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As inflation rears, will it throw off SaaS and ITO operating models

Who today has experienced a long-term economic inflationary period?

Inflation is very much in the U.S. news as it reaches 40-year highs. This means a person has to be near the end of their professional careers to have experienced the previous inflationary period. One of the authors dimly recalls his economics professors trying to parse what, at the time, was called stagflation, which impacted the United States in the 1970s. Oil price shocks drove up prices, while unemployment remained high. Inflation previously had been explained as too many dollars chasing too few goods and was generally assigned to economies overheating because of very low unemployment rates.

Today economists seek to assess economic fundamentals to predict whether this inflationary spike will be temporary or persistent. Factors suggesting a short-term spike revolve around the well-publicized supply chain disruptions coupled with record savings levels during the pandemic when discretionary spending on things like travel and restaurant meals was greatly hindered and retail spending shifted from in-store shopping to e-commerce.

On the other hand, some economists point to persistent government deficits due to pumping money into the economy. Given various regulatory and economic uncertainties, that money has been sitting on the sidelines. Further stock market run-ups in valuation have been attributed to investor money seeking higher returns that can be achieved in traditional savings and bond ownership because of low interest rates on these conservative investment instruments.

Partisans will selectively mention these factors to explain away or criticize the current economic climate. Businesses, on the other hand, have a recently dormant financial risk rearing its ugly head that can dramatically impact long-term financial forecasting.

So what are the technology company business models where inflation has near term impact?

Transaction-based businesses in  the IT industry will be able to follow traditional methods of passing costs on to the customer. But, for those business units working from Anything as a Service (XaaS) subscription models, ITO contracts and infrastructure managed service agreements, the near-term impact could be more acute.

Cloud-enabled SaaS models are a relatively new phenomenon as Industry 4.0 gains momentum. Proponents of these business models also assert that legacy business model metrics and analysis do not apply given the majority of selling expenses are recognized in the first fiscal quarter of multiyear agreements while the revenue is then recognized ratably over the contract term. As such, the financial spokespeople for these business models lean heavily on relatively new business metrics — annual recurring revenue (ARR), net dollar revenue retention and lifetime customer value — that chart a forecast course for when operating profits will materialize.

ITO contracts have had a somewhat longer evolution, starting as multiyear deals where vendors could reap greater profits as operating costs declined due to the increased automation of the overall monitoring and maintenance. These contracts then moved to shorter-term durations and, more recently, have stipulated cost decreases over time such that any operating costs savings created by the vendor are passed along, or at least shared with, the customer. The ITO market has likewise seen a shift or rebranding of these customer offers into infrastructure managed services to pivot the contract model to be more in line with SaaS constructs.

When inflation was last a top-of-mind economic consideration, most IT was on premises and operated by company personnel. TBR seriously doubts strategic scenario planning for these new subscription consumption models prior to perhaps late 2020 anticipated the current inflationary levels and their potential operating impact.

What is the immediate inflationary risk to XaaS and ITO business models?

SaaS models take several years to generate profit in what is variously described as the flywheel effect or the force multiplier effect. Increased labor and utility costs beyond forecast and tethered to long-term contracts will add several percentage points of operating costs to these models. In this sense, the newer the SaaS operating model the less risk it will have to cost structure as it has less renewed revenue. TBR expects the more mature the SaaS model, and greater amount of accrued or committed revenue, the more adverse the bottom-line operating impact.

The ITO market, on the other hand, has shown persistent declines, resulting in consolidations and divestments to profitably manage eroding streams traditional ITO vendors seek to convert into managed services agreements. The inflation impact on costing will amplify the need to infuse these business practices with more automated capabilities or increased low-cost (typically offshore) labor as offsets. Still, the operating profit declines in this space will likely worsen unless vendors seek to negotiate incremental cost increases that customers may or may not be willing to accept based on their own issues with cost containment.

What go-forward tactics are in the technology vendor toolbox to mitigate inflationary impact?

