The Impact of Covid-19 on UK SITS Market: Our First Take

(Note: This is Part One of a three-part assessment of the current market impact. We will publish the other two parts – including our latest expectations for market growth - in the coming days).

It is still much too early to be sure what the final effects of the coronavirus crisis will be on software and IT services spending in the UK, but here is our early take based on what we have seen so far.

From today’s perspective, it seems likely that this crisis will have a significant and prolonged impact on the IT market. When most travel sector businesses put their staff on furlough, any IT projects that are not absolutely necessary will be cancelled, or put on hold. Most planned IT purchases will be shelved for now, but the impact will affect different segments of the IT market in different ways…

Commercially, the crisis has stimulated demand for all providers of products or services relating to the digital workplace. The rapidly increasing number of home office workers is driving a surge in demand for platforms, tools and equipment. This applies not only to the purchase of notebooks with associated software licenses (electronics retailer Dixons Carphone said that online sales surged 72% in the first three weeks of March), but also to demand for infrastructure including VPN access and security solutions.

There has also been disruption to the hardware supply chain. The spike in demand for notebooks is proving hard to fulfill, since production in China has not yet returned to pre-virus levels (Amazon has pushed back PC component shipment dates by a month in many cases). IT providers may help support hardware sales by offering finance deals, which was a notable trend during the last financial crisis. 

The coronavirus crisis can also have a favourable impact on the IT outsourcing business. By outsourcing, companies aim to reduce their costs – a priority both during and after the crisis. Likewise, the responsibility for the operation of data centers can be outsourced to external partners so that they can concentrate on essential work in the aftermath of the crisis. However, negative effects can also be expected if, for example, sales cycles shift massively backwards and current or potential customers fail due bankruptcies. There will also be a rush to renegotiate the terms of existing engagements to extend payment cycles, reduce fees and to refocus on delivering short-term cost savings.

Similar considerations (cost reduction, refocus on core business) can also help the cloud providers. argumenta key factor is the scalability of cloud infrastructures. When we finally take stock of the extent that cloud-enabled companies have been able to flex their short-term demand, we may well find that many emerge from the crisis in an improved position in terms of IT costs. 

However, we expect massive slumps in the IT projects business in the short term. Many ongoing IT projects are being stopped or paused as enforced homeworking makes delivery hugely difficult. Communication and collaboration among deliver teams will suffer in the short term as they adapt to new ways of working.

Planned projects that had yet to get off the ground are being checked again for their urgency and necessity. The sales pipeline of many IT providers is definitely shifting backwards, at least in the short term. Consulting is most affected, but the situation is very different in the various sectors. 

We will explore the impact of the coronavirus at a vertical industry level, and share our latest views on the growth prospects for UK SITS spending in the coming days.