Why Bad Business Habits Kill R&D Effectiveness

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Since the summer, I’ve been working with well over a dozen companies in different capacities and in several of these companies, there is a challenge on the R&D front that actually is caused by bad business habits. When I’m asked to spend some time with a company, it very often is because there is some challenge on the R&D side such as lack of reuse, quality issues, predictability and time to market concerns, etc. Frequently, R&D is then viewed as the problem child of the company by the other functions and R&D leadership sometimes has even started to believe the story and frantically looks for solutions inside the confines of the R&D organization. When analyzing the challenges faced by the organization, though, it turns out that although there are opportunities for improvement inside R&D, the root cause of much of what ails R&D actually originates on the business side of the company. There are at least three problems that I have seen recurring time and again: overly tactical sales, unhealthy customer focus and too strong reliance on physical products.

One of the biggest challenges that I see is that the sales organization is ready to sell customers exactly they’re asking for without understanding or, in fact, caring about the downstream consequences. This leads to significant overhead for R&D due to the lifetime cost of the additional complexity, due to variants, customer specific code branches and customer specific requests for “their” version of the product. The problem here is not that R&D shouldn’t built functionality that provides value for customers. The problem is that the little revenue from selling something unique to a specific customer doesn’t even come close to the lifetime cost of maintaining this functionality for years or sometimes even decades to come. Nor does sales take into account the complexity, performance or reliability consequences for other customers. Even if customer specific functionality can be disabled for other customers, it still will affect the other customers in some ways.

The second challenge that I see companies struggle with is the pattern where the customer that screams the loudest is prioritized over other customers. In some of the cases that I experienced, the functionality built for a “loud” customer is commodity or so specific for that customer that it does not provide any business value beyond this customer. Although many companies pride themselves on their customer orientation, the fact is that spending R&D resources on the specific needs of one customer comes with an opportunity cost: those resources can not be used for building functionality that serves many or all customers.

The third challenge that many business struggle with is that their senior leadership, even on the business side, has a background in mechanics or electronics and, as a consequence, has a strong focus on physical products and views software as secondary. This exhibits itself in at least two ways. First, whenever faced with a choice to invest in “atoms” or in “bits”, the choice almost falls towards “atoms” at the expense of “bits”. Second, the focus of everyone in the company is on minimizing bill of materials for products independent of the implications on the software. With the adoption of continuous deployment of software for products throughout their economic life, minimizing computing resources by squeezing the bill of materials is akin to shooting yourself in the foot. You are cutting off an entire strategic growth opportunity for your business.

So, having identified these challenges, the question is what we can do about it. In my engagements with different companies, I typically focus on three main activities: reinforcing the business strategy and its implications, establishment of a governance mechanism with proper representation and adopting the three layer product model as a template for reasoning about innovation, differentiation and commodity.

First, I still find it surprising that in many companies the business strategy is treated as some vague, irrelevant document that doesn’t really affect day to day operations. When developing the business strategy, the company tends to prioritize software and the establishment of digital services, data-driven services and software products in addition to its physical product portfolio. Starting from the business strategy and reasoning with the team through all the consequences and what this requires in terms of changes right here and now often leads to more intentional and less habitual behavior in the organization. It is amazing how often different leaders will interpret the business strategy in a way that is logically incoherent but that allows them to keep doing what they’ve always done.

Second, decision making concerning the prioritization of R&D activities is surprisingly often a decentralized and a highly politicized process where project managers, product managers, team leads and engineers constantly engage in a process of “cow trading” and exchanging favors to get what they need for their project or their customer without any regard for the overall company interests. Establishing a governance mechanism where key leaders meet on a frequent basis, preferably every agile sprint, to decide on the relative priority of all the various requests from customers, the roadmap activities, major defects,  architecture refactoring and infrastructure needs removes the local optimization and allows for the company to optimize for the overall needs of the company.

Third, in earlier articles, I have introduced the three layer product model (3LPM). The model, as shown in the figure below, distinguishes between three types of functionality: innovative, differentiation and commodity. Our research shows that typical organizations spend 80-90% of their R&D resources on commodity functionality. One of the key reasons is that there often is an incorrect understanding in the organization about what functionality is considered to be innovative or differentiating rather than commodity by customers. This results in a situation that companies tend to invest heavily in commodity functionality that customers have little interest in. Using the 3LPM, we can get a conversation going in the organization about what functionality actually is commodity and should be deprioritized for R&D investments.

Figure: The Three Layer Product Model

Concluding, the business side of many companies causes fundamental inefficiencies in R&D that offer no business benefits to customers or to the company itself. These inefficiences are, among others, caused by overly tactical sales, unhealthy customer focus and too strong reliance on physical products. By reinforcing the business strategy and its implications, establishing a governance mechanism with proper representation and adopting the three layer product model for reasoning about innovation, differentiation and commodity, we can significantly increase the effectiveness of R&D and business success.

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