Executives agree that R&D is a global effort requiring collaboration, yet many say their organizations must improve their skills in this area and focus on talent in order to meet strategic goals.

Executives from around the world say their R&D organizations require new ways of working and agree that as R&D activities become more global and complex, their organizations should move away from the predominantly centralized approach many companies now use. These are among the findings from our fourth annual survey on R&D,1 which asked executives about the structure of their companies’ global R&D footprints, the way product decisions are made, and the actions R&D organizations are taking to meet their objectives in the next three to five years.2 According to the largest share of executives, the R&D organizations best positioned to meet their strategic goals would consist of satellite units that operate—and collaborate—as a network. Meeting this goal will be a challenge, however: 63 percent of respondents say their R&D organizations already include multiple sites, but only 21 percent at these companies report that the satellite R&D sites collaborate effectively.

The results also suggest that the differences between high-performing R&D functions and all others are not only financial.3 Rather, executives at the companies that excel in this area are likelier to say their R&D sites collaborate effectively and that their global R&D organiza- tions are investing much more in talent. For R&D organizations to get where executives say they want to go, they will have to overcome key obstacles (the oversubscription of talent,

1 The online survey was conducted from April 17 to April 27, 2012, and received responses from 1,283 executives representing the full range of regions, indus- tries, functional specialties, tenures, and company sizes. To adjust for differences in response rates, the data are weighted by the contri- bution of each respondent’s nation to global GDP.

2 Respondents are executives who either work in their companies’ global R&D organizations or have a working knowledge of their R&D organizations’ activities.

3 High-performing R&D functions are those that, according to executives, have had higher rates of organic growth than competitors and realized more than 30 percent of that growth through new products developed in-house.

Organizing R&D for the futureMcKinsey Global Survey results

Jean-François Martin

2 Organizing R&D for the futureMcKinsey Global Survey results

for example) and develop organizational capabilities, including greater transparency and collaboration-friendly mind-sets.

Going global

Executives’ responses on the current state of R&D depict an increasingly global reality that is at odds with today’s organizational structures. The largest share of respondents say their current R&D organizations consist of a central function in a single location; to meet their goals in the next three to five years, the largest share say their organizations should employ a more decentralized model in which individual R&D sites operate as nodes in a global network (Exhibit 1). Executives in developing markets4 indicate that their companies are at an earlier stage of this organizational evolution: 56 percent say their organizations are centralized today, and while only 27 percent think they should be in the future, these respondents are the least likely among their peers in other locations to prefer a global R&D network.

This overall preference for moving away from centralization reflects the reality on the ground: 63 percent of executives say their R&D organizations already include more than one site,5 and 38 percent say their companies plan to increase offshoring6 of their global R&D activities.

4 Includes executives working in Latin America and excludes those working in China and India.

5 This measure counts R&D sites with 10 people or more; 29 percent say their organiza-tions include at least six separate R&D sites.

6 In the survey question, “offshoring” was defined as moving func- tions and processes away from the company’s home country to a location abroad.

Exhibit 1

Moving toward a global network

Survey 2012R&D Exhibit 1 of 6Exhibit title: Moving toward a global network

1 Respondents who answered “don’t know” are not shown.2Includes Bahrain, Bangladesh, Caicos Island, Egypt, Indonesia, Israel, Kenya, Kuwait, Lebanon, Macau, Malaysia, Mauritius, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, South Africa, Sri Lanka, Swaziland, Syria, Thailand, Uganda, United Arab Emirates, and Zambia.

% of respondents,1 by office location

Organizational structure of global R&D, current and preferred

Total,n = 1,081

Central R&D function with a single location

3619

238

5627

3220

3011

3124

3518

Central R&D function (eg, at headquarters) with sites in different locations

2627

3228

2131

2427

2927

3826

2525

Central R&D function with independent sites in different locations

1312

1512

76

1412

1921

910

1412

Globally distributed group of R&D sites operating as nodes in a network

2339

2839

1132

2740

2038

2342

1839

Asia-Pacific,n = 116

Developing markets,2n = 135

India, n = 135

North America, n = 266

Europe,n = 358

China,n = 71

Current structure

Preferred structure in 3–5 years

3 Organizing R&D for the futureMcKinsey Global Survey results

While there has been much recent discussion of companies bringing manufacturing activities and processes closer to home (to increase operating flexibility, for example), our results suggest that for many R&D organizations, the offshoring trend continues. Just 18 percent say their companies’ onshoring7 of global R&D functions and processes will increase in the next three to five years, and only 24 percent say the same about nearshoring.8

The value, and challenge, of collaboration

There is an even more decisive difference between executives’ views on how product-related decisions should be made in the next few years (collaboratively, by members of a global R&D team in different locations) and how they are made today (by the central function and then applied to satellite R&D sites). Across regions, industries, company types, and locations within the R&D organization (Exhibit 2), pluralities of executives agree that decision making related to products should be a collaborative effort in order to meet strategic goals.

7 In the survey question, “onshoring” was defined as moving func- tions and processes back to the company’s home country.

