How to Measure Return of Investment (ROI) in Research and Development (R&D)

Any business owner wants to optimize their work for maximum profit. One of the methods to achieve this goal is to increase the R&D return on investment. Let's start with the fact: ROI is now used everywhere - from large to small companies.

This parameter is of maximum relevance for companies focused on selling and providing services to customers. ROI is a great way to evaluate activities, the financial benefit of which directly depends on the buyers.

What is ROI? We can say that this parameter shows the optimality of your investment. The higher the indicator, the better your research and development team works and the more profit you get. By the way, this instrument can be applied in absolutely any area. However, it becomes the most relevant when evaluating the work of an R&D team.

Multifarious indirect costs during manufacturing and selling make ROI the best method of measuring for R&D. Thus, for evaluating the performance of the research and development team, there is simply no better parameter than a return on investment.

In addition to all the above factors, measuring ROI in R&D is also important because it can help you figure out a more profitable business strategy. ROI gives you the priceless capacity to measure team performance over time.

At the beginning of the article, we already discussed that the ROI formula covers not only the direct and indirect costs, but many other factors that are difficult to quantify.

Therefore, most heads of R&D departments use a simple formula that looks like this:

Everything is simple and clear here. We get our return on investment in the fastest possible way. It's easy enough to get numbers on profits and costs, so solving this equation is not difficult even for a person new to such calculations. But this formula does not reflect all the possible factors and outcomes of investing time and money in an R&D team.

To get the complete picture, you have to use the following formula:

Here we see many more variables, which significantly complicate the calculation process. Why do we need to take into account not only the basic values such as investments and profits? Let's take a closer look at this issue.

First, it is worth considering that the work of an R&D team does not always result in the creation of a specific product or service. In some cases, you can get a minimal profit but a tremendous experience that will affect your future projects.

Social impact and national prestige (SROI) are two things that can hardly be overestimated. Although they are difficult to quantify, they can have a fantastic effect on your company. You will earn the trust of customers, thereby attracting new clients, expanding the target audience, and so on.

The research of Tarbiat Modares University, one of the best postgraduate universities in Iran, serves as an excellent argument for using the complete ROI formula for R&D. If we take all the statistics on the research work of this university, we can clearly see the number of research papers and investments are growing over time.

However, we see that this is not a direct proportionality. What does it mean? Apparently, the amount of funds spent increases, but the profit is not growing as rapidly. It would seem worth cutting funding for the research department of the institute, but this is where social impact and national prestige come into play.

Each publication of research conducted by TMU creates exceptional opportunities for the promotion of the university, thereby increasing its prestige. Moreover, some of the publications can solve global problems.

That is why we should not forget about these parameters when calculating ROI and use a more complex formula.

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