Research matters

Successful research and development is a surefire way for global technology players to stay ahead of their competitors. However, CEOs must ensure that their R&D strategies not only deliver quickly, but also result in products that customers want to buy, and don’t cost the earth

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By  Jack Turner Published  February 16, 2006

|~||~||~|With the possible exception of life sciences and secret military labs, the industry most associated with research and development is the information technology sector. After all, despite the fact that most organisations use elements of IT today without a second thought, its products, services and associated offerings are still relatively new to business life. The number of chief executives that remember life before the personal computer is still high, and most firms’ IT departments still carry an air of mystique long since lost by their predecessors in sales, marketing or finance. In the dog eat dog world of IT, the ability to innovate and constantly deliver either upgrades or new products is paramount not only to survival but also continued corporate growth. While aggressive pricing and value-added services, for example, are nice extras for potential customers, little beats being able to offer a competitor’s clients something it hasn’t even thought of. Samsung, for example, invested roughly US$4.6 billion in R&D in 2004. This figure represented 8.3% of the electronics giant’s sales and its efforts resulted in over 1600 US patents. In terms of products recognisable to customers around the world, R&D delivered a 102-inch plasma TV, a mobile phone that takes 7 million-megapixel photos, and memory chips fabricated with sub-90-nanometer process technology. Samsung is not alone in spending significant sums on R&D. To maintain its dominance in numerous sectors within the IT industry, HP spends approximately US$3.5 billion per year on R&D. In addition to tweaking its existing product line up and uncovering next generation printing and imaging solutions, the computing giant is also investing in emerging technologies such as nano-electronics. “We are one of only a handful of systems companies left on the planet that invests in significant R&D,” says Mark Hurd, chief executive officer and president of HP. “My goal is for HP to be the R&D leader in the areas strategic to HP and our customers. I want them [customers] to think of HP as a company that’s driving useful innovation and bringing it to market in the most efficient way possible to help them solve problems or improve their lives,” he adds.||**|||~||~||~|Although not every IT company on the planet can afford to invest the billions of dollars the likes of Samsung and HP do in R&D, it is clear that the ability to deliver something new is essential to each and every technology business in the world. German company Fujitsu Siemens Computers (FSC), for example, uses the combined resources of its parent companies – Fujitsu and Siemens – to deliver R&D and compete with the likes of HP. “Of course we have less money [than HP], but we can benefit from the expertise of our parent companies. Siemens has a massive R&D budget and this is something that we can tap into. We can leverage that and that helps us work on developing solutions for vertical markets such as healthcare as well, where Siemens has considerable expertise,” explains Bernd Bischoff, president and chief executive officer of FSC. “Both Fujitsu and Siemens are very large companies that offer considerable advantages to Fujitsu Siemens when it comes to benefiting from their R&D activities,” he adds. While R&D is a must for any ambitious IT company chief executive, the products developed within the depths of research labs must be useable. While the image of a mad scientist wildly innovating at will certainly has its appeal – from both marketing and recruiting perspectives – the bottom line is that customers must want the finished product. If they don’t, then it is simply a question of wasted money. To this end, the chief executives of global IT firms are starting to talk to their customers about the benefits of the R&D process at a much earlier stage . For example, HP’s Hurd suggests that it is the customer that actual dictates much of what is worked on in the computing giant’s labs. “Customers are the most important asset that HP has. We’re very focused on helping customers solve problems and improve their business,” he says. HP is not alone in integrating customers into the R&D process. In fact, Bruce Claflin, chief executive officer of networking vendor 3Com, says that if customers are not involved in the development process then innovation can do more harm than good. “They [customers] do want innovation but it’s got to be innovation that matters. In infrastructure it goes back to performance, reliability, availability, and cost of ownership management. These are the parameters that matter to the customer. If you innovate outside of what matters to them then frankly it is aggravating because it is one more complexity [for the customer] to manage,” he explains. “We have seven values that we talk about all the time. One of them is to innovate with purpose. The whole idea is that innovation for the sake of innovation is irrelevant, unless it addresses a real customer need and solves a problem better than anybody else it is not worth doing,” Claflin adds. To ensure that 3Com is developing products that match customer demand, the networking vendor uses its advisory board, which is made up of end users and includes Soubhi Abdulkarim, IT manager of Aspire, a Qatari sports development academy based in Doha. The board’s role is wide-ranging, and designed to keep 3Com’s vision in line with what customers want. In other words, it helps prevent the mad scientist dictating product development. “The advisory council gives us advice on technology and products, as well as advice on what I call business matters,” Claflin explains. “A good example is our interoperability strategy. They [the advisory council] are hugely supportive of this and their message to us is to be zealous on this, don’t cave in to the desire to do something proprietary. A real example was Tipping Point [a recent acquisition by 3Com]. The advice they gave us when we bought it was ‘do not attempt to do some sort of unique hook into 3Com that no else does’. They were absolutely driving us on that and we agreed.” ||**|||~||~||~|While the majority of chief executives in the technology industry love talking about the R&D coming out of their labs, as many believe it makes them appear forward thinking and at the forefront of the sector, there is a serious question over how involved they should actually be. After all, if the customers’ needs are now paramount to R&D, the vast majority of chief executives are further away from the filed than the majority of their employees. As such, one wonders just how in tune they are with heading research initiatives. FSC’s Bischoff admits that his role is more one of creating the right environment in which innovation can flourish, rather than rolling up his sleeves and heading down to the labs. “As CEO, in terms of innovation, my role is to make sure that people are not afraid to come up with crazy