June 17, 2020

Enterprise Technology - Partners Lack Confidence in Q3 Pipelines

CSCO, CTXS, DELL, HPE, MSFT, PANW, VMW
By Nancy Piccin
Enterprise technology spending constraints are expected to persist at least through 3Q20, following a muted 2Q20, as many customers remain cash strapped and uncertain about budgets through year-end.
  • 2Q20 spending hurt by weakness in automotive, tourism, hospitality in mid-market, enterprise sectors; public-sector demand high, especially education; healthcare demand uneven
  • Confidence in 3Q20 pipelines weak for most sources, though European partners more optimistic than North American partners; forecasts dependent on ability to leverage financing options, revive stalled deals
  • Remote access, cloud, security, endpoint remain key budget priorities benefiting especially MSFT, CSCO; storage, switches, routing, enterprise software spending scaled back in favor of other priorities
  • Area to Watch: Some partners anticipate second wave of spending to support more permanent telework infrastructure

IT Spending Remains Muted During 2Q20
Enterprise technology channel partners in North America and Europe said business conditions remain difficult in many sectors because of pandemic-related shutdowns, similar to commentary in OTR Global’s May 11 note. The exceptions were public sector spending, especially in Europe, and education. A North American partner said, “It’s not getting better. COVID has an impact, and it’s hurting. It’s impossible to develop new customers and projects. We are generating 20% fewer quotes than normal in a given quarter, so we are assuming it will translate into less business.”

Another said, “It’s muted as people are coming back to work and some have put off spending, depending on what they are seeing. The lockdown cost these companies money, and some companies lost focus and have to reassess their technology needs.”

Enterprise, Mid-Market Cautious; Public Sector Spending More

2Q20 IT Spending YY for SMB, Mid-Market, Enterprise, Public Sector
(number of mentions)
 SMBMid-MarketEnterprisePublic Sector
Up1334
Flat-121
Down2551
Not applicable10437

IT spending patterns varied among SMB, mid-market, enterprise and public sector customers. Partners said public sector customers were most likely to spend more on IT yy during 2Q20, while most mid-market and enterprise customers were spending the same or less yy.

A German partner said, “It’s totally mixed. The pharmaceutical and public sector and finance are running well, while the automotive and tourism sectors are absolutely down.” Another said, “The gastronomy and tourism sector is absolutely down, and IT budgets are very significantly cut, for some customers even to zero. The public sector is increasing strongly as they get much money from the government.”

A North American partner said, “There is a light at the end of tunnel in retail and manufacturing. They are still trying to figure out how to reopen.”

Confidence Weak on 3Q20 Pipelines
Partners’ confidence in their 3Q20 pipelines, and in 2H20 in general, depended on several factors, including vertical market exposure. In the May note, partners did not anticipate an increase in business activity until at least 3Q20 or 4Q20, and although some are reporting or anticipating improvements, more remain uncertain. One U.S. partner said, “We feel like it’s impossible to forecast 3Q or 4Q. Will there be a second wave and will all hell let loose? Future pipeline development is where we are most concerned. You can’t develop a new customer through Zoom meetings and everyone is distracted and it’s challenging to say I’m a new sales person and I want to talk to you.”

A French partner said, “Some companies are in wait-and-see mode, as we won’t have visibility until September on government support, tax incentives and potential bankruptcies.” A partner in the United Kingdom had similar concerns. “I wouldn’t even want to guess. Everyone’s working from home, and I’ve still got about three-quarters of my customers with staff in furloughs. This month has been more positive than last month, but it’s still all renewals, nothing new.”

A German partner said public sector spending and pent-up demand contributed to a strong pipeline, consistent with findings in May when German partners were more optimistic than other European sources. “Our pipeline looks OK at the moment. Our colleagues in the U.K. could win a gigantic deal for schools and the according infrastructure. Then in France, everything was closed for four weeks, and we couldn’t deliver products because there was nobody to receive the stuff. Now business in France significantly is gaining momentum.”

A U.S. partner said his company is benefiting from financial programs offered by technology distributors. “VARs should be leveraging their ‘distie’ partners. And I’m going to position ways I get paid up front -- like leases. I’m not holding those notes. In terms of financing, Cisco [Systems Inc.] is the best and that’s something I never thought I’d say.”

Technology Supporting Remote Work Remains Priority

Categories of Tech Spending Becoming a Bigger Priority
number of mentions)
Access (work from home, VDI, VPN, etc.)8
Security7
Endpoints (notebooks, workstations)5
Cloud3
Networking3
Storage2
Other3

As in other recent OTR Global findings, partners said many customers are making the transition to remote work permanent for a significant number of employees and deepening their investments in technologies to support that change. Virtual private networks, virtual desktop infrastructure, collaboration, security and endpoints all remain priorities, and a few partners said cloud computing, networking and storage also are important to those efforts. “End-user security is hot. Ransomware is exploding, because of all the new end points,” a U.S. partner said. Another said, “For us, the drag right now is all things remote.”

Another North American partner said, “I think there was an initial wave of reactive buying as they realized everyone had to work from home, but all that is done now. I think there will be a next wave of that as people say this [work from home] is the new normal, but not until the fall. They are looking at the long-term reality and that will be about, ‘What else do I have to do to make that [work from home] more secure, a better experience?’  Cloud adoption is part of that, so we see an increase in those discussions.”  

