Research and development (R&D) is the initial, exploratory stages of product and service development. In the United Kingdom (UK) and some other areas of the world, research and development is known as research and technical development (RTD).
R&D is often conducted within a company’s development unit, but it may also be outsourced to a service provider. Within the enterprise, research and development is considered a cost center because it is a consumer of resources rather than a direct source of profit. R&D doesn’t offer any immediate payoff and potential return on investment (ROI) is uncertain. Nevertheless, it’s essential to the development of new products and services and the continued profitability of existing ones.
Best practices recommended to minimize the financial risk associated with R&D include:
- Conducting preliminary research to determine the competitive environment and the market for a proposed product or service.
- Performing a cost/benefit analysis (CBA) to evaluate the potential payoff of a product or service in contrast with the resources required for R&D.
- Defining a budget for all projects and adhering to them. As with other types of projects, formalized processes should be employed to avoid unnecessary expenditures.