Meeting with Wall Streat analysts in July, Bill Gates, Microsoft's chairman and chief software architect, vowed to raise the company's research and development spending to $5.2 billion in fiscal 2003, a 20% increase over 2002. "It's an aggressive approach, but one that I certainly believe in," Gates said.
Two months later, Sun Microsystems CEO Scott McNealy, in his Sun Network conference keynote speech, vowed to aggressively increase Sun's R&D spending during the next three to five years -- a critical component of the company's strategy to reverse its steep sales decline.
Gates and McNealy rarely agree on much. But the importance of R&D spending in tough times is one thing they're both behind. The trick for the technology industry is how to do that amid a massive sales slump. The answer for many companies: trim R&D, but not at the rate that revenue is falling. Among 14 of the top software and hardware vendors, only three this year have cut R&D spending as a percentage of sales, a common metric for gauging R&D expenditures. Even total dollars have increased at six of the 14 companies, assuming companies spend at the same pace in the last quarter of the fiscal year.
The issue is more than academic for IT managers. Companies and institutions that once developed their own applications increasingly depend on the vendors they've chosen to partner with, says James Roberts, Duke University's executive vice provost of finance and administration. Today's R&D expenditures are tomorrow's IT product innovations. Businesses could find themselves at a disadvantage when the economy rebounds if they tie their futures to IT vendors that cut back drastically on R&D spending and can't deliver leading-edge products when customers need them. "We've outsourced our fate to the R&D spending of IT vendors," Roberts says. "It's really fundamental to our strategy."
Duke has used PeopleSoft Inc.'s student-administration software for five years and recently adopted the vendor's new application for reporting to the U.S. government the status of foreign students. "That's a good example of their ability to be agile and responsive to our changing needs," Roberts says.
IT buyers aren't likely to choose vendors that are cutting R&D efforts, says Olivier Helleboid, president of products at BEA Systems Inc., which in its 2002 fiscal year doubled R&D spending from two years ago. "They want to make sure a company is committed to product innovation," he says. "They're buying not just a point product, they're buying a future, a product program."
Sun Microsystems has been augmenting its R&D efforts with acquisitions, Tolliver says.
Most IT vendors tried to maintain significant levels of R&D spending for several quarters after the economy soured early last year, says Henry Chesbrough, a Harvard Business School assistant professor who's writing a book about product development and innovation. "They tried to do the right thing," he says. But as the economic downturn has dragged on, more companies are scrutinizing their R&D budgets, Chesbrough says.