With COVID-19 still spreading and broad quarantines, shutdowns, and other measures to contain it continuing, it is still impossible to make definitive predictions of its impact on the tech channel. Instead, we are using three scenarios that take into account different recovery start times and shapes of recovery graphs. More detail around these scenarios, tech budgets, and spending, as well as economic recovery, can be found in Andrew Bartels’ report: “US Tech Budget Outlooks In A COVID-19 Recession.”
1. Scenario A, a best-case scenario (30% probability). In this scenario, the virus’s infection and death rates peak in Q2 2020 in the US, with the impacts on economies and tech markets hitting in Q2 and Q3 but reversing in Q4 2020. We view this as having a 30% probability at present, though this could change if efforts to flatten the curve of infection work and federal economic stabilization programs counter the downward pressure coming from massive layoffs and revenue reductions.
2. Scenario B, a more damaging scenario (60% probability). This scenario would occur if the pandemic and economic downturn last through 2020 but conditions start to improve by mid-2021. Right now, we view this as having a 60% probability. However, these odds could rise as new evidence comes in about the extent or recurrence of coronavirus infections and the government mandates more extensive social distancing and quarantines. Or they could fall if the federal economic stabilization program improves consumer and business confidence.
3. Scenario C, an even more dangerous scenario (10% probability). If the pandemic recurs and the resulting economic downturn extends well into 2021, we could see this scenario. This would break a contractual firewall, and large parts of tech spending (e.g., software and hardware maintenance agreements, outsourcing contracts, telecom contracts, software-as-a-service contracts, etc.) could be breached on a widespread basis. Modeling these impacts is not possible at this time.
The US channel will decline under all three of these scenarios.
It is no longer a question of if the US will experience a recession in 2020, and it is certain that customer tech budgets will be cut. The only question is how deep and long-lasting the recession will be and thus how much tech budgets will be reduced, affecting channel revenue and the financial health of partners’ businesses.
In scenario A, tech spending in the US falls by around 5% in 2020. Earlier in 2020, our forecast was that US tech spending growth would slow to 4% by 2021 from 4.5% in 2019. We now project in the best case that US tech budget spending will decrease by 5% in 2020 but recover and fall by only 0.1% in 2021.
The channel impact is deeper than these overall averages because of the different subcategories of customer spend. For example, double-digit drops in 2020 for computer equipment (-11.9%), communications equipment (-13.9%), and tech consulting and systems integration services (-10.5%) affect the channel disproportionately because 70–80% of that business flows indirectly today.
On the other hand, growing categories such as cloud infrastructure, platforms, and SaaS are only around 30% indirect.
Areas of relative stability in 2020 for the channel are in tech outsourcing, managed services, and hardware maintenance (-1.9%), as well as telecommunication services (-4.9%).
From a revenue perspective, the $880 billion that the US channel delivered in 2019 will decline to $812 billion in 2020 and $800 billion in 2021. This is a sharp decline from the $961 billion we were forecasting by 2021 before COVID-19. The $161 billion dollar delta, combined with the broader economic implications of the crisis, will force upward of 10% of VARs, MSPs, and other tech solution providers into unrecoverable financial distress in scenario A (bankruptcy, forced M&A, retirement, etc.).
In scenario B, US tech budgets would go down in both 2020 and 2021. In this scenario, our current forecast is that US tech budget spending would be cut by 9% in 2020 and by an additional 5% in 2021.
Again, the channel impact is much deeper than these overall averages because of the different subcategories of customer spend. For example, significant drops in 2020 for computer equipment (-16%), communications equipment (-17%), and tech consulting and systems integration services (-15.7%) affect the channel disproportionately.
Even more stable and predictable customer spend for the channel gets more deeply impacted in scenario B in 2020, including tech outsourcing, managed services, and hardware maintenance (-6.8%), as well as telecommunication services (-7.0%).
From a revenue perspective in scenario B, the $880 billion that the US channel delivered in 2019 will decline to $777 billion in 2020 and $724 billion in 2021. This is a jaw-dropping decline of 18%, or $237 billion from our pre-COVID-19 forecasting for 2021.
Given our modeling around the 150,000 channel partners in the US, with an average size of eight employees and around $2 million in revenue, 25% will experience unrecoverable financial distress in scenario B. These are similar numbers to what we saw in the Great Recession of 2008.
Moving Forward Through Uncertainty
Every channel firm will face a different set of challenges, depending on the trajectory of the pandemic, changes in buying behavior, vendor and distributor actions, and the resulting impacts on their business.
Given the uncertainties, partners, vendors, distributors, and the broader ecosystem of media firms, associations, communities, and agencies need to develop relevant scenarios for their own businesses based on emerging news, customer engagement, and new opportunities for recovery.
Beyond the initial surge in remote work, including communication and collaboration tools, partners can capitalize on moving customers to cloud infrastructure faster, recognize and secure new threat parameters, automate customer workflows and business logic, provide enhanced disaster recovery and redundancy protection, and engage deeper in business consulting to help customers survive and, later, thrive from this crisis.
We are hearing that the channel’s “brand” is benefiting as an essential service that empathizes with customers and shapes responses around their needs.
The channel is also helping broader communities prepare and cope, reminding many businesses why local service and support is necessary. Customers are reporting to us that they are seeing more agile, responsive, and cross-functional support organizations, and this can be leveraged moving forward.