Uncertainty underpins the short- and long-term outlook for the impact of the coronavirus pandemic on the federal IT space. Federal agencies and their IT contractors face disruptions across their supply chains, operations, procurement functions and fiscal management.

Near-term turbulence is inevitable

Defense majors Northrop Grumman and General Dynamics, on March 19 and March 23, respectively, published 8-K filings updated with assessments of the potential negative impact of the coronavirus on their businesses. Risk factors are far-reaching and extend beyond company fiscal health, including diminished employee productivity and contract performance, supply chain disruptions, increased cost of and diminished availability of investment capital, temporary suspension of operations at customer facilities or work sites, and reduced demand for company products and services stemming from possible economic downturns in the U.S. and abroad. These contractors and others issuing similarly cautionary remarks have further noted they cannot predict the full impact of COVID-19 on their business or the industry at this time.

TBR foresees additional near-term challenges in the form of purchasing delays and deferred starts (and thus revenue recognition) on recent awards as the entire procurement cycle shifts to the right, along with project execution on programs already underway. Travel bans or restrictions will further impact project delivery and impede business development efforts.

As the federal IT market moves into calendar 2Q and the fiscal reporting season for calendar 1Q20 begins in late April, COVID-19 will be a major factor driving revised outlooks for 2020 fiscal performance for contractors amending their guidance (and we expect many, if not most, will be compelled to do so). During its earnings release on March 19, Accenture revised its projections for fiscal 2020 global top-line revenue and growth from its previous forecast of 6% to 8% growth over fiscal 2019 to a new projection of 3% to 6% top-line growth over fiscal 2019 (both ranges in local currency).

Raytheon Technologies is another federal contractor that is particularly vulnerable to the impact of COVID-19. Raytheon’s legacy defense business will face the same challenges as its defense sector peers as the COVID-19 situation plays out, but as the merger with United Technologies (UT) includes the integration of UT’s Pratt & Whitney and Collins Aerospace operations, Raytheon will be highly exposed to the aerospace sector. The commercial aviation market has been particularly hard-hit by COVID-19-related travel bans and restrictions, and the negative effects will linger for years. This underscores the urgency for Raytheon to complete the merger quickly and fully assess the potential impact of the inevitable decline of the global aerospace sector.

There is still a fog of uncertainty around COVID-19’s impact. What is clear, however, is this outbreak is unlike any event in living history. The long-term health crisis, economic disruption and social disruption are occurring at levels that were unfathomable just months ago. These changes are taking place in a world that is much different from when the last widespread pandemic, the Spanish flu, hit more than 100 years ago. Technology has become such an integral part of our lives since that time and, as such, will be deeply ingrained in many of the short-term and long-term effects of the COVID-19 virus. In this report, TBR will provide a high-level overview of the impact these recent events will have across the hardware, software, cloud, telecom and services markets we cover. While most of the market effects will be painful due to the economic disruption occurring, many will lead to changes in long-held business strategies and create opportunities as technology needs shift for both individuals and organizations.

Social distancing challenges core of IT services industry

Pain: At the core, IT services and professional services are human-centric businesses, delivered by humans and intended to improve employees’ efficiency or accelerate their ability to connect with clients and enable growth. Changes in travel and personal interaction as well as business disruption all challenge the existing IT services business model. Additionally, many of the largest IT services providers will have new leadership tasked with managing these disruptions. In 2019 TBR noted a large number of C-level changes at the largest IT services vendors and consulting firms, as well as their technology partners. Those leaders will be tested in the coming months, and TBR anticipated more positive than negative reviews. More significantly for the long-term business impacts will be the performance of those leaders at the team and business group level, the equivalent of squad leaders and company commanders in a military organization. Adjusting to COVID-19 safety measures; managing people remotely; delivering to clients and managing their expectations, particularly in a tough economy; and continuing to lead — those will be massive challenges for team leaders. How well prepared they are, how well their companies have trained them, and how agile and flexible they can be in an ever-changing business climate are the factors that will distinguish high-performing IT services vendors and consultancies from struggling ones in 2020. The CEOs and top leadership will set the tone, but execution at the lower levels will become exponentially more difficult with this pandemic. 

