5 minute read 1 Jul 2016
A scientist with a beaker

How advanced manufacturing companies must scrutinize their R&D efforts

Authors

Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Passionate about manufacturing, mobility and disruption. Champion for women and diversity & inclusiveness in the Advanced Manufacturing & Mobility industries.

Anil Valsan

EY Global Automotive & Transportation Lead Analyst

Thought leader in automotive and transportation. Strong proponent of diversity and inclusiveness. Social business coach.

5 minute read 1 Jul 2016

Effective project and portfolio management is critical to addressing a vast number of challenges. Here are some questions to ask yourself.

In the quest for innovation and competitive advantage, the primary enabler is research and development (R&D) spending. Even the most efficient operations-oriented enterprises realize that cost reduction has its limits and must be balanced by the need for new products, services and innovative ways of working.

While there may be increased levels of R&D spending across businesses, those investments aren’t always productive. In fact, a study involving over 10,000 analyses of R&D spending across the 1,000 largest R&D spenders found no statistical correlation between R&D spend and sales growth, gross profit growth, operating profit growth, operating margin, net profit growth, net margin, market cap growth or total shareholder return.1

Although effective project and portfolio management is critical to R&D investment results, it often is not performed well. Over a five-year period ending in 2016, an annual survey of project management practitioners and executives found that two-thirds of projects did not meet original goals/business intent, one-half were not completed within the original budget and one-half were not completed within the original schedule, and 15% of projects were deemed to be a failure.2

Here is a look across different types of challenges and questions to consider to improve return on investment.

Challenges in defining, developing and valuing R&D investment projects

  • Physicals-based estimating and target setting
    Some projects are estimated top down, some are bottom up, and others are some combination of both. Often the actual timing of expenditures is misaligned with the estimates or the total cost magnitude is significantly off or both. Is project estimate accuracy regularly measured? How accurate are project estimates?
  • Investment valuation management
    Establishing and enforcing standard benefit valuation processes, models and methods is crucial, but so is the determination of the input assumptions. How thoroughly and consistently are both the costs and the benefits associated with investment projects determined? Are costs and benefits regularly revisited on major in-flight projects?
  • Change management
    Changes supporting establishment of new portfolio items or changes to an existing portfolio must follow a workflow with predetermined reviews and approvals in order for a capital allocation process to be adequately controlled. How difficult is it to understand and explain the changes from period to period?
  • Continuously improving estimating and program execution
    Establishing a process that examines, analyzes and corrects for the variations between estimated and actual results is key to improving R&D execution and ultimately the allocation of future investments. Do you perform a process to close the loop and continuously examine, analyze and modify the estimating models used for estimating R&D projects?
Integration and coordination of the processes and information throughout the full investment life cycle leads to better investment decisions and management.
Bart Huthwaite,
Advisory, Performance Improvement, Ernst & Young LLP

Challenges in managing the R&D investment portfolio

  • Inconsistent development and understanding of investment information
    Many organizations continue to struggle with R&D investment environments that are managed largely via spreadsheets, email and a variety of inconsistent policies and processes that are used to support R&D investment management. What changes would need to be made to processes and systems to eliminate the major information accuracy error states?
  • Global consistency and standardization
    Capital project planning, estimating and execution for large organizations are often globally dispersed. With this geographic distribution typically comes significant variation in policies, processes, tools and methods. How geographically distributed is capital allocation management in your organization?
  • Concurrent planning and execution
    Effective R&D investment management should include an ability to support long-range planning while simultaneously incorporating the forecasts and actuals from ongoing programs. How often are your long-range plans updated? Do they systematically incorporate actual and forecast updates from ongoing programs?
  • Resource management
    Inconsistency and inaccuracy of actual time reporting results in an inability to understand where resources are deployed and what they are really doing. Is chargeable or productive resource utilization regularly measured? What is the overall chargeable or productive resource utilization, and how has it been trending?
A key question at many companies is, ‘How can we better leverage our resources?’ That can’t be answered without a unified way of tracking employees’ skill sets and project staffing.
Rose Martin,
Advisory, Performance Improvement, Ernst & Young LLP

Challenges in forecasting, reporting, analyzing and making decisions

  • Spending forecast accuracy
    Many enterprises often significantly miss the timing or overall magnitude of their planned spending levels for major projects, resulting in projects that are not funded, projects that are canceled, resources that are suboptimally deployed and other inefficiencies. What process and information management changes would be needed to drive improvement?
  • Accurate and timely analytical insights
    The holy grail of capital investment management is an ability to consistently and efficiently convert data into information, actionable insights and decisions.
    What types of business drivers or insights are you currently unable or challenged to produce with your current process, tools and organizational structure?
  • Decision support vs. transaction management
    As the size of the portfolio increases, typically the level of effort required to monitor and forecast spending also increases. What capabilities and capacities exist to provide decision support so that the effectiveness of the capital investment portfolio is thoroughly evaluated on a regular basis?
Financials are merely outcomes, not explanations. The stronger the connection to operations, the more effectively organizations are able to leverage key business drivers to improve planning, forecasting and decision-making.
Rose Martin,
Advisory, Performance Improvement, Ernst & Young LLP
  • Show article references

    1. Strategy & 2015 Global Innovation 1000 analysis, Bloomberg data, Capital IQ data.
    2. Project Management Institute, “Pulse of the Profession, 8th Global Project Management Survey,” 2016.

Summary

Planning and forecasting must be taken seriously in R&D projects to drive success of the initiative, and that requires awareness into the complexity of your operations and where hurdles could develop.

About this article

Authors

Randall Miller

EY Global Advanced Manufacturing & Mobility Leader

Passionate about manufacturing, mobility and disruption. Champion for women and diversity & inclusiveness in the Advanced Manufacturing & Mobility industries.

Anil Valsan

EY Global Automotive & Transportation Lead Analyst

Thought leader in automotive and transportation. Strong proponent of diversity and inclusiveness. Social business coach.