Economic impact of Covid-19 – consequences of the pandemic (part 1)
Interview with George Brown and Dana Willmer
The pandemic has affected almost every aspect of our life and the economy is no exception to that. The financial impact of Covid-19 is also felt in the software sector. Dana Willmer and George Brown, co-founders of the consulting agency “Partner Economics”, conducted a study about the economic impact of Covid-19 on Microsoft partners. We spoke with them about the current situation and the results of their study. The first part of the interview focuses on:
«We predicted the recession in 2008/2009»
Before we start: could you introduce yourselves to the readers?
Dana: Partner Economics does three things. First, research to really help Microsoft partners and people in the ecosystem improve their financial performance. Second, we also work directly with partners in terms of helping them improve profitability, restructure their businesses, and build a business that is worth more to the shareholders. Third, we work as advisors for people looking to buy or sell their businesses.
George has been involved in the ecosystem for 34 years now and he is the one who is active on the strategic side of things. I am more on the analytical side. I drive the research, the benchmarking, the financial analysis. We have both done a lot of work for Microsoft around cloud business model transition. We are co-authors of the materials and the curriculum that help Microsoft partners transition their business to the cloud.
George: I started in this business with the very first PC-based accounting solution. I then have evolved into a management consultant to both Microsoft and Microsoft’s ecosystem. I do not want to be arrogant about that, but we have had pretty good luck predicting recessions. For example, we predicted the recession in 2008/2009.
The market was very hot, but we could see demand (funnel pressure) falling. Following that, we found that sales contracts were not closing as expected. Those two things combined led us to the conclusion that there would be a recession pretty quick. We were not thinking about the debt bubble bursting in the US, but we knew that there was something happening in the market we had to pay attention to. Everybody thought that I was crazy when I said there would be a big recession.
«About two thirds of the participants in the study reported a decline both in revenue and profitability»
You recently conducted a study on the economic impact of Covid-19. Who exactly did you interview for the study?
Dana: Over 100 individual partners participated in the study and they had a mix of different activities in their business model. A lot of Dynamics Partners have historically participated in this study, and they did this time, too. So, in terms of the business model, many participants really had a concentration in business applications and specifically in ERP.
There were several ISVs (independent software vendors) in the Dynamics space that participated as well. Systems integrators, managed services providers and modern workplace specialists rounded out the sample size. Most of the participants were located either in North America or Europe. It was pretty evenly weighted between both sides of the Atlantic. In terms of the markets that those businesses serve, it was predominantly the SMB space and the core mid-market.
Overall, what was the financial impact of Covid-19 on the companies you interviewed?
Dana: About two thirds of the participants in the study reported a decline both in revenue and profitability. And those declines were in some cases significant: 20 to 30 %. The median was around 15 %. A lot of the participants also saw changes like less cash flow because they just were not closing orders as much as they had before the recession started. Sometimes, that was even to a level that caused them to inject capital back into the business.
And in more detail: how did the pandemic affect different companies and/or sectors?
George: Partners that were very cloud-oriented, people that were already into remote workplaces or cloud workplaces, saw revenue and profitability increases, and they are still seeing that today. We felt a little bit vindicated in that because we have said now for seven or eight years: you have to get to the cloud. The sooner you get to the cloud, the more recession-proof you will be. In a cloud-based environment, you have ongoing subscriptions, services and contracts that keep going regardless of the recession.
In contrast, partners that stayed in the traditional Business Central model saw all the upgrade projects, all the development projects, etc. stopped cold in their tracks. And then, partners in Norway, the UK, US, and Canada that were tied to energy, saw their revenue shrink by as much as 40 %. They had a double problem, a pandemic, and an oil war. In addition, partners that were predominantly in the tourism sector were heavily impacted, because everything stopped.
Dana: In more traditional businesses that had not moved to more of a cloud model, to the degree that there were new projects coming in, there was a lot more focus on the SaaS model. So, subscription revenue for almost all of the players was up significantly. That was good if you had already shifted your business to more of the cloud model. However, it was bad in terms of its impact on profitability and cash flow if you had not already made significant strides in transitioning the business. The more focused on the cloud you were, the better off you were.
Expectations of the study participants regarding the duration of the recession and the strength of their recovery (figure by Dana Willmer and George Brown).
«This is probably a once-in-a-lifetime restructure»
The financial impact of Covid-19 aside: Did the pandemic reinforce or reverse certain trends you did observe before?
George: Yes, it reinforced the trend towards a remote workplace. And you can still see that today. The pandemic is not over and there is still more and more demand for a remote workplace. If you think about the number of Dynamics customers that are on Great Plains – that product is very difficult to use remotely. You still have to use a terminal server for it. That has put pressure on that particular part of the Dynamics ecosystem to move to Business Central as well.
Dana: A little bit further on that, the move towards Business Central, the full SaaS version, the vast majority of new projects are in that form. So, it is getting next to impossible, I would say, to sell a traditional on-prem perpetual license solution these days. From a customer point of view, the move to the cloud, that is where the demand is. There is very, very little demand left for the traditional solutions.
George: The only place there is an anomaly there, is in manufacturing. Manufacturers will be five to seven years behind the rest of the world in cloud adoption. The more heavily manufacturing focused a customer is, the more reticence about moving they have. It is like in the old days with retail. Nobody in retail wanted to be online, in the cloud, because they were worried about not being able to run their business if the connection went down. Now, retail is almost all in the cloud. Manufacturing will be the next group to move.
