As part of the research for defining an R&D market, R&D
managers can also define specific strategic goals for the
R&D department of their organization. Putting into words
what the R&D manager wants to accomplish informs other
parts of the organization where they are, where the R&D
department wants to go, and how it intends to get there.
Sometimes this can be as simple as a mission statement.
Other times, it can set the stage for a “strategic five-year
plan” to substantially improve the organization’s capabilities
from where they are now.
One of the criteria most managers are judged by is how
closely they adhere to their budget plans, especially without
exceeding them. But, as noted earlier more than 20% of
the research managers we surveyed actually exceeded their
2015 R&D budgets. The concern and challenge here when
determining a new R&D budget is how conservative budget
submitters have been with regard to the accomplishment of
their overall goals. To satisfy this situation, many organizations submit “realistic” budgets with a built-in contingency
fund. This occurs more often in industrial organizations
rather than government organizations. Government budgets
are more often more controllable. Contingency funds are
generally based on historic norms and can be as much as
20% of the overall R&D budget.
Contingency funds ensure that the organization stays
within their finalized budget agreement, assuming the con-
tingency was adequate. Inflation could also be considered
in the contingency category, although inflation rates have
been relatively small. When our survey respondents were
queried about how 2016 cost changes (inflation, etc.) com-
pared to the increases they received in their new 2016 R&D
budgets, slightly more than half of the respondents stated
they matched well. Nearly a third stated that the R&D cost
changes they experienced were larger than the increases
they saw in their 2016 R&D budgets relative to their 2015
R&D budgets. The remainder of the survey respondents
said that cost increases were less than the increases in their
2016 R&D budget increases.
Each R&D budget is specific to a particular application and
organization. General budgeting models don’t work well
for these complicated R&D situations. To simplify these sophisticated documents, some organizations break their R&D
budgets into staffing, facilities and equipment, and operational improvement categories. Other organizations separate
their R&D budgets into fixed people costs, project costs and
variable costs. Some organizations develop their own R&D
specific budgeting models based upon historic outcomes.
These R&D organizations develop visualization models for
R&D growth, income and capability evaluations.
Other R&D organizations use mathematical models for
R&D cash flow and investment evaluations. These in-house
developed models have inherent strengths and weaknesses.
The reliability of a one-year forecast is high using normal
extrapolations of current data. The reliability of a five-year
forecast of most technologies, even in stable economic
periods, however, is generally low. Some industries, like the
semiconductor industry, find that even though their technology forecasts continue to be reliable, their historic economic
patterns have changed and they have to change their modeling criteria, mostly due to globalization.
It may be useful when establishing a model to consider
several variations, such as normal extrapolations, cyclical
patterns, contingency models based on unforeseen events, or
even a model based on the outcome of an R&D strategic plan.
The specific values of R&D budgets for research organizations cover a wide range of levels as noted in the Chart.
The average annual 2016 R&D budget for these organiza-
How do 2016 R&D costs compare to
current economic changes?
29% 2016 cost changes > R&D increases
54% 2016 cost changes = R&D increases
17% 2016 cost changes < R&D increases