R&D ROI: What's It Really Worth?

The accelerating drive toward greater efficiency and effectiveness – not to mention sustainability and ecological friendliness, is throwing an ever tighter spotlight on innovation with each passing year. The days of hurling cash into vaguely defined projects and hoping for the best have given way to a much tighter focus on what you're actually getting for your research and development money. We're paying closer, more results-minded attention to our R&D, treating it less as leap of faith and more as a finely calculated risk. That's a good trend to see taking hold, because tackling risk is what effective R&D management is all about. Innovation, to be fair, is always a dice roll - but those dice can be loaded if you understand the rules of the game.

The nature of innovation

One of the problems with measuring the ROI of your R&D is the nature of innovation itself. Honestly, you won't always know what you'll be getting for your money. Not every project pays off as intended, and many businesses don't even have a firm handle on how much they're actually spending on their R&D. More specifically, a lot of R&D investment simply isn't recognised when the blood's up and the money's flowing, since innovation is so often drowned out in the industrial roar of day-to-day business. If you can't track your R&D costs as they crop up, you'll never have a clear picture of what you're getting from your investment.

Putting a figure on value

The other side of the problem, of course, is that what you're getting isn't always easy to slap a value on anyway. The uncertainty of getting results at all is always a concern, and any direct links between innovation and standard markers like growth and revenue aren't always clear. A lot of the time, the benefits of your R&D projects are better measured against the risks and costs of not investing in them in the first place. It's a mistake, for example, to assume that your business' success (however you're choosing to measure it) would remain static without R&D investment. With innovation woven so tightly into the fabric of many industries that it's virtually invisible, the cost of failing to innovate is likely to be painfully, even dangerously, high. Simple margin erosion would almost certainly take a heavy toll, along with the potentially catastrophic failure to match pace with competitors and market developments.

All that said, if you were looking to put a simple figure on the value of your business' innovations, there's strong evidence to support a return of between 20% and 30%. Now, that simplistic estimate won't tell you anything at all about the broader impact of your R&D projects – the doors they open, the boundaries they push back or potentially even the lives they save. However, measured in terms of “economic outcomes”, they still form a useful benchmark.

How innovation is rewarded

The UK is strong in innovation across all sectors, and a big part of that strength comes from the way that innovation is encouraged and rewarded – particularly for smaller, more agile and dynamic businesses. UKRI, the UK's national R&D funding agency, works with businesses, charities, universities and other organisations to take the risk out of innovation. UKRI's investments already total around £2.5 billion since 2007, giving rise to 70,000 jobs across 8,500 organisations.

Meanwhile, the government's R&D Tax Credits scheme is largest and most generous incentive system of its kind. Innovative SMEs can claim a 230% of their qualifying R&D costs as a tax deduction, or a tax credit of up to 14.5% of their surrenderable losses. Larger firms claiming under the Research and Development Expenditure Credit (RDEC) scheme can qualify for a credit worth 12% of their eligible expenditure. Crucially, in terms of risk reduction, neither R&D tax relief scheme insists that a company's innovations actually pay off in themselves. Even failed projects and loss-making businesses can benefit, as long as the work being done qualifies as R&D. The scheme is about ensuring that innovation investment always brings rewards, rather than simply rewarding success itself.

The big-picture view of all this is that it takes a focused, co-ordinated approach to R&D throughout every level of a business to make the very most from it. Understanding where your qualifying costs and projects lie is the just first step on that road, but it means embedding a comprehensive awareness and appreciation of innovation at the very core of your company.