R&D Budgets | Innovation Speed AND Efficiency

Guest post with Claire Vo, CPO of LaunchDarkly and founder of ChatPRD

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Q: How do you balance efficiency and speed within the engineering org? How is AI impacting these decisions?

Revenue growth is still the #1 metric for high-growth tech companies, but efficiency is a very close #2 now. While this hasn’t always been the case, it is a healthy shift to building enduring companies.

A budgeting area that companies frequently struggle with is R&D (research & development). For software companies this is often referred to as EPD (engineering, product, and design).

To help establish a framework for how companies should approach R&D budgeting I teamed up with Claire Vo. Claire is currently the Chief Product Officer (CPO) at LaunchDarkly and was previously the CPO at Color Health and Optimizely, which acquired Experiment Engine, a company she founded and led as CEO. Claire is an active speaker, advisor, board member, and angel investor, as well as the founder of ChatPRD, a popular AI copilot for PMs.

Keep reading to learn more about budgeting for R&D and the impact of AI. And share this with your R&D and finance teams because both sides need to understand this stuff.

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I’ve been a Chief Product Officer running EPD teams now for nearly a decade and the task in each role is always the same: drive growth through innovation while maintaining efficiency and high performance.

While we like to say that working in product, engineering, and design is about lofty goals around embracing customer empathy, seeing the future of technology, and empowering teams to collaborate and build, the reality is R&D is one of (if not the) most significant investments a company makes. In fact, that is why many companies have embraced the CPTO role, bringing product and design under one functional leader. This centralized team forces one executive leader to care for and be accountable for all of R&D spend across the company.

Collaborating closely with my CFO partner inside a company is one of my favorite parts of the job; both sides are metrics-minded, willing to invest big (if the payoff is right), and as an operationally minded CPTO, I find that a systems approach to R&D investment resonates with my partners in the finance org.

So whether you're in a high-growth phase of investment or tightening budgets, I have a few tactical and practical tips on evaluating efficiency, finding opportunities to tighten investment, and maintaining performant, engaged teams while embracing financial discipline across EPD.

Sizing the EPD Budget

I’ve worked at every stage of a company, from founding my own startup to working at scaling growth stage companies to building teams at publicly traded companies. Each stage requires thoughtful management of the EPD budget; it can get very expensive, very quickly and it’s a place where runaway costs can start to build because “we need to build more product.”

So how do I approach EPD sizing?

Benchmarking: Your North Star

First, let's talk about industry benchmarks. Data is your best friend here. Sources like public company statements and VC industry reports offer invaluable insights into the spending patterns of similar-sized companies. For instance, if you're a SaaS startup with 50-100 employees and your peers are allocating around 40% of their budgets to EPD, that's a good starting point for your own budget.

There is a key word in that statement, though: “peers.” Make sure you’re being honest about the stage, industry, shape, and performance of your company, and do your best to understand the “why” not just the “how” of benchmarks. I’ve seen many companies budget their investment based on companies they’d like to be, but not the company they need to be right now. 

So don't just take these benchmarks at face value. Dive into the details. Look at how these companies allocate funds within EPD. Are they investing heavily in AI? What's their ratio of engineers to designers? Look around left and right: what does this mean for the shape of their investment in GTM and R&D? What are the year over year trends in your industry? Answering these questions will help you fine-tune your own budget and make more informed decisions.

The Ghost of Budgets Past

Think you’re too small to have visible benchmarks? Your company's historical data is a goldmine of insights. Take a deep dive into your past budgets. Analyze where you overspent and where you under-invested. Did that expensive design tool really pay off? Did skimping on engineering resources delay your product launch?

This is also true of “lessons learned” from peers and teammates. For example, when I was building my own startup, I invested what felt like at the time a huge amount of dollars on an external contractor firm that could help us build a technically difficult product we felt was essential to get buyers to convert. Well guess what? In pre-Product Market Fit, it’s rarely just one feature that gets markets excited, and that investment didn’t pay off. That lesson stuck with me for a while—I realized at the early stages you have to lean hard into R&D investment relative to other parts of the company, but it has to be spread across a high velocity cadence of bets, not one big thing.

Align With Growth Goals

Aligning your budget with your growth goals is crucial. If you're planning for rapid scale-up, be prepared for a higher initial investment. But remember, flexibility is key. You need to be able to adapt your budget as your growth trajectory changes.