ideas. So we have a climate where people speak up even if is a crazy idea — a lot of innovation comes out of crazy ideas,” he says. “So we have actually started a CEO innovation award within Fujitsu Siemens. Then we have a committee where these ideas come into play and they make a decision on whether or not it is something that the company should pursue,” Bischoff adds. “FlexFrame for mySAP, for example, started out life as an idea. The lead free soldering that we do was the same. We want to follow more of these ideas that are generated within the company. We want to get more of these ideas out because differentiation is key to us. When you differentiate you can provide more value to the customer and you can make more margin as a result.” While chief executives are perhaps best kept away from the sharp end of R&D, they certainly have a leading role to play in the funding of R&D, and more importantly balancing the demand for investment from research departments with the shareholders’ need for a decent return. Both Samsung and FSC balance the books by making R&D investment a percentage of revenue. As a result, the funds available increase or decrease depending on the success of the company’s sales force (see box opposite). “You need to generate the profits to fund the R&D,” says Bischoff. “What we are striving for is 2.5% margin and I think we will be able to achieve that [in 2006] without sacrificing our R&D investment.” While this approach is a safe one in terms of controlling spending, it does go against the ‘spend money to make money’ mantra and can create a chicken and egg scenario. After all, if a vendor’s sales are in free fall, it is often a new product developed by the lab rats that can help pull the business out of the doldrums. While such considerations were less of a concern during the dot-com boom, when money poured into tech stocks and facilitated huge R&D budgets, those days are now gone. Today the chief executives of IT companies have to be sure that research will develop a product that not only pays in the long-term but also quickly delivers sales spikes. Arguably, this more constricted approach to R&D has had a huge impact on the way IT firms have approached research in the past few years, as today more CEOs are opting to direct their war chests away from in-house development and towards acquisitions. To this end, and despite the claims that R&D is still vital, over the past few years the IT industry has been littered with examples of vendors eschewing organic growth for mergers and acquisitions. Perhaps the best example is enterprise and accounting software giant Oracle. In its efforts to eliminate the competition and catch its main rival SAP, Oracle’s chief executive officer Larry Ellison spearheaded a vast acquisition spree in 2005. The year began with the capture of long-time target PeopleSoft for approximately US$10.3 billion, and from there Ellison and his team went onto acquire a number of smaller vendors, including Oblix, Retek, TripleHop, TimesTen, ProfitLogic, Context Media, and i-flex. Then, in September last year, the ever open cheque book came out again with the acquisition of customer relationship management (CRM) giant Siebel for a handsome US$5.85 billion. ||**|||~||~||~|Once the Siebel deal had been signed, Ellison once again turned Oracle’s attention to smaller firms, as the software vendor snapped up G-Log, Innobase, Thor Technologies, and OctetString. The thinking behind Ellison’s strategy during 2005 was simple – get the best products on the market, integrate them quickly with Oracle’s existing offerings, and provide customers with a more complete product offering. It also allowed the vendor to quickly become a market leader in a number of areas, rather than having to ‘invent’ a rival solution and then market it until it became the leader in its field. As Ellison said when the Siebel deal was announced, “In a single step, Oracle becomes the number one CRM applications company in the world… and Siebel’s 4000 applications customers and 3.4 million CRM users strengthen our number one position in applications in North America and move us closer to the number one position in applications globally.” While Oracle may have grabbed the headlines with some of its more aggressive acquisitions, Ellison is not alone in preferring to expand the company’s product offering by buying rivals rather than waiting for his R&D departments to deliver. For example, 3Com acquired TippingPoint Technologies for around US$430 million in order to give it an entry point into the intrusion prevention market. And Claflin is up front about the reasons for striking the deal – it gave him access to a solution set he didn’t have and the R&D team could not complete fast enough. “Although we have had a long history of innovation… some [solutions] we have got by acquiring promising companies like Tipping Point,” he says. Another firm to have hit the acquisition trail is Juniper Networks, another infrastructure vendor attempting to overhaul the lead Cisco Systems currently has in the sector. The US firm agreed to buy Funk Software for US$122 million late last year. Prior to that it acquired Wide Area Network (WAN) optimisation technology firm Peribit Networks for around US$337 million, and Application Front End (AFE) developer Redline Networks for approximately US$132 million. Although both Peribit and Redline were relatively young companies – both were formed in 2000 and had yet to generate large revenues – each firm had a product that served a growing market and fleshed out Juniper’s solution set. “The addition of application acceleration technologies to Juniper Networks’ best-in-class routing and security solutions is a natural extension of our traffic processing strategy,” explains Scott Kriens, chairman and chief executive of Juniper Networks. However, despite splashing out on technology developed in the R&D labs of other firms, Kriens says there is a fine balance to be maintained when searching for the next big thing. He argues that it is essential for Juniper to continue to develop its own products and not rely solely on acquisitions for new solutions and corporate growth. “Juniper spent about US$350 million last year on its own R&D… The acquisitions we have made have contributed a very modest amount — about 3% to 5% at most,” Kriens says. “The growth we have achieved has come as a result of the organic investments we have made. “Juniper will always be driven by organic development and the intellectual property that exists within the company,” he adds. This balancing act appears to lie at the very heart of the R&D debate, as neither acquired technology nor in-house R&D should dominate an IT company’s outlook when it comes to product development. A poorly balanced strategy can have a negative rather than positive impact, as an over reliance on in-house development can slow a company down, while too many acquisitions can dilute the corporate brand bestowing years of integration work on a company’s developers. As a result, it is the chief executive who can best plot a course between these two R&D options that will emerge the winner, and ensure his or her company stays ahead of the field for the foreseeable future.||**||

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