ICT players remain relatively resilient to Covid-19

04 June 2020 Consultancy.uk 4 min. read

A strategic and financial analysis on the potential impact of Covid-19 on B2B-focused ICT businesses has found that the industry will likely remain relatively resilient to Covid-19 over a two year frame. However, the impact will vary by a mix of service lines and operating models.

The impact of Covid-19 has taken a heavy toll on economic activity in almost every sector in 2020. Even technology, which had been booming in the last few years thanks to the growing need for digitalisation, has taken a hit – to the extent that even 5G technology, which was expected to greatly improve the interconnectivity of modern business, has been significantly delayed by the lock-down.

In the ICT segment, the impacts of Covid-19 are meanwhile manifest in everything from diminished consumer discretionary spending to a freeze on business expenditures including capital budgets, hiring, and reduction of everything but essential operational expenses. Despite this though, according to a new study from OC&C Strategy Consultants, ICT players may still be able to remain resilient amid the coronavirus crisis for a period of as much as two years.

Definitions and OC&C Modelled Scenrios

According to the analysis, ICT has proven it is a ‘key enabler’ of the economy, with mostly non-discretionary spend. As the lock-down looks to be easing while the economy approaches a massive recession, this will make it an increasingly important slice of the economy, and many ‘in-train’ trends to re-platform to cloud, collaboration tools and cyber will be being accelerated, creating demand for these services like for including trusted advice, deployment and management.

If the pandemic is controlled in the most effective way possible, OC&C suggested that reaching a ‘new normal’ of macro-recovery could occur as soon as March 2021. This would allow for fewer bankruptcies, and more new projects more quickly – as ICT firms will enjoy demand for support with remote working, connectivity, cloud, and SaaS, as well as transformations away from legacy tech systems.

In the event that the lock-down has not effectively curtailed the spread of Covid-19, though, a prolonged pandemic only brought to an end by mass immunisation could take until Autumn 2021 to reach the ‘new normal.’ In this scenario, OC&C forecast that a reduced demand for projects from firms tightening their belts will mean there will be more insolvencies in ICT. Either way, however, the sector will still bounce back quicker than many other industries in the post-Covid-19 era.

EBITDA Impacts

While most players will show resilience in ICT, however, OC&C did highlight a number of examples to this. Covid-19 will disproportionately impact hardware-focused VARs and traditional calls and lines players in the sector, for example.

In the event of the pandemic being controlled by Summer, IT VAR’s drop in EBITDA is 20%, meaning its already slim portion of the market would shrink to just 4%. Meanwhile managed IT services’ EBITDA will fall by 11%. Conversely, however, OC&C anticipates cyber managed security service provider (MSSP) looks likely to come out of the crisis relatively strongly, seeing a 3% growth in EBITDA thanks to the sudden leap in hackers looking to exploit the fledgling remote systems of many organisations.

Thanks to the relatively sturdy structural characteristics of most ICT sub-sectors, they subsequently will remain attractive for investment looking ahead. Even though most assets will be negatively impacted in the short-term, OC&C’s researchers suggested that with requisite management action, there will often be a strong medium-term growth story. Many assets have attractive businesses models - high recurring revenue, variable cost-bases, delivery of non-discretionary, business critical services, trusted personalised advice to make sense of fast-moving tech and vendor changes, presenting value creation opportunities.