Shareholder value will be significantly influenced by tech firms' AI-related strategic decisions in the next 2-3 years.

In my podcast a couple of months ago I had a bit of a moan about how there is not enough attention being paid to AI strategy in the boardrooms of UK tech companies.

The team at Megabuyte engages in discussions with approximately 50 management teams every month within the Software and ICT Services sectors. Remarkably few of these teams have a fully developed AI strategy, with many not having even begun to consider it seriously. This not only poses a significant challenge for these companies but also for the broader UK tech sector and, indeed, the wider UK economy.

My comments drew quite a bit of feedback from listeners, some in agreement, others questioning my logic, the latter often citing DeepMind and the like as proof that the UK has a strong AI sector. Fair enough, but that wasn’t really the point I was trying to make. My point was more about AI adoption amongst the Megabuyte universe of mid-market and scale-up companies.

Either way, my comments seem to have struck a chord so I thought it would be worth expanding on them. So, in this article, I elaborate on why I consider the development of AI strategy crucial, why I perceive it as imperative to expedite the process of constructing robust AI strategies, and how I propose tech CEOs and their boards commence this journey.

Megabuyte's mission during this pivotal period is to provide support to the boards of scale-up and mid-market Software and ICT Services companies. As part of this initiative, we are nearing completion of a comprehensive AI Readiness Report, which will expand on the points discussed in this article with much greater depth. Furthermore, we aim to ensure widespread accessibility of our research so this report will be offered outside of the Megabuyte subscription service, provided free- of-charge to the boards of companies we monitor at Megabuyte.

I will also be presenting a summary of the report's key findings at a working breakfast event on the 22nd of May. UK tech companies that are Megabuyte subscribers will receive automatic access to the event. If you represent a UK-headquartered tech company but are not (yet!) a Megabuyte subscriber and wish to attend the event or register to receive a copy of the report, please contact me.

Think SaaS transition on steroids

So, let’s begin by discussing why establishing a robust AI strategy is crucial. In essence, I firmly believe that no other single strategic component will come close to generating shareholder value for tech companies (in fact, for all companies) as significantly over the medium to long-term.

Having spent much of the last year thinking about and writing our AI Readiness Report, I am left in no doubt that we are at the start of the most disruptive phase in the industry since the early 2000s. As such, strategic decisions tech companies make in the next 2-3 years will have a disproportionately significant impact on shareholder value over the medium to long-term, as was the case at the start of the SaaS/Cloud era. There are huge opportunities available to well-positioned companies but, as always in the most disruptive points in the technology cycle, many threats to growth and valuations along the way.

But there is an arguably more significant societal point here as well. If, collectively, the UK tech industry can lead the world in adopting AI into their products, services and operations, then this will not only enhance the competitiveness of the tech sector globally, but it should also support a rapid adoption of AI technologies amongst UK Plc more broadly. In my view, this has the potential to go a long way to solving the seemingly intractable productivity problem in this country. And that in turn in is the only way we can unlock additional spending for critical services. And it doesn’t get more fundamental than that.

We’re not having the AI conversation (enough)

So why aren’t senior leadership teams having the conversation with sufficient urgency in the boardrooms of companies within the Megabuyte research coverage universe? I think it is partly because there is just too much, often conflicting, information and opinion on AI out there, but most of it is not really of any practical help to CEOs of mid-market tech companies.

Bessemer Venture Partners categorises AI companies into two main groups – AI-first companies (such as OpenAI), that are in the business of advancing AI as a science, and AI-enabled companies that create enterprise value at the application level.

Perhaps understandably, so much of the commentary is about the development of AI-first companies with precious little about AI-enabled companies. Chatter about development of large language models and geeky conversations about when we might get to Artificial General Intelligence are all very interesting, but they are not helpful for CEO trying to develop their AI strategies. Worse, they are a distraction.

Existential threat and massive opportunity

And this really matters. While there is lots of moaning in the UK about how we don’t produce enough global leaders in tech, I prefer to look at it from a glass half-full perspective – we do scale-up and mid-market tech really well. So let’s lean into that and create the world’s best AI-enabled companies.

The harsh reality is that many of the UK’s largest software companies simply won’t be able to make the AI transition because the sheer volume of acquisitions they have done over the last decade will slow them down too much. So it’s going to be down to the next generation to lead the charge.

When we look at this from the perspective of the success and global competitiveness of the UK tech industry, it is therefore critical that our scale-up and mid-market tech companies successfully make the AI transition. The potential upside for getting this right for the UK economy and standards of living in this country is huge.

Boards need to start asking the right questions

So what to do? Talking to CEOs in the sector, my clear impression is that they want to develop an AI strategy but are taking more of a tactical than a strategic view. While this might mean that things get going a bit quicker, I see significant risks to this approach, mainly that the revenue potential and investment required in AI may be poorly estimated.

To avoid these potential pitfalls, I believe boards need to adopt a more strategic view and develop a comprehensive plan. That’s not to say that they need to try and do everything at once, although I think a sense of pace and urgency is important, but they do need to understand what the phases of development will be over a three to five year period. With the clear understanding, of course, that the later elements of the plan will inevitably need to be regularly reworked as more information is gathered.

To get going with this strategic approach, in my view, the first thing for boards to do is to ask the right questions, and that is the subject of our AI Readiness Report to be published in May. The initial aim of the report was to create an ‘AI Playbook’, but it very quickly became obvious that AI strategies will differ so much from market to market, and company to company, that trying to develop a one-size-fits-all playbook is impossible.

Our AI Readiness Report details 10 key questions or, more accurately, 10 groups of questions. We’re taking a top-down approach, thinking about end-market adoption of AI and the development of the competitive dynamics, leading into how to think about data, product and service strategy, on to optimising execution strategies around internal AI adoption, people, skills and go-to-market strategies. We also need to think about how best to approach M&A in the context of an AI strategy. 

Email lauren.robinson-stanley@megabuyte.com to register your interest in attending Megabuyte's working breakfast AI Readiness: Essential Questions for your Board on 22 May 2024.