SAP and IBM were prepared, responding rapidly, but are still waiting for COVID-19’s peak impact

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The 1Q20 earnings releases of IBM and SAP offered the first glimpse into how COVID-19 is impacting IT vendors financially and into the strategies being used to respond. The two vendors are a positive litmus test for the rest of the IT industry, given their breadth of businesses and customer bases across geographies and vertical industries. From their performances and commentary, it is clear that 1Q20 was a tale of two halves. Before mid-February, business was progressing as normal, while after that point, customer priorities shifted and many deals stalled. In the latter half of the quarter, IBM’s and SAP’s priorities also shifted, including both vendors citing 95% of their workforces have been moved to working remotely. Revenue was slightly impacted during the quarter, but more significantly, the two vendors noted their reactions to the many facets of the virus.

Transactional businesses suffer the first negative impacts

Early results show the COVID-19 pandemic is having the most profound impact on transactional businesses. In broad terms, IT business models fall into two categories: transactional and annuity. Transactional businesses are those where an immediate one-time event results in revenue for the vendor and access to a product for the customer. For IT vendors, examples of transactional businesses are software licensing hardware sales and fixed-price services.

Both IBM (NYSE: IBM) and SAP (NYSE: SAP) cited the stalling of their software licensing businesses as the biggest weakness experienced during 1Q20. The quarter was progressing fairly normally until roughly mid-February, at which point customer priorities shifted dramatically and many sales engagements came to a halt. That behavior is understandable, as at first the uncertainty surrounding the virus caused customers to pause, and then attention shifted to direct COVID-19 responses, primarily the shift of most employees to working remotely. The impact during 1Q20 was amplified by the seasonal dynamics of the software license sales business, which relies on most deals closing just before quarter’s end. By the end of March, the impacts of COVID-19 were in full effect, as most customers dealt with huge disruption to normal operations.

There is both good and bad news for software licensing throughout the remainder of 2020. The bad news is that the first quarter is the lightest seasonal quarter for software licensing and hardware sales — both IBM and SAP expect to experience a bigger impact in the second quarter. The potential good news is that there is still a possibility some of the impacts caused by COVID-19 could fade before 2H20, when the majority of software licensing activity typically occurs. In this respect, the timing of reopening and resuming business as usual will have deep implications for any vendor with a transactional software business like that of SAP and IBM.

Annuity businesses are immune, at least for now

Annuity business recognize revenue from long-term contracts over time, which is an asset in the current environment. For IBM, SAP and Oracle (NYSE: ORCL), annuity businesses are primarily cloud subscriptions and software maintenance, and those businesses have so far remained resilient. Especially for these vendors, the resiliency of annuity businesses reinforces the benefit of shifting to a cloud subscription model, even though it was disruptive to the traditional software licensing model. There has been a marked shift to cloud for IBM, SAP and Oracle over the past 10 years, which increased the mix of their revenue from annuity businesses, of which IBM boasts more than 60%, Oracle 71% and SAP 70%.

For more insight on how COVID-19 is changing IT sales strategies, read Senior Strategy Consultant Geoff Woollacott’s blog COVID-19: Shifting customer loyalties and selling motions.

COVID-19: Shifting customer loyalties and selling motions

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Recent earnings calls by IBM and SAP triggered two broad yet interconnected thoughts:

  • The current pause in economic activity presents a pervasive period of thinking slow — recalling the book “Thinking, Fast and Slow” — for businesses, which could result in persistent share shifts.
  • The tactical need for more digital commerce avenues seems poised to accelerate a skill set transformation in selling organizations, away from the affable blue suit seller and toward a more consultative selling model.

Thinking slow requires deliberation, and deliberation comes when life-changing events happen

That headline is the fundamental premise of the book, which nets out as two different lines of thinking. System 1 is our reflexive thinking, and System 2 is our more deliberate thinking. System 2 gets triggered by life-changing events, such as reviewing purchase patterns while preparing to add the first child to a family. This was the underpinning of Target’s strategy to market to expectant mothers to lock them in to long-term buying patterns. COVID-19 has certainly triggered System 2 thinking for business decision makers.

