We recently talked with TCS about its ERP on Cloud offering. The SAP ecosystem has been going through intense change, with the planned end of SAP ECC support from December 31, 2027, and transformation with S/4HANA and recent Clean Core SAP initiatives. The change is driving accelerated ERP adoption, as demonstrated by SAP’s increasing revenue growth driven by SaaS applications. To accommodate this increased pace of change, TCS recently amended its ERP on Cloud offering.

TCS has positioned ERP on Cloud at the intersection of SAP cloud infrastructure and application services with bundled services. The offering is firmly focused on the cloud infrastructure with, for instance, migration of SAP ECC to the cloud targeting hosting modernization. ERP on Cloud also comprises the provisioning of development and test environments, as well as monitoring. It also bridges with application services and S/4HANA systems integration/transformation services. While the focus is on SAP opportunities, TCS also offers related services for other ERP and custom application production environments.

TCS’ ERP on Cloud offering is part of TCS’ Products and Platforms. While TCS’ IP investment is known for its software product portfolio, it also hosts offerings such as ERP on Cloud, i.e., bundled application and cloud infrastructure services, targeting large enterprises and the mid-market.

TCS’ immediate priority for ERP on Cloud is to scale the offering. The growth opportunity is significant, fueled by the end of ECC support and the S/4HANA transformation. The growth is also necessary to help TCS continue bringing automation across its various ERP on Cloud offerings and lowering costs.

Four Specialized Offerings

TCS’s flagship offering is around SAP migration to the cloud. With this offering, the company offers a lift-and-shift migration. The offering is technical, targeting the migration of databases and OS. Common client scenarios for this offering include organizations facing middleware that is no longer supported by their respective ISVs. The company highlights the IP’s scalability and that it can accommodate any middleware. TCS provides the necessary middleware refresh, minimizing client investment while benefiting from cloud hosting and hyperscaler innovation.

TCS started its ERP on Cloud journey with environment provisioning, whether for SAP PoCs, development and testing, specific usages such as document archival, or even large production environments. TCS has worked on accelerating instances deployment on the cloud and has pre-installed cloud templates to provision SAP Basis. With the rise of FinOps, TCS promotes a right-sizing approach to control spending while reaping the benefits of public cloud.

Complementing its lift-and-shift migration to the cloud offering, TCS offers greenfield S/4HANA transformation. The company provides pre-configured templates with ~120 standard processes to accelerate the deployment. Most processes support back-office functions (e.g., order to cash, procure to pay). They also address several industry-specific templates for processes in discrete manufacturing sectors (e.g., plan to produce, quality management, maintenance management). TCS has also localized these templates for several countries, including U.S., U.K., India, UAE, China, and Indonesia. TCS estimates that this offering helps to reduce implementation, targeting 16 weeks of deployment time. For this offering, TCS is an SAP-Qualified Partner-Packaged Solutions, targeting the mid-market with its pre-configured templates.

TCS also provides SAP environment monitoring and management. The company has its TCS Enterprise Manager IP for multi-cloud application and cloud infrastructure monitoring, also integrating with ITSM tools (e.g., ServiceNow). TCS is investing significantly in automation with AI, deploying SAP updates automatically, and conducting production data and ITSM pattern analysis. TCS Enterprise Manager is ERP on Cloud’s fastest-growing offering. Client demand is SAP-centric, but expanding to other ERP platforms and custom applications, filling an application monitoring market gap.

The Road Ahead

Naturally, TCS is looking for additional productivity gains and automation to reduce costs further; accordingly, it is investing in automation and has grouped its IP and automation efforts under the ERP Enablers category. An example of a recent investment includes a library of IaC configuration files to provision cloud instances. Another example is a data migration and source and target validation tool dealing with a heterogeneous set of now unsupported databases.

Geographic expansion is also a priority. The current SAP momentum should help. Organizations are accelerating their transition, whether lift-and-shift or transformation. They require a standard and industrialized service to mitigate risk in the context of tight budgets. TCS’ emphasis on innovation and service repeatability should help.

