© 1998 Wiley-Liss, Inc.

DRUG DEVELOPMENT RESEARCH 43:149–155 (1998)

Policy Overview

Managerial Value in R&D: A Self-AuditIvan Jensen,1* Ole Dissing,2 and Stig Jørgensen1

1SANT + Bendix, Holte, Denmark2COWI, Lyngby, Denmark

ABSTRACT A vital but overlooked part of process reengineering and quality improvement efforts inR&D is the assessment of managerial value-added. This article proposes one means for such assessment,consisting of a conceptual framework and a “toolbox” comprising a Value Audit. We identify why and howmanagers must respond to organizational needs for resources, for knowledge, and for guiding principles.And we provide a methodology by which managers can conduct a system and a compliance audit of mana-gerial value-added. While the fat is being trimmed from the organization, every manager must be preparedto answer the inevitable question: How do I as a manager add value to R&D? Drug Dev. Res. 43:149–155,1998. © 1998 Wiley-Liss, Inc.

Key words: management value-added; cognitive value; normative value

Strategy, Management and Health Policy

Venture CapitalEnablingTechnology

PreclinicalResearch

Preclinical DevelopmentToxicology, FormulationDrug Delivery,Pharmacokinetics

Clinical DevelopmentPhases I-IIIRegulatory, Quality,Manufacturing

PostmarketingPhase IV

*Correspondence to: Ivan Jensen, SANT + Bendix,Skovlytoften 9B, DK 2840 Holte, Denmark. E-mail: ivan@jensen.net

INTRODUCTION

At a fundamental level, every pharmaceutical com-pany exists to transform tangible and intangible inputs intoproducts and services that meet the needs of—and arewanted by—patients. When needs are met, value has (bydefinition) been created. Simply speaking, meeting needs,providing value, is the firm’s only reason for existence.

Conceptually, the company in general and R&D inparticular can be broken down into two subsystems. Thefirst, the operational, consists of all the activities by whichinputs are directly transformed into compounds and ser-vices. The second, the managerial, consists of activitiesthat regulate and support the operational subsystem andare vested with formal authority [Vickers, 1965]. In otherwords, the managerial subsystem deals indirectly withthe transformation of inputs into outputs but is respon-sible for overall allocation of resources.

Value generation is presumed to take place in theoperational subsystem. In an increasingly hostile and com-petitive health care environment, any activity within R&Dthat does not add value should be eliminated—for busi-ness reasons (to maximize organizational viability), and forenvironmental reasons (no futile resource consumption,minimal environmental load from waste emissions).

We contend that the managerial subsystem mustalso fulfill the value-adding requirement and demonstra-bly add value to R&D. The purpose of this article is topropose a self-audit for managers. In the first part of thediscussion, premises about the nature of value creationare identified and requirements of every activity in theoperational and managerial subsystems are defined. Inthe second part, composite case studies are used to illus-trate some of the consequences of falling short on valuecreation. In the third part, a “toolbox” or self-audit fordetermining managerial value-added is described. Thisaudit is meant to complement business processreengineering, total quality management, and other ef-forts addressing value in the operational subsystem[Bartlett and Ghoshal, 1995a].

ADDING VALUE: THE FRAMEWORK

A number of authors [Mintzberg, 1973; Vaill, 1990]have provided more or less normative descriptions of themindsets, roles, tasks, responsibilities, and actions of

150 JENSEN ET AL.

managers. But few have examined the notion that man-agers (e.g., the managerial subsystem) must add value,however indirectly, to the products or services of theirorganization [Keeney, 1994; Bartlett and Ghoshal, 1995b].And few have explicitly provided a means for assessingmanagerial value-added [Quinn et al., 1996].

Part of this omission may be oversight; part mayreflect the view that value is predominantly economicand added in or by the operational subsystem. We be-lieve that the latter perspective is too narrow and leadsto a de-emphasis of the role of management in value cre-ation. Instead, we must apply the same rigor and tests tothe managerial subsystem that we apply to the opera-tional subsystem. Although we focus in this article onthe management of R&D, our argument applies to man-agement in general.

To begin, we want to make explicit three statementsabout the nature of value creation:

1. Value is generated, in any part of the value chain,when customers’ needs are met. Value is added, in otherwords, when what is actually delivered meets what is ex-pected by customers. Readers will note that this corre-sponds to a formal definition of quality as the state in which“delivered” exactly matches “expected” [Crosby, 1979]. Theprimary customers of the operational subsystem of R&Dare external; the primary customers of the managerial sub-system of R&D are internal (e.g., employees).

