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From SpaceX rocket launches to Amazon drone delivery to the race to develop autonomous cars, the public follows every up and down. However, R&D is not the exclusive domain of Musk and Bezos; it’s actually of bedrock importance to small and midsize businesses, too. Innovative solutions and new technologies can create competitive advantages that will slingshot companies to expanded revenues, greater market share, and even the creation of new industrial categories.
Research and development, however, is by definition a risky endeavor; most research never leads to much development. Even if a particular research project is successful, the costs, patent processing, and losses accrued by other unsuccessful research eat into the gains.
Before investing in R&D, be sure that the solution wasn’t already discovered and that your hoped-for solution is patentable. That way, if your team successfully solves the problem, you will be able to reap the benefits. Additionally, consider other businesses in your sector-are they trying to solve the same problem? Will your researchers solve the problem first and better?
Project evaluation comes down to two factors: technical (“Will it work?”) and business (“Is it profitable?”). To determine if the project is worth it, follow this formula:
Evaluation = (Expected payoff if project is successful) x (probability of technical success) x (probability of commercial success) x (probability of financial success)
Say your expected payoff is $10 million; the probability of technical success is 75 percent; the probability of commercial success is 80 percent; and the probability of financial success is 90 percent. According to this formula, this project is evaluated at $5.4 million ($10 million x .75 x .80 x .90). If the required expenditure makes sense based on that rate of return, the project would be considered worthwhile.