Inflation is not new, but the operating models prevalent now were not around when we last experienced it. Business strategists still have a blend of initiatives they can embrace to preserve their operating models and their customer relationships:

  1. Market education: Transparent declarations on the cost impacts to the vendor business and any suggestions of sharing the burden with customers can preserve customer loyalty.
  2. Customer research in existing brand perception. The XaaS Pricing team has a very good blog outlining the Van Westendorp Price Sensitivity Meter and its applicability setting B2B SaaS pricing strategy. That research methodology can assist vendors in level setting where they stand with customers on the value perception and give pricing strategists a line of sight into how much room they have within their brand perception for implementing price increases.
  3. New contract language for price increases: The historic quiet period on inflation, coupled with the innate reality within technology of “faster, better, cheaper,” has customers expecting price reductions for IT that will require true customer education around inflation as an offset to those prevailing market expectations. This will not help with the inflationary impacts on the existing contracts that must be honored, but can establish a new go-forward pricing model that can take into account a business risk largely dormant for the better part of 40 years.

Inflation as a business risk will persist for the foreseeable future. TBR will be assessing it closely as public companies report their earnings and release their financial filing documents.

Conversion, integration and ecosystems drive SaaS growth

Applications serve as the vessel for cloud’s business value 

Value, in the form of agility, innovation and efficiency, is now the driving force behind customers’ cloud investments. Applications, in the form of SaaS, are the purest vessel for customers to implement and achieve the value they so desperately want in order to improve their businesses. It is for that reason that TBR published our first Cloud and Software Applications Benchmark, tracking the nuances of the applications space from a workload and subworkload perspective.

Customers’ growing reliance on SaaS solutions is shown in the market growth of the 10 vendors covered in the inaugural report — their aggregate revenue increased by 26.4% year-to-year in 3Q21, a rate that has accelerated over the past year. Business Applications workloads, which include ERP solutions, was the fastest-growing segment, with aggregate revenue for the 10 vendors covered increasing by 28.5% year-to-year during 3Q21. The drivers of this expansion are threefold: conversion of existing customers to cloud; the integration of solutions through hybrid deployments; and revenue driven by the ecosystems that are critical to the innovation and go-to-market strategy for SaaS solutions.  

Providers from all backgrounds now look to existing customers as their first growth option 

For both traditional software providers and companies that were born on the cloud, customers with existing traditional software installations have become one of the main drivers of SaaS growth. Traditional software providers did not always see the market this way. In fact, SaaS was a threat to their existing license and maintenance businesses for quite some time. After years of customers voting with their dollars and selecting SaaS-delivered solutions over the traditional license and maintenance delivery model, nearly all applications vendors currently see their existing bases as the first opportunity for growth.

In some ways, this transition has played out on a workload-by-workload basis. Sales and marketing applications, led by CRM, are on the periphery of most enterprise applications suites and were the earliest to see a shift to SaaS over traditional software purchasing. Salesforce (NYSE: CRM) led this trend, converting many existing customers from traditional leading providers like SAP (NYSE: SAP) and Oracle (NYSE: ORCL). The dynamics in CRM served as a warning shot for many traditional providers. Even the most reluctant SaaS providers, like Oracle, are now focused on offering cloud solutions to their existing customers before their competitors can.

The shift in strategy is well timed for traditional providers, as cloud demand in the Business Applications segment is beginning to accelerate. As shown in Figure 1, Business Applications has the lowest cloud revenue mix for the vendors included in TBR’s Cloud and Software Applications Benchmark, making it the largest opportunity for traditional customer conversion.  

Figure 1

Top 3 Predictions for Cloud Applications in 2022

SaaS will see new vendors, bigger workloads and more customization

Consistent growth masks considerable change in SaaS during 2022

The expectations for what cloud can offer customers have shifted, and in no market is that more clear than with cloud applications and SaaS. The financial benefits of cloud, both the lower overall cost and the shift to an operating expense pricing model, were the early attractions as customers moved low-risk applications to the cloud. Now that more mission-critical enterprise applications are being moved, cost is still a consideration for major SaaS purchases, but it is no longer the sole driving factor influencing adoption decisions. The constant stream of innovation, more frequent updates, and ability to align cloud to changing business requirements have taken over as the most attractive elements of SaaS solutions.

That high-level value proposition will persist into 2022, making SaaS the largest cloud market in terms of revenue and one that will continue to grow in the double digits year-to-year. It may sound like the same old story, but a shifting set of trends will drive this growth. First, while large providers like SAP, Oracle and Microsoft remain the mainstays of the market, born-in-the-cloud providers have matured greatly over the past few years, best highlighted by Salesforce whose front-office SaaS portfolio aligned well with the adoption patterns of the enterprise, setting the vendor on a course to eclipse SAP as the largest enterprise application provider in terms of revenue by the end of 2021.