2. In order to add value for their internal customers,managers of R&D must meet three critical needs: employ-ees’ needs for resources (money, people, time, equipment);employees’ needs for knowledge (about internal and ex-ternal customers, competitors, science, technology); andemployees’ needs for guiding principles (mission, ideol-ogy, ethics) separating acceptable from unacceptable be-havior. Although the three components are interdependent,such that money is often used as a measure of the othervalue components, not everything can be bought in suffi-cient quantity or quality within given time constraints.Knowledge and guiding principles, therefore, must beconsidered as value components in their own right.

3. There are three necessary and sufficient require-ments that must be satisfied for each activity withinR&D—whether operational or managerial: each must beunique and complementary to preceding activities andproduce an output desired by the customer and involvea transformation.

Below, the components of value (economic, cogni-tive, and normative) that correspond to the three criticalneeds within R&D are discussed in more detail.

Economic or Monetary Value

The most commonly described component of value,economic, is often measured in monetary terms. The higherthe price the patient (and the reimburser as well) is will-

ing to pay beyond the company’s cost of goods and relatedprocesses, the higher the economic value generated. Be-cause value is generated only when needs are met, eco-nomic value implies that what is delivered by the companymeets what is expected (e.g., needed) by the patient.

In order for the company as a whole to generateeconomic value, each activity in the operational subsystemof R&D must add economic value. Managers add eco-nomic value insofar as they respond to employee’s needsfor resources. “Responding to” does not automaticallyimply the provision of more money or other resources. Itmay equally well imply reducing needs by changing thetasks so that available resources suffice. For example,choices may be made to narrow the range of therapeuticareas in which the company does business, so that needsand resources match.

The challenge for managers is to make this matchas precisely as possible. Another way of stating this isthat managers must ensure that the opportunity cost ofR&D is as close to zero as possible. The process by whichthis is done is “strategy”; the tool, “portfolio manage-ment”; and the outcome is prioritized (focused) resourceallocation to programs and projects.

But economic value is only one component. In or-der to provide economic value, the operational subsystemof R&D requires not only resources, but also knowledgeand information about customers, competitors, science,technologies, processes, and so on.

Cognitive Value

Knowledge and information bear a “chicken andegg” relationship with economic value. Every activity inR&D requires information in order to be completed.Cognitive value is determined by how effectively scien-tists and other staff can access and utilize knowledge andinformation so that each activity is optimally performed.When their knowledge and information needs are notmet, or are only partially met, economic consequencesinclude the increased cost of missed deadlines or theopportunity cost of bringing the wrong compound for-ward. In other words, there is an opportunity cost tomaking a wrong choice because of poor information.

Managers add value insofar as they respond to thecognitive needs of R&D employees. Again, response mayinclude increasing the available information or reducingthe need (by, for example, choices that narrow the rangeof therapeutic areas [Galbraith, 1973]).

Normative Value

Of the three components of value, we contend thatnormative value is the most important. Normative valueis added when the critical organizational need for delin-eation of “principles of right action,” or what is accept-able and unacceptable behavior (Webster’s Dictionary,

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Third Ed.), are met. This need includes moral, ethical,and legal principles; norms for how people are to inter-act with one another (e.g., collaboratively or antagonisti-cally) and to communicate with one another (e.g., candidlyor secretively); and strategic boundaries governing busi-ness choices.

Normative value is defined by how closely people’sactual behavior matches ideal behavior [Argyris, 1990].Every discrepancy between what managers say and whatthey do—the “talk” and the “walk”—results in problemsoften described as belonging to the domain of organiza-tional culture. These include risk aversion, paternalism,conflict avoidance, expediency, complacency, and so on.These problems, in turn, determine in large measurewhether or not cognitive value (and, ultimately, economicvalue) is added to R&D. The best practices in the indus-try cannot be achieved if people are antagonistic and se-cretive; efficiency cannot be achieved if people are notgenuinely collaborative.

As Ghoshal and Bartlett [1996] noted, AT&T’s eco-nomic value-added (EVA) system played an important rolein the renovation of the company after its 1984 breakup.However, the role of the EVA was not simply to improvefinancial performance. That system formed “the basis of abehavioral context that resulted in a norm of fulfilling com-mitments and meeting tough standards—a discipline notwidely observed in the predivestiture AT&T.”

