How do you stay on course when the direction keeps changing?

Technology companies are entering a new era of uncertainty relating to how they design their global operating models. Decisions on sourcing, supply chain, product and service production, and distribution are influenced by the rapid pace of change impacting complex economic, political and regulatory changes in the broader business environment. Taken together, these actions are adding a new layer of complexity into the planning and execution within the operating model.

In terms of political and economic challenges, the survey findings indicate that technology company executives are grappling with political instability, changing political costs and new constraints that are creating both opportunities and challenges for their operating models and supply chains.

Tariffs and rising labor costs have created a situation in which many technology companies have adopted a “China-plus-1” strategy. In Asia, countries such as Vietnam, Malaysia, Thailand and India are benefiting from new investments to diversify supply chain risk. There’s also an increased threat perception as companies globally could face heightened cyber-attacks impacting their operations.

Depending on their role in the value chain, technology companies are increasingly seeing government involvement in the sector through a bifurcated lens. On the positive side, governments that are concerned about securing their access to critical technologies are creating new multibillion-dollar incentive programs such as the proposed US Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act and the European Union’s proposed Chips Act to incentivize the building of new research and development (R&D) and fabrication capacity.

Key regulatory challenges impacting technology companies’ operating models

• Digital services tax, trade tax, sales/use tax, value-added tax
• European Union competition policy
• The OECD Base Erosion and Profit Sharing (BEPS) 2.0 projects with Pillars One and Two
• Executive order aimed at anticompetitive practices
• Executive order to review critical supply chains for manufacturing of semiconductors and other cutting-edge technologies
• Taxation of intellectual property (IP)

Across the world, a growing wave of changes to the regulatory and tax environment are having an increasing impact on technology companies.

Globally, countries are targeting a broad-based taxation of their digital economy and its transactions, and recent political changes are potentially accelerating this trend.

Evolving digital services and operating models such as over-the-top and Software-as-a-Service (SaaS) have legislators focused on new tax and regulatory regimes. In the survey results, the regulations related to trade and taxation, transfer of data and efforts to update technology sector competition/antitrust policy consistently emerged as prominent factors impacting operating model changes.

A closer analysis of the survey data reveals some significant divergences between different aspects of the industry. Executives at IT services/cloud and internet/e-commerce companies consistently placed a higher degree of concern for the impact of nearly all of these regulatory issues — with respondents averaging 10 percentage points higher in their concern than the overall response noted in the chart.

Legacy technology executives indicated they are impacted by digital services taxes, European Union General Data Protection Regulation (GDPR) and global minimum taxation. Emerging technology company executives were more focused on the impact of sector competition/antitrust policy and sourcing of raw materials.

Technology companies rethink their supply chains after the unanticipated impact of the pandemic and a host of new “black swan” events.

The global supply chain, which was already absorbing the impact of the US and China trade challenges, came under additional stress during the global COVID-19 pandemic.

Driven by a global shutdown of factories and a shortage of shipping containers, importers experienced delays in receiving manufacturing components, while exporters faced challenges in getting bookings on shipping vessels.

Perhaps not surprisingly, 95% of the executives surveyed indicated their companies are taking action to change their supply chain and operating model. The semiconductor sector stands as an example of the “perfect storm” that is leading executives in this sector and across many sectors to rethink their supply chain operating model.

The move to remote working led to a surge in sales of electronic devices, and this, combined with the digitalization of everything, created and continues to create unprecedented demand for semiconductors and sensors for a wide range of historically non-digital products. Combined with other unanticipated supply bottlenecks, including natural disasters taking select chip fabricators offline, it created a huge scarcity for semiconductors — impacting 169 industries ranging from consumer products to automotive.1

If we look closer at the survey respondents who indicated that they have passed these additional costs onto their customers, an interesting subplot arises, indicating that emerging technology companies have not been as successful in increasing their prices:

• 73% of industry leaders have passed additional costs on to customers vs. 53% of industry followers.
• 65% of large technology companies (US$10b-plus) have passed additional costs to customers, compared with 53% of small technology companies (US$50m–$499m).
• 59% of legacy technology companies have passed these costs to customers, compared with 53% of emerging technology companies.

