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Disruption remains constant in today’s business climate, pushing companies to fine-tune their plans for allocating investments to support organic growth. While uncertainty can cloud decision-making, in our work with clients, we have witnessed the ever-increasing importance of fueling growth via the product development pipeline. Success or failure often comes down to thoughtfully investing research and development (R&D) dollars.
The engine of growth and differentiation
R&D is the engine of growth and differentiation, driving product-based businesses such as automotive, chemicals, and highly engineered equipment; to project-based businesses including oil and gas, aerospace and defense, and industrial services.
R&D isn’t only about dreaming up moonshots. Gaining competitive advantage depends on a company’s ability to continually redefine and improve the foundational technologies that underpin the value proposition. Depending on a company’s priorities, R&D activities can range from scientific discovery to new product development to existing offering enhancement.
In our current environment, businesses (and their leaders) are facing pressure across many fronts, as well as being judged on near-term performance. This results in a light being shined on all discretionary investment, to justify the spending as being accretive to shareholder value.
We don’t use the term investment lightly. R&D is resource-intensive, requiring time, patience, and specialized talent. It is among the largest discretionary investments in a company’s budget, with a cost base typically equivalent to 1% to 4% of revenue. This investment covers skilled engineers, technicians, and scientists, development tools, facilities, and prototype materials. Return on investment, meanwhile, requires patience. If returns occur at all, they often materialize years after the initial investment, requiring a certain degree of belief.
Avoid black box thinking
Too often, companies mismanage R&D by treating it as a “black box” rather than a disciplined capital and rigorous allocation process. Budgets are often created by habit, with projects being funded based on intuition or longstanding practice rather than real-time evidence and performance-based metrics. This can lead to short-term fixes that chase immediate customer demands but miss long-term and strategically critical targets that enable future growth.
Fundamentally, the challenge of R&D (and engineering) is strategic: how do you grow capabilities and position investments, so they best shape the company’s long-term trajectory? It is only through rigorous evidence-based analysis that true ROI on a project – such as a specialized semiconductor high temperature packaging development that later finds use in an aerospace platform – can be assessed.
To effectively manage R&D, it needs to be reframed and treated as a disciplined capital investment for growth, rather than an ad hoc short-term budget that is often reactively applied to product enhancement. Using R&D as a forward-looking bet on where technology and the market are headed is the way to properly frame how building capability today positions the company for tomorrow’s opportunities. Viewed this way, R&D allocation becomes a forward indicator of strategic direction, where capabilities should be developed and where differentiation will emerge.
There are three key steps to getting this balance right:
Set the spend envelope by balancing affordability, industry dynamics, and company ambition. A sector’s average R&D-to-revenue ratio is a benchmark, but not a target. Compare that ratio against competitors’ disclosures, while watching for accounting treatments that inflate “R&D” (such as costs parked in R&D that could be G&A). Then size the total spend to match the technological ambition of the company. Finally, respect the “70-20-10” rule of innovation: allocate 70% to core initiatives that sustain the platform, 20% to adjacent opportunities, and 10% to transformational ones.
Align R&D spend with business strategy and market demand. R&D projects should only be considered when they support both company-level and business-segment strategies—especially when uncertainty is high. This comes down to the key question of how you can differentiate yourself, and where do you want to grow. Vague claims of being “strategically important” without proof do not qualify. Regular portfolio reviews are essential, along with a readiness to exit work that no longer aligns with customer needs or strategic priorities. As hard as it may be to swallow, sunk cost is irrelevant—only forward strategic fit and impact matter.
Measure what you spend. Every move forward with an R&D project must be quantitatively tied to the company’s growth and goals. Does the R&D spend result in more customers? Is it expanding your market? Does it add revenue streams? Improve margin? A functional R&D evaluation framework looks across financial and technical concerns.
Measure R&D as capital
It is important to apply rigor to every initiative the company pursues. Assign each candidate a risk score covering cost overruns, time‑to‑market, and technical feasibility. Then weigh the metrics and rank projects within each archetype by their composite score. Finally, consider secondary signals—like direct customer co‑funding or demonstrable strategic differentiation—to break ties and fine‑tune prioritization.
Oversight and accountability are essential. Appoint an Investment Committee to manage and own the governance of R&D investment. This will support the accountability for ROI and performance by looking across the portfolio (rather than letting individual teams make decisions), applying clear rules, and making decisions.
Companies can drive sustainable growth and optionality via clarifying priorities, being pragmatic about trade-offs and performance, and enforcing accountabilities. A disciplined approach to R&D results in obvious returns – revenue growth, better product offerings, and a reputation as a technical innovator.
AlixPartners works closely with business and technical leadership to define strategic objectives and align the technology and R&D framework needed to set clear execution priorities. We support companies to ensure R&D decisions made today are creating opportunities for the future, turning innovation into measurable performance.
