Research and development is often associated with large corporations with ample funding and the ability to attract top-class innovators. But research and development (R&D) is not the purview of major corporations only. Despite access to smaller budgets, many small businesses can also reap the advantages of a robust R&D strategy.
Research and development basics
Within the business world, research and development refers to activities a company pursues for a number of purposes, including:
- The creation of new products or innovations
- Improvements to existing products
- The development of new processes to enhance the production process
While there is always a cost associated with R&D, the funds you direct toward such activities can potentially reap generous rewards. When viewed from this perspective, the costs of research and development can be seen as an investment.
Importance of research and development
As the name indicates, research and development activities are composed of two phases. Investigative activities inform the research phase, during which ideas and innovative approaches are examined to determine feasibility. Once research pinpoints a potential direction, development can then take place.
The benefits of R&D can include:
- Reduced production costs generated by more efficient processes. This in turn can often have a direct impact on a firm's bottom line. For example, a jacket manufacturer initially employs hand-stitching to produce its signature product. Through R&D, the company develops a mass-production process that results in increased profits because it is able to better meet rising demand.
- Increased company value. You business can increase the value of its intellectual property through patents and copyrights arising out of new processes and innovations. For example, a patent obtained for a new invention can be valued, and its valuation becomes an asset in the company's balance sheet.
- Ability to capitalize on trends. This can occur either through product development or by improving existing products to attract the trend's demographic. For example, with the rise in popularity of low-carb diets, a craft beer company that invests in the formulation of a low-carb beer is able to enter into a new market driven by this trend and, in the process, expand its target audience.
- Supporting changes in operations. R&D can help you obtain the evidence required to support crucial operating decisions. For example, data obtained through R&D might enable a company to determine that a particular product or service is no longer feasible and should be retired.
R&D partnership agreements
Because cost can be an important factor in the sustainability of an R&D strategy, many small companies turn to partnerships with other companies or experts to help them further their research and development goals. In such cases, it's important for companies to draft a research and development agreement that provides adequate protection for any innovations generated by the partnership.
Your agreement should clarify the parameters of the joint project. Elements to consider include:
- Description of the project. Be specific about the details of the venture you and any partners are undertaking.
- Duties and responsibilities. Specify who is responsible for the various aspects of the project.
- Confidentiality and nondisclosure. Given the nature of R&D, partners to such an agreement often find themselves exposing trade secrets to each other. It's common for R&D agreements to include nondisclosure wording to provide conditions of confidentiality.
- Ownership of intellectual property. Most R&D ventures give rise to intellectual property such as patents or copyright. Your agreement should specify the percentage of ownership of such property that will be accorded to each party to the agreement.
- Revenues and expenses. In addition to a clear outline of how any profits generated as a result of your joint venture will be divided among the partners, there should also be wording that deals with how the costs and expenses of R&D activities will be shared.
- Termination of the agreement. Outline what happens to the R&D that has already taken place if either partner has to terminate its participation in the project.
- Dispute resolution. A number of processes are available to help in the conflict-resolution process. For example, if a conflict does arise, your agreement might stipulate that the parties must engage in mediation or arbitration to come to a resolution of the issue.
A concrete R&D strategy has the ability to give your business a clear competitive advantage within a crowded marketplace. If you've partnered with another company or individual to advance your company's R&D goals, it's always a good idea to protect your innovations with a research and development agreement.
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