NelsonHall recently completed an in-depth analysis of cognitive & self-healing IT infrastructure management services, researching the capabilities of leading IT services vendors and the requirements of their clients. This blog looks at the investments vendors need to make to meet client demand, and how the market will evolve over the next 12 to 18 months.

While there is an increasing focus on utilizing AI and automation to deliver value across every business function within an enterprise including, for example, providing CFOs with contractual commitments to automation-led savings, the use of automation and AI is arguably most advanced in IT infrastructure management.

This increased use of automation and AI within IT infrastructure management is leading to:

• Increasing demand for SRE-led operations to support greater predictability across the full-stack
• A massive ramp-up in digital reskilling and the emergence of new skill sets
• Increased focus on sustainability and ESG.

Increasing demand for SRE-led operations to support greater predictability across the full stack

To achieve a NoOps environment, enterprises need to adopt a real-time data insights-driven approach, with SREs approving self-heal solutions and machine recommendations and developing algorithms for AIOps and automation use cases.

AIOps is already being deployed to trigger automation to auto-remediate, fix issues, detect anomalies, and reduce noise across operations. End-user outcomes typically achieved so far include ~40% improvement in MTTR, ~50% reduction in P1 incidents, and ~65% of incidents autonomously resolved. However, there is scope for more.

AIOps needs to support both full-stack monitoring and accommodate existing enterprise investments. It enables the accommodation of rapid infrastructure changes across hybrid, private cloud, and on-premise; and in addition, the full-stack monitoring of resources in the cloud and on-premise. Enterprises also want modular, plug-and-play AIOps platforms utilizing vendor IP and third-party tools across their ecosystems. The modular approach is important for supporting the existing brownfield automation investments made by enterprises.

There will be increased investment in automation and IaC to enable developer-centric models that extend from DevOps to DevSecOps to NoOps in an agile manner and use DevSecOps to support cloud-native applications. Vendors will continue to expand their use cases and focus on hyper-automation to enable client transition to a future NoOps environment. This involves continuing to develop libraries of AIOps use cases to manage operations across the full stack and achieve 40-50% reusability of assets.

In addition, over the next 12 months, vendors will increasingly focus on dedicated experience centers, supported by SRE teams that look at the performance and experience aspect of IT service delivery and proactively monitor end-users’ sentiments as they engage across services and XLAs (and increase client-specific XLAs by persona). At the same time, there will be greater standardization of XLAs in support of a NoOps environment.

Massive ramp-up in digital reskilling & emergence of new skill sets

The investment in digital reskilling and new partnerships continues at pace. We continue to see traction in digital re-skilling, hyperscaler, and ecosystem partner certifications along with AI architects, cloud-native SMEs, and business value specialists. All vendors are ramping automation academies, proactive experience centers, AI, and Cloud CoEs to monitor performance through a data-driven approach. They enhance what SRE and automation teams learn from operating cloud and infrastructure environments.

In addition, newer skill sets are emerging, including machine coaches developing algorithms for AIOps systems, data modelers, and domain SMEs to support unified business semantics. For example, Kyndryl is developing higher-level skill sets at L2/3, including automation assessment architects and client success engineers. TCS is using its cloud units as a catalyst for change across the organization, enabling infrastructure specialists to become full-stack architects. The company is also expanding its Cloud Service Reliability teams and service reliability engineering approach to operations supported by SRE CoEs, and expanding its value builders within TCS Cognix, to enable autonomous operations through AIOps and MLOps. Likewise, Infosys is developing SRE automation skill sets supporting its Polycloud platform across ~96k employees in the cloud and infrastructure services unit; and Cognizant has developed an automation-in-a-box self-service playbook for account delivery teams. Plus, DXC Technology has developed an automation roadmap by capability persona, with 90 big plays across ITO and cloud to improve each persona.

We see more focus on intelligent OCM to drive digital adoption and device and sentiment insights to inform training methodologies and technology adoption rates. Unisys, for example, applies AI to its OCM engine to target and tailor technology adoption and updates, training, and enhanced experience by persona.

We expect increased investment in AI-based platforms, strategic ecosystem partnerships, and a greater focus on joint IP and GTM with hyperscalers.

