COVID-19: Business R&D Spending Will Fall by at Least 5-6%

In the last few weeks our worlds have been turned upside down. As individuals we are grappling with the fear, disruption and uncertainty brought about by COVID-19. The organizations we work for are scrambling to manage extraordinary challenges. In some sectors, the threat is unquestionably existential. For almost all it is likely unprecedented.

Innovation teams are not, of course, immune to this disruption. There are immediate challenges and opportunities—and longer-term challenges loom large.

This post explores historic trends in business R&D investment during recessions. If you’re interested in how companies are adjusting future spending plans for the remainder of 2020, sign up below for further information about our forthcoming benchmarking report.

Innovation should be part of the immediate response

In the immediate term, innovation teams have opportunities to stay relevant by helping their organizations respond effectively to the new environment in which we find ourselves. That might be in relatively small ways like sharing and disseminating knowledge about tools and behaviors that enhance virtual / remote collaboration. And it might be larger ways such as helping to drive or facilitate innovation processes that identify ways your organization can help our communities and our governments (e.g. a hackathon for an open source ventilator).

Longer-term implications for innovation

Innovation leaders will also need to turn their attention to longer-term questions. Recession is looking increasingly likely in many countries. In the US, current baseline or central forecasts suggest a very steep Q2 decline in GDP (-7% annualized), followed by zero growth in Q3 and a return to positive territory in Q3 (+2.6%). It is, therefore, likely that innovation teams will face budget pressure. To prepare for such challenges, historical experience can be instructive.

In five out of the last six recessions the United States has gone through since 1960, R&D spending (a good proxy for total innovation investment) by firms has declined. For example:

  • Early 2000s recession: R&D spending fell by 0.9% in 2001 and a further 5.6% in 2002.
  • Great Recession (late-2007 to mid-2009): R&D spending didn’t decline until 2009 (by 5.2%), but the decline continued into 2010 (0.4%).

While neither recession is entirely analogous to economists’ current forecasts, they still suggest innovation leaders should anticipate pressure to cut innovation budgets by at least 5-6% over the next 12-18 months. Obviously, this is based on an average impact across all sectors of the US economy—some firms will face pressure for much greater cuts.

Impact of Recession on Business R&D Spending

Data source: NSF Business R&D and Innovation Survey (link), Federal Reserve (FRED)

Prepare for innovation budget pressure now

It is imperative that innovation leaders start preparing for budget conversations now. To do that, we recommend preparing to:

  • Demonstrate the value of innovation to the organization.
  • Run leaner.
  • Gather benchmarking data.

Demonstrate value

Now more than ever it’s critical your key stakeholders across the organization understand the value innovation brings. Ideally you already have a comprehensive set of innovation metrics that help you demonstrate your innovation team’s return on investment. To check you’re measuring what you need to check your metrics against our measurement framework or take our self-assessment.  If you’re not measuring what you need to, now is the time to quickly assemble that data.

The quantitative information provided by metrics should be complemented by stories that make your team’s value and relevance real. Given the current context, these stories could include examples of how your innovation team is supporting your organization’s immediate response to the COVID-19 crisis. And how innovation helped your organization recover from prior recessions.

Prepare to run leaner

Most innovation teams are likely to face significant cuts. That means you need to start preparing to run leaner—now. Again, innovation metrics can help. If you have a comprehensive innovation performance measurement system in place, it will provide you with the insight necessary to know how to run leaner. For example, it will tell you which projects and portfolios deliver higher RoI. And it will highlight areas of your innovation process that could be more efficient.

If you don’t have the insight necessary to inform those decisions, it’s not too late to assemble it. The alternative is to fly blind.

Gather benchmarking data

When setting budgets for innovation / R&D many firms want to understand how their investment levels compare with their competitors’. R&D as a percent of revenue is a common, if somewhat flawed, benchmark. Such insight will be an important input into forthcoming discussions about future funding levels. In some ways it’s more important than ever to understand what your competitors will be doing. If your company cuts innovation spending, but a competitor doesn’t, will you lose your technology leadership position?

Forward-looking benchmarking data on R&D spending is not readily available. Commodore is preparing a benchmarking report analyzing innovation / R&D spending plans for the remainder of 2020. If you are interested in sharing data and receiving the report, sign up below to receive further information.

Forthcoming Report: Benchmarking Innovation Investment post COVID-19

Complete the form below to receive further information about Commodore Innovation’s forthcoming (free) report benchmarking innovation spend plans for the next 12 months.

Take our survey about innovation practitioners' reactions to the COVID-19 crisis (and go in the draw to win an iPad Pro).