Operating with uncertainty – how COVID-19 is affecting IT spend
Earlier in the week, I was fortunate enough to listen to a rather insightful and timely webinar on how businesses are altering their IT spend in response to COVID-19. Unsurprisingly, a lot of the topics arising from the talk aligned with ECS’ own internal conversations about how we can best support client business continuity plans at a time where uncertainty is hindering the ability to forecast or predict revenue.
But let’s keep that conversation in its own blog.
Whilst no business expects to come out the other side of COVID-19 smelling of roses, John Lovelock – VP analyst at Gartner and webinar host – gave businesses a reasons to hope, all whilst preparing them for a rocky ride ahead.
Things will get worse before they get better
The first thing to note is that Gartner forecasted two versions of Q1. The first they described as being the optimists’ view, with expenditure slowing but not drastically reducing across all investments. The second – you guessed it – is the pessimistic outlook, which sees an average -5% deficit across the board. Put into perspective, back in 2019 Gartner predicted that global IT spend would grow by 3.7% in 2020. Whilst an optimistic view was presented, the further we journey into the COVID-19 pandemic, the more data can be gathered on business behaviour in relation to government measures and economic modelling around a single infection rate. These new insights have seen Gartner become more aligned to the recession scenario shown below on the right.
For the most part, income uncertainty forced by industry lockdown is encouraging CFOs to re-evaluate cash flow. This requires a new level of planning factoring in today’s risks and tomorrow’s survival. Even if your industry isn’t directly locked down, you will be affected by those industries which are and as such, Gartner is seeing businesses amend their IT spend forecast to be less optimistic.
When asked by Gartner, 90% of CFOs had already cut operational budgets by 10% or more, with 15% having already cut IT budgets by more than 10% so they could refocus spend on more immediate business needs. When asked ‘will you be’, these numbers doubled to more than 30%.
This caution is being pushed down to CIOs who have unsurprisingly put a stop to discretionary spending as part of a phase one response. The result has so far been a drop in spend in new devices and the complete halt of any new projects.
For businesses who need to take further action, phase two sees CIOs defer on-going projects. Whilst reasons to start the project would have held weight at the beginning, the CIO now judges each project on its cash to project / time to value. Any project absorbing too much cash will likely be postponed.
In the words of Lovelock, “cash is no longer king, it is empire.” Projects going on hold won’t damage the business, in the same way people won’t go out of business because profit margins are down for a quarter or two. The people who will go out of business are those that run out of cash.
The good news? Gartner predict that due to the short, sharp drop caused by immediate actions from Governments across the globe, we will begin to see an economic turnaround come September.
Gartner see this happening in three phases:
- Phase 1 – where we currently are
GDP declines in response to our reaction to public health restrictions imposed by governments around the world. This sees both demand and supply impacted.
- Phase 2
Public health restriction will begin to loosen, enabling businesses the opportunity to make better projections and balance costs in accordance with new information. This will see spending begin to pick up again come summer.
- Phase 3
There will be a more positive turn towards growth. Uncertainty will still be there, but businesses will begin to invest in this turn. Those with cash would have already started to do so in phase 2. Those without cash will inevitably have to wait until later in the year when cash flow enables them to invest beyond lights on measures.
The important thing to keep in mind is that industries that have been shut down don’t just restart. The businesses that form a part of these industries will have suffered across the board, enduring crippling decisions that will affect their ability to ‘bounce back’ when governments deem it safe to do so. Much like the 2-year recovery of aviation and travel post-911, Gartner predict that industries that rely on ‘grouping’ such as retail, hospitality, cruise ships, concerts, theatres, hotels and so on, will experience a lag in reaching a full-time recovery.
Whilst it could be argued that the IT industry was the most prepared for COVID-19, they too will experience a bumpy period leading up to and through the first quarters of 2021. “Whilst cloud-technologies have become increasingly popular in recent years, all businesses still rely on physical hardware to meet consumers storage and processing needs.
Unfortunately, due to factory closures earlier in the year, this has caused a rippling effect in the supply chain of hardware, pushing timelines back by months. In fact, this very topic came up in episode eight of the Friday Tech Round Up, with some news outlets reporting containers full of everything for SSDs to servers, laptops to cabling being stranded port side.
Without being able to get this time back, Gartner predict that manufacturers will be unable to meet 2020 demand, going as far as to say that technologies such as 5G will also experience a push back in its predicted rollout.
