If your company gives exactly the same amount of budget for research and development (R&D) to exactly the same people every year, it is undermining its chances for uncovering innovative new solutions or services, according to new McKinsey research.
 
The consulting firm's study focused on massive companies with more than $1 billion in revenue, but there are plenty of takeaways for smaller businesses.
 
More isn't necessarily more.
The average amount of money dedicated to R&D as a percentage of revenue was pretty consistent across all the companies considered, ranging from 12.7 percent to 13.7 percent regardless of their innovation track.
 
Move the money around.
Seventy-five percent of executives at companies that were in the top quartile of performance reallocated between 6 percent and 30 percent of their R&D budgets in the prior three years. Only one-third of the companies in the lowest performing quartile did the same.
 
Don't mess with success.
That's not to say that you should deprive perennial innovators of funds. Only 5 percent of the top-performing companies reassigned more than 30 percent of their R&D funds in any given year. By contrast, more than 40 percent of the ones in the lowest quartile did so.
 
"The poorest performers, in fact, seem divided between two camps," write the McKinsey researchers who analyzed the data. "At one extreme, there's a near-majority of companies that are sleepwalking through their R&D-reallocation decisions, moving 5 percent or less of their R&D resources a year among businesses and divisions. At the other extreme, a second group is placing huge bets in an attempt to jump-start performance or perhaps to make drastic course corrections."
 
R&D investments shouldn't just be another check-off item during your annual budget-planning process, and these data underscore that.
 
McKinsey has published a report, "The Eight Essentials of Innovation Performance," that your organization might consult for ideas. Here's a summary of the main discussion points:
 
Aspire – Ask your team whether innovation-led growth is critical
 
Choose – Think about whether your portfolio of initiatives is well-balanced and resourced to win
 
Discover – Check to see whether your R&D yielding actionable insights that you have overlooked
 
Evolve – Make sure your culture is open to new business models
 
Accelerate – Encourage flexible processes and organizational structures that can get new ideas to market quickly
 
Scale – Ensure your initiatives are the right size for the right market
 
Extend – Don't forget to consider how business partners can help
 
Mobilize – Give your team incentives to innovate "repeatedly"