Increased focus on sustainability and ESG

Investment in cognitive and self-healing IT infrastructure management services will continue at pace, focusing more on SRE-led operations by default. This in turn will lead to an increased focus and investment in sustainability and ESG, helping clients reduce carbon footprints. TCS, for example, through TCS Cognix for agile infrastructure, adopts a sustainability-by-design approach to drive configurable, composable, and automated infrastructure to adapt the cloud to ESG needs. DXC Technology has developed an ESG data intelligence and reporting solution. In addition, Infosys is rapidly expanding its sustainability practice to support enterprises’ ESG agendas.

Outlook

Investment in cognitive and self-healing IT infrastructure management services will continue to ramp, focusing more on SRE-led operations, including full-stack organizational structure for delivering digital transformation through productized offerings.

Vendors need to focus on automation and cloud academies, AI-enabled learning assistants, and platforms to expedite training. We expect to see expansion in the developer community for automation use case development and deployment; and finally, more focus on hyper-personalization, including developing industry-specific personas and creating AI solutions and use cases to fit key business requirements.

A New Focused Division 

BT has announced the merger of its two ICT services units, Global and Enterprise, into a new division, BT Business. The new division will have pro-forma revenues of £8.5bn and an EBITDA of £2bn. The current CEO of Global will lead BT Business.

With this move, BT wants to unify its B2B market and focus its capabilities on connectivity, unified communication, networking, and security. It also wants to simplify its GTM for its corporate and public sector clients and remove duplication across Global and Enterprise.

Cost savings are an important element of the merger, with BT targeting cost savings of £100m by FY25 through consolidating management, support functions, product portfolios, and IT.

Financial Pressures

For the 3Q ending September 2022, the BT Group reported revenue of £10.4bn, up 1% due to growth in its Consumer and Openreach segments,  and partially offset by legacy declines in large corporate customers in Enterprise and lower equipment sales in Global. Large corporate accounts and the decline of legacy products continue to present a challenge to the BT Group.

Global and Enterprise suffered from the pandemic, with revenues down by 14% and 8% respectively in FY21 (the year ending March 31). However, the two units did not benefit from the digital and cloud catch-up after the pandemic. Revenues were still down in FY22 (by 10% and 5% respectively) and in H1 FY23 (by 2% and 5% respectively).

The decline of Global and Enterprise reflects, unsurprisingly, portfolio changes. Global suffered from lower equipment sales and divestments (in Spain, Latin America, and France). Enterprise has suffered from the decline in legacy services, such as fixed telephony, despite mobile and VoIP growth in the SME and SoHo segments.

EBITDA struggled under pressure despite efficiency actions taken by BT, from its FY 22 in March, where EBITDA was down for Enterprise and Global, by 4% and 23% respectively, YOY. The decline continued into the results for the six months reported in September 2022, with Enterprise (23% down) and Global (5% down) for the six months YOY.

Fiber Deployment

The creation of BT Business is part of a larger cost savings program, with BT targeting £3bn in cost optimization by FY25. BT announced in November 2022 it wanted to save operational costs to fund its investment in deploying fiber options, OpenReach, throughout the U.K. The company targets 25m home and business customers by December 2026, up from 9m in December 2022. The investment comes at a time when BT, like many other European firms, faces rising energy costs. BT’s needs for investments do not stop with fiber deployment. The company is also investing in deploying 5G.

BT Business Outlook

Global and Enterprise had overlapping offerings and also suffered from internal competition on the large U.K. accounts. The merger should help BT Business simplify its GTM and achieve cost savings. It should help the new division to invest more in specific areas, e.g., digital, cloud, and security for large enterprises.

The merger will, however, probably not solve BT Business’ exposure to traditional voice and equipment resale, whose revenue decline has been long-lasting. BT Business will need to develop high-growth offerings through M&As to increase its service mix. Also, given the growing overlap between telecom and IT services, we think that BT Business will need to further lower its cost structure by increasing its India delivery network.