8 In the survey question, “near-shoring” was defined as bringing functions and processes closer to the company’s home country from another location abroad.

Exhibit 2

Collaboration is ideal

Survey 2012R&D Exhibit 2 of 6Exhibit title: Collaboration is ideal

1 Respondents who answered “don’t know” or those who work in a function outside R&D are not shown.

% of respondents,1 by office location within R&D organization

Product-related decision-making processes for global R&D, current and preferred

Total,n = 1,081

Centrally, then applied to satellite sites

4021

5633

2718

257

Split, with some decisions made at central function and others at satellite sites

2424

1921

2624

3120

Collaboratively, by members of global R&D team working in either central function or satellite sites

2344

1938

3043

3255

Independently, at satellite sites

99

46

1415

1015

Satellite site in different country than company headquarters, n = 108

Satellite site in same country as company headquarters, n = 95

Central R&D site,n = 368

Current decision-making process

Preferred decision-making process in 3–5 years

4 Organizing R&D for the futureMcKinsey Global Survey results

Exhibit 3

Mind-sets matter for collaboration

Survey 2012R&D Exhibit 3 of 6Exhibit title: Mind-sets matter for collaboration

1 Respondents who answered “other” or “don’t know/not applicable” are not shown.2Respondents who reported “extremely effective” or “very effective” collaboration were asked which capabilities are most important to promoting effective collaboration across their global R&D organizations; those who reported “somewhat effective” or “not at all effective” collaboration were asked which capabilities would be most important to promoting effective collaboration.

% of respondents1 by effectiveness of companies’ collaboration

Capabilities most important to promoting effective R&D collaboration

Organizational mind-set that global collaboration is vital

5454

4852

Greater transparency on organization’s strategy and objectives

4341

5239

Improved governance and decision making (eg, across global brands or categories)

3827

3830

Improved talent management (eg, for team composition and selection)

3243

3833

Better technological capabilities (eg, videoconferencing, intranet, instant messaging)

3139

2229

Better-aligned metrics and incentives across organization and geographies

2924

3634

Sufficient travel between R&D sites to allow for relationship building

2418

2029

Somewhat or not at all effective, n = 696

Extremely or very effective,2n = 479

Between central R&D function and satellite site

Between separate satellite R&D sites

But collaboration is an art that many R&D organizations have yet to master. Of the executives who have a view,9 less than half say their central functions and satellites collaborate very or extremely effectively with one another; less than one-quarter say the same about satellite-to-satellite collaboration, a requirement of the very model they want to move toward. Respondents at larger organizations with at least six different R&D sites are likeliest to say their satellites collaborate effectively, suggesting that structural moves away from the center may be the push for organizations to improve internal cooperation.

Whether or not their organizations collaborate effectively, respondents say that the most important capabilities for fostering successful collaboration are collaborative mind-sets and greater transparency on R&D strategy (Exhibit 3). Improved talent management also ranks

9 When asked how effectively their central R&D function collab-orates with the satellite sites, 17 percent say, “don’t know/not applicable,” and 29 percent say the same about satellite-to-satellite collaboration. For this report, these responses were removed, and the results from the question were recalculated.

5 Organizing R&D for the futureMcKinsey Global Survey results

highly among those who say their satellites work well together, but talent is an allocation issue as well. When executives identify the most significant challenge their R&D organizations face, the largest share (40 percent) say their key people are overextended and unavailable.

What ‘high performers’ do differently

As in surveys past, we identified a group of “high-performing innovators”—companies where respondents report higher organic growth than competitors and say a large portion of that growth came from new, in-house products. While executives at this year’s high-performing innovators are still likelier than those at other companies to say their R&D budgets increased since last year,10 they also indicate that what is driving these differences is not necessarily budgetary or organizational—it’s cultural as well. Specifically, the executives at high-performing companies say they are far ahead of their peers in three key dimensions: collaboration, allocation of talent and capital, and the use of product platforms to drive speed to market.11

For example, 31 percent of respondents at high-performing companies say their organizations already make product-related decisions collaboratively, compared with 20 percent of all other respondents. And while the results indicate that satellite-to-satellite communication— a critical dimension of achieving a globally networked model of separate R&D sites—is a challenge for most organizations, executives at high-performing companies report more effective collaboration than everyone else (Exhibit 4). The respondents at companies

10 Compared with last year’s results, though, smaller shares of respondents overall and at the high-performing innovators say their R&D budgets increased from the year before. See

“R&D strategies in emerging economies,” mckinseyquarterly

.com, April 2011. 11 Product platforms are defined

as products that use shared product architectures, which are meant to be tailored to local needs.

