Innovation would seem by default to require research and development. But R&D is increasingly under fire for being unpredictable at "delivering" business gains. Does making R&D predictable become a prerequisite for innovation's "creativity"?

1. ©2015 Malcolm Ryder / Archestra Research
MAKING R&D COUNT
McKinsey Quarterly's April 2015 article on productivity -- Brightening the black box of R&D -- tackles the
anxiety that comes with deciding whether R&D is a "good investment". It is offers “An all-in-one,
one-for-all formula to determine R&D’s productivity can help companies see how well the function is
performing.”
Written by Eric Hannon, Sander Smits, and Florian Weig, the article is worth multiple readings, but a
single reading might feel sufficient. Its intent is to show a new simplified calculation for any R&D effort
that is easy to remember and generates one number that can serve as a rating. That allows different
R&D efforts to be compared directly to each other based on their ratings.
The calculation derives from a certain way of describing what R&D "does". Along the way it carefully
introduces the idea that R&D projects "mature" their deliverables in externally evident ways.
This outline sketches a paraphrasing of several of the ideas that are affirmations or
near-recommendations gleaned from the article, highlighting key words.
 Purpose of R&D -- designing and maturing the products that the strategy and marketing
functions conceive
 Management intent -- optimize cost of new product development
 Quantify accomplishments
 Develop product that is valuable to customers
 Make, and credit, R&D "responsible for delivering" mature product
 Conduct development with good performance
 Performance is an outcome
 Base performance on "internal practices"
 Practices are, in effect, inputs.
 Use practices to "mature" (complete) product development cycle at efficient rate of
consumption for amount of time used
I strongly recommend reading the McKinsey article for yourself and extracting your own outline of how
the featured calculation comes to make sense.

2. ©2015 Malcolm Ryder / Archestra Research
However, the featured metric is not carved in stone; it is offered especially because it avoids several
problems that have lingered in prior formulas. This leaves room for ongoing thought and more iterations
from McKinsey or from yourself, which could result in a different metric.
In fact, my view is that despite the new formula, or even because of the way the formula is detailed,
there are four important ways that those problems will continue. All four stem from terminology:
 using "project" as a cost unit instead of as an organizational unit
 saying "productivity" instead of saying "efficiency of production"
 saying "delivery" instead of "operation"
 and, the cost of inputs versus the worth of outputs is not "productivity". It is ROI.
The next "normal" of business environments features continual, open source, recombinant
configuration and invention by which cultural, digital and knowledge influences affect markets, laws
and property.
It is unlikely that new formulas will be able to handle the flow and capture of economic impacts without
the basis of more accurate description -- as sampled further below.
It begins with a simple observation: research is not the same as development. For example, it is
necessary to understand research inputs separately from development inputs in order to recognize the
function of their co-operation. And other key points flow from there.
RESEARCH
The purpose of research is to discover conditions and methods that create viable opportunities. A viable
opportunity is one that has a logically projected sustainability and lifespan that is useful.
The responsibility for identifying opportunities belongs with analysts. Analysts are domain experts who
track and interpret existing and imminent conditions in designated fields.
Research is a competency practiced as an operation that is provided as a service. Research is not a
project.
When management imposes timeframes on research, the timeframe makes research into an exercise.
Most research exercises can be recognized in the form of either assessments or evaluations.

3. ©2015 Malcolm Ryder / Archestra Research
DEVELOPMENT
The purpose of development is to convert viable opportunities into feasible assets. A feasible asset is
one that can be used in an expected and practical way to generate some anticipated worth.
The responsibility for setting expectations of feasibility belongs with the business unit. The business unit
must define why assets of a certain type are going to be reliable means of generating financial gain. The
business unit must define the logically necessary attributes of the asset.
Development is a method that utilizes relevant compositional techniques to produce the required asset.
Therefore the correct way to identify it is as a production.
Management, however, imposes certain constraints on the production as a way to establish accounting.
Production is the framework that allows management to align the organization to the projected worth
of the development output. The true basis of the interest in the production accounting is twofold. One
aspect is about validating the organization itself as a preferred resource. The other aspect is about the
possibility that the asset development is a repeatable process correlating very highly with generating
the projected worth with the asset. The business ambition, whether implicit or explicit, is to find the
optimal match of resource to process for recurring asset development.
PRODUCTIVITY, PERFORMANCE, and VALUE
The single most challenging issue that business has with R&D is uncertainty during timespans. Time
exerts tremendous pressure on the business because opportunity comes and goes with the passage of
time.
If a business could afford to expand the scale and scope of its R&D widely enough, it could pursue
multiple avenues simultaneously in hopes that success with one of them would pay off the expense of
the others. Of course, we recognize this exact tactic with the prosecution of a typical venture capital
investment portfolio, but we don't need that much drama to embrace the proven wisdom of portfolio
diversification.
The portfolio is the key instrument for managing uncertainty with accountability during timeframes.
Pursuit of the various "avenues" in the portfolio is supported with assets. To populate the portfolio with
assets, each asset has a strategic objective which is a type of benefit generation, not a level. However,
retaining the asset in the portfolio is usually decided by a threshold rate of contribution to defined
benefits, made by using the asset.
A benefit is a desired impact of an asset usage. Benefits in a portfolio are inherently diverse unless
artificially restricted by the portfolio manager's benefit recognition model. This points out that most
accountability efforts are preferential, and not necessarily objective even if they are consistent.

