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COVID-19: the challenges and opportunities for NZ service providers

Analyst firm IDC takes a close look at the New Zealand IT market amid the coronavirus pandemic
  • Leon Spencer (New Zealand Reseller News)
  • 10 May, 2020 20:00

The local cloud and infrastructure-as-a-service markets are expected to experience somewhat positive effects from the ongoing COVID-19 pandemic, but the managed services market as a whole is likely to take a hit.

This is according to a recent report by industry research firm IDC, which claims in its IDC Market Perspective report on the Zealand market that while the overall outcome of the economic disruption by COVID-19 in the country is uncertain, trends already indicate an overall decline in most IT markets, if not all.

“The New Zealand Government’s comprehensive lockdown on March 26, 2020 caught many businesses on the back-foot and almost overnight businesses had to reconfigure and adapt to a new way of working,” IDC said. 

“Technology is playing a big role in helping businesses operate, manage and survive, and while many of the ICT markets will experience a substantial drop in revenues, there will also be new areas of growth, unanticipated six months ago.”

Indeed, among the doom and gloom are a few bright points of hope, according to IDC, with cloud, specifically infrastructure-as-a-service (IaaS), expected to see a positive effect. 

Organisations are expected to increasingly turn to IaaS to help ensure business continuity. Hardware constraints and remote working will help to promote IaaS investment, the exhaustive report suggests.

However, IDC suggests that managed services will be negatively hit, with contracts coming up for renewal in 2020 set to undergo scrutiny, simplification and testing for resiliency. 

At the same time, customers under financial duress are likely to undertake emergency reviews and exit clauses triggered will drive down spending, IDC said. IDC claims that the pandemic disruptions are expected to “highly negatively” hit project-oriented IT services activity.

Such activity is expected to be hit hard as non-essential projects are put on hold. Later in 2020, however, the areas of growth will be in consulting, such as enabling business continuity and crisis management, integration, cloud migration and network consulting related services.

IDC also suggests that the disruptions arising from the pandemic will negatively impact IT support services, with supply chain constraints putting pressure on the hardware deploy and support market. However, this is likely to be tempered by a shift towards online education and training.

Broadly, while there has been, and continues to be, much uncertainty, indications of spending trends are already emerging as technology plays a role in the reaction to and economic recovery, according to IDC. 

"Digital devices, cloud computing, collaboration tools and new workplace models adopted prior to the outbreak have enabled the speed of change to remote working and education in a way that would have not been possible five or so years ago,” IDC New Zealand country manager and research director Louise Francis said. 

"One thing that is certain, is that the pandemic is forcing the local ICT industry to adapt and evolve at a pace that requires decisions to be made quickly and decisively,” he added. 

Taking a closer look at the impact to the IT services and public cloud market in New Zealand, IDC said that while it is already forecasting IT services spending will follow other markets into negative growth territory, many traditional IT services contracts are multi-year agreements.

Regardless, in a country dominated by SMBs, it will be the smaller IT services providers that are likely to be hurt the most, especially those that run a low-cost contract-based structure and do not have strong partner ecosystems.

In this context, IDC notes, unless a customer's existing contracts are up for review and renewal in 2020, the impact of the current disruptions could spread beyond 2021, effectively dampening some, if not all, of the impact on IT service providers and their partner ecosystem. 

With the extreme speed and impact of the lockdown, IDC said it also expects some businesses to seek urgent contract reviews to meet their new needs and, where businesses are facing severe financial consequences, exit strategies for all but essential services. 

“[IT service providers] must be prepared to work with customers to ensure their IT services portfolio is still the right fit,” IDC stated in the report. “They must help customers who are under financial stress. For example, by offering contract flexibility, 'pausing' the contract, or offering alternative payment terms and models.”

Globally, IDC said it has already started to observe larger organisations affected by COVID-19 begin to delay scheduled spending on IT services, a trend the analyst firm is also seeing happen in New Zealand. 

“For example, on March 30, the Ministry of Business, Innovation and Employment (MBIE) released a notice to its providers that agencies with active tenders would be reviewing existing plans and the likely impacts would be extension of time to respond to open tenders, reconsidering timing for approaching the market, and/or undertaking emergency procurements,” it stated. 

