William Osler called Pneumonia “The Old Man’s Friend” in the ninth edition of his 1921 Medical text. “.. . one may say that to die of pneumonia is almost the natural end of old people." Just like Pneumonia, COVID-19 kills more people in poor health or with pre-existing conditions. COVID-19’s pandemic is proving to be the "weak business' friend".
COVID-19 is especially friendly to businesses that have:
Small capital resources, (e.g. Small Businesses)
Highest fixed costs, (e.g. Retail and Real Estate)
Revenue Interruption lasting far longer than their cash reserves (e.g. hospitality, tourism, theaters)
Here is some detail from a recent McKinsey piece that details exactly how COVID-19 is directly affecting employment by sector:
Stronger enterprises in the industries listed below are not investing at their pre-2020 pace in revenue, people, or market share:
Energy companies (petroleum)
Transportation (airlines)
Financial
Does this make COVID-19 the weak business' friend? Starting from the industrial sector level we’ll show here how even Enterprise IT operations will be reduced – really soon now!
Even the mightiest companies of any time don’t last forever on the Dow Jones Industrial Average.
Companies aren’t successful at very high rates – with the “Great Recession” in the middle of the data the success rate for an exit on venture funded companies is only 4%. Likely in post COVID-19 this will be even lower.
This is not just a U.S. issue, the rate of investment is slowing globally.
A recent CFO survey by PWC highlights the preference for budget cutting inside of companies:
Enterprises’ investment rate, venture funded, and startup formation are decreasing in relation to COVID-19 deaths domestically.
Source: OECD Updated, July 15, 2020)
State by state Gross Domestic Product has dropped, crushing many businesses.
Those drops in GDP are pushing companies to consider tough choices.
Just as COVID-19 is driving drops in investment and GDP, these Enterprise IT macro trends are applying pressures that are a shock to IT management. It's motivating change in practices and project priorities:
1) Move from capital/expense model to cloud-based expensed cost
2) Move from labor intensive development to activity based costing for each transaction
3) Move from “immune from cuts” to "Variable expenditures that can be reduced proportionately to reductions in demand”
4) Move from “analytics and AI projects are strategic” to “cut enough investments to keep operating”
COVID-19 and GDP drops will force budget cuts even more in the budget for 2021 and NOW! IT spend has been historically been immune to cuts because it was justified by: Innovation, strategic IT investments, and gradual continuous improvement. Now cuts are to MAKE THE BUDGET FIT THE AVAILABLE CASH! Smaller tech companies financed by venture will also suffer greatly. In larger enterprises, new projects and cash revenue vanish for the smaller tech vendors. Enterprise IT needs to reduce its risks and costs. Enterprise IT will avoid new solutions, even freemium or open source, especially for those that have risks or that cannot produce immediate payback.
Therefore, if you're a mid-market CIO:
Identify and prioritize critical people to protect
Identify functions that use the megatrends to your advantage (e.g. Cloud Compute vs. data centers) to cut costs
Measure costs — Use TCO to manage costs
To use William Osler's reference from 100 years ago - Covid19 has become the weak business' friend to enterprises and venture companies. It is going to drive companies to eliminate costs to prevent company failure.
If you'd like an in-depth discussion with one of our senior analysts - please call or text us 605-389-5171.
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