The Power of Technology Economics

By Howard RubinChristophe DuthoitHrishi Hrishikesh, and Ralf Dreischmeier

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 this report, The Boston Consulting Group shows that, on the contrary, declines in technology investment are followed by startling drops in all these measures of economic growth.

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. In effect, companies are cutting back on a critical investment that could power the next wave of growth. 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. To do that, senior executives require new metrics and new ways of thinking. To successfully navigate the “technology economy” they must create, measure, and track virtual economic measures just as carefully as they follow metrics about the physical world.

This report spotlights recent trends in “technology intensity,” a proprietary calculation that reveals the economic impact of the $6 trillion that 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 Great Recession that started in 2007. In the run-up to the recession, 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.

With a powerful diagnostic we call the technology economics frontier, senior executives can understand where the company stands in relation to its competitors in terms of technology intensity—and act on that knowledge. In the face of rapid technological change and digital disruption, executives must become masters of the global technology economy. Those that succeed will create what BCG calls technology advantage.