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IBM Chief: All CEOs Reluctant To Invest In R&D 321

theodp writes "In his Centennial Conversation at the Computer History Museum, IBM CEO Sam Palmisano emphasized the importance of investing in R&D, even in a down economy. 'Shareholder expectations for higher returns don't diminish when the economy stutters,' said Sam. 'And yet, Tom Watson Sr. actually increased research investment during the Great Depression.' Palmisano added, 'I will tell you that my own instinctive reflex isn't to continue investing $6 billion a year during the worst economic downturn since the Great Depression. In that regard, I'm like all CEOs.'"
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IBM Chief: All CEOs Reluctant To Invest In R&D

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  • by intellitech ( 1912116 ) * on Sunday August 21, 2011 @08:21AM (#37160228)

    The problem with R&D is that many company executives that make these investment decisions typically have trouble seeing the chain of innovation that heavy R&D investment brings to the table. Most companies right now (or at least a majority, in any case) expect instant-gratification on every damn investment, forcing every R&D department to constantly justify its existence through operational and productive changes, which almost always involve cutting costs somewhere.. and that's just not the way the fucking world works. If you want to rake in revenue, you're going to have to invest in R&D, and people may eventually figure that out.. hopefully.

    • Re: (Score:3, Insightful)

      I agree (which means I shouldn't reply and instead should just mod your post up but I have something to say so here I am :).

      I'll use an example (not necessarily the best example but a good enough one to certainly support your point): Apple.

      Apple invests an enormous amount of resources into R&D and it is paying off (to say the least). The most important resource that they're clearly investing into R&D? Time. While they're certainly interested in making lots of money now, they've clearly made the
      • It's not really a rumour when Steve Jobs himself mentioned they designed the iPad before the iPhone on All Things D. ;-)

        I agree with your point though and you saved me the time to write my own, also citing Apple as an example. It seems so simple AND they said they would be investing in R&D during the downturn. Now look at them, they are making a killing in profits IN A DOWNTURN! Imagine what it would be like if we weren't living in a recession?

        • by Billly Gates ( 198444 ) on Sunday August 21, 2011 @11:02AM (#37160906) Journal

          Here is a little secret.

          CEO's are not in it to bring profits for a company. That is not their job. Their job is to boast the share price at all costs. Its taught in finance 101 in any college.

          Now imagine you are the CEO. You can invest in R&D and have your shareprice get cut down by almost half in this recession and risk your job for not using the money to hire more marketing and sales people, but if you stay on for 5+ years you will make tons of money and create long term value. Or you eliminate R&D and your company will die within 5 - 7 years right? As CEO you get a 20 million bonus for selling your prized assets that make you money for short term gain and your stock price goes up a good 35%. You do not think such CEOs who do this stay right? They jump ship within 2-3 years with a golden parachute. Even better with that track record you go on raiding the next company for even more money and become a guru and genius to stroke your ego. 90% of CEO's would pick this and let the next CEO take the fall when they go out of business or fade to the competion. Meantime you buy a yatch and retire or buy a bigger one as you ruin the next company, etc.

          This is how the real world works.

          If this needs to change we have to stop having Wall Street reward short term behavior and start punishing companies like HP who do retarded things for long term shareholder wealth. I do not know how and do not think it is our job to do this. Steve Jobs was fired from Apple initially because of R&D and a lack of results. Wall Street hated him for his long term ideas and R&D. They wanted the mac done cheap like a generic PC. HE came back and risked everything for the IPOD as most CEOs refused to work for Apple thinking they were dead.

          • by Cryacin ( 657549 )

            You are spot on right. Unfortunately there is no penalty to be paid for instant gratification. Hopefuly after this correction, investors will learn that 5-10% is an appropriate ROI. Currently the banks are facing an interesting problem. They had a group of essentially conmen, providing unsustainable 20-30% returns, a mad rush on profits and valuation of shares, rather than stable long term business. Now, when the reality cheque's bounced, the shareholders are unhappy with the 5-10% return, so the ban
      • by mvdwege ( 243851 )

        Apple invests an enormous amount of resources into R&D

        Actually, R&D is only about a third of Apple's expenses. And compared to their revenues, the sum gets even smaller. Don't fall for the narrative: check the 10-Q and 10-K for yourself.


        • Only?

          A third expenses for R&D alone sounds quite a lot, I doubt many companies spend that much on R&D alone.