We want to point out that responding to the eco-nomic, cognitive, and normative needs of employees inR&D (i.e., empowering them) does not mean that man-agers relinquish necessary control. However, they willexercise control differently from traditional “commandand control” approaches [Simmons, 1995]. Unlike thesituation of responding to resource and/or cognitiveneeds, responding to normative needs requires a carefulbalance between loss of individual autonomy (settingboundaries too tightly) and encouraging anarchy (by set-ting no boundaries). The need for principles of right ac-tion can never be reduced.

In the following section, we explore some of theconsequences for R&D of falling short on one or morecomponents of managerial value. Not meeting, or onlypartially meeting, any need always imposes an extra costto the organization above ideal or best cost. This can alsobe defined as the penalty cost of not doing the right thingsright, or the cost of nonconformance (CONC) [Crosby,1979)]. With respect to R&D, when the needs of internalcustomers are not met, the cost of nonconformance willbe manifested in missed deadlines, waste, poor compoundchoices, and so on.

SOME CONSEQUENCES OF FALLING SHORT

Our first illustration, using composite examplesfrom our experience, is an organization falling short on

normative value. Managers in R&D fail to delineateclearly the boundary between acceptable and unaccept-able behaviors in the domains of business choice and in-terpersonal interactions.

Company Charlie

This biotechnology venture was begun in 1990 bytwo academics with an infusion of venture capital. Althoughthe company had no products, the scientists’ prowess innovel aspects of genetic engineering attracted sufficientventure capital to support the organization for an estimated7 years (at the current rate of expenditure, or “burn rate”).Not only venture capital but also scientists were drawn tothe company, and it quickly developed a reputation as awonderful place to hone scientific and technical skills.Many relationships were established with highly regardedacademic institutions internationally.

One of the founding scientists left in late 1993 be-cause she and the other founder could never agree onthe company’s strategy, especially the basic question of“What business are we in?” The remaining scientist-di-rector assured the venture capital partners that one ofthe many good ideas being explored at the bench wouldinevitably dictate the business to be pursued. Within thecompany, however, he encouraged fierce competitionamong the scientists to produce “the” good idea on whichthe company’s business would be based. And, by ap-proaching the scientists individually, with hints of pref-erential access to information, he fostered a highlypoliticized atmosphere of secrecy and intrigue.

This director failed to meet normative need in twoways. First, he failed to define the business focus (whattherapeutic areas to exploit). Second, he also failed todefine, by modeling as well as by policy, acceptable be-haviors. As a result, there was no agreement among sci-entists as to what efforts should be funded and whatshould be stopped. They fought among themselves forinternal resources and they “hoarded” information abouttheir work. Soon, what had started as a collaborative andopen group of people with a vision for their companybecame a constellation of warring factions. By 1994, therewere still no product candidates in the pipeline and, al-though the financial situation was deemed acceptable,survival time was recalculated to be down to 18 months.The Board was also looking for a new director.

Our second illustration is of a company with a stillcomfortable growth rate of turnover and profit, but fall-ing short on meeting cognitive and normative needs.

Company Bravo

This is a top 20, somewhat conservative pharma-ceutical company founded around the turn of the cen-tury. In spite of satisfactory economic performance at thebeginning of the 1990s, the entire firm was showing signs

152 JENSEN ET AL.

of unrest: rumors of major reorganization, new lines ofbusiness, and even possible mergers consumed muchtime and energy. These rumors were discussed not onlyin the corridors but also using the company’s state-of-the-art information technology (e-mail, faxes, videoconferencing, etc.), prompting one scientist to remark:“This is the only place in the universe where rumors travelfaster than the speed of light!”

As part of a previously approved Human Re-sources plan, R&D was engaged in conducting a cli-mate survey. Both managers and employees were asked,among other items, to rank their unit’s performance interms of acquisition, use, and sharing of information.When the results were examined, the Human ResourcesDepartment noted a consistent pattern: managersranked performance higher on those dimensions thanemployees, and this difference increased as one trav-eled “up” the hierarchy of management. Employees feltthat managers were filtering or even withholding infor-mation about the critical issues affecting them, provid-ing fertile ground for the rumors and uncertainty.Moreover, employees did not feel comfortable confront-ing managers with their need for information. Appear-ing hesitant or uncertain about any topic was deemed,in R&D, to be a sign of scientific incompetence.

