The Impact of Covid-19 on UK SITS Market: A Vertical View

In our blog post yesterday, we described how we believe the coronavirus crisis will affect the various IT segments. Today we share our assessment of the current situation in the individual industries.

In some industries such as utilities or telecommunications, the short-term effects of the coronavirus crisis on IT spending will be manageable. Other industries, such as leisure and hospitality have no choice but to massively cut and/or re-prioritize any IT spending planned for the coming months and years.

The effects of the coronavirus crisis in UK are felt greatest in services and transport sectors – especially tourism, leisure and hospitality. With Easyjet grounded, 90% of Ryanair flights cancelled, City Airport and Gatwick Closed, it’s clear that the tourism, travel and leisure sectors will suffer huge financial and massive job losses. It is almost impossible to carry out IT projects in such an extraordinary environment and unless they relate to humanitarian / disaster relief (such as the development of ventilators for the NHS by Dyson, Babcock, Smiths etc), we assume that most will be suspended. This will result in a significant drop in SITS spend and a focus on massive cost reduction. 

The picture is different in the transportation of goods. For parcel service providers like DHL, the situation is initially positive thanks to the increase in orders through online retail. However, this cannot compensate for the slump in the market for industrial logistic services (by rail, road and ship). Demand for transportation services is falling significantly. This is due on the one hand to the downtimes in industrial production, and to the disruption to supply chains caused by border closures and restrictions.  

Other parts of the services sector will be impacted differently. IT service providers and business consultants are at risk of under-utilization, which will lead to a drop in sales and to job cuts. These factors will reduce the addressable IT market in this segment but also reduce costs (including IT expenses) drastically.  Only the digital media industry (e.g. streaming services, gaming providers) part of the services sector will benefit from the situation in the short term due to the sharp rise in demand for information and entertainment. This also benefits the hyper-scale cloud service providers, who can provide more capacity where possible.

In retail, UK government restrictions mean that only shops that sell essential items such as grocery stores or pharmacies remain open in the short term. This will lead to a significant drop in their sales, and bankruptcies and store closings can be expected, especially for small, but also medium-sized retailers, which shrinks the addressable IT market. The shift towards online shopping has conversely had a huge boost. The measures currently being observed in retail to protect employees from being infected with the virus will be a trigger for retailers to increasingly invest in self-checkout solutions. AI solutions that help retailers optimize their distribution logistics will also become more attractive.

Banks are facing the next big test of their business models. Bankruptcies lead to loan defaults, interest rates have been cut again, and there is currently only one direction in investment banking: a steep downwards fall. Governments and regulators have relaxed some requirements in areas such as capital and liquidity, so that the banks can absorb at least some of the short-term burden. In addition, deadlines for non-critical reporting processes are to be extended, and stress tests planned for 2020 will be moved to 2021. But even before the crisis, many banks were in a difficult situation in which they had to cut the costs of their outdated IT infrastructure while also investing in digitization. Austerity measures will intensify, but so will the trend towards digitization, because the crisis has exposed how digital and automated processes can continue to run undisturbed. This will further boost the trend towards process automation and favour corresponding IT investments. We also expect banks to accelerate their journey to the cloud to benefit from cost savings and scalability. The bottom line is that banking sector budgets will shrink as cost reduction projects move ahead at  scale.

The impact on the insurance sector will not be as severe. A large number of bankruptcies and the cancellation of policies will place a burden on carriers and their reinsurers. However, it is still unclear to what extent insurance actually has to step in, since a pandemic is often excluded from insurance coverage. Nevertheless, the crisis also reveals weaknesses in the industry. Agency sales have almost come to a standstill, and a high dependence on manual processes has been exposed. For example, the Lloyds market in London had to completely close its underwriting activities. Where employees cannot process damage reports or the like as usual, tasks simply stay put. As with banks, the long term impact will be increased investments in digital innovations and automation. 

In the medium to long term, we do not see any major effects for energy suppliers. Projects such as the stabilization of the networks will continue. In the short term, they will only slow IT spending or postpone new projects. 

For the telecommunications industry, we see limited impact on IT spending as a result of the coronavirus crisis. The same trends apply as before, such as the implementation of process automation in areas such as network management and back office administration. But it could also be positive that they enjoy additional traffic (e.g. streaming services), with many consumers having a flat rate. There may be a few delays in the start of IT projects, but not to the extent that we see in other industries. 

In manufacturing, major plants are on shut-down, with Jaguar Land Rover, Mini, Nissan and Vauxhall all shuttered for now, and their suppliers following suit. The machine and plant construction industry is also experiencing delays in the supply chain and cannot operate at anything like normal productivity. And even where production does continue, no finished goods can be delivered abroad because of border restrictions in many markets. We can only assume that very many planned IT projects will be cancelled.

In the public sector, the coronavirus crisis will accelerate the implementation of digital solutions in the medium term, offering a wider range of citizen services online, and reducing the need for face to face contacts. In addition, the crisis has exposed gaps in online collaboration and in the sharing of information and data. However, it remains to be seen how public sector IT budgets will be impacted by the knock-on consequences of the huge support funds needed to keep large parts of the private sector afloat.

In tomorrow's third and final blog, we will offer our thoughts on the two potential scenarios for UK market growth prospects.