R&D moves to software

October 28th, 2016
By 2020, companies will have shifted the majority of their R&D spending away from product-based offerings to software and service offerings, according to the 2016 Global Innovation 1000 Study from Strategy&, PwC’s strategy consulting business.

The need to stay competitive is the top reason why companies cited a shift in their R&D budgets towards software and services, and for good reason – according to the study, companies who reported faster revenue growth relative to key competitors allocated 25 percent more of their R&D budgets to software offerings than companies who reported slower revenue growth.

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

“In this year’s Global Innovation 1000 study we focused on the transformation that R & D is undergoing as companies strengthen their software and service offerings. The shift is increasingly being driven by the significant improvement in what software can do and the growing use of embedded software and sensors in products, customers, and suppliers via the Internet of Things and the availability of cloud-based data storage. Most of all, it is being driven by increasing customer expectations,” says Liesbeth Botha, Strategic Digital Transformation Leader, PwC Africa.

Only one South African company –chemical and energy giant, Sasol (No. 714) – was listed on the 1000 Companies List for R&D spend and R&D intensity.

According to PwC’s Africa Business Agenda, 2015 report almost 90% of CEOs saw digital technologies and innovations as vital to their success and that will transform their businesses over the next five years. In addition, new advancements and breakthroughs in frontiers of R&D are opening up more opportunities for businesses across the African continent. Adds Botha: “African corporates together with the Government have the opportunity to drive more domestic R&D investment into innovation and digital transformation to build an economy that is recognised for its talent, skills and knowledge.”

For the seventh year running, Apple and Alphabet (formerly Google) continue to lead the most innovative list. Google continues to make waves with initiatives such as its self-driving project, while Apple focuses on its capabilities in gaining customer insights to improve popular products such as the iPhone.

PwC’s strategic partnership with Google is illustrative of its own investment in, and commitment to innovation, comments Botha.

Companies will recruit less mechanical engineers and more data and software engineers to build their capabilities

To support the development of software and services offerings, fewer companies will focus their R&D 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 percent and the proportion of companies who expect that data engineers will represent their largest group of employed engineers will double from 8% to 16%.

Regionally, companies in North America are making the strongest shift to software offerings—from 15 percent of total R&D spending in 2010 to 24 percent in 2020. While Asia remains the most product-centric region, with 44 percent of R&D allocated to product offerings in 2010, only falling to 40 percent in 2020. The automotive and industrial sectors are making the most aggressive push towards developing new software offerings.

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

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

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