Companies that invest R&D budgets to software offerings have faster revenue growth

By 2020, companies will have shifted the majority of their research and 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&, the main reason for this shift in R&D budgets is the need to stay competitive. 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 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.

Furthermore, the average allocation of R&D 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 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 investments in product-based innovation (39% vs. 37% by 2020), while global R&D spending on software offerings has increased by 65% between 2010-2015, from $86 bln to $142 bln.

“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,” said Barry Jaruzelski, innovation and R&D expert for Strategy& and principal with PwC US.

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 that expect that data engineers will represent their largest group of employed engineers will double from 8% to 16%, the PwC survey added.

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%)