This is How Much CEOs are Spending on Software to Keep Pace with Digitization

The findings provide a rough guide to CEOs grappling with how seriously they need to take advances in software technology, which are allowing companies to enhance manufacturing processes, improve and connect existing products and mine customer data for trends and ideas.

They’re also good news for software and data engineers, who will be increasingly favored over workers with mechanical engineering skills.

Today, companies allocate more than half of their R&D spending to product-based offerings, but this is set to change as software capabilities improve, according to the Global Innovation 1000 Study by Strategy&, a strategic consulting division of PwC.

It based its findings on an investigation of the 1,000 public companies around the world that spent the most on R&D in the year to June 30. The proportion of spending dedicated to software and services in the most recent year was 59%, up from 54% in 2010, and is expected to rise to 63% by 2020.

Spending on product-based offerings fell to 41%, from 46% in 2010, and is expected to fall to 37% by 2020.

The shift is primarily being driven by changing customer expectations, Barry Jaruzelski, a principal at Strategy& said. But it’s also underpinned by “the supercharged pace of improvement in what software can do”, he added. Key capabilities include embedded software and sensors in products, cloud-based storage and the ability to connect products, customers and manufacturers via the Internet of Things.

And embracing digital R&D isn’t just about keeping up with the latest trends. It also appears to boost revenue.

Companies with faster revenue growth than key competitors spent 25% more of their R&D budget on software offerings, the research found.

Interestingly, the two companies that topped Strategy&’s list of R&D spenders, Volkswagen and Samsung, have both been the subject of costly scandals, a reminder that innovating successfully isn’t just about spending. The German auto company is still reeling from the revelation that it placed emissions-cheating software in cars, while Samsung this month was forced to kill off production of a smartphone prone to catching fire.

Rounding out the top five were Amazon, Google parent Alphabet and Intel.