World Class R&D Budgeting

Traditional budgeting is often practiced as a behavioral control mechanism. Financial and corporate officers who know little about R&D feel they gain a level of control over those wascally researchers, who only know how to spend money and not how to make it.

Head of R&D to CEO:  You are not qualified to understand the science behind this research proposal.

CEO:  Then you are not qualified to spend my budget.

DIA Pharmaceutical Industry Survey+ Participant

Aside from the many other issues in the above exchange, as offered by a participant in the pharmaceutical industry survey+, it’s clear the CEO wants to retain the reins on R&D spending, and will be a key advocate of budgeting activities from the right hand column below. We're talking about personal power vis-a-vis the head of R&D: productivity be damned. The head of R&D will be at a disadvantage in budget battles and I can use that to my advantage as the CEO.

The exhibit below lists all the valid uses for corporate budgeting as touted in the literature. Only the uses in left-hand column are valid for World Class R&D. The right-hand column typically reduces productivity in R&D or is simply make-work.

Beneficial Uses of Budgets in R&D Perverse Uses of Budgets in R&D
  • Communicates to investors the overall financial projections of the company and allows them to allocate their future investments proactively
  • Allows the corporation to allocate internal investments proactively
  • Guides teams to prioritize their spending internally on the most productive activities
  • Ensures there are enough corporate funds for all the R&D activities in the coming period
  • Provides a structure to assist R&D budget-builders in projecting their funding needs for the coming period
  • Establishes a common unit of measure, activity or focal point to coordinate planning for the future
  • Creates a basis for performance measurement of managers
  • Promotes continuous improvement by benchmarking, comparators, or trending
  • Provides a mechanism for delegation of duties, authorities and areas of responsibility – reinforcing the organizational structure
  • Signals+ the need for remedial actions in the event of variances
  • Sets a ceiling on spending for the coming period - no surprises for the investors

With only the left-hand column as valid uses for budgeting, the submitted R&D budget can be as simple as a handwritten sheet of paper with a single number, the amount of cash needed for the year (or 4 numbers if you want quarterly). We already know what to expect as a return for this cash based on R&D planning activities. Even without budgeting, we can readily structure R&D funding in such a way that ensures you only ask for what you need.

Budgeting activities in pursuit of the right-hand column lead to quite perverse behaviors (in R&D):

  • use it or lose it
  • build it and they’ll come+
  • anal retention
  • budgetary blackmail
  • burying of the talents
  • padding+ and hedging
  • hoarding
  • budgetary fiefdoms or empire building
  • trending
  • benchmarking
  • creative budgeting exercises, gaming

The imagination and creativity of researchers get diverted, if only momentarily, to activities that add nothing to the research effort.

World Class R&D budgeting will be more purely a funding mechanism with little or no intention of using budgets to control behaviors. We need to know how much you intend to spend and fiscal responsibility is merely wrapped into your team assessment as reported by Independent Evaluation+. We give you a pile of money: it’s literally your money to spend with no strings attached.

We don't really care how much you spent or didn't spend in the last period: it's a sunk cost+. We’re setting this up so you’re spending your own money. You will want to pay close attention to how it’s being spent.

The behavioral controls in World Class R&D are at the level of the R&D pursuit. You give me results or I shut you down (or swap out the leadership of the pursuit if it’s still viable). The CEO will feel no need to exert authority using budgetary controls. We'll replace that with a much bigger hammer (to be discussed in a later article).

Budgeting is the cornerstone of management in most organizations despite widespread acknowledgment of its serious shortfalls, not to mention its need for a major time commitment. Budgeting as an activity has its vested interests. The wonks who build the budgeting system will be loathe to give it up. It’s a one-size-fits-all+ exercise that allows for easy mechanical roll-up of the budgets from thousands of cost centers.

But not a one wonk can come up with a valid reason for why just handing each R&D pursuit a copy of Quicken™ isn’t more than enough, that is, if we’re really interested in R&D effectiveness.

Home Page April 2010