Morningstar - Q1 2022 - 66

Investors
Big Spend
Digital transformation is driving
software demand.
SECTOR RAP
Laura Lallos
Lavish corporate IT spending has meant
lucrative opportunities for software companies
for the past several years. The next several
years are just as promising, but the drivers have
shifted, as Morningstar senior equity analyst Dan
Romanoff explains in a recent Technology
Observer.1
A secular shift to cloud computing and
software as a service, or SaaS, is well in
place. The pandemic kickstarted demand for
remote working software in 2020. Now,
companies are directing software spending
to facilitate a digital transformation of the way
they do business.
The software industry as a whole will benefit from
digital transformation-but some companies
are already established leaders in the field. I spoke
with Romanoff on the opportunities ahead;
our discussion reflects conditions as of Dec. 31.
Laura Lallos: " Digital transformation " is a complicated
concept, as you note in your white paper. Is there
a quick and easy definition we can use to ground the
discussion?
Dan Romanoff is a senior equity
analyst with Morningstar Research
Services LLC.
touches many areas of the organization
and has a significant human impact on
a company's employees.
Lallos: Can you give an example of software that isn't
really part of a digital transformation?
Romanoff: At the most basic level, an operating
system kind of software is probably not part of
what we're talking about here. Microsoft Windows,
of course, is very advanced software, and
I'm sure that Microsoft MSFT would argue that it
is part of this digital transformation. But
there are baseline operating systems that are
not-maybe the software that is embedded in
your garage door opener.
Lallos: So, this is a pervasive concept.
Romanoff: Yeah, it'd be hard to avoid digital
transformation when you talk about
anything within software today. Almost every
conversation I've had with CEOs and CIOs
in the past year involves a digital transformation
makeover and strategy by their customers. It's
fair on one level. But it perhaps is too broad-based
on another.
Romanoff: Our working definition of digital
transformation is using software to
modernize a business process in a way that
Lallos: In 2020, the pandemic prompted a shift
in software spending priorities to facilitate
working from home. This year, there's been another
shift of focus, to digital transformation. Can you
set the backdrop here?
Romanoff: When we suddenly went into a
lockdown mode in March and April of 2020, with
people around the globe working from home
en masse, some companies just weren't prepared.
Their IT infrastructure was not ready to handle
that sort of workload and they were scrambling to
make remote work possible. That sometimes
meant quickly getting Zoom ZM for thousands of
workers, or RingCentral RNG, and Microsoft
Office 365, which is the cloud version of Office,
because IT personnel couldn't update everyone's
desktop for the new apps. These were tactical
decisions that were being made to address
the immediate problem. I don't want to say these
decisions were rash, but they weren't always
the best long-term ideas.
Fast-forward to today, and CIOs, CEOs, CTOs, even
the workers themselves, have all learned a lot
about how to work remotely. Spending priorities
have changed now. Some of those urgent
decisions are being rethought. Companies are
making more permanent, strategic decisions that
fit more holistically into the organization.
Organizations also want to do more with less.
Companies are now looking at their entire
communications infrastructure. At Morningstar, for
example, we had Zoom but also phones on our
desks, and we were using Microsoft Office,
which, of course, has Teams in it. In recent months,
we have made a more strategic long-term
decision to lose the phones on our desks and go
with Teams as a phone system.
Now that things are a little bit more normal,
companies are saying, OK, we survived that, and
we saw what happened when our systems
were stressed. Now, what else do we need to do
to make sure that we can interact with
our customers in the way our customers want
to interact with us? There were all these
new e-commerce initiatives during the pandemic:
buy online to pick up in store; curbside
pickup; every restaurant allowing Internet orders.
These kinds of e-commerce-related software
implementations are being made permanent now.
Even companies not involved in stuff like that
are making similar decisions in order to
interact better with customers. For example, now
you can text customer service or call
them or have a chat online with them. Soon,
you'll be able to have a video call with
1 Romanoff, D. & Colello, B. 2021. " Doing More With Less: Digital Transformation Remains a Lucrative Opportunity in Software. " Morningstar Technology Observer. October.
66
Morningstar Q1 2022

https://www.morningstar.com/authors/44/laura-lallos https://www.morningstar.com/stocks/xnas/msft/quote

Morningstar - Q1 2022

Table of Contents for the Digital Edition of Morningstar - Q1 2022