          • by mvdwege ( 243851 )

            Compared to their overal revenue? Yes, only. Apple is good at keeping costs down, which is why R&D is a fairly big hit out of their expenses. However compared to their revenues, they invest very little.

            It's a nice narrative, but the numbers don't hold up.


          • by Cryacin ( 657549 )
            3% R&D is standard for an established business. Any more and the shareholders would have your head as CEO.
      • by chrb ( 1083577 ) on Sunday August 21, 2011 @12:34PM (#37161470)
        R&D Expenditures for Tech Companies []. As a percentage of revenue, Microsoft is highest (14.6%), followed by Cisco (14%) and Google (12%). Apple is down at the bottom with 2.3%.
      • Re: (Score:3, Insightful)

        by Belial6 ( 794905 )
        Apple is a terrible example of a company doing well due to R&D. Apple sells 70% on marketing and 30% on product. The fact that they made a tablet, just like lots of other companies have done, and Jobs said, "Lets make a small one like the Palm" followed by a realization years later that people might actually want a the large version, doesn't mean Apple is investing heavily in R&D. Apple doesn't wait until a product is "just right". The iPad isn't an example of Apple "taking several years to poli
        • I bet Apple's success really annoys the hell out of you. All those mindless sheeple buying shiny glossy worthless gadgets because of Apple's "marketing" and "Reality Distortion Field", right?

          You couldn't get any more ignorant. Apple succeeds because they understand technology and human beings. I think you'd be surprised how little they spend on marketing -- certainly nowhere near the 70% you claim. Apple's products are superior over the competition, so they sell themselves. There's no secret to this, it's

      • When your point and conclusion rests on rumors, legends, and "it seems" or "I believe" rather than actual facts.... it makes your conclusion valueless.

        But you'll get +5 anyhow, because your conclusion coincides with one of Slashdot's most treasured bits of dogma.

    • Innovation does not always lead to future profit. Sometimes you sink billions into a project only to find out that it can't possibly work. Taking chances like that requires disposable income, which is not available when times are bad. In a boom a company can easily afford to invest in long-term projects that provide no immediate benefits, but now when companies struggle to stay afloat amid all that debt they took on while betting on infinite growth, it would be totally insane to spend money on flakey things

    • Managers aren't stupid; they don't "have trouble seeing the chain of innovation". By cutting R&D management can balance budgets, create short term profits, meet earnings projections, get huge bonuses, get promotions, and generally live the good life. It's the board and investors who are supposed to hold management to strategies of long term value, but they often don't have any long term commitment themselves.
      • by Lumpy ( 12016 )

        "Managers aren't stupid; "

        You've never worked at Comcast or AT&T

      • It's the board and investors who are supposed to hold management to strategies of long term value, but they often don't have any long term commitment themselves.

        In today's world of mega-corporations there's no personal involvement in the future of a company.

        In the days of family owned businesses a long term vision was what guaranteed the retirement pensions of the investors. Today investments are managed by pension funds, none of which is committed to investing in one company alone.

        Likewise, board members are director of several different companies, they are always ready to sacrifice one of them for short term profit.

    • "which almost always involve cutting costs somewhere.. and that's just not the way the fucking world works."

      The real issue is that capitalisms desire for profit and the natural physical logistics of solving problems are at odds. If you've lived long enough you'll see this time and time again in business. We can see this especially in the videogame industry as computational power increased team sizes ballooned as the cost of developing art assets and game engines kept going up while market size for various

  • theodp (Score:2, Informative)

    by Raenex ( 947668 )

    I was surprised to see a story from theodp without a ton of links and screechy hyperbole, but then I looked at the original submission. Kudos to Soulskill for doing some editing.

    • I found the speech itself good to read as well.

      The reduction in R&D spending by several companies has me worried. It's nice to see IBM speak out in favour of it.

      • My dad worked for IBM on the sales and management side for over 30 years.
        He told me on several occasions in the 80's and 90's how important it was that IBM was investing in fundamental research, even if the research didn't have an obvious, immediate application. They could afford to throw a lot of things at the wall and see what sticks, and things that did stick could become part of products IBM could introduce and/or license technology to (at their option, whichever is more profitable) some 10 to 20 years

  • by decora ( 1710862 ) on Sunday August 21, 2011 @08:26AM (#37160258) Journal

    the social security system was one of the most massive IT projects ever undertaken in history, when it came about in 1930s. IBM made massive amounts of money off of that project.

    the German Census of 1936 was a massive operation and brought huge profits to IBM, as well as Hitler's grand plans for a massively centralized healthcare system which required vast amounts of data processing.

    then there was the Soviet Union, which ran a planned economy - meaning that massive amounts of data had to be sifted in a centralized fashion. IBM was there too.

    then there was Japan....

    so its kind of easy for IBM to spend on R&D in the 1930s, considering that every government on the planet was pouring money into it's coffers.

