NEW YORK, NY, Sept. 19, 2005 -- Innovation remains the technology industry's most critical competitive factor, yet most technology companies still lack effective processes to manage innovation investments that drive their success, according to a new study by Ernst & Young.

The study indicates that technology executives are struggling to find a balance between a variety of competing demands, including short-term financial returns and long-term investment, opportunity and risk, innovation creativity and financial discipline. As a result, companies require new and improved disciplines for managing innovation spending, according to the study, Balance Point: Bringing Discipline to Investment in Innovation and Growth. The study is based on surveys, interviews and roundtable discussions with 175 Chief Financial Officers, Chief Technology Officers and other senior executives from North America, Europe and Asia.

The study also indicates that CFOs are becoming more involved in the innovation investment process, but their roles and responsibilities are inadequately defined at many companies, reducing their effectiveness and value in the process. Executives believe the role of the CFO in innovation investment has received too little attention. "I think this topic -- exploring the interaction between finance and technology -- has been very much an overlooked area," one executive remarked.

Among the survey findings:

* Executives mention product and service innovation more often than any other factor as a driver of business success.

* 80 percent of respondents say technology innovation is more important than ever to their companies' success.

* 60 percent say their companies have a process to assess the strategic, financial and operational risks associated with innovation investments; however, only 47 percent grade their ability to manage these investments as above average.

* 74 percent of respondents say their company's CFO and finance organization are now more involved in the innovation investment process; however, only 57 percent say the finance organization adds significant value to the process, and only 53 percent say the role of the CFO is clearly defined.

* Just 31 percent say that their companies use leading analytical tools to make and track innovation investments.

* Half of survey respondents are spending more than 10 percent of their revenue on research and development (R&D) spending.

* Respondents indicate about 30 percent of their innovation investments are ineffective.

"Technology companies are struggling to meet the demand for faster, smarter investment decisions in innovation and growth, but the formula for improvement is elusive," according to Stephen E. Almassy, Ernst & Young's Global Vice Chair, Technology, Communications, and Entertainment. "The general consensus among executives is that their companies need to do much better in managing these investments."

"The finance department is playing a larger role in making and monitoring corporate investments in innovation, but there are still considerable questions about how to involve the CFO in a way that truly adds value and improves results," Chris Harrison, Ernst & Young's European Technology Leader, added. "CFOs must take more of a leadership role in bringing new analytics, tools and disciplines to the investment process. In fact, the technology executives that we talked with are hungry for more CFO involvement."

The Ernst & Young study underscores the fundamental role that innovation investment (including R&D, mergers and acquisitions, joint ventures and outsourcing) plays in global competitiveness. For example, the study indicates a significant relationship between R&D intensity and profitability for technology companies.

At the same time, executives feel growing pressures to deliver immediate financial results, and many worry that the short-term focus will negatively affect long-term competitive positioning. Some 69 percent of respondents say increased pressure for short-term financial results is affecting their investment strategies. "During the last few years, innovation gravitated toward the short-term, but not the strategically important," said an executive interviewed for the study.

External sources of innovation -- through mergers and acquisitions, strategic partnerships and outsourcing relationships -- are playing a greater role in innovation and growth strategies. However, executives are concerned about losing control of core technology and relying too heavily on outside sources. Sixty-eight percent of respondents expect strategic alliances and joint ventures to affect their innovation and growth strategies. Only 38 percent, however, say their companies rely on externally sourced technology investments more than they did two years ago. The study identifies a series of actions that CFOs can take to improve the innovation investment process, including positioning themselves as a business partner in the process, acting as a collaborative agent for investments within the organization and providing the necessary risk assessment throughout the process. "Many technology executives told us that they still rely on gut-level decision making when it comes to their innovation investments," said Gregg Sutherland, the managing director at Ernst & Young who leads the firm's Business Planning and Analytics practice. "They have been slow to adopt sophisticated analytical tools and repeatable processes to help make and track their investment decisions. The result is often missed opportunities and unnecessary failures. The good news is companies, that decide to manage the process rigorously, can achieve better results."

Note: For the purpose of this study, innovation investment was defined as the commitment of financial resources to create product and services and take them to market.

About Ernst & Young

Ernst & Young, a global leader in professional services, is committed to restoring the public's trust in professional services firms and in the quality of financial reporting. Its 100,000 people in 140 countries pursue the highest levels of integrity, quality, and professionalism in providing a range of sophisticated services centered on our core competencies of auditing, accounting, tax, and transactions. Further information about Ernst & Young and its approach to a variety of business issues can be found at http://www.ey.com/perspectives. Ernst & Young refers to all the members of the global Ernst & Young organization.

Lisa Rosendorf
lisa.rosendorf@ey.com