Change: TBR has already spoken with consultancies and IT services vendors grappling with changes to their business models, particularly around collaborative design sessions in the early stages of digital transformation engagements. Vendors with pilot projects to enhance global coordination and project management have accelerated those efforts and expect to invest heavily in the infrastructure needed to perform at speed and at scale. Vendors have also begun evaluating their technology alliances and resetting expectations around large-scale systems integrations. Also being mentioned are new engagements based on COVID-19, including technology consulting around delivering healthcare — and, critically, testing — through “drive-up” systems.

Opportunity: TBR expects that recent trends around automation, AI and platform-delivered services will be catalyzed by the spread of COVID-19 and imperatives to work remotely and with minimal in-person contact, resulting in a few knock-on effects across the broad IT services and consulting space. Most significantly, those companies that have invested most heavily in automation and remote delivery will see the least impact on their engagements, even if clients begin to freeze or reduce spend in line with a broader economic slowdown. Second, consultancies and IT services vendors with experience in online, remote training and upskilling will be able to both continue their own digital transformations and provide offerings around human capital training and management based on their own lessons learned and best practices. Third, vendors that anticipated a global economic slowdown and prepared to take advantage of lower costs for acquisitions and new opportunities to assist clients in distressed markets — while they likely did not anticipate this virus — are best positioned to provide consulting and IT services throughout the pandemic.

Vendors are rebuilding their IoT GTM strategies

Although vendors are deemphasizing IoT publicly, their overall businesses continue to grow at an accelerating rate slightly over 20%. While TBR is seeing more IoT-based projects than before, the average project scale is shrinking. And though a growing number of specialized solutions and components are entering the market, most still require substantial configuration and integration.

Many vendors enthusiastically embraced IoT as a way to open new markets and bring in new customers. Apart from the major IoT platform vendors — Amazon Web Services (AWS), Microsoft, Google and PTC — smaller vendors are now using IoT to enhance and promote their existing products and services, largely to existing customers. This reflects how IoT has become an often-implicit part of companies’ digital transformation offerings and go-to-market strategies. In many cases, IoT development, marketing and sales organizations have be folded into product, service and vertically oriented organizations.

The number of IoT use cases continues to grow, particularly those with smaller-scale and specific applications

IoT projects are proliferating across verticals and geographies, despite the reduced level of promotion and discussion among vendors. Customers, and therefore vendors, are focused on solutions, and IoT is a class of solutions. While customers concentrate on using IoT concepts to solve specific problems, vendors are turning to vertically oriented  products and sales structures as well as relationships with vertically oriented IT and OT partners.

As a result of multiple vendors having similar needs, there is a large variety of use cases from which common use cases in specific verticals are emerging. For instance, in manufacturing, there are production-related use cases that increase productivity and quality, as well as product-oriented use cases that help monitor and service products in the field. In the public and utilities verticals, there are many instances of smart metering of power and water. In the public vertical, use cases focusing on air quality, parking and lighting are common.

TBR’s semiannual Commercial IoT Market Landscape delivers overall market and top vertical insights, including identifying key use cases as well as trends in technology and buyer behavior. The landscape also captures the top public deals within those verticals and the lead vendors associated with them.

TBR estimates over 1.2 million network sites and cell sites will become mini data center (edge) locations globally by 2025, up from nearly 9,000 sites globally at the end of 2019. The primary driver of edge build-outs from 2019 to 2024 is telcos’ and cablecos’ network transformations, which entail migrating to a cloudified and virtualized network, and webscales’ edge initiatives to support their cloud businesses and digital lifestyle endeavors. In this new architecture, network functions will be virtualized and housed in network functions virtualization infrastructure, which is essentially a data center. Network sites, such as central offices, have been the primary edge compute locations to date, with cell site builds expected to ramp up significantly in 2021 and become the primary locations for the CSP edge by 2025.