BT Business keeps an important SoHo and SME business, which intrinsically have different dynamics than ICT services to large enterprises. BT has a good track record in packaging services and offerings to its clients. The deployment of fiber and 5G should help the company gain market share in this customer segment. The question is whether this customer segment should be part of BT Business or BT Retail.

Certainly, between the two divisions, better clarity on customer focus and reduction of duplicative services and roles like solution and deal architects, financial analysts, and bid managers will provide the focus that the two units need and assist in meeting BT Group’s financial goals.

The new BT Business division will report as a single unit from April 1, 2023.

NelsonHall recently completed an in-depth analysis of end-to-end cloud infrastructure management services, in which we spoke to multiple leading IT services vendors and their clients. This blog looks at some of the key themes from this research, the investments vendors need to make to meet client demand, and how the market will evolve over the next 12 to 18 months.

There is an increasing focus on utilizing the cloud to deliver value across every business function within an enterprise; for example, improving security, compliance, and governance for the CSO and enabling HR to drive positive employee engagement and experience. In addition, cloud management and FinOps provide CFOs with greater visibility and management of the cloud ecosystem to control and optimize cloud costs and greater utilization of AI and automation to enable CIOs to focus beyond TCO. Vendors are creating cloud-native industry-specific solutions to support LOB heads and expedite enterprises’ ability to create and develop new products and services by sector.

The three overarching themes from this study were:

• Enhancing hybrid cloud management and employee experience
• Ramping digital re-skilling and empowering end-users
• Increasing focus on AIOps and cloud-native capabilities.

Let’s look at these three focus areas in more detail.

Defining and measuring cloud journeys through co-creation

Vendors need to take a collaborative design thinking approach to cloud transformation to co-create and innovate with clients to support business outcomes. This includes utilizing AI and analytics in the initial cloud advisory and assessment stages to improve the overall cloud transformation roadmap. This takes a three-phased approach, including:

• Advisory and assessment: enabling data-driven insights to provide deep discovery of infrastructure and application assets. Also, cloud architecture analysis and identifying the right cloud type (IaaS, PaaS, SaaS) and approach (private, public, hybrid). Then developing cloud maturity roadmaps including OCM to deliver the desired client outcomes through the identification of business needs and driving digital adoption
• Migration and modernization: identifying application modernization opportunities, including monolithic architecture implementation and deployment. Then deploying a migration factory approach with templates, repeatable tasks, and agile squads. This includes landing zone and platform build, including cloud-native and adoption of DevOps and serverless architecture. An example includes Capgemini’s Cloud Migration Factory, providing a highly automated and industrialized approach to application and infrastructure migration. This includes providing end-to-end migration from package to production using an automated release pipeline and a migration management portal. It also provides an assessment tool for cloud cost optimization for clients that have already migrated to the cloud
• Operate and manage:  Clients want to manage hybrid, multi-cloud environments through a single CMP console with self-service and automated provisioning with a single click. This also includes the integration of private cloud and edge. There is also a greater focus on cloud-native PaaS support, including microservices and containers. This includes a more open approach to orchestration, including cloud-native provisioning with cloud APIs. In addition, integration of third-party monitoring and visualization tools to tag, monitor, and optimize spend based on usage patterns, with automated reporting and chargebacks to business units through FinOps. 

Over the next 12-18 months, we expect vendors to rapidly increase the utilization of Cloud CoEs, labs, experience centers, and Digital Transformation Centers to help clients prototype and co-create cloud-first solutions to facilitate this approach.

Vendors need to identify and measure employee experience, define industry personas, and personalize experience services across the enterprise. They need to continue to invest in end-user analytics tools to measure employee sentiment and performance, with typical tools including 1E Tachyon, SysTrack, Nexthink, and Qualtrics. These measure UX across devices, applications, and networks.

Digital re-skilling continues at pace

We continue to see traction in digital re-skilling, hyperscaler certifications, and new skill-sets, including machine coaches developing algorithms for AIOps systems, automation, AI architects, cloud-native SMEs, data analytics, and business value specialists. Also, vendors are ramping cloud academies, experience centers, and site reliability engineers (SRE) to monitor cloud ecosystems’ performance through a data-driven approach and building capabilities and enhancements based on what SRE teams learn from operating cloud environments for clients. For example, across cloud operations, TCS takes a service reliability engineering approach with dedicated teams resolving issues and platform and architecture teams automating activities and enabling greater self-service.

