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The Innovators Studio with Phil McKinney

The Innovators Studio with Phil McKinney

By: Phil McKinney
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 Forty years of billion-dollar innovation decisions. The real stories, the hard calls, and the patterns that repeat across every organization that's ever tried to build something new. Phil McKinney shares what those decisions actually look like. Phil was HP's CTO when Fast Company named it one of the most innovative companies in the world three years running. He co-founded a company and took it public. Now he runs CableLabs, the R&D engine behind the global broadband industry. This isn't theory. It's what happened. And what you can see coming if you know what to look for. Running since 2005, originally as The Killer Innovations Show, now The Innovators Studio. Tens of millions of downloads. Full archive at killerinnovations.com. New episodes at philmckinney.com.Copyright 2005-2026 Techtrend Group LLC. See philmckinney.com Economics Leadership Management & Leadership Personal Development Personal Success
Episodes
  • R&D Spending Is the Most Misleading Number in Business

    R&D Spending Is the Most Misleading Number in Business
    Apr 15 2026
    Every public company's R&D number is a lie hiding in plain sight. Not because anyone falsified it. Because the number was never built to tell the truth. It was built to satisfy an accounting standard written in 1974. And for fifty years, boards, analysts, and CEOs have been making billion-dollar innovation decisions based on a number designed by accountants to solve a different problem entirely. Here's what makes this genuinely strange. The real number exists. The government has been collecting it from every major US company for decades. It would answer the question every innovation leader and investor actually needs answered. And it is locked away by federal law. Confidential. Never published. Never seen by the people who need it most. It's sitting in a federal database right now. And there's a way to estimate it for any public company, without asking anyone's permission. I know it exists because I spent years building it from the inside. Why the R&D Signal Was Blurry When I was running innovation at HP, we discovered this problem firsthand. We had a connection between R&D investment and gross margin that held up across decades of HP history. Better than anything Wall Street was using. But the signal was blurry. None of us could figure out why. The answer came from a question someone on the team asked almost as an aside. What if R&D isn't one thing? Research and Development Are Not the Same Thing Think about what actually lives inside a typical R&D budget. There's a team somewhere investigating whether a new approach could enable a capability that doesn't exist yet. No product defined. No spec written. Asking whether something is even possible. And there's a team building the next version of a product that ships in eighteen months. Spec locked. Timeline set. Engineering executing against a defined target. Both show up on the same line in the budget. Both get called R&D. Both count equally toward the number that gets reviewed every quarter. They are not the same thing. One is Research. The other is Development. Research is the work you do when you don't yet know what you're building. The output is understanding. New knowledge that might enable future products nobody has designed yet. You can't know exactly what you'll find. If you already knew, it wouldn't be research. Development is the work you do when you know exactly what you're building. The spec exists. The product is defined. The question isn't what to make. It's whether it can be made, on time, at cost, at quality. One creates the future. The other delivers the present. And for fifty years, every public company in America has been required to report them as one indistinguishable number. When we split the HP data along that line, Research on one side and Development on the other, the signal sharpened immediately. Research spend, measured against gross margin three to five years later, was a meaningfully stronger predictor than the combined number had ever been. The blur hadn't been in the gross margin data. It had been in the R&D number itself. Two fundamentally different things, averaged together, producing a number that looked precise and predicted almost nothing. But splitting R from D at the company level was only the beginning. The model was still lying to us. Just more quietly. Why Company-Level R&D Splits Still Mislead Even with the split, something was still soft. HP wasn't one business. It was dozens. Printers, PCs, servers, software, each running on different timelines, different technology cycles, different competitive dynamics. What if the R/D split meant something different depending on where it was applied? We pushed it to the product line level. Then further, to the platform level within product lines. Printers were the clearest example. HP's printer business wasn't one story. There were platforms built on established technology. Mature ink systems, proven print head chemistry, products that had been shipping for years. And there were platforms built on genuinely new core technology. New chemistry. New mechanisms. New approaches to fundamental problems that nobody had solved yet. Research investment by platform told a completely different story than Research investment by product category. The Research going into new technology platforms had a completely different relationship to future margin than Research going into mature platforms. Different time horizons. Different risk profiles. Different margin implications years down the road. Laptops told the same story. A traditional consumer laptop line and a high-performance portable workstation weren't the same investment. One was Development-heavy. Defined product, known market, engineering executing against spec. The other had genuine Research behind it. Unsolved thermal problems, new form factor constraints, and materials questions that hadn't been answered yet. When a single R&D assumption is applied across all of that, treating every dollar the same regardless of what it actually...
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    17 mins
  • The R&D Metric Mark Hurd and HP Got Wrong