How public cloud, infrastructure-as-a-service will be impacted

As noted earlier, IDC expects the local New Zealand public cloud market to stand as a bright spot amid a broader landscape over which the disruptions are likely to cast a pall.

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The analyst firm suggests that the current COVID-19 situation will see organisations move quickly to ensure they can operate and deliver, from anywhere, at any time, while reducing business risk — with cloud technology providing solutions enabling businesses to achieve their goals in this respect. 

As such, IDC said it expects that local cloud services providers will proactively work with customers seeking to urgently migrate services to the cloud as IT departments are cut or delivery from offshore providers is no longer tenable. 

In the long-term, IDC also expects infrastructure-as-a-service (IaaS) spending to increase, thanks to a focus by business first on the quick reconfiguring and provisioning of platforms for technologies required for a longer period in which employees might work remotely, which is likely to continue into the foreseeable future. 

Once these areas are addressed, it is expected that businesses will move their focus to business continuity, resilience and addressing the potential risk presented to on-premises infrastructure.

COVID-19 is also expected to create infrastructure supply chain constraints that will put pressure on organisations with plans to deploy their own infrastructure or private cloud models, IDC said. 

So, what’s next?

Taking a step back to capture a broader view, IDC has broken down its near-term forecasts into three scenarios: pessimistic, probable and optimistic. 

The company claims that its ‘optimistic scenario’ modelling would see the COVID-19 pandemic limited to just the first half of 2020.

“During this period there is a reduction in spending on IT services, however, this reduction is constrained to 2020H1,” IDC said. “Throughout this period, critical IT services contracts continue to be executed with minimal disruptions. 

“Spending on public cloud services will accelerate strongly as businesses seek to reduce costs and deploy solutions quickly. While some may pause public cloud deployment, most will continue with deployment plans in 2020H1, further bolstered by a new wave of organisations rushing to adopt cloud services,” the report stated. 

And while IDC suggests that large scale projects may go into hibernation, few will be completely abandoned, resulting in a return to spending growth in the second half of 2020 and early into 2021. 

In this optimistic scenario, projects that were planned prior to the COVID-19 lockdown will undergo rigorous reviews, with many re-tendered or replaced with projects more relevant to the changed markets and opportunities for growth.

IDC’s probable scenario, however, sees the outbreak lasting through to the second half of 2020 and into early 2021. This could result in a much deeper reduction in spending on IT services spending, particularly around project-based services and deployment services, in all but the most critical areas. 

“As restrictions are relaxed, businesses will review their IT services portfolio and ecosystems, with the intention to rationalise and simplify IT environments for greater resiliency,” the report said.

“Once the New Zealand lockdown is lifted and the country returns to the Level 2 restrictions, businesses in a position to resume operations will cautiously return to public cloud deployment plans focusing on the core essential services and critical infrastructure. 

“Projects that go ahead will be challenged by periodic disruptions associated with onsite execution and continuing restrictions on workforce conditions,” IDC stated. 

At the same time, in this probable scenario, IDC expects IT services contract renewals to be deferred until early 2021, and many large-scale resource heavy projects leveraging external support potentially postponed indefinitely. 

“During this period, public cloud services continue to be adopted for specific functions,” IDC said. 

The analyst firm’s pessimistic scenario for New Zealand, meanwhile, proposes that the COVID-19 outbreak could continue into 2021, with most projects that were put on hold in 2020 either cancelled or drastically downsized. 

“New initiatives will also be put on hold as organisations redirect spending to internal rebuilds and employee retention programmes,” the report said. “IT services providers which are unable to recognise and adapt to their customers' rapidly changing needs will be faced with the decision of whether to downsize, form new partnerships or reduce their portfolio of offerings to focus on the most profitable service offerings. 

“Those [IT service providers] without an offering in areas customers will focus [on], such as collaboration services/integration, cloud migration/brokerage and business continuity and risk management, will likely cease trading by the end of 2020,” it stated. 

Opportunities and challenges

Despite the potential damage done to the industry in these three scenarios, as a result of the COVID-19 pandemic, IDC stresses that there are opportunities for organisations in the local New Zealand IT industry, along with some challenges.

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Among the challenges flagged by IDC is the potential for IT service providers’ resilience coming under increased scrutiny, with organisations that manage IT internally watching how IT services providers cope during the outbreak to determine whether to move to an IT service management (ITSM) model or retain services inhouse. 