    • I think the point of the article is that when those challenges came, IBM was ready to answer them and apparently nobody else was. They could have just kept making cheese slicers, but IBM had a vision to be on the edge of what is technologically possible.

      • to IBM in the era, including several in europe.

        Watson destroyed them, partly through competition, but partly through IBM's endless schmoozing with high government officials, including Nazis.

        it would be like saying that Microsoft invested in R&D during the Great Recession. Of course they did. They also bribed teachers to teach students their products, forced Andriod phone makers and linux vendors to pay them protection money, launched a patent war (through SCO) against Linux, schmoozed with high governme

  • by curmudgeon99 ( 1040054 ) on Sunday August 21, 2011 @08:38AM (#37160308)
    Not only is the modern corporation and its CEO unwilling to pay for R&D, they are unwilling to pay for the Technical Debt of their existing systems.
    Software developers who work in production support know they will only be able to fix individual defects that have been targeted by the business customers. So, any production system becomes a series of code compromises. Developers fix individual issues and never do a broad refactoring of the code base. So, when a developer comes to a page, sees it's a collection of compromise/hacks, there is no stomach from the business to taking the time to refactor the page. So, instead, the developer holds his nose and adds another hack. Horrible.
    So, developers do the refactoring on the sly. If they are really honorable, they come in on their own time and implement architectural improvements on their own dime.
    No one in business understands it idea of Technical Debt and the value in future bugs prevented of paying that debt off.
    • by obarel ( 670863 )

      You have to be more careful with the way you describe reality. Too much accuracy may cause depression.

    • if you want to talk about brutal reality....

      That's why I only like to work on new projects. Let drones maintain it and deal with any architectural flaws and burn out doing it, that's why they get half my pay.
      • Sir, I have spent many years building brand-new green field systems. Then again, every company has their legacy systems and they expect every architect to be willing to dig into those. I have had great success in my career by being willing to work on any project--green field new development and on existing systems. Primadonnas like you are the kind that give software developers a bad name in the eyes of the business side. I made $200,000 a year in NYC just because I was willing to go into companies in a wor
        • I made $200,000 a year in NYC just because I was willing to go into companies in a world of pain and rewrite their systems from scratch.

          Said the primadonna no different than me. You didn't go in a quarter of that pay and fix the existing system. you might think between your left and right ear that yours will be easier to maintain, but by the way you said "you" rewrote it that will not be the case. You did do the good thing of giving them the features they wanted at the time, but down the road the sa
          • by curmudgeon99 ( 1040054 ) on Sunday August 21, 2011 @09:56AM (#37160586)
            No, you don't understand at all. The old system had all kinds of abominations such as database-access code mingled inside of JSPs and inline styles. So, I rewrote their apps with clean separation into tiers with proper style sheets and security and proper service/Dao layers. I actually got them to use a source control system rather than storing code in developer's unix home directories. I insisted on primary keys for DB tables and all kinds of no brainers like that. I resisted the urge to use Hibernate because I knew the existing staff could not support that. So, you underestimated the scope of what I fixed. What I left behind will be much easier to maintain. Separating the view code from the DB access code alone made it infinitely easier to support. Using PreparedStatements instead of Statements made their lives so much easier and removed a whole class of defects from occurring.
            The difference between dumb and smart is not measured in percentages--but in orders of magnitude.
      • by Tarsir ( 1175373 )

        Let drones maintain [my projects] and deal with any architectural flaws and burn out doing it, that's why they get half my pay.

        You know, if you switched to running companies into the ground, you could probably make 10 times your current pay.

    • by Anonymous Coward on Sunday August 21, 2011 @09:20AM (#37160442)

      If they are really honorable, they come in on their own time and implement architectural improvements on their own dime.

      Stop right there. That's not honor, that's foolishness. Give up your life, family time, whatever, for a corporation that couldn't care less if you dropped dead right now. Furthermore, shit like that hides the true cost of the work being done, and increases expectations on under resourced staff.

