The Business Case For Research and Development
Authors: Stokes Edward G. 
Published: June 2014

It is possible to demonstrate the value of R&D (Research and Development) through aligning the development of new technologies with portfolio business needs. Furthermore, it is possible to determine the value of individual new technologies in terms of NPV (Net Present Value) and EMV (Expected Monetary Value) as well as the Opportunity Cost of delaying development. Finally, it is possible, based upon comparative assessment, to prioritize technology development timing based upon the amount of value each adds as well as how much it will be applied.

Technology development, better known to the general public as R&D, has always had a hard time demonstrating its value in corporations, especially to senior management. This is particularly true in companies where R&D does not serve as a major source of product creation and future revenue generation. In different types of companies, such as integrated petroleum companies, R&D can prove to be a competitive advantage if it is focused and if significant investment is made over time in new ideas and techniques that later turn into new products and processes. But the willingness to apply this type of focus these days is the exception rather than the rule.

Since the early 1990s, most major integrated petroleum companies have undergone an evergreen restructuring exercise to remove layers of management, consolidate asset portfolios and re-examine where they should invest their money for highest impact. Not too surprisingly, R&D has been one of the areas where severe cutbacks have been made to reduce costs. One of the main reasons has been the difficulty of demonstrating its value to the company. Why is this so? There has not been a dependable way to tie what has been done internally "in the company lab" to the future value and growth of the company. On the other hand, there have been subjective attempts to define the value gained through anecdotal examples. Unfortunately, anecdotes often lead to an easy decision to cut or postpone investment.

During the downsizing many firms undertook, R&D departments went through several cuts in personnel deemed nonessential or who performed tasks that could be easily duplicated outside the company. In some cases, it was true that these companies had overbuilt their research capabilities and that the value provided from them needed to be examined. However, due to low oil prices and pressure on earnings, additional cuts were taken to get the personnel count down to save operating costs. Unfortunately, this action was taken in many cases without a complete understanding of the future technology needs in the asset portfolio. In the end, a large part of these organizations were removed because their size or projects couldn't be monetarily justified. The expectation was that the areas of technology development left within the organization were needed now, while those that would be needed in the future could be obtained outside at the right time.

R&D organizations continue to struggle with fulfilling the strategic need to provide metrics (measurable criteria) for their R&D programs as well as having a reliable method (acceptable to senior management) that shows the potential value of pursuing different types of technologies through their research. Past attempts to do this, by looking backward in time to determine the impact of R&D, have been met with questions of accuracy and questions of value and scope. This has led to confrontations with business units and senior management about who should get credit (operations or R&D) for the application of new technology as well as how significant the technology has been to the company.