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IT Services: Who Will Win When Demand Bounces Back?

This article was first published on June 23 .

Editor's note: Oliver Wyman is monitoring the COVID events in real time and we have compiled resources to help our clients and the industries they serve. Please continue to monitor the Oliver Wyman Coronavirus hub for updates.

What Is Next For IT Services?

The pandemic continues to affect business across industries. IT service providers are facing a demand shock, with CTO’s and CIO’s priorities shifting to damage control and external spend being cut. The recovery will be faster than for previous big crises but we will see increased market bi-modality. The rebound will be fastest for players with a diversified client industry coverage and portfolio strengths in digital and cloud offerings. We show what both IT services provider and CIOs should be considering now to set course for the future.

An Industry Affected By An Unprecendented Demand Shock

In the IT services industry, the spread of COVID-19 and related containment measures have stifled global demand. Gartner predicts a reduction of up to €120 billion (10%) in 2020 global revenues, with leading players revising target guidance across service segments.

Client decision makers have focused on enabling operational continuity by implementing remote working tools and enforcing cyber security rules for the new work-from-home paradigm. Revenue gaps have resulted in increased cost pressure and a freeze on external spend, delaying or interrupting non-critical IT transformation efforts across industries.

Consequentially, IT services spend has taken a major hit. Within this downturn, our analysis shows client scope to be a major factor. IT services providers serving industries less affected by the pandemic (e.g., telecommunication, pharma) are more resilient, while exposure to discretionary spend in more critically affected segments (e.g., travel and leisure, automotive) creates a larger challenge.

Markets have reacted promptly to the change in demand, eliminating one third of market capitalization for Europe’s top 20 IT services providers in the first quarter of 2020, implying a higher risk exposure than broader technology indices. And while traders have been more optimistic lately, IT services have a long way to go to catch up with pre-pandemic levels.


Exhibit 1. IT service providers market capitalization, NASDAQ price index

Percent vs. January 2nd, 2020

Source: S&P Capital IQ, Oliver Wyman analysis

Despite this, the industry has proved to be resilient in the past. After the Dot-com bubble burst in the early 2000s growth was back to normal after around two years, and the financial crisis of 2008 left a textbook V-shaped dent in demand that recovered after just 12 months.

An Expected V-Shaped Demand Curve With Increased Market Bi-Modality

Based on our models, the COVID-19 fallout will turbocharge the evolution of IT services. In fact, chances are turnaround will happen even faster this time. IT services have seen a remarkable shift in demand in the last few years, with an ever-increasing share of digital, cloud, and cyber security offerings overegacy infrastructure and application services.


Exhibit 2. IT services market evolution

Percent of total market

Source: Oliver Wyman analysis

Digital capabilities will be in high demand coming out of the pandemic. Retailers’ online channels are experiencing unprecedented demand, the proliferation of remote working highlights the need for cyber security tools, and cloud services are enabling new ways of off-site collaboration. IT service providers can be at the heart of this transformation.


Exhibit 3. Transition from legacy to digital driven by revenue uptake of seven offerings

1. Expected impact vs market forecasts

Source: Gartner, OW analysis

Setting Course For The Future

While the segment outlook is positive, individual players in the industry need to act now to sharpen their portfolio and set course for a brighter future.

Exhibit 4. Strategies for winning in IT services post COVID-19

Source: Oliver Wyman analysis

Now Is The Time To Act

IT service providers may find that the external demand shock caused by COVID-19 will soon give way to an unprecedented push for digitalization of client interfaces and industry processes arising from the current crisis. And yet, unlocking this opportunity will require a targeted, nimble strategy. We suggest focusing on six activities going forward:

 

IT Services: Who Will Win When Demand Bounces Back?


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