With the pandemic’s effects on supply chains intensifying the focus on resiliency and sustainability, the desire of technology executives and their companies to nearshore and reshore their supply chains was prominent in the survey results. While 19% of executives indicated their companies have already moved their manufacturing to be onshore or more localized, 71% indicated they plan to do the same over the next three years. A related factor that also builds the case for near/reshoring is likely the fact that 68% of the executives indicated that tech firms will need to take stronger actions to reduce global emissions over the next three years.

When we asked how executives planned to adapt their operations, respondents indicated that recent changes triggered by the global pandemic and the challenges throughout the supply chain have led to increased business resiliency throughout the organization and across their value chains and ecosystem.

Recognizing the need to proactively and continuously update one’s operating model, executives indicated that they look for benefits such as higher revenue growth and employee satisfaction as the top benefits realized from operating model changes, but many are addressing tactical and functional issues, creating a sense that there is much more to do.

Industry leaders were more bullish about the benefits from implementing the right operating model. These gains are expected to be visible across financial performance and customer or employee satisfaction and showcase a direct correlation between having the right operating model and material improvements in business performance.

As companies’ size and revenue increased, their confidence in having the right operating model also rose. High-revenue technology firms believe they have the right operating model, but most small and medium-sized companies or companies with low to medium revenue believe they do not and are planning for further enhancements.

While the majority of autotech and technology infrastructure executives believe their companies have the right operating model, executives in other sectors were evenly split or indicated that they need to plan for new enhancements.

Building a future-fit supply chain and operations model

Change is often faced with inertia and a sense of uncertainty. In a recent EY return-to-work survey, nearly 54% of global employees indicated that they would consider leaving their job post-COVID-19 if they were not afforded some form of flexibility in where and when they work.²

As a result, executives in nearly all industry sub-sectors surveyed ranked employee satisfaction and well-being as the most important criterion. FinTech executives placed a higher degree of importance on tax and other statutory regulations in first place, followed by the ability to access/manage labor and skills at second place, and employee satisfaction and well-being in third place.

Company size (in revenue)

Taking a closer look at specific areas of change and focus over the next three years, the importance of ESG and agility, speed and flexibility are high on the agenda. ESG emerges as a consideration in both supply chain and operations changes. Other prominent themes include creating a holistic view of supply chain; nearshoring and reshoring; a willingness to work across ecosystems; and a desire to diversify risk.

Yet change is not without risk. While executives were fairly consistent in their concerns around the challenges, they thought would most likely hold the organization back, there was a wider variance when comparing the concerns between legacy and emerging technology companies. Given emerging companies’ more recent formation, their executives were less concerned about uncertainty around the business environment (28% vs. average of 38% for all tech executives). However, emerging company executives indicated a higher degree of concern about their own IT/system limitations (53%) and concerns about implications of changes in their business (47%).

To thrive and accelerate growth in this constantly changing business environment, technology companies will need a comprehensive and cohesive global trade strategy through an agile operating model. It must have the ability to be ready to pivot and be ready to update with changes to global compliance regulations, reimagine workforce and commit to ESG needs.

The question every C-suite executive needs to evaluate today is “Is my operating model ready to support new strategies and drive future success in the wake of an unpredictable future?”

Today, two out of three technology executives (68%) highlighted the need to be agile and flexible and have plans to amend their operating model to support existing and evolving business needs over the next three years. But do they have the technologies and platforms in place to make real-time adjustments with a view of the holistic impacts that each discrete change will have on the company’s financial situation and operational efficiencies?

Overall, the executives in our survey indicated that technologies and tools related to customer transactions, relations and support (58%); supply chain optimization (53%); and supply chain transparency (45%) will be the most significant areas they will invest in as enablers to improve their operating models over the next three years (with a slight variance when ranked in terms of their top three priorities).

Sixty-four percent of the executives surveyed plan to change their corporate structure to help improve financial reporting and tax management. This is driven by a need for global visibility and risk management due to increasingly complex compliance and reporting obligations across the world.