All this affects IT spending.
What CIOs are spending their money on
When operating in uncertainty, cash constraints have become the main driver for CIOs, alongside technology and solutions that can service the urgent needs of the business.
As can be expected, spend in communication services continues to help accommodate remote working measures. This has followed a similar pattern seen in consumers which, as Lovelock pointed out, is true to human nature, in the sense that people will continue to have money from things that entertain them.
For those who already had remote working capabilities, these have been further expanded to accommodate a business-wide response. For those on the fence, they have been propelled into an entirely new way of working, navigating remote platforms to enable basic business functions needed to ensure business continuity.
Investment into unified comms, and everything that supports this – including broadband, VPNs, supportive collaboration systems, telecommunication platforms and so on – continues, and in some cases increases depending on the setup of the business before COIVD-19.
However, some are investing more than others. What’s interesting about this particular pandemic is the disparity in how businesses are responding. Whilst many CFOs and CIOs are reacting as predicted, IT spend is still very much reliant on a business’ view of technology’s value to its operations.
It’s not uncommon knowledge that some view IT as an expense, and this feeling hasn’t disappeared simply because remote working has hit the scene. For the most past, those viewing IT as an expense have been the first to cut IT spend and refocus their efforts on keeping the lights on. On the other hand, there are those who believe IT is what is driving their business forward. This group makes up 40% of business in Gartner’s research and are currently spending more on IT even in the current climate. They are betting on technology to make them more resilient and capable of meeting the Q3 turn at pace, rather than laying low and waiting for the moment when they can reset.
In the words of Lovelock:
“people are leaving the middle and going to one of the extremes. They are either doing more, or they are doing less”.
Businesses are actively redefining what lights on spending means to them, with some changing strategy to accommodate delays in their original transformation / IT roadmaps. This is especially true when it comes to cloud.
In a cash constrained environment, cloud solutions look increasingly attractive, especially when your hardware is stuck in a container somewhere in China. This delay in the supply chain has mirrored itself in the CIOs timeline, leaving them with one of two choices:
- Accept the delay
- Move to the cloud
For those who have already adopted the cloud, many are exploring opportunities to extend that penetration. Alternatively, organisations not yet on the cloud are finding the current climate as a reason to investigate what the technology can offer them. Whilst it’s not a big enough motivation to tempt the entire industry to the cloud, it is a temptation none-the-less and Gartner are beginning to see a change in behaviour across the industry.
Whilst cloud was seen as a strategy of its own, it is now being viewed as a technology capable of supporting the COVID-19 crisis and remote working demands. But rather than investing in new logos, Gartner caution that CIOs are likely to turn to incumbent vendors rather than risk moving a new logo or product through any already risk-adverse culture. This can see certain ‘trimming’ exercises taking place across the business when it comes to working with consultancies.
Cash flow constraints mean that CIOs won’t trim all consultancies by the same amount, as some will remain integral to delivering the solutions needed to navigate COVID-19. However, those that are trimmed will likely lose all their projects in one hit. This comes as CIOs adopt the mindset that a project going on hold isn’t going to risk the business’ survival, and once this three-quarter phenomenon passes, contracts can be re-evaluated in line with new business needs and available IT spend.
For those stung by certain countries going into lockdown, we may also see a greater dispersion of future operations and functionality relocated to different outsourcing touchpoints to help spread the risk – although it’s unlikely these changes will happen until after this period has passed.
One positive thought to come out of the webinar, and one we will finish this blog on, is this idea that COVID-19 has sprung such a vast amount of industry innovation that it has inadvertently brought the future forward. In the words of John Lovelock:
“By the time we get to 2023, we will be further along on many of the big trends that Gartner has been talking about than if we were without the pandemic. There will be more companies operating as digital businesses, more of the supply chain will automated and with less friction, there will be more remote work, more cloud, more optimisation, a different workforce, and more digitalised processes”.
Whilst an inspiring notion, I think for many businesses, future gazing will have to wait until Q3.
About the author:
A few things you should know about Eloisa Tovee. She’s a creative – take of that what you will, she’s interested in seeing how small nuggets of information connect to tell a bigger story, and she loves exploring ideas that bring copy and art together. Currently, Eloisa sits within the marketing team at ECS, specialising in content creation that best tells the stories of the technology and digital transformation space.