Remote Desktops, Remote Access Gain

Vendors Benefiting From New Tech Spending Priorities
(number of mentions)
Microsoft Corp.5
Cisco Systems Inc.4
Dell Technologies Inc.3
Hewlett-Packard Enterprise Co.3
Pulse Secure LLC2
Other8

Partners said Microsoft Corp. was benefiting from the spending priority shift because of increased interest in Windows Virtual Desktop, Azure, Microsoft 365 and other products. “I’m all in on Microsoft, and I never, ever thought I would say that,” said a U.S. partner who is replacing Citrix Systems Inc. products with Microsoft products. Another said, “We are a strong Dell [Technologies Inc.] shop, and our business for Dell workstations and laptops is way up. [VMware Inc.’s] Carbon Black will let you go with a 50 count versus Palo Alto [Networks Inc.]’s Cortex, which requires 100.” Two partners mentioned Pulse Secure LLC, a private company that provides remote access products.

Savings, Productivity Gains from Telework
While some customers prior to the pandemic had been opposed to letting workers telecommute, now most acknowledge cost savings as well as productivity gains from the change. “The estimate I’ve seen is, every employee that works from home half the year means $11,000 in savings for their company. So if you have 10,000 employees, that’s $110 million. And for the employee, it’s up to $4,000 savings per year because of less eating out, gas, etc.,” he said. 

A U.K. partner said, “Our mid-market customers are also looking at reducing floor space.  They are also transitioning more and more to the cloud. With lots of their services they’ve realized that they can be more flexible in cloud -- for example, spinning up remote workers very quickly. One client has just issued a tender for centralized call processing in the cloud.”

On-Premise Infrastructure Lower Priority
Partners said the increase in remote work priorities has made many customers defer or rethink traditional data center projects. A German partner said, “Especially large data center projects were set on hold because home office requirements and security currently have a higher priority. Cisco is performing relatively well because they are broadly positioned with security, cloud, etc. -- not winning or losing but at least shipping safely through these troubled waters.”

A large U.S. VAR said storage, switches, routing and enterprise software all took a back seat as companies reset their priorities. “The kinds of things that one would see in IT spending are being cancelled or delayed. I don’t think it’s the cloud. Storage capacity purchases are to handle growth in the on-prem environment, and I am not seeing a demand for additional capacity,” he said.

A U.S. partner said, “Normally their stuff is getting old and we’d refresh at five years, but because of what is happening things will hold on for one more year.”

Additional Quotes
North America

“Like other companies, our revenues have definitely dipped, and we had to furlough people. However, things are actually not as dire as they were a couple months ago. So right now, we’re trending toward the numbers we had for last year, which isn’t bad at all.”

“All my customers are in some degree of cash-preservation mode. They are trying to accumulate cash and are reviewing major capital expenditures, and some are canceling major capital projects.”

“We saw an uptick in virtual [desktops] and some VoIP to work from home, but big product purchases are being delayed. I can’t tell when, and everyone is reassessing budgets.”

“Organizations that are going to spend on projects for 2021 are seeing the disruption in supply chains, forcing them to spend earlier than they would like.”

“Oil and gas hit bottom fast. They have zero spend because they have no business coming in. That is starting to change a little.”

“We’ve got leads coming left and right, but if you qualify your leads the same way as before, you’re going to go out of business. You have to peel the onion back and do one more layer.”

“I have some large manufacturing accounts that closed completely for the first time in their history. That has passed and they are all back to work again. They aren’t rushing back to spend yet. There are some that shut down systems and they are having to redo their systems [and processes] to adjust to the new norm. In terms of big IT spend, I think it will be closer to Q4 where you see anything.” 

“In New York, they put away money for each school district to spend on technology and wireless and wiring and other tech, and that may come still, but they may reallocate it to create social distancing. The tech portion of it, schools have been buying up, but next year it might be more like desktops and whoever comes with the best solution to keep people safe will be making money. Also, the cameras to be able to check for temperatures and monitor people in the building.”

“I’ve noticed Cisco has a two- to four-month lead time now for their VoIP phone systems. That’s a new dimension.”

“Artificial intelligence around contact tracing and social distancing is red hot. We are doing a webinar next week and it is sold out. A.I. will help schools figure out how they can help with social distancing and contact tracing, and be important as we get to the back to school.”

Europe
“French customers invested in clouds, remote access, mobility management and are now considering how to reinforce those domains. But some sectors were more affected by the crisis -- transport, tourism, airplanes -- and those are planning to cut their investment by about 30% for 2H20.”

“I expect a significant slump after August. But I expected that for June and July and it turned out to be quite the contrary, eventually. So nobody knows what will happen, but with our 1H20 numbers it looks like we will have a good year.”

“Some customers in the automotive industry stopped everything.”

“Some are saying they are all geared up for reducing their office space, but I have another customer where the owner of the company wants people back in the office.”

“In the warehousing and logistics sector, on the back of stockpiling and distribution of PPE they are also now in their annual planning cycles and thinking about Black Friday and Cyber Monday. It will be interesting to see how much more traditional brick-and-mortar companies who don’t go out of business move to online retail business. So we expect to see an increase.”

“At the moment we are seeing more of a ramping up. We tend to supply more SME businesses who are all doing more remote working.”