    The R&D Metric Mark Hurd and HP Got Wrong
    Mar 25 2026
    Twenty years. Nearly one thousand episodes on this show. And starting today, we're going to try something a little different this season. Season 21 is about the decisions that actually determine whether innovation lives or dies inside any organization. The real calls. Not the fluff stuff we read in academic textbooks. I want to actually put you in the rooms where these decisions are happening. What went right. What went wrong. My objective is to expose you to the patterns in innovation decisions so that you can recognize them. Recognize them in yourself, in the people you need to influence, long before you step into any landmines. So let's get into it. The Encounter on the Top Floor of Building 25 Making generational decisions on innovation investment can be a make-or-break moment. What I refer to as a CLM, a Career Limiting Move. In my case, it started with a chance conversation with Mark Hurd, HP's CEO. Let me take you back to 2005. HP headquarters is on Page Mill Road in Palo Alto, referred to internally as Building 25. The top floor is where all of the executive offices are. That's where Mark's office was. I was up there doing some meetings and got snagged by Mark. Now, Mark had a reputation. He was a big numbers guy. He believed in what he called extreme benchmarking. You tore into your competitors' numbers. You knew your own numbers in and out.1 Others had warned me about this. He had a famous quote that everybody shared: "Stare at the numbers long enough, and they will eventually confess." Mark believed you could not lead a critical role at HP if you did not know your numbers cold, inside and out. Didn't matter whether it was sales, CTO, a function, or a division. It didn't matter. And Mark tested everyone on the leadership team. Not just the leadership team. He would randomly stop employees and ask them for their numbers based on what group they worked in. It was non-stop. It was constant. To where support staff was literally constantly preparing briefing books for managers, VPs, leaders, just in case they got nabbed by Mark. In my case, I happened to be walking past his office. Mark waved me in. I sat down, and he immediately started drilling me on the CTO numbers. The number he focused on was R&D as a percentage of revenue. The Broken Benchmark: R&D as a Percentage of Revenue Now, if you've been a regular listener of this show, you know my opinion of that metric. R&D as a percentage of revenue is a meaningless number.2 It is absolutely meaningless. But every public company CEO at an innovation-dependent company, all the tech companies, AI companies, even automotive, they live by this number. It's a number that Wall Street looks at. You have to report it as part of your quarterlies, and from there it's simple math.3 When Mark grilled me, he was focused specifically on the PC group at HP. HP's number at the time for the PC group was about one and a half percent. R&D as a percentage of the PC group's revenue. Acer, which was a key competitor, was at 0.8%. Less than one percent. Roughly half of HP's number.4 Apple was at four percent.5 Mark's question, and he was really pounding on this, was: How do we get our ratios in line with Acer? Basically, he was saying: how do we cut costs so that our R&D expense as a percentage of revenue equals Acer at 0.8%? This is exactly the problem with choosing the wrong metric. Now I'm going to quote somebody who I think was probably one of the most insightful leaders in the business world. Charlie Munger. If you've ever watched any of his talks, he had a really strong opinion on certain metrics. Specifically EBITDA, earnings before interest, taxes, depreciation and amortization. Charlie referred to EBITDA as BS earnings. It was a metric Wall Street swore by, and Munger said it hid more than it revealed. His exact words: "Every time you see the word EBITDA, just substitute the word 'bullshit' earnings."6 R&D as a percentage of revenue is the same problem in a different disguise. It's the metric that makes every company look like it's investing when all it's doing is spending. Mark was using a broken instrument to make a generational decision. If you make decisions based on R&D as a percentage of revenue, and then you do comparisons like "let's make our numbers look like Acer," what you are actually deciding to do is cut your R&D. That is generational. You will destroy a company's innovation capability over the next ten to twenty years before you can even have a hope of rebuilding it.7 "We Are Not Apple and We Never Will Be" I looked at him and said: Why aren't we raising our R&D spend to match Apple? Mark didn't hesitate. He said: "We are not Apple and we never will be." I took offense at that. I was offended that he wouldn't even contemplate it. And I pushed back. I pushed back hard. I argued we could be Apple in areas where we had genuine advantage. Here's one example. Go back to September 2004, about a year before my meeting with Mark. Carly Fiorina was still...
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    14 mins
  • The Innovation Metric Bill Hewlett and Dave Packard Used

