6 Unleashing R&D's strategic potential by breaking the organisational boundaries

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1 6 Unleashing R&D's strategic potential by breaking the organisational boundaries Hervé Baratte, Accenture As chemical companies battle against the current tough conditions in their industry, the effectiveness of their R&D is increasingly crucial to their long-term success. In any assessment of R&D performance, companies must not only examine how much they spend on R&D, but how well this money is spent in the drive to achieve their strategic business goals. This assessment should be based on the fact that the management processes involved in R&D can be divided clearly into four distinct areas: Systematic and rigorous management of a pipeline of ideas; e.g. create efficient circuits to capture ideas systematically. Stringent and ruthless decision-making over which ideas to pursue; e.g. aggressive rebalancing of the development projects portfolio. Clear focus when bringing them to market; e.g. create clear milestones and business case for the project teams. Consistent leadership and organisation ensuring close alignment with the business's strategy. Our approach to the structuring and management of chemical R&D can demonstrably boost results, bring revenues on stream earlier and save costs in the expensive scale-up and commercialisation stages. By combining tight R&D management processes with loose organisational structures, chemical companies can transform the contribution that their R&D operation makes to the delivery of their overall business strategy. R&D management specialists have helped numerous chemical companies improve the management of their R&D and deliver higher returns as a result. Although R&D in chemical companies is much more closely aligned to the business 1

2 than it was a decade ago, it still faces four major challenges: It is difficult for R&D to achieve strategic alignment with business functions, such as marketing and sales. The management of the R&D projects portfolios is weakly formalised and not transparent to the business as a whole. The immense knowledge available in research does not flow swiftly across the organisational boundaries. Many R&D organisational structures remain rigid and hierarchical, as the introduction of flat and porous organisational structures would threaten the status quo. Today, the key to meeting these challenges successfully lies in balancing a 'loose' organisational structure with 'tight' management processes, to help R&D support the business's overall goals more effectively. 6.1 The immense strengths of Chemical R&D Expenditure reductions over the past decade mean chemical companies now spend between 2% and 6% of their sales on R&D. Managements realise that these cuts cannot go any further without damaging companies' future prospects. Assuming the level of R&D spending will now stabilise, the question is how to increase the effectiveness of this expenditure for the business by better leveraging the capabilities of R&D. The raw HR materials to achieve this are clearly present. Many chemical R&D staff are brilliant, highly creative people. As a result there is no lack of powerful ideas, many of them with good business potential. The outcome has been a long list of commercially successful R&D innovations - of which Bayer s polycarbonate MACROLON, Degussa s nano-sized pyrogenic silica AEROSIL, CELANESE s HOSTAFORM ; DuPont s KEVLAR, and DOW s SiLK dielectric resin are just a few well-known examples. The concentration of technical expertise in R&D is equally impressive. At BASF alone, more 2

3 than 8,000 employees work in R&D, and in many companies 1 out of 3 chemicals researchers has a PhD. R&D also employs top thinkers with strong analytical skills and the ability to understand complex market requirements. 6.2 Why fix it, if it isn't broken? If R&D has these strengths and has changed a lot in the past decade, why not keep it the way it is today? The reason is R&D stakeholders of all types continue to make valid complaints about its effectiveness and efficiency. As a result, while both external and internal customers value R&D expertise, they often do not know how to leverage it. Here are two of the complaints most commonly voiced by stakeholders 'Management processes in R&D are ineffective' All major chemical companies have articulated an innovation strategy. But the business unit leadership often continues to see R&D as a necessary pain, because it cannot articulate the direct benefits for customers. So management is only weakly committed to R&D's efforts, and R&D itself remains 'excluded' from the business, with too little direct customer contact. Many companies also have difficulty selecting the highest-priority R&D projects, as a result of which they end up with fragmented and unbalanced R&D projects portfolios. A further complaint is R&D's lack of business perspective during projects, with many companies still having loosely-defined processes and milestones and failing to follow up the incurred development costs and expected revenues from an ongoing project. Finally, R&D projects are usually started or stopped only once a year in the budgeting process, thus reducing the flexibility to adjust the portfolio quickly. The management shortcomings listed above often result in excessive times to commercialisation R&D organisational structures are 'functional' and too 3

