June 11, 2024 | InBrief

Why R&D efficiency matters now for software companies

Using a balanced scorecard approach to prove business value and drive results

Why R&D efficiency matters now for software companies

As growth slows and enterprise values fall for many in the high-tech industry following the post-COVID boom, software companies must increasingly focus on maintaining and expanding margins. The need for efficient growth at scale requires fundamental changes beyond traditional cost reduction measures such as pausing hiring, reducing unnecessary spend, and halting initiatives. 

Emerging technologies present a unique opportunity to redefine engineering processes, enabling greater efficiencies, enhanced agility, and faster innovation.

R&D efficiency is critical in this context, but understanding where, how, and the potential for impact is a crucial first step.

What’s more, being able to measure R&D efficiency becomes even more critical for those businesses that want to optimize innovation investments.  

Moving beyond traditional metrics

Expanding beyond traditional DORA and SPACE metrics, companies need to better address the business impact and cost considerations to diagnose performance and improve R&D efficiency using a balanced scorecard. This approach enables a holistic view of your operations—allowing you to identify the interplay across the key measures to increase R&D and product efficiency and faster business results. 

R&D efficiency framework and best practices

By leveraging a balanced set of metrics, tech and software companies can thoroughly evaluate how their R&D capability impacts or contributes to their business value. A framework based on these components allows for a comprehensive understanding of the current state and identification of major opportunities for enhancement. The framework spans three crucial areas:

  1. Product development processes: Companies should assess process metrics, sprint metrics, QA metrics, release metrics, and DevOps metrics. While performance against each individual metric may vary, the collective view is helpful to surface opportunities to improve and standardize development processes and leverage automation.
  2. Product delivery costs: Companies can gauge the cost-effectiveness of their operations by examining organization composition, resource cost, and function cost. Metrics that measure delivery costs are key to understanding if teams are optimally structured. They also allow insight into your cost profile and ensure that investments are aligned to the right products and/or development. 
  3. Business results: Analyzing financial results, customer impact, product impact, and capital allocation will provide an understanding of whether business value is being created. Business results metrics also indicate if investments are yielding the outcomes that were expected.

A recent example: A previous client faced significant challenges in product development. Their product development capability became a patchwork of internal teams, external contractors, and managed services providers with competing priorities. They were spending more, but their returns (i.e., business value) were not improving.  

Our team first reviewed their product and engineering data, alongside their financials, to assess output, cost, and team composition. The numbers painted a disturbing picture -- for every 1 hour of development time, engineers spent an average of 6 hours completing analysis and project management activities required by their SDLC process.  

This revelation was startling for the client. With newfound clarity in the data, we crafted a plan to recalibrate their efforts. By tracking the right metrics, the client could fund initiatives more strategically. Ultimately, it wasn't just about the numbers but about giving the organization the tools to harness its true potential. 

Aligning metrics for maximum business impact

While companies measure these metrics individually, the power is in the collective view. The interplay between the metrics can shine a spotlight on gaps related to investment misalignment and process and delivery gaps. 

Example metrics below show that companies can track aligned to product development, product delivery, and business results. The secret is not in these specific metrics alone, but understanding how you are tracking against your industry peers.  

The first step is ensuring that you are collecting these data points. If you aren’t, that’s a great place to start. The second step is understanding how you compare to others in your industry, and knowing which metrics will make the most immediate impact to your business.  

Improving R&D efficiency and understanding the data behind these metrics can help software and technology companies achieve quicker, cost-effective results. The journey toward a highly efficient Product and R&D function starts the same as many other important business initiatives, with a clear understanding of the current state.  

Companies that are not proactively evaluating their R&D investments using a balanced scorecard will struggle to receive appropriate investments in R&D and innovation. And without the ability to show the impact on business value those investments have, these companies will continue to receive less funding.

Interested in diving deeper into your R&D metrics and understanding industry benchmarks?

Reach out to one of our experts to start a conversation.

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