Businesses need to measure the effectiveness of R&D

iStock

Many businesses invest in research and development (R&D) for anything from scientific research into new medicines or materials, to improvements to existing products. But many fail to measure its effectiveness.

An article by consultants McKinsey and Company reports an ability to measure the impact of R&D spending more effectively would not only help business leaders to better advocate for continued funding, but also allow them to show that better collaboration with universities and research institutes can actually have a bottom line impact for businesses.

The report suggests two ways that businesses can do this.

The first metric, RDP, is computed by taking the ratio of R&D spend (as a percentage of sales) to sales from new products. This allows organisations to track the efficacy with which R&D dollars translate into new-product sales.

The second metric, NPM, takes the ratio of gross margin to sales from new products. This provides an indication of the contribution that new-product sales make to margin uplift.

Australia has a poor record on collaboration between universities, research groups and businesses to commercialise research. Measures like those proposed by McKinsey could help business leaders to show the dollar value of their R&D efforts and encourage more of a focus in this area.

Australian businesses need to consider their approach in this area. Without action, Australia will remain as an outpost of excellent research that does not connect with the commercial world as well as it could.

To read more about why collaboration between business and researchers matters and where Australia needs to improve see The Collaboration Report

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.