“Those providers that maintain customer engagement and business continuity throughout the pandemic will be the ones that survive, if not thrive after the pandemic restrictions are lifted,” IDC said.

Additionally, pandemic restrictions on offshore services and the insource-outsource model could become more polarised as customer experiences reshape views about the delivery risk.

“[IT service providers’] workforce are not only curtailed by the New Zealand lockdown, but also by restrictions imposed in offshore markets where partners — such as call centres — fulfil local services,” IDC said. “For example, lockdowns in India, Philippines and Malaysia will not only affect delivery during the lockdown, but customers will review the offshore resilience of their outsourcing partners, post crisis. 

“Customers will also realise how leveraged the provider call centres are and this will create greater operational costs driving the potential for a focus on AI based solutions,” it said. 

At the same time, COVID-19 is causing hardware and infrastructure supply chain constraints, with IDC predicting that many customers will either delay deployments or even cancel projects entirely, electing instead to move to cloud infrastructure and take the device-as-a-service option. 

“The New Zealand government publicly warned government agencies they are likely to face delays in acquiring new IT hardware,” IDC satd. “However, the government has also taken steps to minimise hardware deployment disruptions, such as, announcing that it will extend the IT hardware procurement contract which is due to expire in September.

Regardless, IDC also said it believes that COVID-19 can create an opportunity for IT services providers to differentiate themselves on capabilities, resiliency, customer engagement, contract fulfilment and trustworthiness. 

For example, IDC reckons that new areas of growth will emerge. Indeed, the analyst firm suggests that the IT services that will lead regrowth in the months after the pandemic has passed will be collaboration services, business continuity and crisis management consulting, cloud migration and network management services. 

Integration services, meanwhile, are expected to get a reboot, as businesses seek to integrate technologies rapidly deployed prior to and during the lockdown.

Business continuity and crisis risk management are also an area of great opportunity, and for good reason. According to IDC, early indications are that very few businesses have a business continuity plan in place that accounts for pandemics. 

“In previous events where business continuity has been tested, there has been an upswing in investment around business continuity and risk management strategy development,” the report said.

At the same time, the security issues that will emerge and face deeper interrogation over the next six months will be identity, home security and remote working solutions. For IDC, the massive shift to working at home in such a short space of time has exposed a number of security weaknesses for organisations that will need to be addressed urgently. 

This means that security solutions will be highly sought after, even before the crisis has lifted, to overcome security issues related to mobility including mobile device management, collaboration tools and data, VPNs, and end-point encryption. 

“There will also be an increased need for collaboration tools, requiring associated services, to minimise business disruption,” IDC said.

Unsurprisingly, cloud technology is expected to be an area of great opportunity, according to IDC, with organisations that migrate to the cloud solutions quickly during the lockdown period set to seek to strengthen cloud management and integration with core services. 

“These customers will be seeking to engage with cloud service providers for a longer term more robust cloud strategy when business resumes to relatively normal conditions,” the report stated. 

“Accelerated adoption of the cloud will put pressure on IaaS providers to ensure that they hold the capacity to deliver to the increased market demands. The service providers themselves will lean more towards global solutions such as IaaS and SaaS.”

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According to IDC, early areas of growth will be tied to enabling collaboration, business continuity and risk management. 

In the mid-term, IDC expects the focus to turn to integration and the refinement of urgently deployed working from home solutions, building resiliency and supply chain diversity, and strengthening onshore or offshore delivery models. 

Some recommendations

IDC goes further, recommending some actions that IT service providers can as they work to minimise the potential challenges of the current climate and maximise the potential opportunities that are expected to arise as a result of the current and ongoing disruptions. 

First and foremost, IDC suggests that empathy and support for customers must be the top priority. 

“This is not the time to be tone deaf and be seen as profiteering from COVID-19,” it said.

Next, IDC recommends that IT service providers take a community collaboration approach, suggesting that a successful reboot of the New Zealand economy and getting businesses back on their feet quickly will rely on multi-partisan collaboration to resolve the roadblocks to recovery.

Finally, IDC suggests that risk mitigation should be a top priority for every business.

“Businesses and the ICT ecosystem must be prepared to flex dependent on market fluctuations. Many business’s risk management and contingency planning only covers short-term disruption — COVID-19 has proven that this approach is woefully inadequate,” the report stated.