Tech Companies, Not Factories, Are Getting the Capital Spending Dollars Now

CIO-022422 OSC-Capital Spending3-Tech not factories _Georgie McAusland-web

Art by Georgie McAusland

For decades, capital expenditure was seen as a foundational element of any successful business. From a small mom and pop shop all the way to the largest corporations, physical capital was a critical component to building, creating, and growing a company.

In the 2000s and 2010s, some argued that the internet would chip away at the importance of physical capital. But the shift was never dramatic.

Cloud technology and other digital upgrades “just cost money,” said Jeff DeVerter, chief technology evangelist for Rackspace, a cloud computing company. “And so a lot of companies said, ‘I’m not going to do it.’ Because financially, they couldn’t make it make sense.”

Then came the pandemic. Suddenly cloud technology became a necessity, and companies found themselves forced to invest in the transition, whether they wanted to or not. DeVerter began noticing a huge influx in companies demanding cloud technology at Rackspace.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“We started this rush to the cloud several years ago, and that was amplified by COVID, when everybody went home, and we needed everything centrally accessible,” he said.

But that doesn’t mean cloud technology is cheap for companies.

“It is still in a sense, quote unquote, ‘hurting their bottom line,’ but they’re getting a greater business benefit that offsets that,” DeVerter said.

In other words, while investments in software and cloud technology are often still expensive for companies, such upgrades help them do their jobs more efficiently, thus making the extra expense worth it, he said.

JP Morgan’s 2021 “Business Leaders Outlook Pulse” survey found that 51% of executives said they automated “back office” functions with new digital platforms and plan to continue doing so after the pandemic. The survey received responses from 1,375 senior executives at midsized US companies and was conducted in June.

“What you are seeing is a dip in spending on physical infrastructure and a move away from a capex-based model toward an opex-based model,” said DeVerter.

An operating expense model—opex for short—differs from the traditional capital expenditure model because operational expenses do not depreciate.

The JP Morgan survey also found that not all technologies are seeing the same levels of growth in investment.

“Outlays for intellectual property, including software, are rivaling expenditures on new production equipment like robotics,” according to the survey.

This focus on software and automation is especially important as companies begin to face labor shortages in the wake of the pandemic. Eighty-one percent of executives said they intend to hire within the next six months.

The lack of labor may force companies to look for alternative methods to increase productivity, and software and automation are some of the most accessible ways to do that.

Rackspace also sponsored a survey in September of 1,870 information technology leaders at companies around the world. That survey similarly found that companies are increasingly seeing technology as a positive asset. Seventy-one percent of respondents in the financial services industry said machine learning and artificial intelligence positively impacted their company’s revenue. Other industries, such as manufacturing, retail, health care, and energy, also had over 65% of respondents reporting that artificial intelligence and machine learning had a positive revenue impact.

Another telling statistic was the percentage of companies’ information technology budgets that were spent on artificial intelligence and machine learning. Initially in 2020, the survey showed that across all sectors, between 1% to 10% of the average information technology budget was spent on machine learning and artificial intelligence. However, when the survey was done again in 2021, that numbers shifted so that the average company spent between 6% to 10% of its budget on machine learning and artificial intelligence.

While this shift may seem subtle, DeVerter said the change in the lower number shows how pervasive these technologies are becoming in all sectors around the globe. Additionally, he thinks the fact that these numbers seem relatively small means there is even more room for the machine learning and artificial intelligence spaces to expand over the coming years.

“They still have so much more room to grow,” he said. “Especially if they’ve made the move to the cloud, there’s still so much opportunity for them to ask more of the cloud.”