Benefit Model of the Rd Productivity Generation

Understanding the financial benefits of any major new initiative is essential, particularly after some questionable systems investments of the 1990s. The next generation of product development is not an exception to the need for clear benefits. These benefits do not necessarily need to be simple to understand, but they must be significant and real.

Early on in the TTM Generation, the benefits of improved time to market were estimated by projecting the revenue increase that could be achieved by bringing products to market sooner. To do this, companies first estimated their potential to improve time to market, for example, by 30 to 50 percent. It turned out that precision in this estimate didn't matter much, since the benefits were significant at almost any improvement. Then they projected what the new revenue curve would be if products were brought to market earlier, and estimated the revenue and profit benefit based on the new revenue curve.

A similar benefit-estimating technique can be applied to understand the potential improvements in the next generation of product development management. As you will see, the potential benefits are extraordinary, and I've constructed the benefit model in Figure 2-3 to help estimate them. The model assumes a current baseline of financial performance and then computes the financial impact of improvements to R&D productivity.




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Figure 2-3: Benefit Model for the R&D Productivity Generation

For the baseline, we will assume that a company invests $100 million R&D per year, and that this R&D investment will create new products that collectively result in $150 million of profit. After deducting the R&D investment required to develop the products, the net profit is $50 million, for a simple return on investment of 50 percent. Using the benefit model, you can later insert your own data, make your own assumptions, and compute your own expected benefits, but let's walk through the example. In it, there are seven performance factors that drive increased productivity in this new generation, and each of these is shown in a highlighted box.

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