IT is the backbone of digital commerce and, therefore, gets called into question by virtually all businesses no matter where they are on the transformation continuum. Close scrutiny of all discretionary spend and major projects means IT purchasers will be rapidly assessing their buying criteria, including revisiting those used prior to the COVID-19 outbreak to determine if they still apply in light of the current economic climate and somewhat fuzzy future outlook.

IT firms with solid digital practices and the ability to meet enterprise demands from a nimble virtual environment will be able to gain long-term share once the economy stabilizes and thinking fast returns to the business community.

Is COVID-19 the Death of a Salesman?

Both IBM and SAP mentioned in their earnings calls the need to shift more of their selling motions to virtual activities. IBM also highlighted the shift to virtual garages. This movement has a couple of potential impacts:

  • Blue suit selling has to shift from relationship building to advisory selling, satisfying the aforementioned System 2 thinking going on among enterprises around the globe. This shift will require more immediate translation of technical implications and seller capabilities around business pain points — something that was previously addressed in the second or third sales interactions when the blue suit seller brought in a coterie of subject matter experts. In essence, that first point of contact is being replaced by digital tools. That somewhat depersonalizes the engagement, but it also strips considerable cost and turnaround time out of the prevailing selling models while enabling decision makers to seek answers through System 2 thinking. In some ways, this brings the consumerization of IT into the enterprise in much the same way that omnichannel marketing from e-tailers such as Amazon has disrupted traditional brick-and-mortar delivery of consumer goods to the populace.
  • Advisory selling will have to become more of the norm for all technology sellers and not just the high-end advisory firms. Buying more network capacity could be considered a quick-hit selling transaction for a territory sales rep. It could also be an opening to discuss the overall IT estate, the impact of SD-WAN on security and cloud access, and the need to revisit the whole enterprise IT construct for better resiliency lest an economic impact like COVID-19 — or COVID-19 itself — resurfaces in the future. System 1 thinking would have the seller “take the order,” no questions asked. System 2 consultative selling would ask the questions of the purchaser and seek to expand the engagement into a broader discussion more beneficial to the client and more lucrative to the seller.
  • Will the buildup of design centers wind up as a competitive cost disadvantage as more businesses become comfortable with virtual engagements? We saw the phenomenon of virtual activity replacing in-person activity solidify teleconferences as a business after 9/11 curtailed air travel. Now the health risks of in-person meetings will spur further use of virtual meetings and, with it, a potential reduction in demand for these high-cost design-thinking studio facilities.
  • Transformation maturity impacts buying behaviors considerably. Those ahead of the curve on transformation are feeling very optimistic about their ability to weather this economic pause. They did the System 2 thinking and are somewhat comfortable in System 1 mode. They also are likely to have some checklists and deeper understanding of the ramifications that they can step through more quickly than less digitally savvy peers. Others are delaying transformation engagements due to a desire to conserve cash, and still others hear horror stories in other industries and see where digital transformation of their operations could inoculate them against this business threat if they move ahead with infusing intelligence into their front- and back-office systems. So leaders lengthen their leads, the hesitant can fall behind, and the newly awakened can get ahead of the vertical impact by heeding the lessons learned of their business colleagues in adjacent industries.

The global economy as we know it is on pause. Our System 1 thinking — our conventional wisdom — is being seriously challenged. This enables savvy business leaders to take this time to rethink their IT investment decisions. When thinking slow, they will be making decisions on suppliers that will have far-reaching market share implications. In turn, savvy technology companies will need to pivot to virtual engagements to provide customers with the desired self-service content and the technically savvy advisors to help work through customers’ future plans in light of this once-in-a-lifetime economic event still cascading through economic activity in real time.

For more insight on how COVID-19 is changing IT sales strategies, read Principal Analyst Allan Krans’ special report SAP and IBM were prepared, responding rapidly, but are still waiting for COVID-19’s peak impact.