The difference in survey ranking was ironic, be-cause top management always emphasized that value-added came from the scientific and technical know-howof R&D. Also, the company was described by the popu-lar media as one of the most egalitarian institutions, inwhich there was no corporate dining room or executiveparking space, and top management prided themselveson their “open door” and “family friendly” policies.

Unfortunately, nothing came of the climate survey.Instead, development times increased and the firm wasconsistently late to market. Soon, outside investors beganto demand a stringent evaluation of company performance.

The third company provides an illustration of anorganization falling short on each component of the valuesystem; in other words, not meeting resource, knowledge,or normative needs.

Company Alpha

In the post-war period, this mid-size pharmaceuti-cal company captured a major share of the market for anti-infective compounds. On the strength of these revenues,research was expanded to other therapeutic areas. How-ever, by 1992 market share was flat and performance inthe context of industry standards was falling behind. A moredetailed analysis of the financial situation revealed thatturnover, profitability, and R&D expenditure per employeewere among the lowest in the industry.

An outside study of Company Alpha’s developmenttimes compared with its relevant competitors revealed

that, within the same therapeutic area, Company Alphawas three times slower than the average. More detailedresults showed that 1) across therapeutic areas, time tomarket was well below industry standards, 2) costs werewithin the industry average, but 3) quality (as measuredby cycle time, stopping and starting of projects, and tech-nical reputation) was very poor.

Consultants called in to evaluate R&D discovered,among other problems:

• the Information Technology Group was woefullyunderstaffed for the size and scope of their operations;

• much of the information technology was out of date;• scientific staff were often starting and stopping

projects as information became available;• the company was paying a premium for strategic

and competitive intelligence, because internal resourceswere so poor.

One supervisor wondered aloud: “Why can’t weafford to do it right the first time, when we can alwaysafford outside services?”

During the next phase of the consultants’ activities,development activities were examined in detail. Thisphase revealed that paper records predominated: mis-filed, missing, incomplete, and difficult to retrieve andutilize. Most of the company’s geographically dispersedfacilities were linked by computer, but the informationtechnology was at best old-fashioned and at worst nonex-istent. Thus, very little real-time comparative informa-tion was available. In addition, “turf ” battles werecommon. People rarely communicated beyond their lo-cal facility, and sharing of data, problems, or solutionsthroughout the company was rare. Suboptimization,rather than synchronized problem solving, was the in-evitable result.

As the consultants continued to probe, they beganto uncover a large discrepancy between what manage-ment stated were company policies and practices and howmanagers and employees actually behaved. For example,as articulated in the company’s vision, quality was themost important success factor (“world class quality is ahallmark of our operations...”). Employee policies em-phasized collaboration and sharing of information (“...prosper in a collegial and cooperative environment sup-ported by free exchange of leading-edge knowledge”).

According to our framework, Company Alpha man-agers were not meeting employees’ needs for resources(R&D expenditure per employee was among the lowestin the industry), for knowledge and information (infor-mation technology was outdated or missing), or for prin-ciples of right action (there was little or no collaborationand communication across “silos”).

In the concluding section, below, we present aframework and process for determining the value-addedof management, using Company Alpha as our example.

MANAGERIAL VALUE IN R&D 153

DETERMINING MANAGERIAL VALUE IN R&D:A VALUE AUDIT

Because of its qualitative nature, direct, “objective”measurement of managerial value-added is not possible,even at the level of its three principal components. Out-come or surrogate endpoint measurement is also diffi-cult, because the three principal value components areso interrelated that it is often possible to compensate—temporarily—for deficiencies in one component withmore of another component [Galbraith, 1973].

Despite these difficulties, managers can and mustevaluate their own performance with respect to meetingthe needs of R&D employees. Our Value Audit is de-signed as a series of questions to be answered candidlyand reflected upon, although it also makes use of mea-surable data. The audit has two main parts, similar to aquality audit:

• the system part, consisting of the formal testingof basic assumptions, and

• the compliance part, which estimates the cost ofnonconformance (i.e., the cost of doing things wrong) andthe extent to which normative need is met (i.e., norma-tive value is added).

Testing Basic Assumptions

The system part of the self-audit is concerned withdetermining the degree to which the three necessary andsufficient requirements for each step in the value chain—and each component of the managerial subsystem—aresatisfied. Is each unique and complementary? Does eachproduce an output that is desired by R&D employees?Does each involve a transformation?

