As the global economic downturn spurs companies to slash costs, many senior executives are intensely scrutinizing research-and-development budgets. In fact, R&D is a perennially attractive target for corporate belt-tightening rituals, since it doesn’t produce cash directly. Now more than ever, many companies are trying to generate quick savings—and to spread the pain of cutbacks in an equitable way—by asking their development groups to cut costs across the board.

Yet such tempting reductions starve and therefore delay promising projects while allowing unworthy “zombie” ones to linger. Worse, wholesale layoffs destroy morale among the remaining staff and can even prod your very best development engineers, who are always in demand, to accept the severance package that may be on offer and move elsewhere. Companies should take a more strategic approach to cutting R&D costs, by using today’s difficult economic environment as an opportunity to upgrade the R&D organization’s focus, practices, and management. That path helps companies not only to cut their costs but also to raise productivity and speed up time to market—while positioning themselves for even greater success in the future.

For most organizations, the first step is to examine the R&D portfolio rigorously to accelerate the most strategically promising projects...