How “Smart” Is Your R&D Spending?

Directing R&D investments: Strategy&’s annual Global Innovation 1000 study, which examines the 1,000 public companies that spend the most on R&D (collectively 40% of the world’s total R&D spending), is always insightful. The most dismaying finding: In every one of the past 12 years, the study has found no statistically significant relationship between the financial performance of the Innovation 1000 companies and their R&D spending.

Assuming that fact doesn’t cause you to throw up your hands and use your company’s R&D budget for a massive beer bash, this year’s study, published in strategy+business, provided another insight that is well worth considering: A transformation in R&D spending is occurring.

“R&D is shifting more and more toward developing software and services,” write Strategy& principals Barry Jaruzelski, Volker Staack, and Aritomo Shinozaki. “Software increasingly carries the burden of enabling product differentiation and adaptability, and enhancing customer experiences and outcomes. Services, offered along with or separately from physical products, now focus more on new customer needs, providing enhanced value and improved usability.”

This shift, explain the authors, is driven by the ever-increasing capabilities of software, the embedding of software and sensors in products, the ability to connect products via IoT and the cloud, and, as always, customer demand. It’s manifesting in every kind of “smart” product and service.

Since 2010, the Global Innovation 1000 companies have increased their R&D spending on software offerings by 65% — to $142 billion. In addition, report the authors, “companies currently allocating 25% or more of their R&D budgets to software offerings reported that their revenues were growing significantly faster than those of key competitors with lower allocations.”

What does your company spend its R&D budget on?

When smart stuff isn’t smart enough: All that R&D spending on smart products and services is pretty terrific, but it appears that a lot of the smart stuff is pretty dumb. Unfortunately, the script kiddies who broke the internet on Oct. 21 figured that out before the companies that make the smart stuff.

The distributed denial-of-service (DDoS) attacks against DNS provider Dyn, which cut off major internet platforms and services, were originally thought to be caused by tens of millions of hacked IoT devices. Now, it’s down to 100,000 unsecured security cams, according to Quartz. I’m not sure which is worse: The idea that tens of millions of IoT devices could be harnessed to mount an attack or that all you need is 100,000 devices.

In either case, the DDoS attack on Dyn should prompt companies to take a closer look at IoT, according to CSO contributing writer Stacy Collett. “Security professionals say the service disruption was merely a nuisance attack — although an eye-opening one,” she writes. “Friday’s attack brought glaring attention to the potential danger of having billions of devices connected to the internet with little or no cybersecurity protections.”

Collett’s story suggests that the blame for that attack — and the responsibility for ensuring the prevention of future attacks — should be spread around. Device manufacturers shouldn’t be rushing unsecured products in the marketplace. The government should be providing regulation and guidelines for connected devices. ISPs should be building more networks that are more robust and resistant to attack. And, corporate users of IoT solutions should be taking steps to protect themselves.

Or you can just wait around for a visit from the script kiddies.

Defining digital transformation: “Digital transformation” is one of those phrases that gets thrown around so often and encompasses so much that it has become meaningless. So I was curious to see what InfoWorld editor-in-chief Eric Knorr and contributing editor Dan Tynan would make of it.

“Transformation usually implies moving from one fixed state to another. Yet digital transformation has come to mean a journey from inflexible platforms, products, and workflows to a ‘permanently agile’ condition,” they write in their InfoWorld Deep Dive on the topic. “Getting there may involve the adoption of new programming, infrastructure, or the internet of things (IoT) advances and processes. But the goal is to create a platform for continuous experimentation and to establish mechanisms to measure results.”

For Knorr and Tyan, permanent agility is a quest for digital value. It starts with customer-facing applications, because they generate revenue. But it quickly extends into business itself: “Most promising is making agility a permanent part of the custom software that defines a company’s core business — from manufacturing software to collaborative design platforms to logistical systems,” they write.

The payoff: faster time to market, higher-quality results, increased revenue, greater reliability, cost reduction, and the ability to attract and retain the best talent. How do you earn them? Read the rest of the InfoWorld Deep Dive to find out.