We don’t prejudge where the next blockbuster⁺ product or service will appear when working in unpredictable R&D⁺. Today’s ugly baby⁺ may be tomorrow’s greatest win.

Today’s managers track project milestones in R&D. They have a ‘portfolio of R&D projects’ each with projected completion dates, risk factors and estimated commercial values. Managers map all projects along a visual timeline and ‘manage’ projects using this chart. Movement along the project chart gives the illusion of leadership and makes for great theater in endless meetings convened by managers to show off these (meticulously prepared) charts.

Project milestones have no welcome in our funding agency⁺. We don’t select an arbitrary commercial path or promising R&D candidates and drive forward using these as our anchor. Creative R&D means tacking and turning. We don’t shut down future options until very late in the commercialization⁺ game. Commercial direction, the way we address commercial needs, the very nature of how we conduct our research, are all fluid and subject to continuous change. The visualization instead is a large, dense cloud out of which ...

Introduction

Our task is to reduce damage from perfect storms. These storms are perfectly unpredictable, a confluence of many failures that individually should never happen. There are no sure-fire preventative measures. If we can’t predict the storm, then what can we do to reduce the damage from the storm?

At one end of the Cub Run commercial cave tour in Kentucky there is a 65 foot high spiral staircase leading from the main level of the cave up to the surface. Examine the supports attaching this staircase to the surrounding walls and you’ll notice they are pointed in very unusual angles. The engineer was a retired automotive expert from GM Experimental and the staircase supports were modeled after those found in the crumple-zones of most late model cars. "I built the staircase to support triple the weight we should see on any typical cave tour, but in case it collapses it will simply tilt over to one side."

What’s our crumple zone for systemic (financial) risks? How do we fail softly? First we must admit there is no perfect solution, or it would be prohibitively expensive. We need to accept the fact that major losses sometimes occur and look for ...

Intellectual Capital⁺ – the new economy. A corporation's value is not found in bricks and mortar, rather in the skills and capabilities of its people. Show me the bricks and mortar of a Paypal or E-bay?

Property records (repositories) for Intellectual Capital are rightly viewed as a graveyard for dead capital. They capture the tangible, ignoring the much more valuable intangible components. Intellectual Capital remains dead until further packaged into a team, a mandate, a budget, a strategic direction and a sense of mission. The knowledge of how to commercially exploit Intellectual Capital, which in itself is not patentable, is where the real value lies.

Intellectual capital is much more than intellectual property. It’s much more than patents, trademarks, trade secrets, manuals and procedures, databases, software, etc. It’s more than what is commonly captured in asset property records. The very name reveals its true nature, wealth within the mind. We sell intellectual property. It’s the basis of a thriving industry.1

• 1. IBM and Kodak make billions in licensing fees, a fact touted to sell you an intellectual capital consulting engagement so you too ...

Illustrative Corporate Systemic Failures

WorldCom Fraud Centered on Connection Costs The accounting fraud at WorldCom resulted from a decision by its chief financial officer to categorize as long-term investments money paid to local phone companies to complete calls. At the beginning of 2001 the $3.8 billion scandal came to light. WorldCom shook financial markets by announcing it would restate five quarters of past earnings to reclassify these monies instead as routine costs. Yet another corporate scandal – employee stock option backdating Since the start of the year (2006), more than 100 companies have undergone federal investigations into stock option backdating, a way of boosting the value of options grants used as compensation by issuing them retroactively on days when company stocks were trading low, the Securities and Exchange Commission says. Jenkens & Gilchrist Attorneys, Former BDO Seidman CEO and Deutsche Bank Broker Found Guilty in New York of Multi-Billion Dollar Criminal Tax Fraud Scheme The case involved making up hundreds of millions of dollars in losses for clients to avoid paying taxes. Prosecutors: Sentence Ghilarducci to 41 months in prison Ghilarducci ...

A recent article in the New Yorker magazine, The Truth Wears Off discusses how findings from rigorously controlled studies, repeated years later by the same researcher sometimes are not replicable. This happens in medical research, behavioral research, and ecological studies. Mostly in the life sciences.

Regular readers of World Class R&D articles will recognize the pattern. It has been discussed in many articles:

• The Flour Beetle
• You Get the Answer You Want
• Statistics and A>B

Many research examples cited in the New Yorker article were seemingly statistically solid — that is, they contained enough data so the effect due to ‘statistical fluctuations’ shouldn’t be as dramatic as those later found. But results were not replicable none-the-less.

The conclusion of the article is startling:

We like to pretend our experiments define the truth for us. But that’s often not the case. Just because an idea is true doesn’t mean it can be proved. And just because an idea can be proved doesn’t mean it’s true. When the experiments are done, we still have to choose what to believe.

What this means for industrial R&D is that in order to commit to a line of ...

We do not commit investors for the duration. We prefer long-term investors, consistent with our aim of providing long-term predictable funding for unpredictable R&D⁺. We provide many sweeteners to retain the business of each investor. But we leave it to the investor to decide how long they want to stay.

We could ask investors to provide funding until success happens (the venture capital model). It could be 5, 10 or 15 years. In exchange for such lengthy commitments investors would demand exorbitant returns, would meddle in the affairs of our investees, and would come up with unreasonable demands on the timing of returns. The Investee Bill of Rights and Obligations would be under constant assault, risking returns for all investors. We practice instead voluntary retention.

Our approach provides steady share pricing over decades. We make-a-market in a perpetual fund⁺. Share price is independent of mood swings in the larger public markets. The value of assets underpinning our share price doesn’t change much from period-to-period. Events causing large changes in valuation for underlying assets⁺ are infrequent (e.g., advancements⁺, exits, IPO’s). The ...

Individuals (typically agency management⁺ and management of Investible Units⁺) will eventually have a significant stake-in-the-game in the form of reinvested equity. This equity is at risk. We will reach into reinvested equity to repair damages caused by those individuals. These monies stay reinvested until they can be shown to result from success that is repeatable, that strikes twice. They monies must also be shown to not have been the result of having mortgaged the future of the agency.

What this means is agency management (and manager-owners of the Investible Units) will not receive extraordinary compensation until many years after it is assigned them. Managers would be wise not to use this assigned equity as security for personal loans. This money is restricted. It can be taken back should the manager later be found to have earned it inappropriately (based on subsequent agency history). A better description of these monies would be ‘equity assigned but not yet earned’.

These ‘assigned’ monies come from Investible Units going IPO⁺, from sale of sub-blockbuster⁺ products, or from sale of the first blockbuster product for an Investible Unit.

A .pdf of this article is provided here for your reading comfort.

R&D productivity is falling precipitously across several major industrial sectors. There are many contributing factors, but the most important seems to be the lack of continuous renewal in today’s industrial R&D organizations. A predominate ‘factory model’ inevitably runs its course and only firms deliberately positioned with new models are able to escape the descent into commoditization. It’s not from lack of trying. Instead most firms in most industries fail to appreciate that funding development of new models requires new models for funding.1

Entrepreneurs are those individuals who take on a challenge simply ...

• 1. In pharmaceutical R&D, the research model based on receptor theory and advances in organic chemistry has run its course. Attempts to ‘acquire’ new models have failed, not surprisingly. New wine into old wineskins.
  Receptor concept: pharmacology's big idea. H P Rang. J Pharmacol. 2006 January; 147(S1): S9–S16.
  "Pharmaceutical M&A activity during the last decade lost close to one trillion dollars in value" - Burrill & Company's 25th Annual Report