It is of crucial importance for managers to test thesebasic assumptions. Failing to do so is almost invariablyassociated with the dysfunctional behavior of “skilledincompetence” [Jensen et al., 1995). If the above threerequirements are not adequately met, the remainder ofthe audit is superfluous (if your car has run out of gas, itis futile to attempt to measure its speed...).

The first requirement—uniqueness and comple-mentarity—is assessed by asking managers in R&D “Whodoes what.” Answers will reflect the clarity and mutualacceptance of roles, tasks, and authority. The objective isto eliminate duplication of efforts (non-unique tasks), be-cause duplication invites territorial infighting and reducesvalue-added through extra costs, delays, etc. Managersshould also ensure that no task is left undone because ofunclear responsibilities (non-complementarity of tasks).

It is tempting to speculate that, ideally, only fourconceptual levels of management are necessary: norma-tive, strategic, tactical, and operational. If this is so, anR&D organization with eight to ten managerial levelsmust be incurring a high cost of nonconformance, be-

cause some or all of its managers have non-unique andnon-complementary tasks.

The second requirement—desired output—is as-sessed by asking “why?” of managerial actions. We haveemphasized that managers must respond to three princi-pal needs of employees in R&D, rather than the reverse,and therefore must concern themselves with how well(both quantitatively and qualitatively) they meet thoseneeds. Apparent managerial productivity can be impres-sive, if it is measured by the number of meetings attended,trips undertaken, minutes, memos, and monthly reportswritten. At the same time, however, cost may be incurredbecause nobody actually needs or wants the output. Manymanagers do much of what they do, not as a result of arational observe-analyze-plan-act process. Rather, theybehave as a result of the conditioning imprinted uponthem by their company culture; as a result of tradition,because that is what they were taught by their role mod-els, and because “that’s what we do around here.” Man-agers must, therefore, seek employees’ feedback as towhether their output is desired, using every available toolbut especially talking candidly with them.

In addition to determining whether their output isdesired by employees, managers must also determine howsatisfied employees are with that output—the second orcompliance part of the self-audit. Thus, the above toolsmust be examined to ensure that the answers to bothquestions (is the output desired, and are employees sat-isfied with that output) are captured.

Managers must always be willing to assess their roleand performance as manager, rather than believe them in-violate. If there are no systems for obtaining employee feed-back, managers in R&D end up either seeking informationopportunistically or simply managing by serendipity. Justas acting on the basis of untested assumptions leads to skilledincompetence [Jensen et al., 1995], so does acting on thebasis of tested assumptions lead to skilled competence.

The third requirement—transformation—is of vi-tal importance. Value is added only when something isactually done and the action leads to a change or trans-formation. If no transformation of the inputs to a task hastaken place, no managerial value has been added. Man-agers must not only act but also act in a way that inducesa change (the “difference that leads to a difference”[Bateson, 1979]). Information that is distributed withoutdigestion, internalization, and being put into a relevantcontext is an example of action that does not involve atransformation. Such a task might just as well have beenundertaken by any number of alternative means (e-mail,bulletin board, etc.), because managers involved in anontransforming process add only cost, not value.

The second (compliance) part of the audit involvesestimating the cost of nonconformance and the extent towhich normative need is met. Each is examined below.

154 JENSEN ET AL.

The Cost of Nonconformance

The ideal cost, when available resources, knowl-edge, and guiding principles perfectly meet needs, canonly be estimated and, thus, is a difficult target. Never-theless, the penalty cost of doing things wrong (cost ofnonconformance) can often be measured. Monitoring thiscost provides a qualitative and quantitative indicator, al-beit indirect, of managerial value-added. Consider Com-pany Alpha:

A few years ago, Company Alpha incorporated afermentation step in one of its preclinical processes thathad to remain sterile. Whenever bacterial growth oc-curred in that step, the cost of scrap and reworkamounted to around $0.5M. Episodes of infectionseemed to be slowly increasing, with five taking placewithin one year. In spite of the CONC, around $5M overa 2-year period, potential causes of the infections wereonly cursorily examined and the bacterial growth waswritten off as unavoidable.

In conjunction with a pre-ISO certification audit,the auditors uncovered a series of related noncon-formities. Most of the staff in the unit responsible for thisfermentation step had more than 20 years’ seniority inthe company and had received their “on-the-job” train-ing more than ten years ago, at a time when sterility wasnot an issue. None of the staff had received any formaltraining in sterile techniques. One of the workers hadbeen employed for 26 years in the same position withoutever attending a single training session or course.

