Officials at the US Centers for Disease Control and Prevention (CDC) and epidemic experts from universities around the world conferred in February about what might happen if the new coronavirus gained a foothold in the United States. The CDC presented four possible scenarios, each one of which we predict would have incremental effects on the channel.
The significant actions we are seeing today are meant to flatten the curve on the healthcare system and mitigate the worst-case figures of between 160 million and 214 million Americans infected and as many as 1.7 million dying.
Based on recent events, Forrester revised its tech market forecast for 2020 downward.
As we previously reported, the global technology channel delivered $2.26 trillion to the economy in 2019, or 64% of total customer spend. In the US, the channel delivers $880.5 billion, or 61% of the total customer spend.
Scenario A: In the best case, US and global tech market growth will slow to around 2% in 2020. That assumes that the US and other major economies have declined in the first half of 2020 but manage to recover in the second half. This represents a global drop of $47 billion in spend in technology through the channel. In terms of the health of the channel, there could be a marginal increase in bankruptcies and forced M&A activity as a result.
Underneath the covers, computer and communications equipment spending will be weakest, with potential declines of 5% to 10%. Tech consulting and systems integration services spending will be flat in a temporary slowdown and could be down by up to 5% if firms really cut back on new tech projects. Software spending growth will slow to the 2% to 4% range in the best case and will post no growth in the worst case of a recession. Tech outsourcing, managed services, and telecom services will hold up better, though contract revisions could cause spending to go down. (Follow my colleague, Andrew Bartels, for late-breaking changes.)
Scenarios B and C: At present, we believe there is a 50% probability that US and global tech markets will decline by 2% or more in 2020 if a full-fledged recession begins. This could seriously impact upward of 25% of resellers, value-added resellers, independent software vendors, and managed service providers (MSPs) around the world. In 2008, we saw a material contraction of the technology and telecom channels, and this time would be no different. We have observed models where one-fourth of all technology partners either lose money or struggle to break even (in good economic times). These partners are the most exposed in this scenario and are least likely to get additional capital or other lifelines.
The only positive notes would be continued growth in demand for cloud infrastructure services and potential increases in spending on specialized software, communications equipment, and telecom services for remote work and education as firms encourage workers to work from home and schools move to online courses.
If we use the unified-communications-as-a-service (UCaaS) market as a bellwether to the new normal, the results we are seeing this week are mind-blowing. Microsoft gained 12 million users for Teams, Slack picked up 7,000 new customers, Cisco Webex logged 5.5 billion meeting minutes during first the 11 days of March (3.2 million meetings per day), and Zoom added more users in Q1 than all of 2019.
Scenario D: The worst-case scenario by the CDC, including a multiyear impact and millions of lives potentially lost, would have devastating effects on the economy and the channel at large. This scenario would be impossible to quantify and would create a generational change in how business is conducted.
There Are Things We Know For Sure, Regardless Of Scenario:
- Vendors and partners will suffer short-term revenue losses. Other than a burst in triage activities including laptop sales, VPNs, cloud sign-ups, UCaaS, and help-desk services, many core IT services businesses will be impacted as on-premises work grinds to a halt.
- 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.
- There is a new “channel normal,” one that is more agile, responsive, and cross-functional than before in response to this fast-moving crisis. For those who don’t adapt, it could hasten their decline.
- The coronavirus pandemic has created millions of new home workers, including channel partner employees, customers, and suppliers. The cloud apps and platforms they need to be hyperproductive and always connected are being put to the test. This change in work may never fully rebound.
Technology vendors are busy stress-testing their infrastructures, activating pandemic-specific resiliency testing procedures, sending their own employees home, and expanding free access to important online video chat and conferencing apps. They are also examining their channel programs to address the different potential scenarios.
There is an important human element to this for the channel.
Before the crisis, one of the most difficult things that partners reported is their inability to find, hire, and retain talent. Conducted during a very strong economy, CompTIA’s 8th State of the Channel report shows that 35% of channel leaders are concerned about skills gaps (specifically in emerging technologies) and 30% report difficulty hiring.
As with most small businesses, the largest expense is human capital, and channel partners don’t have the luxury of furloughing or laying off employees. When the market rebounds, these individuals may look for safer employment opportunities with larger organizations offering more comprehensive benefits and financial stability.
Pandemics pose serious threats to business operations for vendors, partners, and customers alike, including rampant employee absenteeism and supply chain disruption. While customers expect heightened levels of service, delivering may be very difficult. Before the crisis, the channel was dealing with parts shortages and rising component costs due to tariffs — these will only amplify.
Business models will also be challenged. For example, the rapid growth of managed services over the past 20 years has given customers a predictable level of service and support for (mostly) on-premises infrastructure. If the future of work changes, the monthly value delivered in a typical MSP contract may be scrutinized at a line-item level.
Beyond the initial surge in remote work, including communication and collaboration tools, channel partners will need to capitalize on moving customers to cloud infrastructure faster, recognizing and securing new threat parameters, automating customer workflows and business logic, providing new disaster recovery and redundancy protection, and engaging deeper in business consulting to help customers survive and, later, thrive from this crisis.
One last word of caution for vendors: During economic downturns, especially when partners’ accounts receivable are threatened and customers are spending less, there tends to be higher claims on partner programs from cash-starved partners. This can change the forecasted yield on some programs and, in some cases, could be a material impact that needs to be reported internally and externally. We also observe that gaming the system can happen across the multitude of incentive programs, as well as an increase in fraud.