Report: Profits Plunge Whenever Companies Cut Back on Tech Spending

Despite its starring role in business and everyday life, many economists openly question whether technology is visible in traditional economic metrics such as GDP, productivity, and corporate profits.

In two articles—Why Technology Matters (published earlier this month) and Why the Technology Economy Matters (published today)—The Boston Consulting Group (BCG) shows that, on the contrary, declines in technology investment are followed by startling drops in all these measures of economic growth.

The articles demonstrate that whenever companies cut back on technology spending in order to shore up profits—as companies in many industries are doing now—profits plunge. GDP also falls dramatically. Within a few years, labor productivity across the economy falls, as well.

“Companies are cutting back on a critical investment that could power the next wave of growth,” says Howard Rubin, a BCG senior advisor and the lead author of the series. “In many cases, that investment could create huge leverage, lowering other expenses much more quickly than technology spending rises. But that can happen only if companies manage their technology spending well.”

Making the Invisible Visible

The series spotlights recent trends in “technology intensity,” a proprietary calculation that reveals the economic impact of the $6 trillion corporations around the world spend on IT each year. The technology intensity calculation uses a patented formula to analyze technology spending relative to a company’s and an industry’s revenues and operating expenses.

Across a range of industries, companies with high technology intensity also have high gross margins. Furthermore, technology intensity and gross margins tend to rise and decline together.

This effect was seen before and after the recent world economic crash. In the run-up to the Great Recession that started in 2007, companies were investing heavily in technology relative to revenues and operating expenses, and gross margins were rising. That trend continued to accelerate until 2009, when companies cut technology investment dramatically. After that, technology intensity dropped precipitously along with gross margins, GDP, and productivity.

In the last article in the series, How to Reach the Technology Economics Frontier, to be released on October 19th, 2016, the authors explore the ways that senior executives can understand where the company stands in relation to its competitors—and act on that knowledge.

Given the rapid emergence of disruptive products and business models and the transformative power of digital technologies, the authors of the series argue that executives must become masters of the global “technology economy,” capable of detecting the economic impact of rapid technological change and able to respond with speed and foresight. Those that succeed will make the most of technology and create what BCG calls technology advantage.

“Executives require new metrics and new ways of thinking in order to navigate the technology economy and approach the many investment decisions in which technology plays a role,” says Ralf Dreischmeier, the global leader of BCG’s Technology Advantage practice and a coauthor of the series.

“To successfully navigate the technology economy they must create, measure, and track virtual economic measures just as carefully as metrics about the physical world.”

 

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