Shifting spending from physical products to software and services

PwC study shows that companies who invested more of their R&D budgets to software offerings reported significantly faster revenue growth

 

By 2020, companies will have shifted the majority of their Research & Development (R&D) spending away from product-based offerings to software and service offerings. According to the Global Innovation 1000 Study from PwC’s Strategy& -conducted in 2016 the main reason for this shift in R&D budgets is the need to stay competitive since. The study showed that, companies which reported faster revenue growth relative to key competitors allocated 25% more of their R&D budgets to software offerings than companies which reported slower revenue growth.

 

Studies also showed that:

 

  • The average allocation of Research and Development spending for software and services increased from 54% to 59% between 2010 and 2015 and is expected to grow to 63% by 2020.
  • The average allocation of Research and Development spending dedicated to product-based offerings fell to 41% (from 46% in 2012), and is expected to fall to 37% by 2020 (an overall decrease of 19% in a decade).
  • Average allocation of Research and Development spending on software offerings alone will increase by 43% by the end of this decade and R&D spending on services will gradually overtake investments in product-based innovation (39% vs. 37% by 2020).
  • Global Research and Development spending on software offerings has increased by 65% between 2010-2015, from US $86 billion to $142 billion.

 

Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with PwC US stated that “the shift is being driven by the supercharged pace of improvement in what software can do, including the increasing use of embedded software and sensors in products, the ability to reliably and inexpensively connect products, customers and manufacturers via the Internet of Things (IoT), and the availability of cloud-based data storage. 

 

Software engineer appointments double

To support the development of software and services offerings, fewer companies will focus their spending on the electrical and mechanical field. By 2020, the number of companies reporting that electrical engineers are their top employed engineering specialty will fall by 35% and the proportion of companies who expect that data engineers will represent their largest group of employed engineers will double from 8% to 16%. 

Among companies that made an acquisition in the past five years, the vast majority – 71% – were made to enhance capabilities in software (33%) or services (38%)

 

R&D largest spenders

Strategy&’s annual analysis of the world’s 1000 largest R&D spenders also found the following:

 

  • By 2018, the healthcare sector will surpass computing and electronics to become the largest R&D spending industry globally (US$165 billion v. US$159 billion), and the software and internet industry will leap ahead of the automotive sector (US$129 billion v. US$105 billion). Industrials rounds out the Top 5 R&D industries by spend.

  • For the first time in the study’s history, the number of Global Innovation 1000 companies headquartered in the US grew, up 9.5% year over year. 

  • Volkswagen, Samsung, Amazon, Alphabet (Google) and Intel round out the Top 5 R&D Spenders, with Amazon and Google making bold moves up the list (+4 and +2 positions, respectively).  

  • Global innovation professionals responding to a 2016 survey have ranked Apple, Alphabet (Google), and 3M as the three Most Innovative Companies in the world. 

  • The 10 most innovative companies continue to outperform the Top 10 R&D Spenders on key performance metrics, as has been the case for each of the past seven years.

 

2016 Ranking: The 10 Most Innovative Companies vs. Top 10 R&D spenders

 

Rank

10 Most * Innovative Companies

2016 R&D spend
(US$ Bn)

R&D intensity

Top 10 R&D Spenders

2016 R&D spend
(US$ Bn)

R&D intensity

1st

Apple Inc.

8.1

3.5%

Volkswagen AG

13.2

5.6%

2nd

Alphabet Inc.

12.3

16.4%

Samsung Electronics Co Ltd

12.7

7.2%

3rd

3M Co.

1.8

5.8%

Amazon.com Inc.

12.5

11.7%

4th

Tesla Motors Inc.

0.7

17.7%

Alphabet Inc.

12.3

16.4%

5th

Amazon.com Inc.

12.5

11.7%

Intel Corp

12.1

21.9%

6th

Samsung Electronics
Co Ltd

12.7

7.2%

Microsoft Corp

12.0

12.9%

7th

Facebook Inc.

4.8

26.9%

Roche Holding AG

10.0

19.9%

8th

Microsoft Corp

12.0

12.9%

Novartis AG

9.5

19.2%

9th

General
Electric Co

4.2

3.7%

Johnson & Johnson

9.0

12.9%

10th

International Business Machines Corp

5.2

6.4%

Toyota Motor Corp

8.8

3.7%

            *The 10 Most Innovative Companies are named by respondents of a 2016 survey of global innovation experts. 

 

To learn more about the 2016 Global Innovation 1000 Study, visit www.strategyand.pwc.com/innovation1000.

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Konstantina Logotheti

Director - Marketing & Communications, PwC Cyprus

Tel: +357-22555108

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