Benchmarking the performance of this particularprocess revealed that the unit cost for released product(an injectable antibiotic) was only slightly above indus-try average. Including the cost of scrap and rework forrejected batches—the cost of nonconformance—the costprofile was distinctly unfavorable. The manager of theunit, however, saw his employees as a hardworking andloyal group who did the best they could with a constitu-tionally treacherous process. He did not understand thathe had failed in his obligation as a manager to provide amatch between tasks and resources (sufficient headcountand decent equipment), knowledge (relevant training andeducation), and guiding principles (“almost good enoughis never good enough”) in his part of R&D.

Meeting Normative Need

As stated earlier in our discussion, the need forprinciples of right action—normative need—can neverbe reduced. Given human nature, of course, there willalways be some gap or distance between the ideal orga-nization and how people actually behave. But managersmust continually evaluate the extent to which norma-tive need is met (i.e., normative value is provided) andimprove on it. Because every person in R&D quickly

becomes embedded in the company’s culture and un-able to perceive clearly the distance between the walkand the talk, the final portion of the self-audit must besupplemented by the observations of someone externalto the organization.

We propose that managers first describe what theyperceive to be some of the manifestations of the organi-zational culture [Schein, 1985] and, second, that theyanswer a number of items from a cultural analysis ques-tionnaire [Kolb et al., 1995].

For example, Company Alpha had a stunning cor-porate visual identity program with a prominent and col-orful logo (a silver Ehrlenmeyer flask with the companyname in gold surrounding it) and a widely disseminatedslogan: “World class scientific expertise is a hallmark ofour operations.” With the exception of corporate head-quarters, however, the buildings were somewhat run-down and the laboratories were only adequate. Meetingsof R&D staff were usually quite disorganized. Partici-pants arrived late, if at all; those present often ate whilechatting in small groups. Information was rarely avail-able when needed, and scientists often expressed sur-prise when external speakers discussed currentexperimental approaches.

Although embedded in the culture, managers inR&D can also draw inferences about the extent to whichnormative need is met by reflecting on their answers toquestions about how people succeed in R&D and arerewarded, about which people are considered deviantfrom the norm, and so on [Kolb et al., 1995].

Consider what answers are implied by the managerof the fermentation unit, who said:

“In my group we roll up our sleeves and geton with it. We don’t waste time with a lot ofpaperwork. We mind our own business andwe don’t snitch on one another if somethinggoes wrong. Some years ago, they tried to getus to document every little thing we did. Wegot around this by taking so long to get outthe paperwork, they gave up and let us get onwith the work. Since this company wasfounded, the people who helped it succeedweren’t the paper pushers but the scientificand technical staff....”

SUMMARY AND CONCLUSIONS

Even the very brief evaluation of Company Alphaprovided above revealed the extent to which normativeneed was not met. The company’s “public face” consistedof an emphasis on scientific expertise and high quality(e.g., silver and gold logo; handsome corporate facilities;company slogan) and collaboration and communicationamong employees. Behind the public face, however, thefollowing could be inferred:

MANAGERIAL VALUE IN R&D 155

• sloppiness is tolerated (continuous outbreaks ofinfection; disorganized meetings), and

• scientific expertise, collaboration, and communi-cation are relatively unimportant (lack of training; poorinformation systems; chronic understaffing; norms thatsupport uncooperativeness).

Had managers in Company Alpha also reflected onthe other questions in our self-audit, they might havediscovered: 1) there were too many managerial layers, aswell as duplicate managerial tasks in R&D; 2) employ-ees neither desired nor were satisfied with managerialoutput; 3) few managerial actions involved genuine trans-formation; and 4) the cost of scrap and rework was atleast $5M, and there were no procedures for tracking,reducing, or monitoring the cost of nonconformance.

Company Alpha is meant to be a “worst case” sce-nario. If any portion appears ominously familiar to thereader, we urge that the value audit (Fig. 1) be completed.As stated in the introduction, in an increasingly hostileand competitive environment, every activity withinR&D—operational and managerial—must demonstrablyadd value or be eliminated.

While the fat is being trimmed from the organiza-tion, while employees are involved in business processreengineering and quality improvement activities, everymanager must be prepared to answer the inevitable ques-tion: How do I add value to R&D?.

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