The need to stay competitive is the top reason why companies cited a shift in their R&D budgets towards software and services, and for good reason – according to the 2016 Global Innovation 1000 Study.

Companies who reported faster revenue growth relative to key competitors allocated 25 per cent more of their R&D budgets to software offerings than companies who reported slower revenue growth. According to the research, the average allocation of R&D spending for software and services increased from 54 per cent to 59 per cent between 2010 and 2015 and is expected to grow to 63 per cent by 2020. Meanwhile, the average allocation of R&D spending dedicated to product-based offerings fell to 41 percent from 46 per cent six years ago, and is expected to fall to 37 per cent by 2020.

“Many of the world’s major innovators are in the midst of a transformational journey mostly driven by changing – and rising – customer expectations,” says Barry Jaruzelski, innovation and R&D expert for Strategy&, and principal with PwC US. “The shift is also being driven by the supercharged pace of improvement in what software can do, including the increasing use of embedded software and sensors in products, the ability to reliably and inexpensively connect products, customers and manufacturers via the Internet of Things (IoT), and the availability of cloud-based data storage.

To support the development of software and services offerings, fewer companies will focus their R&D spending on the electrical and mechanical field. By 2020, the number of companies reporting that electrical engineers are their top employed engineering specialty will fall by 35 percent and the proportion of companies who expect that data engineers will represent their largest group of employed engineers will double from 8 per cent to 16 per cent.

An increase in software and services, even in more traditional industries has created a shift towards hiring talent that can develop software and provide platforms to collect and analyse product-related data, says Jaruzelski. “The shift is already changing the way business schools think about their course offerings, and will have profound effects both on education and, more generally, on the future of employment.”

Regionally, companies in North America are making the strongest shift to software offerings-from 15 per cent of total R&D spending in 2010 to 24 per cent in 2020. For the first time in the study’s history, the number of Global Innovation 1000 companies headquartered in the US grew, up 9.5 per cent year over year.

In terms of sectors, automotive and industrial firms are making the most aggressive push towards developing new software offerings.

Among companies that made an acquisition during the past five years, the vast majority – 71 per cent – was required to enhance capabilities in software or services.

Strategy&’s annual analysis of the world’s 1000 largest R&D spenders also found that by 2018, the healthcare sector will surpass computing and electronics to become the largest R&D spending industry globally, and the software and internet industry will leap ahead of the automotive sector. Volkswagen, Samsung, Amazon, Alphabet (Google) and Intel round out the top five R&D spenders, with Amazon and Google making bold moves up the list by four and two positions respectively.