4. ©2015 Malcolm Ryder / Archestra Research
One of the main reasons why preferences are applied to benefit types is because of a limitation on the
amount of investment that can be supplied at any given time. However, this perspective on investment
must recognize that acquiring assets and leveraging them are two separate efforts, and the amount of
potential investment that can be supplied is determined by the type of leverage exploited, more than by
the type of asset.
So again, it turns out that the business unit, not development, is the party that must "perform" by
establishing a beneficial reason and direction of its asset exploitation and correctly articulating the
appropriate asset attributes.
Development likewise has the responsibility to present a plausible asset production plan. There will be a
presumption that the production plan will logically design the generation of the asset to result in the
effort's highest correspondence with the benefit opportunity and the appropriate attributes.
In that way, the correct performance measure to apply to production is a compliance measure -- and it
means, separately, that productivity of the production is really only about the input cost of obtaining a
known output level of compliance. Most of the cost input will immediately be recognizable as three
major production variables: qualified resources, situational risk mitigation, and procedural support.
Without those three things, a production plan is probably irrational.
The next distinction that must be grasped here by management is between the performance of the
production and the value of the production.
RATIONAL PRODUCTION and ROI
A production has two main ways of achieving value. One is as a proof of concept. The other is as a
facilitator of business leverage. This means that the objective of production performance is to achieve
production value.
Production performance presumes that attention to compliance is generating high correlation of activity
effects to value. But performance does not guarantee (cause) value.
An expert production of a bad plan is still a high-performance production. Remarkably -- yet we already
knew this -- great execution does not logically turn a bad plan into a good one. For example, in
development, a bad plan can certainly obscure or degrade the recognition of a concept needing proof or
a facility needing to be provided.
And when we say "compliance", the point is not about asset specifications. Today the velocity and
likelihood of change during production means that initial specifications are under constant pressure of
modification. "Deliverables" is a term that unfortunately tends to dilute sensitivity to value and inject
oversensitivity to specifications. These days, what needs to occur and be measured for impact is the

5. ©2015 Malcolm Ryder / Archestra Research
ability to adapt to changing specifications while sustaining a position of current compliance.
Meanwhile, the usefulness of the value is where business begins to get the type and level of benefit
that it wants.
A production does not use itself; and its level of performance will need to reach a threshold at which the
business wants the achieved degree of value to begin being exploited. When the threshold is met or
exceeded, the business must perform. The threshold must be high enough to offer the value, and low
enough to protect access to opportunity. (Access can be affected by agility, economy, velocity, and other
characteristics that affect alignment with opportunity timespans.)
The productivity of the business represents the efficiency of the business's consumption of resources
that it supplies to define, conserve and execute the use of the production outputs -- versus the
quantified benefit obtained from their usage.
In short,
 There is a cost of enablling production. Then there is a cost of production operation to achieve
production value. Then there is a cost of exploting the leverage offered by the value.
 The business exploits the leverage of the production output. The outcome of that exploitation
is a type and level of benefit.
 The benefit may be quantifiable in terms of its potential financial impact (such as in a
transaction).
 The ratio of the benefit to the allocated expense (cost inputs) of the time-framed research and
development is the Return on Investment.
THE RIGHT PROBLEM
What we know is that research informs development, and that development informs the portfolio.
Management makes decisions on how much, how often, and when their cross-influences occur. So, we
have to understand why managers make the decisions that they do.
If the purpose of R&D is to "provide new products" that provoke business gains, the real anxiety about
R&D is that the effort might fail to drive that desired outcome while it also eliminates some capacity for
trying alternatives that succeed.
Not knowing how to predict success means that the forfeited capacity is not redeemable and that the
used capacity is not cost effective. It also means that the next effort may be no more likely to succeed
than the last.
"Productivity" here is a code word for "certainty". It argues, with or without evidence, that uncertainty

6. ©2015 Malcolm Ryder / Archestra Research
can be logically eliminated within the ability of management to exert influence. So, management is
looking for what to influence, how, when and why. But increasing frequency and diversity of change in
the business
This explains why it is important to recognize the factors that foster uncertainty when they are not
managed. We should think of them not as causes but as clarified prerequisites.
Having a reference model eases the recognition of those factors. This model derives from extensive
observations that were allowed without any artificial pressure to make anyone in particular happy.
Continuing observations, made the same way, can change the model, so this presentation is no more
nor less than "current to date". This model offers a logical description from left to right.
With a reference model available, it is more likely that descriptions of decisions about what
management is doing will be consistent. In that consistency, the additional requirement is a degree of
precision that clarifies what is actually affected by management action and management decisions. The
affected conditions are measures, distinguishable as in the following example glossary.
Overall, the numerous details of the two references above argue against the expectation that
simplification of measures is likely to give a reliable formula.
Generalizing the measures would require reducing the granularity of the precision -- which would seem
to require omitting distinctions that are now visibly fundamental.
And substituting one kind of measure for another would be a mistake. For example, it is apparent that
changes to research are simply not the same as changes to development. Likewise, improvements to
something in development can promote the likelihood of other things in the portfolio becoming
desirable but may not cause that outcome at all.

7. ©2015 Malcolm Ryder / Archestra Research
Put into perspective, productivity is a way of thinking about how the business applies resources to take
responsibility for progress.
But by itself, it plainly falls short in predicting the kind of benefit that is often demanded to "justify"
investment.
More importantly, overall productivity comprises three independent variables; the correlation of
productivity to market success is not about single-number that means "productivity" but instead a 3-D
profile of productivity in research, development, and the portfolio.
REALITY vs. MYTH
Strategy and Marketing are given the responsibility to "conceive" of necessary products (which includes
services as well as goods or other tangibles). What we also should be able to assume is that strategy
also has the responsibility of accounting for the business ability to exploit any leverage that justifies the
production of the products.
"Productive" R&D does not cause business success; it allows business success. The challenge of
prioritizing R&D assignments must allow that productivity only has meaning within the context of the
business capability to tackle business preferences.