    The Innovation Metric Bill Hewlett and Dave Packard Used
    Apr 1 2026
    Every public company in the technology industry measures innovation spending the same way. R&D as a percentage of revenue. Why? Because Wall Street tracks it. Boards benchmark it. CEOs get fired over it. And it tells you almost nothing about whether the spending is working. Bill Hewlett and Dave Packard knew that. From the very beginning, they measured something different. Something the rest of the industry has been ignoring for seventy years. And the proof was sitting in a paper that Chuck House pulled out and sent to me after a conversation at a Computer History Museum board meeting. By the end of this episode, you'll know what that metric is, why it works, and why the one everyone else uses makes it nearly impossible to tell whether your innovation investment is building the future or just burning cash. Here's how I found it. The Question That Wouldn't Let Go In the last episode, I talked about the argument with Mark Hurd. The question was over whether HP should cut R&D as a percentage of revenue to match Acer. I knew Mark was fundamentally wrong. But I couldn't prove it. The only metric on the table was R&D as a percentage of revenue. That was what Wall Street expected. It's what shareholders expected. It's what the board expected. But I couldn't argue against it, because I didn't have the data. I needed a better metric. So I decided to go back to the beginning. HP's complete financial records dating back to the 1940s. Division by division. R&D project by R&D project. The actual operating data. I got access to all of it. The HP archive team gave me direct access to Bill and Dave's original notebooks. Now, data alone wasn't enough. It was mountains and mountains of data, and you're trying to extract the signal. What is the trigger in that data? The conversation that cracked it open happened outside HP. The Man with the Medal of Defiance I was at a Computer History Museum board meeting, standing next to Chuck House, and I shared with him the struggle I was having. A little context on Chuck. He spent twenty-nine years at HP. He was the Corporate Engineering Director and he helped launch dozens of products. He's also the recipient, from David Packard himself, of the Medal of Defiance. The Medal of Defiance was given to him because David had told him at one point to kill a product line. Chuck went around that decision, put the product into the catalog, shipped it, and it turned into a phenomenal success. When David gave Chuck the medal, the citation was something along the lines of: "for going above and beyond the stupidity of management and doing what was right." Chuck and Raymond Price co-authored a book called The HP Phenomenon, published by Stanford Press. It's the deep dive into the history of the innovation culture inside HP, all of the metrics used back in the Bill and Dave days that put in place the structure that allowed HP to be successful. By the time I'm at HP, Chuck had long since moved on. He was running Media X at Stanford, the university's research program on innovation, media, and technology. But we both served on the Computer History Museum board. At that board meeting, I shared the argument I'd had with Mark and the search for a better metric. I had a strong feeling there was something around gross margin. That R&D investment impacted gross margin. But a feeling isn't an argument. I needed data. I needed to correlate R&D spend to margin, and that's extraordinarily hard to do when you've got all these different product lines and divisions. Chuck got this little smile on his face and said, "I need to send you something." The Paper and the Whiteboard What he sent me was a paper. A journal paper he and a few of his colleagues had written decades before. And it laid out the connection between research investment and margin performance. The correlation I suspected but couldn't prove was right there on the page. I read it that night. The next morning I emailed Chuck, and I was just really excited. What they'd written decades ago matched what I was finding in the data. That email exchange turned into an invitation. I asked Chuck to come to HP Labs. We met in a conference room in Building 3, the main building for HP Labs at the time. And I'll tell you, I look back on this and it makes me smile a little, because this conference room was just down the hall from Bill and Dave's offices. HP preserved those offices exactly as Bill and Dave left them. You can walk in there today, see their desks, see their offices, just as they were on their last day. There's something about being that close to where it all started that makes the history feel less like history and more like unfinished business. Chuck walked up to the whiteboard and drew two things. On the left side: R&D as a percentage of revenue. The metric every company reports. The metric Mark used to argue HP was overspending. Chuck's point was simple. That metric tells you how much you're spending. That's it. Nothing about whether your ...
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    20 mins
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