New Product Development. 9 steps in setting an R&D budget

Mar 18, 2015

New Product Development

New Product Development (NPD) is a huge subject and one that is absolutely essential to the survival and growth of any company providing a product or service.


One of the most important functions of an NPD process is that of R&D. In-house or outsourced R&D can have a significant impact on the success of a company’s growth strategy through innovation and plays a significant role in getting new products into and through the NPD cycle.


Understand your market.

R&D is an exercise in fully understanding the marketplace in which you compete. To create a budget you first need to know where your markets are going. Generally speaking, this five year view looks back over three years and focusses intently on where markets are going over the next two years.


This analysis helps to understand the ‘big picture’ and what is happening to core technologies, the marketplace and what new technologies are impacting upon your particular markets.


New Product Development Goals

Define your strategic goals.

Whilst researching your overall market position, you should also define the specific strategic goals of the R&D output.  This helps inform other parts of the business where you are, where you want to go and how you want to get there.


This can take the form of a ‘mission statement’ or a five year plan, if you want to set the stage for a strategy to substantially extend your organisations capability.


Know your capabilities.

To create an efficient budget plan you must understand your company’s abilities and resources. Underestimation can lead to an inefficient use of resources, but overestimation can be catastrophic to the successful completion of projects, meeting revenue and profit targets.


Some businesses perform annual audits of their R&D capabilities to accomplish this and assist in the budgeting process. If your review reveals shortcomings in capability or that it is not possible to utilise your existing resource efficiently, then outsourcing your R&D may be an alternative resourcing option.


Include partnerships.

Whilst creating an R&D budget for your business is fairly well understood and straightforward, it is rare that no external resources are required at all.


Integrating the legal, technological and IP ownership complexities of an alliance, collaboration or partnership can easily complicate an otherwise controllable budget plan. They must be included however; otherwise the plan will certainly fail as projects progress.


Plan for contingencies.

Budgets are always an estimation of costs, based on experience and guesswork. Therefore, it is likely that the budgets may have been either under or over estimated.


Although it is always the objective to submit a ‘realistic’ budget, it is prudent to include a contingency fund which is generally based upon historic norms. Depending on these experiences, contingencies can sometimes be as much as 20% of an overall R&D budget.


Use forecasting models when possible.

All forecasting models have strengths and weaknesses. One-year projections generally have a high reliability, but the reliability of five year views are generally low. With the rapid change of technologies and markets, the assumptions included in these models can quickly become out of date.


Link R&D to revenue growth. Expenditure on R&D projects is rarely confined to one fiscal year and it can be a number of years before a new product is finally manufactured. By breaking down the R&D budget into product related investment streams, the link between revenue growth and R&D spend can be modelled.


Bring in the experts.

All R&D budgets go through a number of refinements. Do not forget to bring in the staff that will be involved in the project to get the finer details of what will be involved and required.


This information can be used to create a database of the budget information capabilities, resources, models, personnel, experts, etc. This provides managers the ability to continuously fine tune the budget at it goes through subsequent iterations.


New Product Development Funding

Consider the sources of funding.

As companies grow and evolve over time or change their planning processes, so the provider of funds for an R&D project can change. These changes can take time but the way the structure of the budgeting process is performed can alter.


Sometimes the process may be to create or take advantage of new technologies, at other times it may be to support individual business units with next-generation products to help win increased market share. It is rare that the strategic goals remain the same through these changes.


Make sure your model fits your needs.

How you budget your R&D and how it is split into individual components should be set up in a way that best fits your company's needs; do not force fit your requirements into someone else's general model.


For example, you may want to split your budget into three categories; people, facilities and equipment. Or it may fit your needs better to split along fixed people costs, project costs and variable costs. Whichever way you do it, make sure it suits your business and not try to squeeze it into another organisations model.


One final point. Do not offset R&D expenditure against Marketing and Product Launch (see last week’s post), this must instead be offset against projected sales and overall company budgets.


This is the fourth in a series of articles on NPD. Previous articles can be found here Keep visiting for our next NPD article which will be appearing here shortly.

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