As part of its new Industrial Strategy, the UK Government unveiled a plan to increase the UK’s R&D spending to a record high of 2.4 per cent of GDP.
The ambition to drive the UK’s future growth through innovation will require companies to grow their return on investment in R&D.
Finance chiefs are required therefore to play a key role in ensuring that not only that they can allocate capital to projects but also measure their effectiveness.
CFOs and their finance departments need to be included in the early stages of R&D to identify risk, but without stifling innovation, according to research last month from Association of Chartered Certified Accountants (ACCA) and IMA (Institute of Management Accountants).
In a report called The CFOs’ Guide to Technology Roadmapping the ACCA and IMA recommend that CFOs can add discipline to the R&D process, especially in highly innovative industries, by using Technology Roadmaps to better identify the link between risk, investment and spending.
Technology Roadmaps are documents that can be used as a reference point when choosing and managing R&D projects, providing an overview of the future needs and technical challenges facing an industry and outline possible solutions.
The report says success in R&D is not solely dependent on the amount of time and money spent, but is also about collaboration and cross-departmental teamwork.
Paul Kenyon, CFO of shoemaker Clarks, held a number of senior financial roles AstraZeneca, one of the UK’s leading pharmaceutical companies, including group CFO.
He says one of the biggest challenges of working in finance in Pharma is learning to how to evaluate the return on investment of R&D projects, given that companies are required to invest significant amounts of capital in drug discovery and development with no guarantee of having a medicine to bring to market at the end of it.
“While the opinion of the R&D teams and their interpretation of trial results are obviously key, the quality of the finance business partners is also important in ensuring that the financial returns are rigorously and objectively assessed,” says Kenyon.
“A scientific background obviously helps, but so too does having the courage to ask the difficult questions however unwelcome they might be,” he adds.
The gateway system
Andrew Lewis, the finance director of Chemring, which provides a range of advanced technology products and services to the aerospace, defence and security markets, argues for a “sensible gateway type process” when seeking the best returns on R&D.
“There’s a million and one derivations of it-some of them have got 7 gates and some have got 6 gates, but crucially you don’t want to stifle creativity at an early stage,” says Lewis. “People need to be able to come up with ideas, but they then need to demonstrate a business case and then there need to be checks and balances at various points along the way,” he says.
Lewis says: “If you start 10 ideas and really believe that all 10 are really going to succeed, you’re probably naïve, but you learn these things along the way. Actually I think the skill is saying you can start with 10 but at gateway 2 you really need to kill 3.”
“You’ve spent a bit of money, but either the technology is not going to make it or there is no business case, no market. So you need to kill those early at gateway 4 or 5 , or wherever you get to, you may have to kill another 2.
“It’s often hard because you might have already put £500,000 into those, but actually- what can be really hard is if you’ve got scarce capital. You may be killing a good idea but you’re supporting a better one,” he says.
Lewis says there is great importance in finding the balance between projects that can be created in 6 months, taken to market in 12 months and delivering revenue in 18, versus those that can be created in 2 years, go to market in 4 years and deliver revenue in 5 years.
“You need a balance in the portfolio of short, medium and long term delivery. In principle you need the portfolio and have the discipline to make stop/go decisions at the right point in time,” says Lewis- who joined Chemring at the beginning of 2017. “That’s the lifeblood of all businesses- what’s driving a return in say 2-3 years’ time, not necessarily today,” he informs.
Lewis says Chemring’s main customers such as the Ministry of Defence (MoD) and America’s Department of Defense (DoD) will support and fund some R&D. “As such, partnering can be quite important because you then get a sense of what’s important to them in terms of technology and you can jump on those horses as opposed to flying a kite,” he says.
“If the MoD and the DoD aren’t going to buy it, then you’re going to really struggle to sell it to anybody else, so you need to lead the customer at an early stage,” says Lewis. “If they’re interested in a project, we can say we could develop that with you over the next 18 months,” he adds.