How to Recession-Proof your Innovation Spending

With signs of a new recession growing on the horizon, it can be tempting to focus primarily on the short term actions that the US might need to do to manage the negative impact on the economy.  Innovation managers are especially gloomy, because many companies treat innovation investment as a luxury good: wonderful when times are good, but one of the first things to cut when times are bad. 

The National Bureau of Economic Research defines a recession as two consecutive quarters in which the gross domestic product (GDP) declines.  The depth of any given recession varies, from as much as a 26% drop in the Great Depression, to as little as 0.3% in the early 2000s.  The most recent recession, a deep one by recent standards, caused the US GDP to fall by 5%. 

It is fruitless to pretend that one can maintain the previous level of innovation spending, during a deep recession.  Cuts have to be made, and made soon.  It isn’t simply a matter of trimming a bit of fat here and there.  One must make sizeable cuts of 10%, 20% or more, and do so now.  Any one unable or unwilling to do this will likely find themselves to be one of the cuts to the new budget!

So cuts will be made, whether you want to do so or not.  But there are better ways and worse ways to trim your spending.  The key difference lies in the ability to grow back again, once the bad times are over, and good times return.  Since the Great Depression, the average length of a recession has ranged from 6 months to 18 months.  Because a recession is defined as two consecutive quarters of decline, the time to recover from a recession once it starts is just 0 to 12 months.  So it makes sense, even when cutting innovation spending, to think about the recovery that may come within a single year. 

A useful metaphor here to contrast different modes of cutting innovation expenses is “topping” a tree, vs. trimming the tree.  Trimming the tree will remove many limbs and branches of the tree.  But done properly, the trimming does not reduce the tree’s ability to grow in the long run.  Indeed, done well, the trimming can actually help the tree grow back even stronger.  By contrast, topping a tree stunts the tree’s long term growth, permanently reducing its ultimate height to a level far lower than it otherwise would have been.

When you cut an individual innovation program, this is like trimming one of the branches of the tree.  The bulk of the tree and its root system are still health and intact.  When you shut down an entire function, and lay off many knowledgable, long-serving staff however, that is like topping the tree.  Priceless knowledge and experience may be lost, and unavailable to you when the growth opportunities return.

Since many R&D costs are fixed in the short to medium term, reducing internal costs without permanently damaging your long term growth requires a more open mindset.  Instead of shutting down a functional group, for example, what about letting it open up its services to outside customers, to spread those fixed costs over more volume?  Those outside customers help pay to keep the group and its knowledge intact.  Or, instead of closing down a major project, what about moving its ongoing costs to a supplier, and becoming a customer of the project?  Your costs are now variable, and you only pay for what you use.  During the bad times, you dial down your own usage.  And when the good times return, you dial it back up again.  Alternatively, if you have a potential customer for the project, get them to invest the additional funds to take it to market, and become a supplier to that customer for the project.

Yes, these moves do reduce your upside when the good times return.  You must now share the proceeds of that project with your customer, or your supplier.  But recall the bad times: you were going to shut the thing down entirely.  Half of something is vastly better than 100% of nothing.  That is another part of the open mindset required.

The 13 recessions in the past 90 years have lasted less than two years on average.  Even the Great Depression only lasted for 3 and a half years.  So recovery will come again, perhaps sooner than you think.  Those companies who keep that in mind can outgrow their competitors when the good times return.