More Frogs on the Frying Pan for Europe: Technology and Innovation

16 Jan
IDC-Innovation-Technology-Europe

More Frogs on the Frying Pan for Europe: Technology and Innovation

Mark Yates    
Research Manager,European Digital Transformation Practice
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Finding a crisis is Europe is almost as easy as meeting a protestor on the Champs Élysées when French labor laws are about to be changed. There are euro zone worries, migrant worries, fears of political destabilization, Brexit (and other member-state recalcitrance), a resurgent Russia, potential trade wars with the U.S., the specter of terrorism, and others related to political bodies, economic structures, and aging populations.

The headline-grabbing crises too often distract from subtler ones that can be just as dangerous when left unchecked. A big one that IDC has been tracking is related to IT and innovation. In a nutshell, IDC data reveals that enterprises based in the European Union are investing far less into strategic IT than those based in the United States in both absolute terms and as a percent of nominal GDP.  According to a recent IDC study, the U.S. is forecast to outspend Europe by around 75% in terms of overall IT spending (not including telecom services) through 2022. For innovation accelerators, the numbers are a bit less extreme but still troubling, with the U.S. set to invest around 55% more.

US, China and Western Europe Forecast Spending on Innovation Accelerators, 2019-2022
Source: IDC Worldwide Black Book 3rd Platform Edition, 2018

While there has always been a digital technology gap between North America and Europe, these numbers point to a troubling widening. Information technology is now the foundation upon which nearly every other element of the business depends. In some industries and markets, as little as five years ago, business intelligence solutions, omni-channel communications, and customer analytics were considered cutting edge. Today they are more or less required simply to stay in the game, let alone get ahead of the curve in terms of being competitive.

One of the most striking examples is the rise of Amazon. According to http://www.retail-index.com, the company is already the 7th largest retailer in Europe. Its international approach has allowed it to utterly dominate the ecommerce space — in 2017, its online turnover in Europe was greater than the next four competitors combined. (As the leading provider of infrastructure-as-a-service to enterprises, Amazon can also be considered an IT company, another area where U.S. firms dominate. It serves as a poignant affirmation of the truism that every company is now an IT company.) As one of the oldest digital native companies, for retail, it invests heavily into robotics and IoT to run its warehouses, AI to analyze its customers, mobility to enable easier access to its service, headline grabbing R&D (such as drone delivery), and APIs and ecosystems of partners to expand its offerings.

This is not to say that Europe is void of companies pushing the innovation envelope with cutting-edge technology. IDC has written about or referenced operational and product innovation at companies as diverse as BBVA and Campofrio in Spain, Bosch and Klöckner & Co in Germany, John Lewis and Waitrose in the U.K., and various smart cities, energy companies, and upstart banks across Europe. Europe also produces a fair share of startups. According to Tech Nation, a tech industry network with a U.K. bias, London, and Berlin were both among the top 10 locations globally for launching startups. Having said that, a few swallows do not make spring. In Forbes’s 2018 list of the world’s most innovative companies, 15 of the top 20 are from the U.S. and three from South Korea. The first European company appears at position 29. Meanwhile, five of Tech Nation’s Top 10 locations for startups are in the U.S.

Top 20 Most Innovative Companies Globally, according to Forbes

Top 20 Most Innovative Companies Globally
Source: Forbes, 2018

Certainly, IT is not the only reason why European enterprises are falling behind their North American and Korean (and often Chinese) competitors. Regulations are sometimes to blame. European policies have kept companies smaller with the aim of fostering competition, inhibiting many European firms from generating the scale necessary to move aggressively into other markers at a regional or global level. (There is evidence to suggest that regulations may actually have a slightly positive impact on innovation in Europe.) But even with scale, the fragmented nature of the European marketspace is also an issue. A caterer in Milan will likely face greater obstacles expanding to other European cities than a Chicago-based caterer would encounter if it sought customers in other American cities. The IT skills gap in Europe is also pronounced and growing (though the U.S. also faces a significant skills gap). And Europe lacks tech hubs of the same scale as those found in the U.S., limiting the development of wider communities of tech enthusiasts and experts.

Still, investments can and do make a huge difference. Catering requires mastering both logistics and culinary sciences. It requires coordinating fleets of vans, raw material supply chains, kitchens and staging areas, specialist staff, and recipes and processes, as well as marketing activities and a customer base. Whether speaking about catering or business more generally, in our current digital age, this requires building and deploying software like never before. But when we look at the numbers, European firms appear to be doing so at a much slower pace than those in North America. DevOps serves as a sort-of proxy. Enterprises in the US will invest more than twice as much as those in Europe through 2022 into software specifically designed to build, deploy, and manage other software. While this may not be a big deal for a caterer, it certainly will be for most one-to-many service providers and a great many manufacturers and retailers as well.

The good news is that this crisis is pressing rather than urgent. (It is also easier to solve than some of the others mentioned at the start of this post.) European enterprises do not need to rush out and start spending more tomorrow. They have time to map out mid and long-term destinations and use cases, then work backwards from there to establish roadmaps for achieving those goals. Many have already done this. But the spending levels suggest they probably need to be more aggressive in their goals. IT suppliers can help by educating their customer both on the need for accelerating IT investments and best practices around hyperscale and multi-cloud platforms, rapid deployments, failing fast, ecosystem development, and collaboration. This will require IT buyers and suppliers to reframe their relationship as a collaborative rather than strictly transaction. 

This blog post is partially based  on IDC’s Western Europe Risks Losing the Technology Race, which uses IT investment forecasts to argue that Western Europe may be falling behind other developed regions in its technology development. The document analyzes the reasons why Western may be at risk and provides guidance for correcting the situation and ensuring European competitiveness.

If you would like Mark Yates to help with your understanding of the technology gap between Western Europe and North America, head over to https://uk.idc.com/ and drop your details in the form on the top right.

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