The success of Salesforce and other cloud pure plays like Workday has been recognized by a growing ecosystem of nontraditional ISVs that are entering the market to capitalize on the opportunity. Systems integrators, small managed services partners, and cloud platform providers will all package solutions that are sold as SaaS to end customers. Second, the larger, mission-critical services in the ERP category of workloads will see increased adoption. That shift carries significant dollar investments not only in the SaaS offerings being purchased but also in the associated services and technologies that support those environments. Third, the need for customization based on the business process, existing technology, and vertical industry increases the value of broad ecosystems that extend the core SaaS offerings.

This dynamic is supported by TBR’s 1H21 Cloud Applications Customer Research, which found that the value of ISV ecosystems was not just in filling gaps in vendors’ portfolios but also, more critically, in increasing the stickiness of vendors’ offerings within clients’ environments. This dynamic will result in PaaS capabilities becoming a key differentiator for vendors in the overall public cloud market. So while growth will continue in SaaS, it will mask big changes occurring in the market during the coming year.

2022 Cloud Applications Predictions

  • The SaaS opportunity attracts all kinds of new participants
  • Cloud delivery for mission-critical applications inches closer to mainstream
  • Customization becomes the standard for cloud applications

Learn more in our webinar 2022 Predictions: Cloud

Send me a free copy of TBR’s Top 3 Predictions for Cloud Applications in 2022

Telecom Business Research’s 2022 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud, telecom, devices, data center, and services & digital.

VMware’s Chapter 3 outline hinges on a more comprehensive portfolio and multicloud partnerships

TBR perspective

With the looming separation from Dell Technologies (NYSE: DELL) and departure of long-trusted CEO Pat Gelsinger, 2021 has undoubtedly been a turbulent year for VMware (NYSE: VMW). Since effectively taking over as CEO on June 1, Raghu Raghuram has been tasked with executing on Gelsinger’s vision of bringing the same virtualization products trusted by enterprises for decades into the cloud era. As many legacy software companies can attest, capturing net-new business in a market crowding with ‘born-in-the-cloud’ startups is no easy feat; yet, as the company that brought virtualization technology into the mainstream and remains pervasive throughout enterprises today, VMware faces a unique set of challenges and opportunities.

Since starting with stand-alone vSphere license agreements then progressing into full Software-Defined Data Center (SDDC) stack sales, VMware is now entering what Raghuram deems the company’s Chapter 3, the era of hybrid multicloud. Like the first two chapters, Chapter 3 will be defined by product innovation, but it will require a more nuanced partner strategy, leaning on value-added resellers and hyperscalers that will help bring VMware into the cloud. This is an area TBR expects VMware to execute on especially as it enters 2022 as a stand-alone company.

VMware unveils Cross-Cloud Services to drive multiproduct adoption and position as a SaaS company

At VMworld 2020 VMware was coming off a series of tuck-in acquisitions that provided the company additional value in areas like networking, security and modern applications. Evidenced by historic acquisitions, such as VeloCloud, and more recent purchases, including Pivotal, VMware has proven its ability to use acquired IP to quickly pivot and meet demand from customers’ IT operations and development teams. While Gelsinger’s departure and the company’s spinout could be playing a role in slowing acquisition activity, VMware also appears to be at a point where it has all the workings of a competitive portfolio and must now determine how to integrate and scale it. Marking a key step in this direction was the announcement of Cross-Cloud Services at VMworld 2021.

Cross-Cloud Services is a manifestation of the company’s five-pillar framework and brings application, cloud infrastructure, cloud management, security & networking and anywhere workspace & edge services into a single, unified platform that can be deployed in any IT environment. In addition to established offerings such as VMware Cloud solutions and vRealize for cloud management, VMware released new products, such as Tanzu Application Platform (TAP) and Project Arctic, which are also offered as part of the Cross-Cloud Services product family. More services are expected to be offered under the Cross-Cloud Services umbrella in the future to provide existing customers with more choices and the flexibility to deploy VMware services anywhere.