Going will be tough for IT firms relying mainly on cost advantage

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“Boz Hristov. Professional Services Senior Analyst, Technology Business Research, Inc, said vendors may have to demonstrate pricing agility to retain clients. If the incumbent is not offering/thinking of ‘sweetening up the deal’, there is likely a competitor knocking on the door ready to do so.” — The Hindu Business Line

IBM’s cloud business jumps thanks to Red Hat, but total revenue still down by 3%

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“‘Despite the stalling economic downturn over the past month, IBM still operates from a position of growth with a healthy pipeline of services engagements that are augmented by Red Hat’s commitment to automated and open sourced development,’ said Nicki Catchpole, senior analyst at TBR Cloud and Software.” — WRAL TechWire

Zoom videoconferencing booms amid COVID-19, but Microsoft and Google will win with broader SaaS

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Zoom’s rapid adoption highlights security concerns; Microsoft and Google are better positioned

Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOGL) were relatively well prepared for the unexpected demand for videoconferencing, with global data centers and strong security measures in place, while Zoom’s security was not ready for the same scaling. There have been numerous reports of “Zoombombing,” which is when hackers join a Zoom meeting and disrupt the workflow, particularly in online classrooms. While some educators did not use password protection to make their online classrooms private, TBR believes this security lapse also occurred because Zoom lacks end-to-end encryption. Microsoft and Google Cloud have experienced difficulty with outages but have performed well in terms of security with end-to-end encryption in Teams and Meet. The regularity of these hacks has led to a recent investigation by the FBI and caused some government agencies, companies and educational institutions to ban the use of Zoom. In TBR’s special report Security measures taken to combat impacts of COVID-19 on businesses will have long-term implications, Senior Analyst Nicole Catchpole discusses the security concerns with Zoom and other cybersecurity threats that have risen amid the COVID-19 pandemic.

Zoom, Microsoft and Google remove pay barriers, increasing usage and setting the foundation for a much larger base of paying customers post-COVID-19

Use of videoconferencing solutions is skyrocketing, but modernization of these platforms will be a long-term strategy

Zoom, Microsoft and Google are offering their video-collaboration tools for free to support the unexpected global shift to remote work and learning environments. For six months, Microsoft is removing paywalls for Government Cloud and certain Office 365 subscriptions — including Office 365 E1 for businesses and Office 365 A1 for educational institutions, both of which include Microsoft Teams. Google Cloud is also offering Meet for free until Sept. 30, but only to existing customers, which makes it slightly more restrictive than Microsoft’s offer. Finally, Zoom has also removed the 40-minute time limit on its free basic subscription tier for K-12 schools in numerous countries, including the U.S., where the company boasts roughly 60,000 customers as of mid-March. Within the “freemium” tiers that are available, Zoom customers can have up to 100 participants in a virtual meeting, whereas Teams and Meet can support up to 250 people in a meeting. Given that each of these vendors has reduced cost-related barriers to adoption, customers can select the vendor that best fits their broader IT environment.

The global shift to a virtual work-from-home and learn-from-home environment has drastically increased demand for SaaS solutions that support collaboration and remote workflows, particularly videoconferencing as companies and educational institutions try to maintain as much face-to-face communication as possible. Among the numerous SaaS offerings available, some of the most popular are Zoom, Microsoft Teams and Google Meet. Zoom quickly rose in popularity and became a household name, growing from 10 million users in December 2019 to 200 million users in March 2020. While Zoom’s (Nasdaq: ZM) number includes individual nonpaying consumers, the vendor has also signed paying business and organizational customers including IAC Group, Rubrik and Texas A&M. Microsoft Teams and Google Meet experienced growth spikes as well. The number of users on Teams more than doubled, from 20 million daily active users in November 2019 to 44 million in March 2020, including enterprises such as EY, SAP (NYSE: SAP), Continental AG and Accenture (NYSE: ACN). Google Meet grew by more than 25 times from January to the end of March and is adding 2 million new users per day, with customers such as Korean Air, Shopify (NYSE: SHOP) and TELUS (NYSE: TU). While Zoom’s total user growth is strong and its offerings are widely used, TBR expects Microsoft and Google Cloud will start to poach Zoom customers due to their value-add hardware and SaaS offerings Office 365 (200-plus million users) and G Suite (6-plus million users).