I’ve been lucky enough to work at successful companies that want to invest in growth—new business lines, top talent, etc. But I never treat even the most ambitious plans as a blank check. I rely on a few practical guidelines when investing aggressively, but efficiently, in growth initiatives:

Small on Size, Big on Talent - Even if a CEO is willing to make large investments (big headcount spend, M&A), 9 times out of 10 the company’s goals are better served by starting small with top talent in the company focused on growth initiatives. 4-7 folks can often generate more momentum than 40 folks over the same early launch time period.

Plan for progressive budget unlock - My teams embrace the “PM as GM” mindset, which means they’re not just managing products they’re managing business lines. I consistently coach teams that they must earn their investments, and plan milestones that unlock progressive budgets.

Know when to hit the gas - That being said, there are obvious moments with aggressive and outsized investments that will make a huge impact on the trajectory of the business. Often newer executives are sheepish about putting their names on these asks—whether it’s an acquisition or a hard shift of resources. The best leaders are willing to place their best and lean in hard when there’s big upside. So make sure you’re not throttling unnecessarily when holding back resources.

Increasing Efficiency During High Growth

When you're in hyper-growth mode, inefficiency can creep in like a silent killer. It’s my least favorite part about working at growing companies; teams get lazy about efficiency, take pride in spend, not growth, and think bigger = better. 

But with the right strategies, you can keep your team lean and mean.

Small Teams, Big Impact

As I’ve said many times, I'm a big believer in the power of small, focused teams. Think of them as elite strike forces rather than lumbering armies. Small teams are more agile, more creative, and more accountable. They can make decisions quickly and pivot on a dime.

If you want to go slow: build a big team. If you want to align some stakeholders: build a bigger team. If you want to ship fast: keep things small.

Managing Capacity: Keeping Teams Lean

A critical way to maintain efficiency is making sure that needs outpace capacity. Why? Because teams often overstate needs and understate capacity, and having too many resources is much more detrimental than having too few (and focusing.) 

I like to keep my teams slightly under-resourced, with ambitions that exceed our self-assessed capacity by 10-15%. This keeps everyone focused on what really matters. It prevents complacency and encourages creative problem-solving. We can’t do everything. We shouldn’t do everything. And I’ve seen time and time again, having “enough resources” ends up ultimately being “enough resources to waste resources.”

Of course, this approach requires careful management. You don't want to burn out your team or sacrifice quality. You actually have to say no to things. But when done right, it can be incredibly effective.

Questioning the future of Glue Jobs

Coordination roles, or "glue jobs," are necessary but not always efficient. These roles are all about how we work rather than what we're working on. In a fast-growing company, it's easy for these roles to proliferate, leading to bureaucracy and slowdown. It’s a good way for headcount to grow, “management opportunities” to develop for high performers, and teams to feel like a “real company”—so they feel like good things to some people. But like more meetings and more processes, they’re a guaranteed way to set your team on a path to decision-by-committee, artificial slowdowns, and wasted work.

I’m not totally against these roles—I just have a really high bar. My rule of thumb is that someone in a classic “glue job” should be in the top 5% of talent and make the team at least 10x more effective. If a teammate or team is not having that kind of impact, it's time to re-evaluate.

Story Time: The Coordinators Conundrum

At one of my previous companies, we had a team of technical program managers who were responsible for managing the workflow between our product, design, and engineering teams. As we grew, this team kept expanding, but our productivity wasn't improving. In fact, it was slowing down.

We decided to do an experiment. We disbanded the coordinator team and had the designers and engineers manage their own workflow. We kept the one superstar technical program manager, promoted them into upper leadership, and deployed them on only the most critical initiatives the company was running. The results were astounding. Without the extra layer of coordination, the teams were able to communicate more directly and make decisions faster. We saw this impact in productivity within a month. It was a powerful reminder that sometimes less is more when it comes to team structure.

The Impact of AI on Budget Sizes

I think about the impact of AI on R&D investment every day; I have a personal goal to be ahead of the curve on how this technology is going to impact my industry. As part of this, I’ve built chatprd.ai as a way to stress-test the capacity of copilots on a role I know extremely well: the product manager.

It’s obvious to everyone that AI is transforming the way we work, and it's having a profound impact on how we think about budgets and efficiency. Here are some specific things I’m considering as a CPTO:

The Great Role Reshuffle

AI is automating or augmenting many traditional roles, from data analysis to content creation. This means that teams can do more with less. I've seen many ChatPRD users resetting their headcount plans and redirecting funds towards AI investments. This is especially true for roles that rely on specialty expertise for their core work. For example, engineers are using product copilots to reduce their dependence on PMs, PMs are relying on generative AI tools to reduce their dependence on engineering resources, and designers are getting more and more leverage through AI. 