Most CSP edge sites will be located in the U.S. and China by 2025

TBR estimates over two-thirds of global far edge sites that are owned or leased by CSPs will be located in the U.S. and China by 2025. This heavy concentration of sites will be due, in part, to webscales pushing the ecosystem into the edge to realize their distributed computing initiatives, which encompass migrating mission-critical and latency-sensitive enterprise workloads into their clouds as well as enabling and supporting their digital lifestyle initiatives.

Telecom and cable operators in these two countries will also be active participants in building out their own edge infrastructure, but this will mostly be to transform their networks into automated, virtualized and cloudified systems.

CSPs in other countries will also build out edge compute infrastructure over the next five years, but the scale will be dwarfed by what stakeholders in the U.S. and China intend to pursue.

TBR’s Telecom Edge Compute Market Forecast, which is global in scope, details edge compute spending trends among communication service providers (CSPs), such as telecom operators, cable operators and webscales. This research includes current-year market sizing and a five-year forecast by multiple edge compute market segments and geographies, with the most recent publication covering 2019 to 2024.

TBR perspective

EY’s latest Global Information Security Survey illuminates critical aspects of how EY sees itself positioned in the cybersecurity services market, even as it informs on the trends and troubling developments across the information security space. Reviewing a preview of the results, TBR was struck by three elements: First, EY clearly sees itself as the bridge between security professionals and their internal colleagues, a role that requires technical expertise and, more importantly, trust from all sides. Second, understanding the toughest challenges facing chief information security officers (CISOs) does not require EY staff to be security experts as much as it requires navigating clients’ organizations and budgets and metrics. Third, evaluating security concerns (or lack thereof) across an entire client’s organization becomes even more challenging for EY when the threats change dramatically, as this year’s survey shows.

The bridge between security and … everyone else

When previewing the survey results with TBR, EY security leaders repeatedly described the firm’s role within a client’s organization as the bridge: between security professionals and business leaders, between security professionals and board members, and between security professionals and industry leaders (both internal and external). According to EY, the firm revamped the survey for 2020 with a fresh approach to reflect clients’ emerging appreciation for the role bridging often difficult and strained relationships between security professionals and their own colleagues. One of the starkest findings, in TBR’s view, showed respondents’ ratings of the relationships between the security teams and other groups within their organizations, ranging from Neutral, Distrust or Non-Existent to High Trust and Consultation. Not surprisingly, IT departments had the most trust in security teams while more than 70% of the respondents indicated the relationship between marketing and security teams rated neutral or worse. While understandable that marketing teams would chafe at restrictions placed on them by security concerns, EY’s critical insight revolved around “New Initiative Owners,” which includes marketing. If new investments and reallocated budget dollars (as well as C-Suite and board interest) flow toward lines of business, R&D and marketing, but security teams have poor relationships with those groups at more than 55% of enterprises, EY’s role as a bridge becomes even more critical. Security teams cannot get sustained support and new funding if their colleagues driving new business do not see them as teammates or even positive actors within the organization.

TBR believes that EY’s efforts to position as a bridge conforms with the firm’s overall approach to consulting and plays to EY’s strengths around risk and compliance. In addition, playing that role demands a high level of trust among all the groups within a client; EY has invested heavily in building that level of trust and continues to benefit from it. Immediate technology-centric opportunities in connection with migration and management of SAP S/4HANA workloads can serve as a use case and strengthen EY’s trust with the IT buyer, a persona the firm looks to strengthen its relationship with, especially when it comes to application and data security management. Challenging for EY, however, is the fact that most organizations continue to make reactionary decisions around security and frequently bring security concerns and requirements into a business initiative well after the first few developmental stages. These variables create opportunities for EY as a security services consultancy and potentially enhance the firm’s role within clients.

In a discussion with TBR prior to the release of the 2020 Global Information Security Survey, EY previewed the survey’s findings and how the firm sees a changing role for itself in the security services market. In TBR’s view, the survey’s most notable findings underscore strategic moves by EY to evolve its security services practice, including a focus on bridging organizational gaps between security teams and business leaders within EY’s clients.