IaaS and PaaS leaders maintain their current positions in the public cloud market but face mounting competition

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Coopetition is growing among vendors to outcompete leaders in the public cloud market, and customers have responded positively by integrating multivendor environments. TBR expects this coopetition will enable multiline vendors to attain notable growth, but likely not until roughly 3Q20, after the COVID-19 pandemic abates, as enterprises manage remote workforces rather than undergo vast integrations.

Amazon Web Services (AWS), Microsoft, Google and Alibaba will continue to lead the global public cloud market, with Google and Alibaba driving the most significant total public cloud revenue growth among large vendors due to their smaller revenue bases. While these rivals battle globally, TBR expects competition will be greatest in Europe.

Public cloud remains the largest and fastest growing segment of the cloud market. Changes in customer acceptance, data integrations and innovation have combined to sustain the rapid growth of public cloud adoption. TBR’s Public Cloud Benchmark details how hybrid deployments, new use cases for enterprise apps, and trends in emerging technology will make public cloud even more relevant in the future.

Survey: COVID-19 impact on tech sector means more cloud, remote work

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“Respondents have not wavered from their belief that the use of cloud technology at their company will increase in the long term due to the COVID-19 pandemic, as indicated by 48% of those surveyed [in a new report from Technology Business Research.] Further, a decrease in respondents indicating their use of cloud technology will diminish in the long term suggests that companies expect this wave of cloud adoption will be maintained in the future, rather than serving as a temporary fix for employees needing to conduct business remotely.” — WRAL TechWire

IT services revenue expected to dip in Q2

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“As business disruption sets in with the Covid-19 pandemic, customer demand for IT services will take a hit, with revenue in the sector set to decline in the second half of 2020, according to Technology Business Research (TBR). In the analyst firm’s Q4 IT Services Vendor Benchmark report, TBR senior analyst Elitsa Bakalova pointed out that 2020 will be a challenging year for IT services companies that are slow to adjust their business models to address rapidly changing market needs.” — Channel Asia

Multiyear bull market in public sector IT spend faces an abrupt end in 2020 as COVID-19 upends global governments

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“The COVID-19 outbreak represents a significant threat to public sector IT investment that has trended steadily upward for the last several years,” says Senior Analyst John Caucis in TBR’s recently published Public Sector IT Services Benchmark. “The full impact, however, may not manifest in public sector vendor fiscal performance until 2H20.”

Caucis, Analyst Brian Baker, and Principal Analyst and Practice Manager Patrick Heffernan delved into the coronavirus impact on U.S. federal IT services vendors, such as Raytheon, Booz Allen Hamilton and Accenture, in a recent TBR Talks COVID-19, available on our YouTube page. In addition to speaking to near-term earnings releases, Caucis reminded listeners that much of the impacts for these vendors will be delayed until the next fiscal year. Baker speculated on how the M&A trends of the last few years could be upended by the pandemic, and Heffernan added context by contrasting commercial sector-focused IT services vendors with those in the U.S. federal space.   

Additional reports recently published by TBR’s analyst teams

1Q20 Tata Consultancy Services Initial Response

Previous investments in its operating model have prepared Tata Consultancy Services (TCS) to execute during the COVID-19 pandemic, but TCS’ biggest hurdles in 2020 will be maintaining its install base and top-line growth.

4Q19 Public Cloud Benchmark

Microsoft is improving its competitive position against Amazon Web Services (AWS) through partnerships, notably its direct data center connections with Oracle. Although only a limited number of regions support these direct connections currently, the Microsoft-Oracle partnership is expanding with new direct connections in Canada. However, AWS holds significant IaaS market share and remains the leading IaaS provider as of 4Q19.

