Artificial intelligence is shaking up business and society in myriad ways-including what drives market value for software companies and what Wall Street rewards.
The upshot? Growing revenue without growing jobs.
Revenue growth, the standard bearer for a decade for predicting market performance, has fallen by the wayside in favor of revenue per employee, according to new University of Michigan research. The working paper was written by Brian Wu, professor of strategy at U-M's Ross School of Business, and Rupesh Thakkar, a U-M alumnus and corporate strategy and development leader at Zoom.
In short, the study finds, investors reward software (and, increasingly, non-software) companies that turbocharge revenue per employee-and conversely sideline those still playing the old "hire to grow" game.
Their statistical analysis of about 470 software as a service (SaaS) companies over a decade finds the impact of revenue per employee on market capitalization change has risen nearly four times since 2021. By contrast, revenue growth has "evaporated completely," and the "growth-at-all-costs" era is officially over.
"Now, the market only rewards efficiency," Thakkar said. "Investors don't care if a company grows 30% if it takes 30% more staff to do it-they want to see companies use AI to grow revenue without hiring more people. If a business can't prove it is using AI to get more output from the same number of workers, Wall Street will punish its stock price."
The findings appear to drive a stake in the heart of the "Rule of 40," which says that an enterprise software company's revenue growth plus its profit margin should be at least 40%. The researchers say those companies "can no longer assume that achieving 40 points of combined growth and margin will be rewarded with a valuation premium."
The formula made sense during SaaS' growth phase: It balanced growth and profitability when "both were valuable and relatively independent." However, AI productivity is reshaping operational efficiency: The study notes U.S. firms such as Amazon, Microsoft and Meta have been posting record results while enacting major layoffs, and data finds rising unemployment among college graduates and AI-exposed white-collar workers-even as revenue surges in tech and finance sectors.
"This suggests a decoupling of corporate health from labor market health-companies can get activities done while employing fewer people," Wu said.
The challenges within this transformation are among many that Wu hopes to confront through what's been dubbed the Center for American Manufacturing and Workforce Transformation. The proposed interdisciplinary center at U-M, for which Wu seeks internal and external funding, would work with business, government and philanthropic leaders to rebuild U.S. manufacturing capabilities and realign education and training pipelines amid the disruption and displacement spurred by the proliferation of AI and other digital technologies.
The views expressed by Thakkar are his own and do not reflect those of his current or past employers.
