, a photo agency that provides online images for newspapers and magazines.

‘Our business relies on us being able to offer and support cutting-edge technologies in multimedia, digital film and the internet, but we don’t have the time or resources to investigate those things ourselves,’ he says.

‘We try to keep track of developments by reading relevant trade papers, but to some extent we rely on vendors to test stuff for us.’

One reason for the decline in R&D spending is that most European companies are focusing on cutting IT investment, says Nicholas Moch, principal consultant at service provider Capgemini.

‘Companies aren’t really investing in innovation or research because they are trying to control costs,’ he says.

But he fears that such an approach could lead to problems in the long term.

‘The risk is that, by failing to innovate, you lose the longer-term competitive race,’ he says.

Controlling costs is not the only reason for companies’ lack of innovation investment.

A recent survey of the 1,000 biggest corporate R&D spenders by consultant BoozAllen found no definitive link between research spending and overall corporate performance.

So if there is no guarantee that R&D will pay off, then why bother?

Navi Radjou, vice president at analyst Forrester Research, says this is a question that every chief information officer (CIO) should be asking.

Many corporate R&D projects are ineffective because they rely on poorly managed projects that are not aligned with wider business targets.

‘There is a growing scepticism in the business community, where R&D is seen as akin to throwing money into a black hole,’ he says.

But Radjou points out that investing in research does not have to mean building your own labs and hiring dozens of boffins.

‘For most companies, it makes more sense to partner a company such as Accenture or IBM that can do the inventing for you,’ he says.

‘You are accessing all their brain power, and they will also help you to implement the technology or applications that you have developed with them.’

Researchers at Accenture’s Technology Labs in the south of France are drawn from universities and businesses all over the world, and are dedicated to finding business applications for cutting-edge technologies.

Michael Redding, global director of development at the labs, says internal R &D departments cannot realistically match the breadth or expertise that his organisation can offer.

‘Working with us you gain efficiency and effectiveness,’ he says. ‘We have already scoured every industry, to see where the technology is used, where it is effective, and who the key vendors are.’

Accenture’s lab is focusing on developing business applications for emerging technologies, such as intelligent devices, data analytic tools, human computer interaction and systems integration. One project recently completed with a UK retailer involved fitting radio frequency identification (RFID) tags into products on shelves and using intelligent CCTV cameras to track shoppers, and what items they picked up and discarded.

Data analysis then allowed the company to position the most profitable products in high-traffic areas in stores, and identify areas that needed improvement.

So companies are beginning to benefit from the innovative work being undertaken at research labs. But Steve Prentice, chief of research at analyst Gartner, says a more common alternative is to work with a technology supplier.

‘Virtually all the big research projects in the technology sector are now being done by IT vendors,’ he says.

‘It makes sense that if a vendor has been pushing a new technology and you want to find out if it could benefit your business, you go and ask Cisco or Intel or BT.’

As well as having deep pockets and plenty of in-house expertise, technology vendors are often in a good position to promote innovation.

Oracle, for example, works with corporate finance house Icon Ventures to identify promising technology start-ups.

These young companies are then given support by Oracle consultants, who can help them to develop cutting-edge technologies for large customers.

The aim is to give companies the credibility of a well-known partner, and expertise from a leading technology player.

In return, Oracle takes a fee once the companies it has helped have a commercial product on the market.

But despite the challenges, some non-IT companies are still investing in IT R &D.

In Europe, both Philips and Reuters run substantial innovation programmes. BP and Exxon Mobil have IT R&D schemes, while BT runs a CIO-led programme for research.

BT’s corporate incubator, Brightstar, was set up almost a decade ago to develop new technologies, and focuses on areas such as Web 2.0, surveillance, pervasive information and communication technology, biometrics and networking.

A successful R&D programme needs to deliver several things, says Forrester’s Radjou.

First, it must be focused on technologies and market opportunities that are allied to the wider business goals.

Second, it must combine short-term projects with long-term ones, with resources distributed equally across different areas of the organisation.

Finally, researchers must make sure that they communicate the value of their projects effectively.

‘There is a tendency for researchers to throw their innovations over the wall and not take credit for them,’ says Radjou.

In the case of large organisations, Gartner’s Prentice says CIOs with responsibility for R&D in the IT department must take a portfolio approach.

‘Look at segmenting technologies into those with short- and long-term returns, and make sure you always combine long-term projects with some short-term, low-hanging fruit,’ he says.

For example, although companies may get a quick benefit from technologies such as RFID or biometrics, the benefits of quantum computing or nanotechnology may not be seen for more than 20 years.

Done well, a portfolio of R&D can deliver enormous value to the business. Corporate financier NVP has advised companies such as Lucent, BT and Philips on how to spin out successful research projects into separate companies.

One of NVP’s most successful projects was the 2003 spin-out from BT of Azure, now the world’s largest revenue assurance company.

‘Every company has the potential to be innovative,’ says Harry Berry, a partner with NVP. ‘The secret is in creating a culture in which engineers are valued, and their contribution to the business is tracked and supported.’

Berry argues that many R&D projects fail because they aren’t aligned with the objectives of business leaders, or are not phrased in terms that convey how they could be aligned with those objectives.

‘My advice is not to think about R&D in terms of technology at all, but to look at un-met business needs,’ says Berry.

‘So you might want to develop a new business model to mature the business, and technology is just one way of doing that.’

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Case study: Google

Five months ago, Google made the decision to open a new research and development (R&D) office in London.

‘Innovation is very much our lifeblood,’ says Rian Liebenberg, Google’s European IT director. ‘Every product we have today – with the exception of a couple of technologies we have acquired – has come out of the R&D centres.’

The company hopes that the new centre, known internally as the Googleplex, will be filled with Europe’s brightest engineers and computer scientists, developing business models and market opportunities.