I think this has huge implications on both the types of roles that will exist in technology organizations, but also their proportion. I’ve spoken extensively about a few ideas I think are coming:

1. Managers will be expected to have broader span of control - The classic “perfect size” of engineering team of 7 will expand to 20+ engineers per people manager. The overall number of management roles will decrease; see how Meta is currently reducing an entire layer of VPs at the company. 

   

2. PM:Eng ratio will shift - Similar to above, I think we’ll see the Product Manager be expected to manage across broader engineering / design teams. I had a PM user of ChatPRD email me and say they now can easily run across a team of twenty engineers.

   

   This example is just one role in R&D–but the shift is coming quickly. If you're not thinking about how this plays out over all the roles in your org, you’re not making the best decisions for efficiency.

3. Founders won’t hire… anyone? I also think early stage teams will stay much smaller, with founders relying on a set of tools, not hires, to grow their company into PMF. I’m testing this concept myself with ChatPRD, which has scaled to 10k users with just two employees: me and a part time contractor. There is a significant amount that can be automated, outsourced, or made more efficient with a combination of copilots for software engineers, AI customer support bots, and of course, lots of efficiencies for product management. 

The Fluid Budget: A New Paradigm

It’s obvious: in the AI era, budgets need to be more fluid than ever. Leaders need to be able to quickly reallocate funds between headcount and software based on the latest technological developments. It's no longer about fixed annual budgets, but about continuous optimization.

I’ve been coaching my leaders recently to think about their remit as a total investment across dollars and people. They should understand they’re responsible for $X in annual spend, and their business lines generate $X in revenue. We need to figure out the operational mechanisms to make managers more active in the balancing of this investment, or at least encourage experimentation that can influence the next budget cycle.

Junior Talent, Senior Output

One of the most exciting implications of AI is that it's making it possible for junior talent to produce senior-level output. With AI-powered tools like Github Copilot or ChatPRD, junior developers or product managers can punch way above their weight class.

This has major implications for budgeting. Instead of paying top dollar for senior talent, companies can hire promising junior talent and equip them with AI tools to supercharge their productivity. It's like giving every employee a personal assistant and a subject matter expert rolled into one.

Story Time: The Junior PM Who Could

One of our ChatPRD users shared a powerful story with me. They had a junior product manager who was struggling to keep up with the demands of the role. But once they started using ChatPRD, something amazing happened. With the help of the AI, this junior PM was able to create product specs, analyze user feedback, and make data-driven decisions at a level that would have normally required years of experience. Their startup was considering hiring a more senior PM to support them, but instead allocated that headcount to a designer who could do hands-on-keyboard creative work.

It's a testament to the power of AI to level the playing field and enable junior talent to make outsized contributions. When leaders are “afraid” AI will make their teams lazy or their thinking worse; I encourage them to consider the alternative: that they could have a higher performance, higher impact team by spending something like $500 / year on their existing team.

Monitoring Financial Metrics for Efficiency

Finally, you move what you measure. Monitoring the right financial metrics is essential for maintaining efficiency. Here are a few of my favorites:

R&D Spend vs. Revenue

The ratio of your R&D spend to your revenue is a key indicator of efficiency. If your R&D spend is growing faster than your revenue, it's a sign that you might be over-investing in product development at the expense of other areas of the business.

Headcount & Headcount Support Efficiency

Headcount efficiency measures the output of your team relative to the number of employees. It's a way to gauge whether you're getting the most out of your human resources. I like to look at metrics like revenue per employee, product velocity over engineering spend, and software spend per technology team member (I once figured out we were spending $5k per engineer on tools that made them more efficient as developers—not core infra or even business productivity. This was a big team! We started to question if we should be investing more or less by looking at this number. It was a big eye opener.)

Conclusion

Managing financial efficiency as a CPTO is a constant balancing act. You need to invest in growth while keeping a tight rein on costs. You need to empower your teams while keeping them lean and hungry. You need to embrace new technologies while ensuring they deliver real value.

But with the right strategies and a relentless focus on optimization, you can navigate these challenges and build an organization that is both efficient and effective. Teams can still have budget for experimentation, you can still reward talent, and you can still do big things. By leveraging data, empowering your teams, and continually re-evaluating your processes, you can find efficiencies in even the most challenging circumstances.

So, whether you're scaling up or trimming down, remember that efficiency is a journey, not a destination. Keep questioning, keep optimizing, and keep pushing forward. The rewards—in terms of both financial performance and organizational agility—are well worth the effort.

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Footnotes:

• Something to think about when budgeting: Excess capital creates laziness and negatively distorts company behavior. Scarcity breeds innovation.

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