Is there a difference between the US and Canada versus Europe in terms of the demand for the cloud?
George: You cannot say Europe. Scandinavia is ahead of North America in cloud adoption whereas Germany is behind the US and Canada. France is about the same place as the US and Canada and the Benelux countries are a little bit ahead of North America. It is an American thing to always compare Europe to North America, but you actually cannot compare them. In Europe, you have a collection of unique countries operating as a financial whole, but their cultures drive their cloud adoption.
I would say that Germany is more conservative and therefore further behind in cloud adoption and digital infrastructure relative to the Nordics. And North America is behind the Nordics as well. Denmark and Sweden are the two most digitalized countries in the world. They do everything online. It is very different than where we are here.
Besides the cloud and remote workplace: are there any other trends that the pandemic did reinforce?
George: Going into the future, retail will change forever. We are probably never going back to as many retail shops. And commercial real estate has changed forever. I would not want to be in the business of owning commercial office buildings or retail malls.
The pandemic forced everybody to buy online that has never bought online. Once people are forced to shop online, they realize: “Wait a second, I can order that online and have it tomorrow for free. I don’t have to pay for shipping, and I won’t spend ten dollars in fuel to go buy it”. So, the pandemic has forced a change on society that will be very hard to reverse because it involves a convenience, a comfort that you cannot get around.
Dana: This is probably a once-in-a-lifetime restructure. Recessions typically cause businesses to restructure. In a way, the function of a recession is to eliminate businesses that are not effective. However, there are so many other long-term forces at play right now, and the technology is at a very different place. So, to George’s point, I think, there is a far more fundamental restructuring in place now. Some industries, like the ones George has mentioned, will just never be the same. It will not be back to usual, there will be some very distinct differences when the recovery finally starts to happen.
«We will have a two to five year run to get back to 2019 levels»
How optimistic or pessimistic are the companies you surveyed regarding the recession and the financial impact of Covid-19 on the chances of their business to survive?
George: We are dealing with sceptics at the partner level. The bulk of the people who founded the ecosystem are accountants or IT people by background. They do not see things through rose-colored glasses. The cup is half empty, not half full. Statistically, probably 70 % were pessimistic and 30 % were optimistic, both in survivability and how long the recession will last. Everybody thinks that we will not come out of this until 2022, 2023.
If you drive around North America and you go to a car lot today, it maybe has 25 % of the amount of cars it used to have because of the supply chain disruptions. You cannot physically get the parts to make the cars. I was looking to buy a Porsche from Germany. Well, you cannot get one right now. The lead time to get a Porsche out of Germany used to be eight or ten weeks. Now we are talking six or eight months. So, you are seeing a supply side problem as well as a demand side problem.
I think that we will have a pick-up in demand and money to modernize the digital transformation, but we will have a two to five year run to get back to 2019 levels. The partners generally think it is two years or more to get back to where we were. And some think they will never get back to 2019 levels.
What is your opinion?
George: I am more pessimistic than that. Usually, a recession is demand-side only. Our economies in EMEA and North America are predominantly driven by consumer demand. If consumer demand pulls out, you get a recession. Now, in addition to the consumer pulling out, even when they want to buy something, they cannot. It is not available. That will prolong the recession.
If we think about home improvement or baking and cooking, those markets are booming. You cannot buy a new pot set, though, because the supply has dried out. In addition, the service part of our economy, which is a third of our economy, has been negatively impacted very hard. And once a restaurant goes bankrupt, a bank does not want to lend money to the next person who wants to open up a restaurant there. So, you got this ongoing problem, where a third of our marketplace will be impaired for a long period.
Dana: I am in the pessimistic camp, too. There are industries who probably will not come back to anything close to what they were in 2019. And it will take longer for those who will eventually come back to get to the levels they were experiencing before the recession.
Based on other economic forecasts, we are seeing that the consumer is more likely to save then spend because the pandemic has caused people to be really uncertain about the future. So, consumers do not come back to the same degree that they would have in other recessions. It will take a while for manufacturing to come back as well. We have seen the downside of our reliance on global supply chains. So there certainly is a desire for a reshoring, but it will take a while to rebuild and it will require investments.
How exactly would you assess the current recession?
George: It will get worse. Right now, governments are still giving money away. That has to stop. You cannot print money forever because if you do, you will create inflation. If you create inflation, you have to raise interest rates to control it. If you raise interest rates, you increase bankruptcies. So, I think it is going to get worse before it is better. It has to. You cannot keep printing money. Look what happened to Greece. Same with Italy when they came into the European Union: The Lira was not worth anything.
Dana: I totally agree with that.
Stay tuned to learn more about the economic impact of Covid-19. In the second part of the interview, we will talk about winners and losers of the crisis, discuss the long-term consequences of the pandemic, and have a look at the recovery. Moreover, Dana and George tell us what they recommend companies in these challenging times.
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Bella Diekmann works for the editorial office of agiles. She studied Spanish and French and has a PhD in linguistics. Besides her passion for languages, she is very interested in current IT topics. Blogging for agiles allows her to combine her love of writing with her interest in computer science and informatics.