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Trendline: R&D spending rises.

Several years ago, we took a look at R&D spending patterns in the software industry and discovered that it was fairly typical for companies to spend 8%-12% of their revenues on R&D activities, regardless of size, profitability, or market segment (Soft*letter, 6/11/87). We recently decided to take a fresh look at that benchmark, to see if spending levels have changed over the past three years.

Certainly there have been major changes in the R&D environment. Most companies now develop for multiple platforms and operating systems, graphical interfaces have added a new layer of design complexity, and compatibility and QA standards continue to rise. At the same time, most software companies generate much greater revenues than they did three years ago. Even if R&D percentage levels don't change, actual budgets are now likely to be more generous.

To gauge the effect of these changes, we analyzed three-year R&D spending trends for a sample of 14 public software companies. Although these companies aren't entirely representative of the software industry as a whole, they do tend to classify R&D costs more rigorously than small companies do. (For consistency, we excluded other public companies from the sample that capitalized more than a nominal portion of their R&D spending.)

The results of this comparison suggest that R&D spending levels in fact have been rising steadily: Over the past two years, average R&D spending for our sample of 14 companies has moved from 12.5% of sales to 14.1%--a 12.8% increase. Measured in absolute dollars, the increase is even more dramatic: Total R&D spending for our sample has more than doubled, from $215 million three years ago to $453 million last year.

When we look at specific companies on the chart, a few interesting points emerge. The most R&D-intensive company is clearly Timberline Software, a developer of vertical market products for the construction industry (1989 sales: $10.7 million). In general, however, the top R&D spenders tend to be large publishers of general purpose productivity software--Ashton-Tate, Symantec, Lotus, SPC, Borland, and Microsoft--who face the most aggressive marketplace competition.

At the low end of the chart, the patterns are harder to define. But our sense is that below-average R&D levels may be characteristic of companies that face less urgent competitive pressures--that is, consumer software companies and established market leaders like Autodesk and Aldus.

But perhaps the most obvious influence on R&D spending is simple history: Companies tend to maintain roughly the same percentage level of R&D spending as they spent in previous years. If there's any lesson here, it's that R&D spending is driven more by internal budget processes than by external competition, sales fluctuations, or new technologies.
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:research and development
Publication:Soft-Letter
Date:Dec 28, 1990
Words:464
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