Like many market players defined as SaaS companies, such as ServiceNow and Salesforce, VMware recently has been emphasizing product bundles. For example, in 2Q21 VMware launched Anywhere Workspace, which brings endpoint management, security and networking capabilities into a single subscription through Workspace One, VMware Carbon Black Cloud and VMware Secure Access Service Edge (SASE), respectively. However, as a company born on premises, VMware is more closely aligned with vendors such as IBM and Microsoft, which are similarly looking to support customers’ hybrid cloud journeys but face pressure to appeal to customers outside their own install bases.

While VMware faces similar challenges, the pervasiveness of VMware — evidenced by roughly 80 million vSphere-based workloads currently in production — arguably puts the company under less pressure to look outside its customer base, at least in the near term, and focus on upselling cloud and application services to its loyal base of traditional virtualization customers. The release of Cross-Cloud Services indicates VMware will take a land-and-expand approach to increase annual contract value (ACV) and become perceived as a SaaS company.  

VMworld 2021: As the coronavirus delta variant continues to take its toll, VMware held its annual event virtually for the second consecutive year. While VMworld 2021 was unique largely because it was the first VMworld in nearly a decade without Pat Gelsinger as CEO, the feel of the event remained the same, offering various breakout sessions and independent talks from customers speaking to each of the five pillars that define VMware’s DT-enabling strategy. VMware also welcomed the CEOs of all major hyperscalers, further highlighting not only its commitment to partners but also to hybrid multicloud as the model that will shape enterprise IT throughout the next 20 years.

OEM earnings roundup: Unpacking a quarter of ‘record growth’

OEMs boasted revenue and profit gains in the first calendar quarter of 2021

“Record growth” was a frequently repeated phrase over the last week as Dell Technologies, Lenovo, Hewlett Packard Enterprise (HPE) and HP Inc. reported their earnings for the first calendar quarter of 2021. For these major OEMs in the PC and data center hardware space, record gains in revenue and profitability have been hard to come by in recent years due to several factors including slowed PC refresh cycles, stiff competition from cloud offerings, component shortages, and uncertainty about the  pandemic’s impact on businesses and consumers.

For all these reasons, it was a pleasant surprise to witness a series of positive earnings announcements. But as one company after the next reported breaking multiple growth records in revenue and/or profit, it led me to wonder the degree to which business growth was based on increased economic stability rather than major changes in the OEM’s go-to-market approach.

Comparing first quarter revenue figures from the last two years provides a good snapshot of how the hardware market has changed since the world was immersed in the COVID-19 pandemic. For Dell Technologies, HP Inc. and HPE, the earnings reported in the first quarter represent revenue from February to April. Looking back to 2020, this represents the time frame when many countries imposed lockdowns. Lenovo’s earnings time frame is slightly different — reporting on revenue from January through March — but remains a good comparison, particularly as Lenovo may have felt the pandemic impacts earlier than peers as a China-based company, especially given that Lenovo has a manufacturing facility in Wuhan.

All vendors but Dell Technologies saw a first quarter corporate revenue decline of at least $1 billion in 1Q20 compared to 1Q19. In 1Q21 all vendors exceeded their revenue levels from the start of the pandemic, and three of the four grew revenue by $1.9 billion to $3.9 billion compared to 1Q19. This is impressive revenue growth for these vendors operating in mature and, in some cases, declining market segments. But are all business units growing equally? The fact that HPE was the only vendor of the four to not grow revenue in 1Q21 compared to 1Q19 and is also the only vendor in the compare lacking a PC business suggests growth is not consistent across hardware segments.

PCs are the driving force in the revenue rebound

Demand for both consumer and commercial PCs has been strong throughout the pandemic as many people spent an increasing amount of screen time at home for work, school and socialization. Dell Technologies, Lenovo and HP Inc. have not only reported 1Q21 revenue gains of billions of dollars compared to 1Q20, but the OEMs’ revenue is also up significantly compared to 1Q19. In addition to pandemic-related demand for PCs, silicon supply shortages have also helped to stem the race to the bottom for PC prices. With limited chip supply available, Intel and peers have focused on producing higher-end chips for premium devices. OEMs are also less competitive on pricing while demand outweighs supply. Improving selling prices and shifting toward premium PCs benefit not only revenue but also profitability.