Although the staff will have a wide remit, Google hopes that the centre will specialise in wireless and mobile platforms, an area in which European engineers have traditionally had a lead on the US.

Shannon Maher, the lead engineer at Googleplex, says London has the best wireless expertise in the world, and is a key area of development for the organisation.

‘The shift in data to mobile devices changes everything, from the type of data being gathered to how it is acquired, organised and accessed,’ he says.

The UK is generally seen as a positive place to do research, thanks to a healthy academic community, says Liebenberg.

‘The UK scores highly in terms of universities, the number of computer science graduates and the level of its postgraduate degrees,’ he says.

To maintain a high level of innovation, it is vital that Google creates the right culture across the company. And Maher says the organisation is built for innovation.

‘We are very choosy about who we hire and how we work. Politics is frowned upon, we have continuous movement of people, we keep teams small and self-organising and encourage measurable results,’ he says.

Google has created a policy where all employees, inside and outside IT, are encouraged to devote 20 per cent of their time to working on new ideas.

Liebenberg says employees can come up with any ideas, even if they are not related to existing products or their job.

One successful project to come out of the so-called ’20 per cent initiative’ was Google News.

Once ideas are generated, staff are encouraged to share them through the intranet and other forums.

If two ideas are similar and show promise, employees are encouraged to collaborate and develop the idea further.

‘At this point, the labs will become involved and track the project and help formalise the research,’ says Liebenberg.

But Google’s strategy does not completely rely on internal R&D; where outside knowledge is richer, Google partners universities and businesses.

For example, the company works closely with telecoms specialist Vodafone on developing search products for mobile phones.

Liebenberg says Google is also negotiating with several universities to set up joint research initiatives.

‘We don’t pretend to have all the answers,’ he says. ‘Sometimes it’s smarter to ask someone else.’

Case study: Philips

Consumer electronics giant Philips is one of Europe’s biggest spenders on research and development (R&D) – investment currently stands at about 10 per cent of sales.

Much of that is ploughed into HomeLab, the company’s dedicated R&D facility in Eindhoven, in The Netherlands.

Created in 2003 to test and develop technology prototypes for internal and external use, HomeLab is designed to look like a regular home and office.

Temporary ‘residents’ stay in the lab for anywhere from four hours to two weeks, depending on the type of research being conducted. In the lab, 34 CCTV cameras observe how people interact with new technology prototypes.

Such research is essential in speeding up the time-to-market for new products, says Chris Winter, a partner at HomeLab.

‘I think it is important that companies create time for innovation because it is extremely difficult to fit research into your day job if you’re focused on meeting the immediate needs,’ he says.

Overall, the aim of HomeLab is to create what Philips calls an ‘ambient intelligence’, which is defined as a world in which electronics are sensitive to people’s needs, personalised to their requirements, and can anticipate their behaviour and respond to their presence – signifying a real improvement in everyday life.

One of the most recent innovations tested at HomeLab is ‘electro-wetting’ technology: a way of creating full-colour, highly reflective displays for mobile applications such as PDAs, mobile phones and video cameras without the need for a backlight.

‘Potentially, it means you can watch TV on a mobile device in any conditions, and using far less battery power than with current devices,’ says Winter. ‘I think it could easily be a billion-dollar market.’

Since Philips does not specialise in display technology, the decision was made to spin out this part of the lab into a separate company, Liquavista. This was done with the assistance of corporate finance company NVP, which has advised Philips on a number of spin-off ventures in Europe from the company’s R&D labs.

Winter, too, has extensive experience of developing spin-offs. He was formerly chief technology officer of BT’s corporate incubator Brightstar, and now sits on the board of Liquavista.

‘Corporate spin-offs have an inbuilt advantage because they tend to be better capitalised, find it easier to win customers, and benefit from the expertise of the parent company,’ he says.

‘At the same time, the parent company benefits because it can maintain a stake in the new venture but remain focused on its core business.’

In other areas, Philips has partnered with third parties on R&D projects, such as a recent deal with UK start-up Innos to collaborate on nanotechnology research. The company also works with Motorola on mobile technology developments.

Expert view

From our experience, investing in innovation will always achieve a better return than cutting the same amount from an IT budget. In fact, people who have focused on cutting costs over the last couple of years by offshoring, for example, have mostly not seen the savings they expected.
Nicholas Moch, principal consultant, Capgemini Consulting

Today, 75 per cent of IT’s resources are focused on just keeping heads above water. Going away and thinking deep thoughts is a luxury that most IT directors can’t even imagine.
Steve Prentice, chief of research, Gartner

Until the researchers and business people both speak the same language, you’re not going to come up with any kind of useful innovation.
Harry Berry, partner, NVP

Having R&D in your IT department only makes sense if can anticipate what the business needs and proactively propose new solutions and business models. Otherwise, whatever you invent won’t be seen as valuable, because you don’t have credibility.
Navi Radjou, vice president, Forrester Research

The value of R&D is that it helps you to see what is coming down the line. Take the move from regular to digital photography: that happened virtually overnight, but R&D by our vendors ensured that we were ready. The pace of change in technology is relentless, but to survive you have to keep one step ahead.
Dan Shillum, head of IT, Vismedia

We believe that innovation is the single most important attribute to bring to the market, and nowhere is this more true than in mobile, which is a rapidly evolving set of technologies, with obvious latent demand that has resisted being captured – at least to date.
Shannon Maher, lead engineer, Google

Innovation is absolutely critical to your survival. Every company operates in a competitive market, and if you aren’t innovating, your competition almost certainly is. You could wait until the product is shrink-wrapped and on the market, but can you afford to?
Michael Redding, global director of development, Accenture Technology Labs