playing with numbers

Within the past couple of weeks, two outstanding organisations have published reports on R&D spending by major corporations. And though they roughly see the same names, somehow the two organisations have reached fairly diverging conclusions.

First to come out was UK's Department of Trade and Industry "The R&D Scorecard 2006" (if you need detailed company R&D information, I strongly recommend this one - the whole database is up on the web as well as available on hard copy free of charge). DTI's report concludes that R&D investment by companies is one of the major drivers of company success.

Yesterday's Financial Times, on the other hand, is touting the supposedly opposite conclusions Booz Allen Hamilton has reached in its freshly published "Smart Spenders: The Global Innovation 1000" (also available online). Booz' study claims that most of the R&D spending is waste of money and only few heavy R&D investing companies are actually making profit out of these investments.

There is certainly some truth in both statements, and I was happy to see the arguments on both sides strongly outlined. There was but one problem that kept scratching my eye in the Booz report. Namely, it compares the R&D spending growth to revenue growth over the past 4-5 years, but does it by comparing R&D spending growth to the revenue growth in the same year - for instance, if R&D spending grew by 15% in 2005 but the revenues of that company grew 10% in 2005, Booz's conclusion is that this company was wasting money and not exploiting its R&D investments in a sensible manner. Now, if you go to the DTI report, then they used a little bit different approach to draw conclusions on the profitability of R&D investments - they looked at the R&D investments in 2001 and then compared these to reveneu and profit indicators in 2004-2005.

When you think for a second, what is the specific nature of R&D spending as compared to other oprational business investments and what is causing all that fuss around the R&D spending - aah, yes, though potentially leading to remarkable profitability, it takes longer to kick in; thus, the profitability results would be revealed with a considerable lag. Granted, 3-4 year lag that DTI used might not be quite sufficient, but it certainly a more adequate indicator than what the Booz has come up with. While Booz' recommendation that companies need to pay more attention to focusing their R&D investments and maximizing their profit potential sounds reasonable, its choice of indicator construction is not really the most convincing way to prove the argument. Right now, it looks a lot like Booz has tried to pull out some explanation to justify their numbers rather than the other way round.

Other than proving that playing with numbers can help you prove any point you want to make, I think both reports are interesting readings. Those fond of number games and having better insights into manipulating them will have good material for a textbook case study.