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200% increase in businesses cutting innovation spend during the Covid-19 crisis

Businesses cutting costs to survive but the real cost could be standing still in this crisis

  •     Businesses have reduced their forecasted 2020 revenues by almost half
  •     In March, just 1 out of 13 businesses surveyed said they would not be investing in innovation compared to 1 in 4 a month later
  •     Data from the last recession shows innovation as a key driver for growth

New global research reveals that in March, before extensive Covid-19 restrictions, just 8% of businesses surveyed said they would not be investing in innovation activity this year, with that rising to 25% during the current crisis – a 213% increase. In the UK that change is higher – from 4% to 23%, an almost 5x increase.

Research by innovation firm Rainmaking, carried out by YouGov, shows that businesses predict 2020 revenues will fall by almost half as the implications of Covid-19 become apparent. Business leaders also confirmed the measures being taken to navigate the current crisis: reducing costs by improving efficiency (30%), cost cutting measures including redundancy (29%), cancelling planned investments in growth projects (28%), accessing state Covid-19 bailout funds (21%) and reducing investment in innovation activities (15%).

The study among business leaders of large businesses (1000+ employees) across the UK, US and Scandinavia revealed over 90% of business leaders will not invest more in innovation in order to kickstart growth in their businesses, despite nearly half of respondents (46%) confirming that investment in innovation had helped to spur growth over the last year, rising to 61% when looking at the US specifically. As recently as March in the UK, businesses attributed 30% of revenue growth to innovation activities that had taken place within the past three years.

As the Bank of England warns of the sharpest recession on record, Rainmaking reveals that while financial control and cost cutting are critical aspects in times of crisis, a company’s performance during and post a crisis is in fact reliant on its ability to innovate.

Carsten Koelbek, Rainmaking CEO comments: “It is understandable that many leaders have focused on stabilising core operations, implementing cost savings and building resilience in their supply chains during the initial phases of the Covid-19 crisis. However, it is also evident that the winners in previous crises are those companies that started investing in new growth opportunities early on. No company can succeed in the long run based on saving costs.

“Now is the time to identify new opportunities that did not exist before, to add value to their customers and change the way they work to support their people. Demands will have changed; new technologies will have been accelerated and often industry barriers will have become more blurred. For the complacent companies this poses a threat to their long-term survival – this is no time to sit tight and hope for the best. Many of the world’s best performing companies were started during a crisis including Apple and Amazon. Now is the time for every CEO to make a choice to get ahead of the game and take some risks with the possible reward of being one of the winners post the crisis.”

Experts widely cite innovation as a key driver for growth and this view is supported by data from the 2008 financial crash which shows businesses that invested in innovation during the uncertainty, grew on average 7%, versus those that didn’t, with some suffering revenue losses of up to 15%*. Research by McKinsey shows that the winners from the last recession were those companies who stepped up their investment in innovation early during the crisis. **

The notion that innovation is a linchpin of growth was also backed by Rishi Sunak, who recently announced a £1.25 billion government support package to help businesses driving innovation and development through the Covid-19 crisis. According to the Chancellor, these businesses “will help power our growth out of the coronavirus crisis.” The message from the government is clear that we need innovation in order to grow out of this crisis. Germany, the world’s most innovative economy according to Bloomberg’s Innovation Index, has announced 2bn Euro funding support to start-ups.

Not all businesses are standing still

The research among over 300 CEOs and company directors of large businesses shows there is some appetite for risk. While overall investment in innovation is down April vs March, a third of businesses still plan to spend at least £1million on innovation in 2020 despite the current crisis, with over 1 in 10 large businesses still planning to invest £25million or more.

In comparison to the US and Scandinavia, the UK is the least likely to be taking financial actions on the back of Covid-19 with 15% not taking any financial actions at all. Some green shoots of new innovation within the UK economy during the crisis include traditional retailers such as Co-op expanding online retail arms within weeks, food supply chains adapting to prioritise and find new distribution channels and technology businesses pivoting to support the government’s Covid-19 efforts.

How do sectors compare?

The sectors least likely to invest in innovation during the Covid-19 crisis are: education and scientific research (45%), hospitality and tourism (38%), health and social care (33%), professional services (26%) and transport (25%).

Pre Covid-19 lockdown, over a quarter of manufacturing businesses questioned said they would be investing £25m or more in innovation in 2020, shrinking to just 8% when questioned last month. Financial services also shrunk from 1 in 4 (25%) to 13% when asked the same question.

Those not expecting revenue to grow in 2020 increased across all sectors between March and April, with financial services increasing from just 8% to 26% and technology, media and telecommunications from 17% to 33%, and tourism and hospitality increased to 50% in April (from 29% in March).

It’s not a time to pay lip service to innovation

Even before Covid-19, getting innovation right was a challenge for businesses as the research shows. Nearly half (49%) of respondents told us that there is too much lip service paid and not enough actual innovation done, a figure rising even higher in the UK (53%) and US (58%). Over a third (35%) of respondents said the use of buzzwords means innovation is not taken seriously in their organisation.

Respondents were also asked about the biggest issues stopping their business from innovating to the best of its ability. The top ten reasons respondents claim innovation within their business fails are:

  1. Red tape within the company (30%)
  2. Innovation is not embedded enough within the company culture (20%)
  3. Lack of collaboration (19%)
  4. Innovation is under-staffed (19%)
  5. Innovation is underfunded (19%)
  6. Innovation doesn’t have enough “buy-in” internally (18%)
  7. There is a talent / skills gap (14%)
  8. People don’t understand innovation within my company (13%)
  9. Progress in terms of innovation is not measured correctly (11%)
  10. My company’s governance team does not value innovation (7%)

Carsten Koelbek adds: Despite almost 1 in 5 business leaders stating that innovation fails due to lack of funding, our research shows budgets have decreased even further post COVID19. This seems to be a dangerous decision by those companies, and it raises the question: are these projects being set up to fail, without the level of investment and support they need? We need to ensure business leaders have the confidence to use innovation in the right way during and after this crisis.”