4 rigid In many cases, chemical R&D organisations continue to be functionally-orientated around the most important areas of expertise, such as organic synthesis, analytics or applications. These functional organisations are often hierarchical. So job mobility is reduced, and assembling flexible project teams across functional departments becomes a major challenge. Such organisational structures limit the flexibility for adjusting R&D priorities, provide little in terms of career incentive or challenge for R&D staff. And the exchange of knowledge across departmental boundaries. The results are slow projects starts and late delivery of new products. Additionally, the use of separate and unconnected systems often hinders the retrieval of specific information. 6.3 The way forward for R&D: balancing 'tight' and 'loose' In order to address the often valid criticisms outlined above, successful companies have adopted tight management processes that enable the choice and implementation of loose organisational structures 'Tight' management processes The R&D management process is deceptively simple - effectively a pipeline of ideas that provides a framework in which innovation is channelled and targeted to support and grow the business. Figure 1 illustrates how this process successfully translates creativity into market effectiveness on a continuing basis. 4

5 Tight management process Creativity Focus Efficiency Think out of the box Explore a lot of ideas Keep the vision in mind Focus on the right ideas Get the ideas quickly to the market Focus on core activities 4 Leadership & Organization Figure 1: Four basic steps for successful innovation management To get the best from this tight management process, the R&D strategy needs to have real influence over the business strategy. We know a polymer producer where the chemicals R&D programme provides the foundation for the business unit s growth strategy. The prioritisation of the R&D projects is agreed upon jointly between R&D and the business leadership through a formalised review process. The evaluation criteria to assess the attractiveness of each project, such as expected return and market incentive, are balanced against potential risks such as technical feasibility and uniqueness. The portfolio review process should typically be applied on a quarterly basis. Projects are evaluated and budgets allocated by the Portfolio Review Panel, whose roles and responsibilities are clearly allocated to specific individuals or groups. The weighted evaluation criteria include factors such as payback time, technical fit and uniqueness, and should be used to assess the attractiveness and risk of the Research and Development Projects. This approach results in a ranked priority list of projects in the portfolio, and companies 5

6 using it generally put a number of project proposals on hold to redirect resources to projects with higher business priorities. In our experience, this has shortened the development phase of high-priority projects by 20% to 40%. Current best-practice in R&D project management involves the Stage-Gate TM1 process to manage against milestones. It also is focused on understanding the cumulated costs and revenue generation potential for each R&D project. This increases R&D's awareness of the value of time. Some project teams are now empowered to make risks decisions, such as skipping a pilot plants phase. Such decisions are based on costs versus revenues analysis and assessment of the additional revenues from faster time to market. Clearly, teams can make such decisions if they are multi-disciplinary, with the involvement of marketing, sales and production 'Loose' organisational structures Managing in this way raises considerable challenges for the leadership, as they need to relinquish 'command and control' management, and allow project teams full responsibility to achieve agreed objectives. The performance of the teams - as well as of the whole R&D - will, at best, be tracked via a robust appraisal process with input from all parties involved, giving '360 feedback'. The best-performing individuals and teams are rewarded accordingly. With tightly-managed processes in place, management can afford to make the organisational structure more 'loose' and flexible. At the core of a 'loose' R&D organisation are market-orientated multi-disciplinary teams. The composition and size of these teams will vary with changes in market needs and the project portfolio process. In practice, teams do not change significantly with every prioritisation review, but the ability to make adjustments during the year can be valuable. In our experience, it is also beneficial to move R&D closer to the customer by organising R&D around industry branches (such as PVC for automotive, PVC for 1 Prof. Robert Cooper "Stage Gate TM " 6