Data center is still not immune to the impact of cloud migration

OEMs’ data center business units tell a different story. While the three vendors all reported increased year-to-year revenue in 1Q21, both Dell Technologies’ and HPE’s data center revenues are down compared to 1Q19. This suggests that year-to-year revenue gains represent customers showing less pandemic-related spending hesitancy and resuming delayed data center projects, while declines compared to 1Q19 align to the overall trend of enterprise data center consolidation in favor of public cloud. Although with the smallest data center revenue base, Lenovo was the only vendor in the comparison that increased revenue from 1Q19 to 1Q21, possibly buoyed by its Cloud Service Provider customer segment, which has higher demand for data center infrastructure compared to the enterprise segment. Overall, the revenue trends suggest that a favorable year-to-year compare may be masking impacts of public cloud adoption, which have accelerated through the pandemic.

Looking ahead to the remainder of 2021, TBR expects the trend of favorable year-to-year compares to continue for hardware vendors as businesses gain confidence in resuming IT spend. Profitability will likely also remain strong as supply constraints on chips will lead to price premiums and a focus on selling high-end devices. The data center space will likely continue to benefit from pent-up demand, but will be offset to some degree by the ongoing trend of public cloud and SaaS adoption, leaving PCs to drive the largest OEM revenue increases in 2021.

Accelerated cloud adoption will persist even after COVID-19 pandemic subsides

The outbreak of COVID-19 led to constraints around enterprise IT budgets, but the emergence of a digital workforce resulted in accelerated adoption of cloud applications, particularly those related to productivity and customer-facing suites in the front office. Enterprises needed to rapidly shift operations to the cloud to support remote workforces, increasing the value of service arms and IT services partners to mitigate client risk in the form of cloud road-mapping, migration and implementation services.

In the long term, internal service capabilities and IT services partners will become critical to enabling enterprises’ digital transformations, particularly as front-office cloud deployments mature and as clients explore migrating more customized environments like ERP to cloud or pursue industry-based solution deployments in highly regulated industries like healthcare and the public sector.

The bulk of enterprises are employing a best-of-breed approach to the development of their cloud IT architectures, evidenced by 42% of respondents stating that they currently use three or more SaaS vendors. As a result, application vendors have been driving alliance activity with infrastructure providers to give clients more flexibility around how they consume cloud, evidenced by SAP’s decision to offer SAP Business Suite 4 HANA with leading infrastructure players like Microsoft Azure and Amazon Web Services. While best-of-breed IT will remain prevalent, cloud players have increasingly driven investments to tighten the integrations of complementary suites to expand share of client wallet by enabling multiproduct deals, a tactic that has been effectively employed by Salesforce and Microsoft in 2020.

Cloud players aim to accelerate the proliferation of their IP by employing industry-based go-to-market capabilities to provide clients with prebuilt data models that alleviate concerns around data compliance and governance. This tactic aligns with clients’ needs, as 51% of respondents who deployed industry solutions cited compliance and regulatory standards as a key benefit. To strengthen the value of industry clouds to clients, vendors are offering prebuilt integrations with leading data providers, such as Microsoft’s integrations with electronic health record providers through Cloud for Healthcare. These types of integrations will be critical to accelerating client time to value, while ensuring the integrity of data by meeting industry-specific regulations.

TBR’s Cloud Applications Customer Research tracks how customers are modernizing application environments and choosing between different cloud delivery methods. Leveraging in-depth conversations between TBR and enterprise customers, the Cloud Infrastructure & Platforms Customer Research provides subscribers with actionable insight that they can use to better understand their customers’ behavior and win cloud infrastructure deals. Topics covered for both reports include public, private and hybrid delivery options; decision-making involvement and criteria; leading vendor perception; field positioning and competition guides; and the impact of emerging trends (e.g., containers, security, platforms).

IaaS providers focus on global expansion, while vendors with remote work-enabling SaaS capitalize on demand

1Q20 Public Cloud Benchmark infographic

While Amazon Web Services (AWS) continues to dominate the public cloud IaaS market, its rivals continue to expand in the space and even collaborate to take market share. Microsoft and Oracle added a new data center interconnection in Amsterdam, deepening the ties between the vendors as they enable customers to run Oracle workloads on Azure and integrate workloads between the vendors’ clouds. TBR believes Microsoft and Oracle will continue to improve their competitive position against AWS as more data center interconnections are added. In addition, TBR expects Alibaba will become a growing threat to AWS and other U.S.-based vendors as it builds out data centers in APAC and EMEA.

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. The 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.

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

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).

COVID-19 survey update: Cloud reliance grows

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.