Assessing the Pay-Off of R&D

Challenges Facing Businesses and Government Funded Organizations
Dave Tyrrell and Gary Floyd, Vertex Intellectual Property Strategies Inc.

Many businesses make significant investments in R&D and a large number have their own R&D operation and staff. In general, these R&D activities can be classified in two ways. First, there is basic research aimed at the discovery of break-through pre-competitive technologies. This type of R&D is focused on discovering a new material or developing a new process. Then there is the other classification in which the major emphasis is on the development of existing technologies into useful products that can be offered in the marketplace.

The larger companies are those typically performing fundamental research, and they often have large research centers, often employing hundreds of researchers. These businesses recognize that R&D activities are high risk and anticipate many failed projects before they achieve the "home-run". The frequency of success will vary, and will generally be quite low. However, lets compare this to baseball. Remember that when Mark McGwire comes to bat, he is expected to hit a home-run only one of eight at bats, but he is considered to be one of the most successful players in the game.

Many businesses, including smaller operations, perform product development work. This entails the adaptation of the pre-competitive or base technology into a useful commercial products or the refining of existing products to meet a specific industry need. This type of work is has a much lower risk and is generally expected to be successful when an adequate budget and time is provided to a competent well-equipped R&D group. Continuing with our sports analogy, this is more like the basketball player, who when stepping to the foul line, is expected to score 80% of the time.

Businesses are constantly faced with the challenge of assessing the return on their investments in both types of R&D. This assessment can be a daunting task, because the financial benefits from the application of the results of the R&D require the calculation of the present value of projected future pay-offs. Included in this calculation are components such as future earnings generated from new products, reduced production costs, improved product quality and licensing potential.

By having an effective mechanism in place to assess the benefits of R&D expenditures, businesses are in a better position to develop effective R&D strategies. The calculation of return on R&D investments becomes more complex in situations where the government contributes funds to the technology development work. Now in addition to the financial factors described previously, items such as the creation of jobs, improvement of the environment and expanding and disseminating knowledge need to be considered and evaluated. The ability to specify all financial contributions resulting from past technology development and commercialization projects is vital in the structuring and funding of future programs.

Recognizing this need for both industry and government organizations, Vertex Intellectual Property Strategies has developed the VTV AnalysisTM model. This tool is designed to identify both the social benefits and projected financial paybacks from industrial R&D funding, industry consortia technology deployment projects, as well as government and government agency funded technology commercialization initiatives.

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