Exhibit 4

Satellites struggle to collaborate

Survey 2012R&D Exhibit 4 of 6Exhibit title: Satellites struggle to collaborate

1 Figures may not sum to 100%, because of rounding.

% of respondents1

Effectiveness of global R&D collaboration

Between separate satellite R&D sites Between central R&D function and satellite sites

2

2At all other organizations, n = 819 277 38 1910 12 34 3021

At “high-performing innovators,” n = 262 4016 28 14 184 40 2612

Extremely effectively

Very effectively Somewhat effectively

Not at all effectively Don’t know/ not applicable

6 Organizing R&D for the futureMcKinsey Global Survey results

whose budgets grew attribute this increase to a corporate focus on organic growth. Yet the high performers’ resource moves are likelier to be proactive and directed toward defined growth opportunities, while their peers are likelier to say their companies increased budgets as a reaction to competitors’ moves. More executives at high-performing innovators also say their companies allocate additional resources to hiring, though oversubscribed talent is the challenge the respondents at these companies cite most often (Exhibit 5).

Another area where the high performers stand out is speed to market. On average, more executives say their R&D organizations’ product strategies focus on creating shared product platforms12 rather than developing local or standardized global products. At high-

Exhibit 5

A talent challenge, even for high performers

Survey 2012R&D Exhibit 5 of 6Exhibit title: A talent challenge, even for high performers

1 Respondents who answered “other” or “don’t know” are not shown.

% of respondents1

Most significant resource-allocation challenges that global R&D organizations face

Key people are always oversubscribed50

37

Decision making requires approval from too many layers of the organization

3234

Organization is not flexible or dynamic enough in allocating resources (eg, people or funds)

2332

Members of technical staff are not easily interchangeable across projects

Organization does not address resource allocation frequently enough

Organization does not have a complete, up-to-date knowledge inventory of staff

2722

1620

1215

At “high-performing innovators,” n = 262

At all other organizations, n = 819

12 A global average of 48 percent of executives say the use of product architectures, or platforms, best describes the way their R&D organizations currently manage global products and categories; 30 percent say their organizations operate almost exclusively with global products that are standard- ized across markets and 17 percent say they develop local products almost exclusively.

7 Organizing R&D for the futureMcKinsey Global Survey results

performing organizations, respondents more often report that they use these platformed products now and plan to focus on them more in the coming years;13 at 51 percent, the largest share also say they use these products for faster times to market. The high performers are ahead in their use of technologies as well (Exhibit 6) and are more likely to be using (or planning to use) social media to collaborate internally, engage external partners, and crowdsource ideas.

13 Among executives at high-performing innovators, 57 percent say their R&D organizations use product architectures or plat- forms, and 71 percent say their organizations’ focus on these products will increase over the next three to five years, compared with 66 percent of the global average who say so.

Exhibit 6

High performers use more technology

Survey 2012R&D Exhibit 6 of 6Exhibit title: High performers use technology better

1 Respondents who answered “don’t know” are not shown.

% of respondents,1 by digital business trends

Adoption of business technology trends at global R&D organizations

Big data and analytics

Mobile technologies and applications

Social media to engage customers

Cloud computing

Embedded computing

At all other organizations, n = 819

2532 30 2536 29 2239 30 2230 33 1625 44

At “high-performing innovators,” n = 262 3142 18 2049 22 2044 30 2538 22 2429 35

Initiatives under way Plans to pursue initiatives in the next year

No plans to pursue in the next year

8 Organizing R&D for the futureMcKinsey Global Survey results

Looking ahead

• As R&D organizations continue to globalize and pursue less-centralized decision making, the talent-allocation challenge that many executives report will become even more important, yet respondents are dissatisfied with how their companies are handling the issue now. That the high-performing innovators are more concerned with this issue—and also report higher growth—speaks to the link between talent and successful R&D. Other companies would do well to follow the high performers’ lead by paying as much attention to the manage-ment and communication elements of their R&D footprints as to their budgets and portfolios.

• Although a majority of respondents say their R&D organizations use social media internally,14 the reported lack of effective collaboration suggests that technological solutions are no panacea. Compared with the global, cross-functional responses from last year’s Web 2.0 survey,15 where the largest share of executives said their companies use social tools and technologies for customer-related purposes, R&D organizations are still thinking about these as internal tools. In the coming years, they will need to use technology in a broader, more externally facing way to achieve their aspirations of operating as a global network.

• The shift away from centralized R&D organizations is particularly preferred in the developing markets, according to respondents. This may speak to a larger trend of emerging-market companies moving away from their home base and into other geographies in greater numbers that may, potentially, result in the rise of a new type of global organization.

Contributors to the development and analysis of this survey include Marla M. Capozzi, a senior expert in McKinsey’s Boston office; Peet Van Biljon, a consultant in the Washington, DC, office; and Jim Williams, a consultant in the Seattle office. They would like to acknowledge Chris Musso for his contributions to this work.

Copyright © 2012 McKinsey & Company. All rights reserved.

14 This refers only to those respondents who say their companies’ global R&D organizations are pursuing or planning to pursue social- media initiatives to engage customers; 30 percent of all respondents say their R&D organizations have no plans to pursue these initiatives in the next year.

15 See Jacques Bughin, Angela Hung Byers, and Michael Chui,

“How social technologies are extending the organization,” mckinseyquarterly.com, November 2011.