Disruptive technology and the future of business
Middle market businesses must keep pace with technological changes.
Technology investments may be beyond the reach of some businesses, either because they are too expensive, too unknown or too irrelevant. Nevertheless, “tech spending—on everything from cloud computing to improved automation and artificial intelligence—is particularly important now, as the economy moves through a period of profound disruption,” says Joe Brusuelas, RSM US chief economist.
“As challenging as it may be during a time of economic uncertainty, middle market businesses must find a way to allocate investment capital to keep pace with technological changes,” Brusuelas says.
As the economy moves through this period of extreme disruption, technology innovations are becoming mainstream. Technologies once seen as unattainable, cost-prohibitive or fraught with risk are transforming into fundamental mainstays for doing business:
|The cloud: After some initial hesitation, companies are now realizing the potential of the cloud, migrating basic information technology (IT) functions such as data storage and network hosting. To a lesser extent, the cloud is being used for financial and productivity systems as well as data analytics.|
|Mobility: Mobility strategies have altered the traditional work environment, removing the need for the daily commute, the desktop PC and the conventional workweek, and transforming how employees work, when they work and where.|
|Automation: Robotic process automation (RPA) can automate repetitive and manual operations, reduce errors and allow employees to focus on more strategic tasks. As a result, RPA can increase productivity, improve efficiency and lower costs.|
|Blockchain: This technology allows for the recording, execution and auditing of contracts in real time on distributed ledgers. It can be adopted for asset sales, payments, loans and contracts of all types. Blockchain’s ability to reengineer processes makes it a truly disruptive technology.|
|Big data: One of a company’s most important assets is its data. Most companies use only a fraction of their data and, even then, not to its full potential. Analytics transform that data into information that can help improve operations, inform decisions and increase returns on investment.|
|Artificial intelligence (AI): AI is being embedded in products from consumer goods to industrial manufacturing. Although still in relatively nascent stages, early adopters in the tech, automotive and financial services sectors are using AI to develop products and services. Although AI is difficult and time-consuming to implement, these early adopters are already creating competitive advantages.|
For companies concerned about having enough capital and human resources to keep up with the latest technology—not to mention administer IT operations—a full-service managed services provider can handle monitoring, patch management, remediation and ongoing technology advisory services. In addition to ensuring that a company can take advantage of the latest technology innovations, outsourcing the IT function can be a cost-effective approach to maximize IT investments, expand resources and allow internal personnel to focus on the core business.
If management is feeling the pinch of a tight labor market, technology—in the form of robotics and automation—can simultaneously address increasing demand and rising labor costs.
Change is good, but slow
The advantages of technology innovations are not always appreciated and can be underutilized. For many companies, equipment is kept in use longer than is typically recommended. Maintenance tends toward extending the life of the equipment rather than updating it, risking downtime and increasing support costs.
It does not help when budgets are a fraction of what they should be if innovation is a priority. Overall, only an average 5.95 percent of revenue is spent on IT by the middle market, according to a 2018 RSM survey of CFOs on digital transformation. While nearly three-quarters of those polled indicate they anticipate their IT budgets to increase in the next three years, those gains are forecast to be primarily in single-digit percentages. Most of those surveyed self-identified as being in the mid-stages of digital maturity, with plans to adopt new IT programs or actually at the beginning of implementation. Yet a majority of survey participants (60 percent) consider themselves to be only at parity with their competitors; only about a quarter describe their company as leaders in digital innovation.
But where there’s a will, there’s a way to pay for it. “The more you integrate tech, the more you need outside help. The more you spend on tech, the more you’ll need to spend to maintain and update it,” says EJ Nedder, RSM US national tax leader. “Outsourcing can help keep costs steady.” He notes that industry behemoth Apple spends very little of its time on manufacturing (it outsources) so the company can focus on what it does best: designing products that the end-user will appreciate. “Focus on where you add value and less on those areas not in your wheelhouse.”
Technology disruption may also be changing the nature of capex spending, as noncapitalized expenses such as outsourcing and cloud computing increase. Indeed, “intangible capital” such as software or online platforms are more difficult to use than physical assets as collateral in obtaining external financing. Intangibles increased, and since 2000 even “companies with the highest growth and valuations failed to fuel investment demand,” according to economists Nicolas Crouzet and Janice Eberly. “Monetary policy is unlikely to influence intangible investment as strongly as it does traditional investment.”
But how long can middle market companies maintain their status quo on IT spending before technology forces them to increase their budgets to survive, let alone maintain a competitive advantage?