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Cloud strategy separated IT industry winners and losers in 2020

Covid-19 accelerated enterprise IT's move into the cloud. Vendors who had invested in their cloud offerings reaped the rewards.

IT spending surged in early 2020 as businesses adjusted to life in the era of Covid-19. Despite this, many enterprise IT vendors struggled this year, including some of the industry’s biggest names. In many cases, it was the effectiveness of their cloud strategy that separated the winners from the losers in the past 12 months.

According to analysis from KPMG and Harvey Nash, an extra $15bn a week was invested in new systems and software packages during the first three months of the year to help support the widespread shift to remote working.

tech winners and losers 2020
Financial rewards of accelerated digitisation were not shared equally among vendors – most IT services providers, for example, saw revenue decline. (Photo by Rafapress/Shutterstock)

“The hyper-digital imperative of Covid-19 has put the spotlight on the enterprise technology and services sector,” according to analysts at research provider GlobalData, writing in a report on the cross-sector impact of Covid-19 earlier this year. “The response of the industry has been swift and largely effective.”

Wendy Xiao Schadeck, principal in the New York office at tech VC fund Northzone, agrees that it has been a broadly positive year for the enterprise IT sector. “People have been more open to adopting more tech and more transformational systems,” she says. “We’ve seen a lot of acceleration in the DevOps enterprise layer and the big data […] enterprise layer because this feels like a good time to be able to make big changes.”

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However, the financial rewards of this accelerated digitisation were not shared equally among vendors. Most IT services providers, for example, saw their revenue decline.

IT services providers: cloud investments pay off

IBM, the world’s largest IT services provider and a bellwether for the enterprise IT sector, saw revenue shrink throughout the pandemic. The company reported revenue drops of 3.4%, 5.4%, and 2.6% in its three financial quarters of the year.

Sreeram Visvanathan, IBM CEO for UK and Ireland, admits it has been a “challenging year” for the company. But the acceleration in digital transformation prompted by the pandemic is a significant opportunity, he adds. “People had been doing digitalisation incrementally, but now they are starting to look at how they reimagine entire processes. That is happening right now.”

Accenture, the second-largest company in the industry, has fared rather better: its revenue dropped 1% and 2% in the preceding quarters, but last week it reported a 4% year-on-year increase for the three months ending in November, up to $11.8bn.

CEO Julie Sweet attributed the company’s resilience in part to its cloud focus, which was increased in October with the launch of a new $3bn business unit, Cloud First, which will comprise 70,000 staff. “2020 has created a new inflection point that requires every company to dramatically accelerate the move to the cloud,” she says.

Tata Consultancy Services, India’s largest IT services provider, was hit especially hard by the pandemic. Its revenue for April to June 2020 fell 7.8% compared to the previous year. The company was initially hampered by India’s severe two-month lockdown in April and May, which saw all economic activity bar essential services put on hold. In the subsequent quarter, however, the revenue drop was limited to just 1.7% and the company now hopes to come close to last year’s performance for the full year.

TCS’s troubles were not shared by all Indian IT services providers. Bangalore-headquartered Infosys reported a year-on-year revenue decline of 0.3% for the quarter ending in June, and growth of 3.2% in the following three months.

Echoing Accenture’s comments, Infosys CEO Salil Parekh attributed this performance to investments made three years ago, in areas including cloud computing. “All the investments made two to three years ago [in] cloud, cybersecurity allow us to be more and more relevant for our clients,” he said.

SAP and Oracle: ERP ‘Hunger Games’ await

SAP and Oracle have dominated the market for enterprise software for decades. And they avoided the steep drops in revenue endured by some IT services providers. But, according to GlobalData’s analysis, both companies are in danger of suffering long-term negative impact from the pandemic as the number of major IT projects tails off.

In October, SAP was forced to downgrade its forecast for the year, citing a dwindling number of digital transformation schemes. It is still on course to make more than €8bn in profit this year but its heavy reliance on income from on-premises software, rather than cloud, meant it was not well-placed to benefit from the overarching trends of 2020.

Furthermore, the shift to cloud may not benefit the traditional ERP software vendors as much as they might hope. Instead, says Paul Saunders, senior research director at Gartner, the shift to cloud could ultimately end up favouring cloud hyperscalers such as Amazon, Google and Microsoft.

“SAP has been pushing a lot of its customers to the cloud without thinking about what that actually means,” he says. “They are happy for people to be hosted in the public cloud on AWS or Azure, but if you move your ERP system to the cloud and don’t make any big changes [to your organisation], you will probably just feel you’ve spent a lot of time and money and the end result is no different.”

Saunders says that allowing customers to build these relationships with third-parties could see the client go directly to their cloud provider next time they want to add a new digital service, such as an API or IoT application, leaving the likes of SAP and Oracle out of the loop.

“It’s going to be very interesting over next 12–24 months to see this all come to a head,” he says. “It’s a bit like the scene in The Hunger Games where they’re all on the podiums waiting for the starting gun, and everybody’s looking at each other deciding who they want to make alliances with and who they want to kill. At the moment they kind of like each other, but at some point it’s going to kick off.”

Salesforce: cloud native among the year’s biggest winners

One of the biggest winners in enterprise IT this year has been cloud software provider Salesforce. Revenue grew 29% and 20% respectively in the last two quarters, as businesses snapped up its offerings, and in the three months to the end of November Salesforce brought in $5.42bn, beating market expectations. Investors have taken notice: the company’s share price has risen 49% in the year, compared to an average of 13% for the S&P 500.

The share price took a knock, however, after Salesforce announced plans to acquire enterprise messaging service Slack for $27bn last month. This may suggest investors see the Slack acquisition as insufficient protection against Microsoft’s encroachment in the Salesforce’s core CRM market.

But Salesforce CEO Marc Benioff is characteristically confident. “We feel very good about our ability to succeed,” he said, when announcing the latest financial results.

Covid-19 accelerated the move of enterprise IT into the cloud. This creates new opportunities for vendors that help companies manage and integrate the cloud services they use, says Northzone’s Xiao Schadeck. “We’re looking [to invest] in things that help organisations be more nimble and save money when it comes to their cloud infrastructure and cloud dependency,” she says.

These providers could well be the winners of 2021.

Matthew Gooding

News editor

Matthew Gooding is news editor for Tech Monitor.