The Need to Measure R&D Performance Within the FMCG Industry

Max GowlandBy Max Gowland

Anyone involved within the innovation process of an FMCG Company will realize that getting their R&D unit firing on six cylinders is one of the keys to success. However, how many CEO’s really know whether their R&D functions are delivering to the max?

Of course, innovation is not just down to R&D….it needs to be a genuine partnership with the all important Marketing community, whose job is to outline the Company’s product or category strategies.
Initially, the financial challenges must come first to determine whether R&D is delivering in line with its expectations. Comparisons must be drawn not only with internal benchmarks on RoI , but also against similar minded competitors too. Questions such as ‘are we growing revenues’ and ‘are we increasing gross profit margins’ must feature as part of this challenge.

Probably the top metric is simply the comparison of the cost of managing R&D and the incremental sales due to innovation. This is the most commonly examined metric but it is crucial to first agree on the Company’s definition of what features as an innovation! Always a difficult one!

The next key set of metrics to look at, are those associated with ‘work in progress’ or the Project Pipeline itself. Both lagging and forward looking metrics are needed here in order to evaluate past performance and also look into the future with anticipated performance too.

The future ‘worth’ of the pipeline is a crucial future metric which will force all within the innovation process to ask serious questions about the quality of the portfolio, such as pipeline worth, risk or certainty. In addition, the project portfolio should always be held up against the Business strategy, to see whether the project portfolio balance matches the strategy or not. A highly innovative growth strategy is not always right for every single category in a Company. Typically some categories will require innovation in spades, whilst other may simply require cash cow type management, cost saving projects and perhaps even manufacturing efficiency projects.
Financial worth of the project pipeline is probably one of the most important metrics for looking at the quality of the pipeline and the quality and alignment of the work being carried out within the R&D function. Each project should carry some simple financials such as incremental sales, or increased profitability or perhaps even cash flow. This way a real financial worth scenario starts to emerge from this analysis. One further comment…never let anyone declare that it is impossible to ‘guestimate’ the financial worth of a project! If this cannot be done then the projects should never have been started in the first place!

For those Company’s with a well developed Stage gate system in place, these financial metrics should be re-evaluated at each stage and not simply be allowed to drift from the concept stage(where the data is initially crude) into the development and eventually the launch stage.
Historically, I have always found the simple 2D style grid on which all projects can be mapped according to their ‘innovation index’ ,a very useful tool against which to evaluate the current state of play of the portfolio vs strategic intent. On the x axis, one can map all projects according to their technology newness/innovativeness, whilst on the y axis can be mapped the ‘newness of concept to the consumer’. Both these scales can carry definitions which use ‘Company language’ to make it easier to understand and discuss using the same language for all. This can be further refined by splitting this by ‘risk’…or splitting by category etc etc. The tool is very versatile and can be tailored to suit the Company accordingly. The main objective however, must be to put some kind of worth on the work that is being carried out.

A further favourite of mine has also been to measure ‘R&D Wastage’.

This is always a controversial subject but all R&D units waste time, money and effort. Not all projects will come to fruition. Some will fail technically while others will be withdrawn by Marketing, for very good reason. Therefore I would encourage R&D Heads to start measuring wastage, as this is a great area for attention if you find that this figure is high. By honestly measuring how much time gets wasted, then it is likely that the efficiency of the R&D department can be enhanced significantly. Taking this a little further, ratios of killed to launched projects can then be debated to see whether there is a better way to manage projects within the Company in the future, so enhancing the hit rate and minimizing the kill rate.

Having a well balanced project portfolio is one thing….however, the projects then need to get to market and they need to launch as soon as possible. After all, speed to market is a powerful weapon which some Company’s have and others do not. Typically the big ‘oil tanker’ Company’s are seen as slow vs the more nimble smaller SME’s , yet this is not always the case. Speed is an essential KPI or metric to measure as this will uncover problem areas ,which if addressed properly, can lead to an even better oiled machine with enhanced speed to market. This is a must for any serious player who see STM as important.