      • Re: (Score:2, Insightful)

        Welcome to the real world. In every profession the true professional spends much more time than they bill to make sure they do a quality job. While I agree it's counterproductive because it changes expectations, this is a cost of doing business. I'm sure you spend plenty of time on your couch watching TV when I and others like me are writing code, learning new technologies and in general kicking your ass. I have not had to worry about being replaced by an offshore resource for the last decade because I have
    • It's called maintenance. Most people don't understand that software needs maintenance and regular check ups, just like hardware does.

    • Refactoring is fraught because to do it, you have to know what you are refactoring for. To make that judgement requires and engineer to think above his/her pay grade, and predict the future. Now, good engineers can do that, but there's no guarantee that their judgement will be supported by the manager that pays the salary. The disincentives are high.
    • by Lumpy ( 12016 )

      " Developers (are told to only) fix individual issues and (directed to by management) never do a broad refactoring of the code base."

      I fixed that for you as you made it sound like the developers are being lazy and dont want to do this. We want to do this, it's management that is being lazy.

      I know of 4 installed systems that are a ticking time bomb because of this. Management has been warned about it to the point that we were told, "do not bring it up again". So we all sit here quietly waiting for the bi

      • CEO/PHB voice here

        How does refactoring bring shareholder value? How does it boast the company's stock price? How does it increase revenue? .../CEO/PHB voice

        First off the CEO is there to make bonus money by screwing the company and leaving in 2-3 years before shit hits the fan. He doesn't care about you or technical debt .... infact he doesn't care about the company.

        Its a viscous cycle, but if you want to do innovative and wonderful things do not become a public company. Wall Street only cares about

        • CEO/PHB voice here
          How does refactoring bring shareholder value? How does it boast the company's stock price? How does it increase revenue? .../CEO/PHB voice

          Which wouldn't quite be so bad if they'd actually listen to the answers. The general answer being "If we refactored/rewrote this system, we'd have many fewer customer-visible critical bugs. We'd thus be able to spend less time putting out fires, and more time building version 11.0 or the next product. And the customers would be happier, and more likel

    • This is not only true of software development: it's true in IT as well. Far too often visiting with corporate partners, I see racks of equipment wired like a cat's cradle, where the engineer on site says "oh, we're not very neat" and I see core servers at risk from unlabeled wires, power and cabling that are out of spec and likely to fail under load, and where expensive system redundancy is wasted because the matched pair of servers are plugged into the same switch and the same power supply and the same sto

    • "So, developers do the refactoring on the sly. If they are really honorable, they come in on their own time and implement architectural improvements on their own dime."

      I used to have this attitude when I first started out, but I learned the hard way that the best thing a developer can do is leave well enough alone, "first, do no harm". This is especially true for hacked up, patched up code. Chances are, ugly as it is, that code is working as expected, especially if it's old, and you may not be able to
      • I started off fixing everything I saw and made exactly the mistakes you describe.
        Then I reverted to holding my nose and adding my hack.
        Now, I have found that I am experienced enough that I identify the hacked-up code and start to compile a list of all the use cases that hit it. I don't just dive on that hand grenade, I put on the bomb-suit and make a plan to take it out. Yes, you always miss some obscure use case that gets you a tiny bit--but I promise you it's a much better place to be and after those fe
  • by gestalt_n_pepper ( 991155 ) on Sunday August 21, 2011 @08:50AM (#37160350)

    ...that cannot think beyond the next quarter's profits. And hasn't that worked out well for the economy? We used to be a country of inventors and innovators. Now we're a country of servants and finance dickheads who neither invent or implement new technology. We went from a country of Hewletts and Packards to a country run by the likes of Carly Fiona.

    • by Veetox ( 931340 )
      I think it's important to point out why research is getting the cold shoulder:

      Shareholder expectations for higher returns don't diminish when the economy stutters.

      There it is. Investors of greater means have come to believe that they are entitled to greater than 6% interest. They don't expect to take risks anymore, so they turn their money towards market hacking, and essentially producing shit products that are just shiny enough for the masses to buy.

    • Nonsense. The US is home to 80% of the Nobel Prize winners since 1940. It makes easily the largest research investment in the world today, almost 3 times that of the next nation, China. A measure of scientific productivity is how often articles are cited by other scientists in the field. The US holds a 30% share of citations which is much larger than it's share of world GDP.

      • Try 40%.. Certainly commendable, but not all that surprising considering the US was the only major wealthy nation left untouched by WWII..

