17May

Pfizer says 24% cut in R&D is good for the company

17 May 2011 Sandeep Mehta

Most high tech companies have ferociously guarded their R&D spending even through the great recession.  In fact, cuts in R&D spending have been much smaller than the reduction in revenues.  Hence, the R&D as a fraction of overall expenditure has actually increased through the recession.  It is known that R&D spending does not guarantee increased profits.  Many observers have pointed out that companies might actually be protecting the wrong investments.
Reuters had an interesting article recently about Pfizer cutting their R&D budgets by 24% in 2011 (See Pfizer R&D chief upbeat despite smaller budget): 

Mikael Dolsten, Pfizer’s president of worldwide research and development, said making choices about research priorities was a ‘sign of a healthy company culture.’ ‘Our action was more a thoughtful deliberation after looking at how the industry has performed as a whole,’ Dolsten said in an interview on the sidelines of the Bio-Windhover Pharmaceutical Strategic Outlook conference in New York. ‘We feel that the amount of investment in R&D that we are committing to is really the right number to drive the priorities we have put in place.’

May be the cut in R&D spending will actually force managers to think through the R&D pipeline and remove pet projects and dead wood.  This is especially important because Pharma R&D seems to have declined in efficiency and return on R&D investments have been falling (See Big pharma’s stalled R&D machine).

However, it is also quite common for CTOs to claim that cutting R&D budgets is a good thing AFTER the R&D funding has been cut.  TI’s CTO suggested that their 25% cut in R&D spending actually sharpened their focus.  What can R&D managers do to actually get the positive results?  Freescale’s CTO made some great points about cutting R&D budgets:
  1. Have a clearly defined strategy that drives investment decisions
  2. Decide on what R&D you are NOT going to do and what you are.
  3. Decide what R&D will be done internally and what will be outsourced to strategic partners
  4. Tie marketing into the R&D planning and align roadmaps with customers
Great advice because pet projects have a way to stick around no matter what.  Also, 90% of all cost cuts are reversed in three years unless there is a purpose and drive behind them.  Here are some portfolio management best practices that you could follow.  There is a lot more about portfolio balancing here.

Article first published as Pfizer Says 24% Cut in R&D is Good for the Company on Technorati.

Leave a Reply