1Q20 Accenture Cloud: Partners and cloud- and cyber-skilled talent enable growth

As Accenture strives to maintain a strong brand for multicloud management opportunities through its certified cloud delivery bench and the launch of myNav, the global coronavirus pandemic will test its ability to succeed.

1Q20 Wipro IT Services Initial Response

Wipro maintained growth in FY4Q20, but cited losses associated with COVID-19 at the tail end of the quarter. Moving through 2020, a reliance on automation to control costs and the ability to offer cloud migration services will be mission-critical capabilities for Wipro and its IT service provider peers in absorbing the shock of COVID-19.

4Q19 Devices and Platforms Benchmark

The device market continued to grow in 4Q19, backed by higher smartphone, PC and smart device sales. However, COVID-19’s effect on the global economy will begin to appear in 1Q20 results, with a more severe impact on midyear performance.

4Q19 Telecom Infrastructure Services

The telecom infrastructure services market finished 2019 on a strong note as CSPs deployed 5G RAN and new optical technology in 4Q19, but rollouts will face delays in 2020 amid COVID-19-induced supply chain issues, human resource challenges and spectrum allocation delays.

4Q19 IT Services Vendor Benchmark

While IT services providers will have growth challenges during 2020, the integral role technology is playing in everyone’s work and personal lives due to the COVID-19 virus provides growth opportunities for vendors that are agile and quick to adapt to the changing market dynamics.

COVID-19 survey update: Cloud reliance grows

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This piece is an update to our blog post in late March that looked at how IT organizations are being impacted by COVID-19, including insights from TBR’s survey of enterprise IT leaders. The blog discussed how we are experiencing the second wave of impacts from the outbreak, in which widespread business disruption is affecting demand for IT products and services.

In typical IT research, we tend to track trending on a quarterly, semiannual or annual basis. Given that nothing we are experiencing during this pandemic aligns with the typical way of doing business, we have decided to compare how sentiment has shifted among IT leaders over a roughly two-week span. During the first half of April, we refielded our March pulse survey questions, which yielded the following trends in sentiment.

Overarching IT projects remain in wait-and-see mode

A delay in IT initiatives is one of the clear emerging trends as companies ride out disruptions to employees’ workflows and gauge the financial impact of the pandemic. Compared to the second half of March, there has been no change in the status of existing projects in the first half of April, with 42% of respondents indicating they are delayed. Trends have also remained constant in regard to IT budgets, with about 32% of respondents indicating budgets are frozen and new spending is on hold.

Attention is increasingly shifting toward enabling remote work

While long-term projects may be slowing or paused, there is growth in IT teams’ spending on and delivering of remote work capabilities for end users. In the latter half of March, 34% of respondents reported increasing spending on remote productivity; by mid-April, nearly half of respondents indicated this was the case. TBR believes this trend is driven not only by extensions of stay-at-home orders but also by general acknowledgement that a reintroduction to “normal” life will likely be a slow process.

Reliance on cloud is increasing

SaaS and IaaS are among some of the few IT segments that may see increased demand in the first half of this year. Responses from IT experts reflect this trend, with a considerable increase in respondents indicating usage of cloud resources has grown compared to our survey fielded in March. Currently 30% of respondents are increasing cloud usage due to data center shortages while 19% are increasing cloud consumption to offset labor shortages related to social distancing.

The impacts of the pandemic will be lasting

Respondents have not wavered from their belief that the use of cloud technology at their company will increase in the long term due to the COVID-19 pandemic, as indicated by 48% of those surveyed. Further, a decrease in respondents indicating their use of cloud technology will diminish in the long term suggests that companies expect this wave of cloud adoption will be maintained in the future, rather than serving as a temporary fix for employees needing to conduct business remotely.

On the other hand, there are also simultaneous increases in optimism and uncertainty compared to responses from two weeks ago, as more respondents indicated that they intend to return to typical IT strategies post-pandemic or that they do not know how the pandemic will shape their IT strategy.

While the pandemic has a variety of implications across different types of businesses as well as the IT vendors that serve them, our survey data suggests that IT strategies and ways of working will change for many. Contact TBR to learn more from our analyst team.