7 electronics) rather than product markets. R&D teams should also have direct contact with strategic customers, who may have valuable perspectives, ideas and input. The way to achieve these objectives is to develop a highly interactive, multi-disciplined, projectorientated organisation involving customers and multiple sites. A varied group of team members with different perspectives and skills - technical manager and experts, marketing, sales account managers - are empowered to respond as appropriate to customers needs. This group interfacing with the customer will be managed by a technical manager, under the supervision of the business unit management. The amount of time the technical experts spend in interfacing directly with the customers will be decided jointly with the Business management. In some cases, the customer himself may become a member of the project team. This structure also brings major benefits for R&D employees. The greater mobility opportunities both within and outside R&D bring wider and more interesting career possibilities. Also, team members have the opportunity not only to fulfil technical roles as before, but also non-technical roles such as cost control, knowledge management and market research. This further broadens the expertise of the R&D people and opens sources for new ideas. As with any radical change, there are potential pitfalls to avoid. The looser organisational structure may run the risk of losing expertise and knowledge, as the traditional centres of expertise disappear. Chemical companies are addressing this risk through robust knowledge management processes and systems. This clearly brings an information technology dimension, to address the need to share knowledge across market-orientated teams with the requirement for supporting IT applications embedded in a harmonised IT infrastructure. 6.4 A check-list for R&D The ultimate litmus test of your R&D organisation is whether it is helping you achieve your business goals. Transforming R&D in the way we have outlined is merely a means to achieving that end. Below is a checklist of ten questions to ask yourself. If too many 7

8 questions are answered with a no, it may be time to review the R&D organisation with a view to changing its management processes and/or structure. 1. Innovation Strategy: Yes/No Is the innovation strategy understood the same way in the Business and in R&D? 2. R&D Strategy: Yes/No Is your R&D strategy aligned to the Business Unit strategy from the perspective of the Business Unit management? 3. Market Responsiveness: Yes/No Is the customer opinion/need sufficiently considered, as measured by marketing & sales and the customers themselves? 4. Customer Contact: Yes/No Does R&D together with sales regularly talk to and involve strategic customers? 5. Project Portfolio: Yes/No Is your project portfolio managed to produce a robust pipeline of proposals? 6. Project Prioritisation: Yes/No Is project prioritisation is based on a robust list of evaluation criteria? 7. Project Execution: Yes/No Are multi-disciplinary teams including sales, marketing and production employed within R&D? 8. Team empowerment: Yes/No Are your R&D teams empowered with full operational responsibility for projects? 9. People Rewarding: Yes/No Is comprehensive system for appraising and rewarding R&D people in place? 10. Knowledge Management: Yes/No Is expertise maintained and knowledge shared in your organisation through special IT tools? 6.5 Case study: Akzo Nobel Polymer Chemicals R&D 8

9 Akzo Nobel has 68,000 employees worldwide, annual sales of 14bn, and business divisions in pharmaceuticals, coatings and chemicals. Its Polymer Chemicals business turns over 650m, and makes products including organic peroxides, metal alkyls and polymer additives. The business unit's R&D organisation has 170 employees across three locations. Akzo Nobel Polymer Chemicals' twin-pronged strategy of market leadership and emerging growth involves R&D playing a key role in business innovation and portfolio renewal. In 2001 the business unit launched a project entitled NOW! (New Organisation Worldwide) aimed at enabling R&D to fulfil that strategic role to the full. NOW!'s objectives include developing a relevant, workable and widely-accepted vision and roadmap for a new organisational model for R&D. Before NOW!, the R&D operation had been organised in a relatively traditional hierarchical structure, and had not used centralised knowledge management or formalised portfolio management systems. Under NOW!, the vision for 2005 includes implementing a more flexible and team-oriented organisation for R&D, with employees directed by shared values reinforced by senior management, and providing R&D to customers worldwide in a responsive and flexible manner. Teams of 8 to 10 people will work independently and co-operatively to brainstorm, test, and apply new ideas and reevaluate production processes. All projects are now prioritised by the R&D and Business management jointly against clear evaluation criteria. Knowledge will be continuously captured and made available globally, and employees will be challenged to excel in a highly interactive environment. This programme will bring Akzo Nobel Polymer Chemicals R&D a wide range of benefits. These will include: better understanding of customers articulated and non-articulated needs; greater flexibility and responsiveness to market changes; comprehensive selection of projects with highest priority according to market needs; 9

10 better work planning leading to higher cost-effectiveness enhanced career opportunities for employees through enriched roles and individual development; higher employee satisfaction through transparent appraisal and rewarding processes; and significantly increased speed-to-market. 10