    • by Grave ( 8234 )

      The Japanese stock market, once upon a time (I suspect no longer) seemed to be focused more on long-term health than quarterly profits, and so the companies that crashed were the ones who didn't invest in the future--this was in direct contrast to western stock markets, where investors only care if the next quarter is going to meet the projections.

      I work for a company that is expanding, partly through buyouts of smaller players that have complimentary technologies, and partly through hiring after those new

    • And hasn't that worked out well for the infrastructure?

      And hasn't that worked out well for the institutions?

      And hasn't that worked out well for the workforce?

      And hasn't that worked out well for the markets?

      Who has it worked out for? The banksters and their fellow oligops. There must be lobbyists, of course, they're the legal pimps. Last, but most culpable, the turncoats who sell out the US from their 'democratically elected' thrones.

      Vote out the incumbents, it is long past due.

    • by yuhong ( 1378501 )

      Yea, I have said that "shareholder value" based on stock price and the quarterly earnings game is fundamentally flawed for a while now. Dividends would be a better idea for most mature companies.

  • How much you value the present is known as time preference. The more you value the present the more you will spend now and the less money available for lending. This causes higher natural interest rates which makes businesses invest less in the future capital equipment or R&D. This makes sense. If people are worried about eating next year it is worth more to plant more aces of crops than use that money to buy new equipment.

    The more forward looking you are the more you save. This makes more funds availab

  • by Anonymous Coward

    I think the Harvard Business school mentality is the most short sighted though process around and I think will be the cause of the fall of western civilization.

    The focus is on short term profit with no long term thought for long term health -- it is the bonus system based on short term gains which generally are at the cost of long term health of the company.

    Executives slash & hack at R&D for short term gain & bonuses. IBM is alive today because of the R&D done in the 80's & 90's and they

    • Fortunately, us folks here in America might soon have a president who understands this. From a New York Post article on Mitt Romney:

      Bain reduced Dade's research and development spending to 6 to 7 percent of sales, while its peers allocated between 10 and 15 percent. Dade in June 1999 used the savings as part of the basis to borrow $421 million. Dade then turned around and used $365 million from the loan to buy shares from its owners, giving them a 4.3 times return on their investment.

      A Dade executive, who r

  • Poorly edited quote (Score:3, Informative)

    by Jazari ( 2006634 ) on Sunday August 21, 2011 @09:21AM (#37160444)
    Gee, the quote in the summary makes it look like he's not in favor of R&D, but right after that he says "But I also know that if you fall behind, it becomes very difficult to catch up."
    He also talks about the evolution of R&D "a deep commitment to both R and D means that it's not only important to innovate it's equally important to innovate how you innovate. "

    In the end of course, like any long term investment, it take guts to spend on R&D when the returns are far from certain.
  • by bzipitidoo ( 647217 ) <> on Sunday August 21, 2011 @09:32AM (#37160482) Journal

    Corporations are lousy organizations for anything long term or big. 1st, they really do not have the resources. 2nd, they warp everything for profit. With the current legal climate, there's not much point in private research, as they'd try to lock up everything and then some with patents, copyrights, and so on.

    Not saying the profit motive is bad, but for some things it is not the best guide. Why did we go to the Moon? Not for profit! Why was the Titanic operated so recklessly? A huge engineering project such as the Panama Canal couldn't be built by a single corporation. That was done by the US government. The transcontinental railroad was built by 2 private companies, but only with a great deal of help from the government in the form of land grants, military protection from Native Americans, and Civil War training and experience in running large organizations and operations. Some of the leaders of the UP considered cheating. They looked into whether it would be worth purposely making the route longer, much longer than necessary, in order to grab more land. Such thinking is all too typical, and the UP is hardly the only corporation to consider such schemes. Hoover Dam was another effort that could not have been done solely with private resources. The people had to negotiate all the details of water rights, power generation, and land use before turning over the work itself to private industry. The Channel Tunnel, the Erie Canal, the Transatlantic cable, and the Internet were similar. Most large civil engineering projects are government organized.

  • Makes sense to me. (Score:4, Informative)

    by sgt scrub ( 869860 ) <(saintium) (at) (> on Sunday August 21, 2011 @09:48AM (#37160558)

    When there is an economic downturn it is due to the fact your current process of getting money is no longer viable. In order to change to a viable process of getting money you must start by looking for a new process. In the world of technology this requires researching technology.

  • CEOs have no idea what's going on with their companies and they're just in it for the money. Who would have thought.

Nothing ever becomes real till it is experienced -- even a proverb is no proverb to you till your life has illustrated it. -- John Keats