August 13, 2024
As we head into yet another new budget planning season, reasons for cautious optimism abound. On a macro level, we’ve seen falling inflation and steady growth after years of economic turbulence. These positive trends are likely to carry over into the tech sector, which was hit particularly hard following pandemic boom times. Moving into 2025, there is reason to expect more robust prospects for growth, according to Deloitte.
But growth no longer means at any cost. Finance and engineering leaders need to work together to take a measured approach to spending, just as they have over the last several years, paying special attention to R&D costs. While so much attention has historically been paid to sales and marketing efficiency, COGS and general and administrative costs, effective R&D budgeting remains elusive.
In the software age, where R&D is the lifeblood of every technology company, how should companies properly plan for the future? And, as Generative AI becomes table stakes, how do finance and engineering teams more accurately account for not just the investment in GenAI coding assistants, but also their impact on the pace of software development?
We’ll explore these questions and more in our new guide: R&D Budget Planning in 2025 – Evaluating Efficient Headcount Growth & the Impact of GenAI.
Keep reading for a sneak peek 👀
Setting the Budget for 2025
Established organizations usually have historical context to which they can refer as they determine the annual budget for R&D. For planning purposes, many engineering leaders start with a baseline operating budget from last year, and adjust their plans based on company financial targets, and the costs associated with any new hires.
A July 2024 survey of 1,500 B2B SaaS companies found that the median percentage of annual recurring revenue spent on R&D by private B2B SaaS companies was 18%, down from 24% in 2023. For high-growth companies only, that number topped 30%.
While last year brought more focus than ever on efficiency, we are starting to see investment in R&D pick up overall. According to Jellyfish’s State of Engineering Management report, 67% of engineering organizations have increased their budget this year, with 57% of engineering leaders increasing their team size. Engineering teams are continuing to grow in order to support product delivery that unlocks future growth and investment.
With new insights into the way engineering teams work, more leaders are using data to inform and determine future R&D priorities and spend. Adding a scenario-based plan to your budgeting cycles allows you to model out different scenarios based on what critical products and features your team needs to deliver, and the investments needed to do so. In some cases, this may mean the percentage investment in R&D looks the same, or even a budget increase if your team is making big product bets.
Measuring GenAI Impact on R&D Costs and Headcount
Some leaders are hoping for the best of both worlds – a consistent level of investment and higher output – and turning to GenAI to get there. While GenAI is certainly not a suitable 1:1 replacement for headcount, it can impact how efficiently your team works, and therefore, your rate of new product development. 94% of engineering leaders and ICs agreed that the integration of AI positively influenced their team’s productivity.
While the anecdotal signals are promising, accurately quantifying the adoption, utilization, and impact of GenAI is the only way to incorporate its impacts into a headcount planning model and, subsequently, accurate budgeting for the new year. Heading into 2025, we should be thinking about how changes in cycle time using GenAI will impact any future investment in GenAI and headcount. Or, how increased efficiency will change the roadmap – and therefore the growth – they can deliver next year.
The use of tools that can provide this objective data will ensure leaders make informed decisions that set teams up for success headed in 2025. But the real key to setting the final R&D budget, as with most things, remains plain old open and honest collaboration and communication between your CEO, R&D, and finance leaders.
Ready to start planning your 2025 R&D budget? Get started with our guide here.
