Tech Service Providers Face Bleak Post-Coronavirus Future
Businesses that sell information-technology services are expected to be hit hard by the economic impact of the coronavirus outbreak as companies across sectors slash IT budgets in the months ahead, industry analysts say.
Third-party IT service providers looking for new customers in the wake of the crisis face a bleak reality, said Stuart Ravens, chief analyst for thematic research at data-analytics and consulting firm
PLC: There will be none.
“We expect spending on noncritical projects to be put on hold,” Mr. Ravens said. “Even extensions to existing agreements will either be negotiated down heavily by customers or canceled,” he said.
Forrester Research Inc.
expects spending by U.S. companies on tech consulting and systems integration services, two core areas of the IT services market, to drop as much as 4% this year, depending on the length and severity of the economic downturn sparked by the outbreak.
Last year, Forrester estimated total U.S. spending on all facets of enterprise IT this year would grow 4% to reach $1.85 trillion, including more than $500 billion on consulting and outsourcing.
Information-technology services help companies run part or all of their infrastructure and software systems, including IT maintenance and support, systems integration, consulting, training and network services, among other areas.
Some of the biggest players in the market are
Most are paid through fixed-price contracts, while some negotiate fees based on outcomes, such as a portion of added revenue earned by a business from a specific project.
Mr. Ravens said Covid-19 is already disrupting this model as IT service providers grapple with a homebound workforce. Many offshore workers in countries such as India or the Philippines are dealing with limited broadband availability while working from home, impairing their ability to meet contractual obligations, he said. That will lead to severe cost cutting and layoffs, he added.
“Short-term pain will be replaced by long-term pain,” Mr. Ravens said.
Tech research firm International Data Corp. estimates that annual global spending on all facets of enterprise IT could drop to $2.3 trillion this year, from an initial forecast of $2.5 trillion, as the pandemic ripples through markets.
“We are expecting a fairly significant impact on IT services spending due to Covid-19,” said Rebecca Segal, IDC’s group vice president for world-wide services.
She said project-based services provided by IT services firms will take the biggest hit. “Projects about to be started will likely be delayed as companies turn to other matters,” Ms. Segal said. These include deploying remote-work tools, shoring up supply chains and other operational needs, she said.
By comparison, she added, managed-services providers that have longer-term contracts with companies for outsourced infrastructure, applications and business-process management are likely to fare better. These services tend to be embedded in a company’s core operations, such as human resources or other critical applications, Ms. Segal said.
The need for IT-services vendors to shift their own employees to remote work will also create operational challenges, said Andrew Bartels, a vice president and principal analyst at Forrester.
“This interferes with their ability to engage with clients on site,” Mr. Bartels said. At the same time, he added, customers in industries including airlines, hotels and entertainment are going to push hard to renegotiate contracts as capital dries up.
John-David Lovelock, vice president of research at Gartner Inc., said many companies will push back new IT-services projects or postpone contracts. But most chief information officers facing cash-flow shortfalls are more likely to cut discretionary spending on items such as computers, laptops and mobile phones, he added.
“It is not until cash-flow restrictions reach higher levels, or last long, that consulting contracts are paused or canceled,” Mr. Lovelock said.
Some large IT-services providers might be well positioned to weather a downturn.
“IBM is typically deployed for customers’ most mission-critical workloads, which are less likely to be cut than more discretionary projects,” Matt Cabral of
said in a research note last week.
Roughly half of the tech giant’s revenue comes from IT outsourcing, mainframe and operating system software, and hardware support. In January, it reported fourth-quarter revenue of $21.78 billion, up 0.1% from a year earlier.
“We are getting a lot of outreach for best practices” from companies trying to cope with the pandemic, said IBM CIO Fletcher Previn.
Write to Angus Loten at firstname.lastname@example.org
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