While constantly adapting their own capabilities may be challenging and costly, companies can leverage consolidated tax and financial operating platforms to facilitate their complex requirements. The finance functions can leverage advanced analytics and standardized methodologies to minimize risk and improve visibility and efficiencies that will help them stay ahead of the digital curve.

Key considerations to ensure effective global compliance and reporting

• Have a coordinated approach to changing global tariffs.
• Reduce cost, risk and delays from trade network.
• Build a strong data foundation to improve the efficiency of compliance and reporting.
• Leverage appropriate technologies.

The commitment to a sustainable future will increasingly have more prominence as technology companies transform their operating models over the next three years. Sixty-six percent of the technology executives we surveyed acknowledged that a focus on ESG was key when designing their operating model.

Reduced shipping cost and quantum of energy usage are going to be important factors while designing operating models. This includes creating long-term sustainability and ESG value by having the right strategy, supply chain, capital allocation and portfolio optimization, as well as creating evaluation frameworks to measure both financial and nonfinancial outcomes.

Key considerations in reimagining work include

• Determine how roles may change, and what new opportunities will emerge, as a result of the new and more collaborative ways of working
• Ensure the organization supports purpose, culture, productivity, and performance with new ways of working
• Assess the real estate footprint and the need for — and use of — space, while establishing provisions for home workspaces and technology enablement
• Assess the global employment tax, corporate tax, payroll, and regulatory implications, while also taking cybersecurity implications into account in decision-making.
   

Technology companies can achieve high sustainability performance while providing profitable returns to stakeholders by taking the following steps:

• Understand the maturity and effectiveness of the current approach to ESG.
• Assess ESG risks, impacts and opportunities.
• Integrate ESG into the organizational strategy.
• Engage with stakeholders and report on ESG performance.
   

Conclusion

The one truism in the global economy and technology industry is that the pace of change is increasing and relentless. Whether it a game-changing innovation or a once in a thousand-year black swan event, the complexities are multiplying at a rate that is challenging even the most adaptive of companies to stay one step ahead in this era of unprecedented change.

Through our survey, we find that technology company executives are focused on continuously reviewing their business and operating models, but often trying to respond to challenges that impact their functional issues. It is addressing the issue at hand versus recognizing there will always be issues, and they need to have a holistic way to address continuous change and grow the business. This manifests in the nuances the executives shared around their key challenges.

Technology executives also indicated that they are looking for supply chain simplification to increase agility in their operating model. This new operating model must foster profitable agility and scalable innovations while enabling real-time decision-making. Companies must also design the right financial and operational management structure to help deliver improved transparency, greater compliance and a strong financial position across areas including profitability, tax and treasury.

While there are new tools like AI that are enabling companies to reimagine their future, we also see that successful companies are focused on putting their people at the center of their new models, giving them the tools to think through significant strategic change in ways that would previously rely on long planning cycles and endless meetings trying to get buy-in and business alignment.

Taken together, we see the focus on people and technology manifesting itself in an “enterprise control room” that allows adaptive enterprises to build a set of linked enterprise decisioning platforms that bring together a wide range of functions from risk management to tax and treasury to visualize and model the impact of change — planned and unanticipated — in areas like global trade and supply chain in near real time. These types of models will allow technology executives to see new possibilities and spot potential bottlenecks and pitfalls as a group and lead to more agile and
accelerated decisions.

Two other interesting observations we see in the survey results and in our own clients’ observations. Operating model changes to drive greater enterprise resiliency and to focus on matters like ESG are not separate initiatives. Instead, they become guiding principles that surround the organization and factor into nearly all future organizational change initiatives in the quest for technology companies to become truly adaptive.

Further, these changes are not just confined within the organization but also increasingly extend into the enterprise’s ecosystem relationships — from suppliers to customers — and other key stakeholders.

EY teams understand these same issues and are intentionally disrupting ourselves through new service and delivery models that mirror the issues our clients are facing. We start by putting humans at the center as we work with clients to define their challenges, model the art of the possible and then test new business models in our TMT convergence network of innovation centers.

Executives are focused but are often trying to respond to challenges that impact their functional issues. It is addressing the issue at hand vs. recognizing there will always be issues, and they need to have a holistic way to address continuous change and grow the business. This manifests in the nuances the executives shared around their key challenges.