Competition and Government Regulation Challenge Tech Sector Funding, According to BDO CFO Survey

Increased concerns over competition and government regulation in the U.S. are top of mind for technology company chief financial officers (CFOs), according to the annual survey by BDO, one of the nation’s leading accounting and consulting organizations. More than a third (39%) of CFOs at leading U.S. technology businesses say that competition will have the greatest impact on the current funding environment, followed closely by regulatory developments (31%). Other factors impacting financing this year include fewer domestic startups (11%), loss of U.S. global technology leadership (9%) and a decline in innovation (8%).

In regards to international expansion, most (29%) of CFOs are wary of uncertain business and/or political climates, which was the same as last year. However, more CFOs (20%) cite intellectual property risk and exploitation as an obstacle to growth abroad this year, which was up from 14 percent in 2009. Only (19%) are concerned with international business and tax regulations this year, which was down from 26 percent in 2009. Others are most uneasy about currency risk (17%), down from 21 percent in 2009, and the training of international employees (13%).

“Uncertainty in the business and regulatory environment both in Washington and abroad continue to be a real concern for most U.S. technology companies this year,” said Michael Whitacre, a Partner in the Technology Practice at BDO. “Further, the shaky economy has led to a decline in international patent filings for the first time in three decades – the U.S. had fewer filings than any other industrialized country and it’s expected that we will continue to lag behind emerging markets in 2010. Decreased innovation and a lack of proper patents and protection will leave domestic technology companies vulnerable to a competitive and aggressive market abroad.”

These findings are from the BDO 2010 Technology Outlook Survey, which examined the opinions of 100 chief financial officers at leading technology companies located throughout the U.S. The survey was conducted in January of 2010.

Other major findings of the 2010 Technology Outlook Survey:

• Outsourcing Bounces Back. Overall, CFOs say they are currently outsourcing to more locations. Below is a comparative chart of outsourcing hotspots:

• China Leading Location for Future Outsourcing. When asked to choose one country where they are considering outsourcing to in the future, outside of those where they are currently outsourcing, China was again the leading location.

“Last year, fraud issues and international strife caused U.S. companies to focus on domestic services as opposed to outsourcing,” said Don Jones, Partner in the Technology Practice at BDO. “This year, however, the economy has significantly squeezed margins and companies have had to resume outsourcing to reduce their operating costs. Asia and India are the leading outsourcing locations because both regions have already built the necessary infrastructure to quickly support increased demand.”

• U.S. Generally Accepted Accounting Principles (GAAP) vs. International Financial Reporting Standards (IFRS) Haunts Multinationals. Although nearly two-thirds (65%) of CFOs feel the switch from GAAP to IFRS will have no impact on U.S. companies’ competitiveness, 68 percent feel GAAP provides better quality revenue recognition rules for technology companies. CFOs of companies with international operations are more likely to prefer IFRS (32%) than CFOs of domestic-only companies (21%).
• Multinational Companies Catch Break on New FASB Rule. The FASB recently passed rule changes that will make it easier for many technology companies to report revenues as delivery to customers occurs. Nearly half (49%) of multinational CFOs say the rule change will be somewhat or very favorable, compared to only 26% of the U.S.-only CFOs. The new rule changes better align U.S. accounting rules related to reporting revenue with current international accounting practices and, as a result, eliminate a significant competitive disadvantage for U.S. companies that compete internationally.
• Tech Companies Not As Concerned with International Tax Changes. Sixty-four percent of CFOs say that Obama’s plan to stop allowing multinational corporations to defer paying taxes on profits earned abroad will have no impact on their business. In fact, five percent of CFOs say that this regulation will have a positive effect on their company. Half (49%) of the multinational tech companies surveyed say that the increased taxes will have a negative impact on their earnings.

The BDO 2010 Technology Outlook Survey is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, whose executive interviewers spoke directly to chief financial officers. Market Measurement used a telephone survey performed within a scientifically-developed, pure random sample of U.S. technology companies in the software, hardware, telecommunications, internet and information technology services sub-sectors. The companies surveyed had revenues up to $10 billion.

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