NEW YORK--(BUSINESS WIRE)--Investment in artificial intelligence is set to consume an increasing share of R&D budgets and capital expenditures at tech companies, underscoring a sector-wide belief that AI is the primary driver of future growth. However, industry executives surveyed by global consulting firm AlixPartners say the benefits of these investments aren’t readily evident, a concern for investors who may grow impatient without a near-term return.
AlixPartners’ 2024 Tech Sector Growth & Performance Report is based on a recent survey of 350 industry leaders serving in C-suites or as senior executives in North America and EMEA. Following a trend evident in the firm’s 2023 survey, a substantial majority of executives (70%) say they are pursuing sustainable profitability over the next 12 months, abandoning the grow-at-any-cost philosophy that once characterized the sector.
In its second annual Tech Sector Growth & Performance Report, AlixPartners focused on strategic decisions tech leaders are making amid rising disruption. Pressures on the industry cannot be ignored as median year-over-year growth rates for the broader tech industry slow for the third consecutive year to 5% in 2024 – down from 7% in 2023, 16% in 2022, and 20% in 2021. Software-as-a-service companies have been among the hardest hit in the sector.
Among the report’s most prevalent findings is a realization that placing bets with AI requires patience, a shift in priorities, and considerable capital, including capex commitments poised to surpass $1 trillion in coming years.
“There has been a structural shift in the tech industry, prompted by an increasingly sharp prioritization on long-term profitability and a growing acknowledgement that successfully adopting AI will require a new cost structure, clear objective, and an appetite for trial-and-error,” said Giacomo Cantu, global leader for the technology, media, and telecommunications practice at AlixPartners. “That AI is a gamechanger is indisputable – the question facing executives is how to measure progress, where to place bets, and how to fund the transition. What’s clear is the days of blindly chasing growth are over.”
Although companies have little to show in terms of material revenue from AI investments, 76% of tech executives identify AI as a primary driver of long-term growth. When it comes to use cases for the technology, more than one-quarter of respondents believe “embedding commercial AI solutions into current offerings” is the top option. Integrating AI into “software development and engineering productivity;” “AI-powered customer service;” and “workflow automation across the organization” are also leading priorities.
Challenges, however, abound. When asked what drives uncertainty and doubt related to use and implementation, “data and privacy security” ranked highest. Other top concerns include “balancing AI investment with other growth and R&D initiatives;” “the readiness of use cases and scalability;” “data readiness, scalability and architecture;” and “return on investment,” according to the report.
Measuring AI’s efficacy is a complex challenge. Revenue growth ranks highest among the metrics through which tech executives measure the success of AI initiatives, while process and efficiency improvements, cost reductions, and employee productivity also score highly.
“This is not a case of simply building AI and watching the profits immediately flood in,” Giuseppe Gasparro, the Americas technology practice leader for AlixPartners, said. “There are formidable hurdles to confront, including the technology’s relative immaturity, ROI on AI investments, robustness of data, and security concerns. Companies are facing tough decision after tough decision on the road ahead.”
Headcounts, which ballooned in North America and EMEA following the pandemic, have reduced as executives tighten belts for various reasons, not least of which is funding AI development. The survey found 64% of tech companies in these regions reduced headcount in 2023. Looking ahead, 25% of North American executives expect additional layoffs in the coming years, with an additional 37% not yet sure if they are necessary. In EMEA, 28% see additional cutbacks on the horizon, while 20% are uncertain.
AlixPartners found the pressure to achieve profitable growth is intensifying, with one-third of respondents boosting both growth and profitability targets for the current fiscal year. To accomplish growth objectives, executives expect AI-enabled products and features, along with the expansion of existing customer accounts, to be primary drivers. To realize profitability improvements, respondents cited using AI to automate internal processes as the top lever, followed by efficiently shifting their product and services mix.
Among the other survey findings:
- Cyclical demand pressures are easing on the tech sector following the slowdown experienced in 2022-2023, with demand improving for both software and SaaS offerings as well as tech hardware and services
- Less than one-quarter of executives will focus on route-to-market design & new logo acquisition for growth
- 54% of tech executives plan to increase AI investments by more than 10% over the next 12 months
- While 83% of executives agree AI has potential to radically disrupt their own operating model, only 22% are using AI to automate internal processes in the current fiscal year
“Tech is experiencing significant disruption and uncertainty, making it difficult to predict the speed and shape of future developments,” said Klaus Hoelbling, EMEA leader of AlixPartners’ technology, media and telecommunications practice. “The best strategy for tech companies is to make fundamental changes, including streamlining operations, rationalizing products, optimizing investments, and driving automation – all of which enable cost reduction.”
About AlixPartners
AlixPartners is a results-driven global consulting firm that specializes in helping businesses successfully address their most complex and critical challenges. Our clients include companies, corporate boards, law firms, investment banks, private equity firms, and others. Founded in 1981, AlixPartners is headquartered in New York and has offices in more than 20 cities around the world. For more information, visit www.alixpartners.com.