A further KPI ,which I could discuss for pages, is that really important metric of ‘slippage’. This is the delta between what the original and agreed target launch date vs the actual launch date, month or even years later.Typically the majority of projects do indeed slip vs that originally planned date. There can be many reasons for this such as poor planning in the early stages or perhaps there were genuine technical or commercial issues which caused those delays. One thing is certain and that is without such measurement, one cannot be in control of a project. Projects do start out with the best of intentions, but real life quickly takes over, and it is important to monitor this slippage and most importantly ,later carry out the analysis of why these delays occurred. Simple yes, but so many never apply this simple analysis. There is so much to benefit from understanding the multitude of reasons for slippage. My own experience has shown that there are always a handful of rogue areas that come up time and time again as the reasons for slippage like this.

Finally, in the important area of Technology Management, there are further areas that can add information value if measured.
Typically for many Company’s, it is vital to have not only a well balanced project portfolio within the Stage Gate process, but also, a ‘seeding’ of various technology projects that have been initiated by the technologists in R&D. If a proper ‘technology strategy’ exercise has been carried out (this is another large subject!), then the Research people (and not the Development people) should have a small number of exploratory technology driven projects already in train.

Contrary to what some might say, this is not ‘technology looking for a home’, but rather ‘proactive R&D’.
But this needs to be monitored too. It is important to understand what technology projects are ‘coming through’ as some of these will undoubtedly be killed, while others will make that move or that formal business ‘acceptance’ from lab ,into the Stage Gate machine of the Company. As large resources can be consumed by unfocussed research staff, the monitoring of the success of the technology strategy again is another way of evaluating the value of such an effort. In effect this is a crude RoI of the Research lab , rather than the entire innovation machine in totality. The ‘transforming’ of technology projects into the mainstream project machine is of great importance to any Company that wants to have technical advantages vs its competitors.

Connected strongly with all technological efforts within a Company must be the management of IP too. Firstly all such Company’s should have a well-honed IP strategy ,against which all IP decisions can be taken.
The decision of whether to patent, or where to patent, or when to patent are crucially important decisions which will last up to twenty years and so must be taken with extreme caution and also with a well considered input.
I have always believed therefore, that it is key to ensure that a Business is aware of its competitors IP by ensuring an ongoing ‘competitor IP intelligence’ programme, that can be reviewed every couple of months or so.
In addition, there are other IP oriented metrics that need to be evaluated such as patent count, the value of those patents, whether the IP is actually commercialized or not etc etc. Looking at this data can also help you understand the different IP cultures of the your competitors and this in itself can be a useful window of the competitor world when developing products in similar areas. By looking at actual IP and various IP decisions, one can start to see whether the Company is making the right or the wrong IP decisions….a key topic and one which company’s cannot afford to get wrong.

Another KPI topic which I will omit is that of Human resources. The measurement of turnover, people ‘churn’ by time, people quality and succession planning metrics etc is another fairly large subject. As these HR metrics are in effect applicable to the entire community as a whole, this would be the subject of another paper and I will prefer to leave this to another time.

So, in summary, the use of KPI’s or metrics is a crucial part of any R&D Leader who wishes to enhance and further hone his unit. Without measurement , it is impossible to see failings clearly and also quite difficult to make recommendations. It is an area that in my experience is not always managed well and if done properly with great leadership too, it can produce a real boost of renewed energy and horsepower to most R&D units.

Max Gowland April 20th 2012

About the author: Max has been active within the world of Household products for over thirty years now. Initially starting his career at Procter & Gamble, he later worked for Reckitt Benckiser as their European R&D Director and later , as Global R&D Director (Home care products). Max then moved to the Jeyes Group where he later took on Group responsibility for Brand Innovation Marketing, Category Marketing, R&D and QA, as the Board’s Chief Innovation Officer.