Enterprise software industry relatively resilient to the crisis

Historically, the enterprise software industry has proved relatively resilient to macroeconomic shocks and cycles, and this is also expected to be the case during the current Covid-19 crisis, explain UK-based Strategy& partners Barry Jaber and Andy Wisnia.

Before the Covid-19 pandemic broke out, consensus forecasts were for the global software market to grow between 6% to 9% in 2020. Now, with the fallout of demand across sectors, revised forecasts point towards growth being in the range of 0% to -7%, with the range reflecting a high degree of uncertainty in future demand due to the nature of the Covid-19 pandemic.

While this is a sizeable deterioration, it would still represent a relatively strong performance in an economic recession. So why is the industry so durable? There are a number of factors that underpin resilience in the enterprise software industry. 

First, Covid-19 is accelerating adoption in certain market segments, for example the increased demand for virtual collaboration tools and the growth in e-commerce since the lockdown began. The lockdowns and work from home guidelines have resulted in a surge for remote working tools, and the need for IT infrastructure and services to facilitate the shift.

“A relatively quick recovery is expected and current trends are likely to accelerate.”
_{– Barry Jaber and Andy Wisnia, Partners at Strategy&}

The majority of market spend is derived from medium-sized and large companies that are generally in a better position to withstand an economic downturn than small businesses. In addition, many applications provided by the enterprise software industry are critical to business operations, and are therefore less likely to be targeted in cost reduction measures.

Then come a number of financial factors. The important fourth quarter was closed before the Covid-19 outbreak, meaning that many (multi-year) contracts have been signed. Software licencing can typically include a recurring payment or may be entirely recurring, providing for more confidence in future revenues.

Furthermore, software vendor revenue models often have a significant upfront component and are generally very cash generative, which provides liquidity.

From an operational perspective, software companies have been able to adjust more easily to lockdown settings due to limited reliance on physical supply chains and given employees are often already accustomed to remote working. 

An uneven playing field

However, as in any other industry, some players will naturally be more resilient than others. Vendors with a higher dependency on one-off licence sales (and a lower component of recurring revenue), or applications that are exposed to the most challenged industry verticals, may fare less well through this crisis. 

Earlier stage, high growth and cash poor companies may face liquidity challenges. Uncertain growth prospects cast doubt on valuations, hindering their ability to raise new investments. Depending on the pandemic's duration, this could impact the number of start-ups that successfully scale in the coming years.

Barry Jaber is a Partner and the Global Technology Industry Leader of Strategy&. Andy Wisnia is a Partner at Strategy&, the strategy consulting business of PwC, formerly known as Booz & Company.