TCS also uses its cloud units as a catalyst for talent change across the organization, enabling infrastructure specialists to become full-stack architects. In addition, developing industry-specific skillsets across cloud delivery resources by utilizing TCS’ industry SMEs.

Vendors are now hiring beyond STEM and across tier 2/3 cities in India, with Tech Mahindra recently opening a delivery center in Coimbatore. Vendors are further utilizing AI-enabled learning assistants and platforms to expedite training. For example, Infosys utilizes its Wingspan learning platform to support cloud training, and its talent strategy focuses on emerging technologies, with 350 learning paths and 46 digital skill tags.

Over the next 12 months, the focus on dedicated experience centers will increase, supported by SRE teams that look at the experience aspect of IT service delivery and proactively monitor end-users’ sentiments as they engage across services and XLAs (and work with clients to create specific XLAs by persona). We also expect to see more focus on end-user empowerment using low code/no code platforms and managing, for example, M365 through the Microsoft Power Platform.

Expanding AIOps use cases to meet client-specific requirements

AIOps are being deployed to trigger automation to auto-remediate and fix issues, including utilization of resolver bots (L0, L1, and L1.5 functions). Also, to detect anomalies, reduce noise across operations, and use ML and diagnostics engines to manage L2/L3. End-user outcomes include ~40% improvement in MTTR, ~45% incident elimination, and ~65% of incidents autonomously resolved.

We expect vendors to expand their use cases to enable transitions to future no-ops. Vendors look to orchestrate tasks using AI and automation and use recommendation engines to provide the best-fit SOP for the issue through one-click automation. There is increased focus on standardization through template-based provisioning of environments and standardized monitoring and data collection frameworks. NTT DATA, for example, adopts a data bias in support of cloud transformation where it makes decisions based on data insights to influence new application features, developments, and architectural improvements.

Vendors must build libraries of standard AIOps use cases to meet clients’ business outcomes, manage operations across the full stack, and achieve ~40-50% reusability on standard assets through enterprise bot stores. This includes increasing the use of cloud architects and administrators to develop infrastructure and industry-specific cloud blueprints, including templating application blueprints. They need to focus on developing service patterns that provide repeatability through a combination of hyperscaler technologies and vendor IP to address specific industry and client requirements. In addition, they need to integrate with and utilize client toolsets where required through an agnostic approach. Also, taking a modular approach to reflect clients’ Brownfield automation capabilities.

Outlook

Investment in end-to-end cloud infrastructure management services will continue at pace, with a greater focus on developing a full-stack organizational structure to deliver cloud transformation through productized offerings. We expect to see increased focus and investment in sustainability and helping clients reduce carbon footprints. This includes continuous monitoring through cloud management platforms, green apps, and observability tools. TCS, for example, adopts a sustainability by design approach to drive configurable, composable, and automated infrastructure to adapt the cloud to environmental, social, and governance needs.

There will be an increase in modernization accelerators and methodologies to enable clients to modernize legacy applications and take advantage of the latest hyperscaler technologies. This includes modernization factory, CoE, and dedicated squads deploying an agile approach and making recommendations for modernization. Application modernization investments will focus on microservices, service mesh, API factory development, and serverless functions.

It will be important to ramp digital re-skilling, hiring, and retention initiatives to ensure the requisite cloud skills are in place to meet specific client requirements and support business outcomes.

Expect vendors to ramp cloud-native services and practices to provide complete end-to-end hybrid services for containerization and move containers off datacenters to the cloud. Also, to provide a unified view of observability, management, and deployment across containers and expand their mainframe as a service capability.

Finally, we expect increased investment in AI-based platforms and tools to enable a self-heal framework, increase autonomous remediation and an SRE-led approach to cloud operations, and a greater focus on joint IP and GTM with hyperscalers.

Find out more about NelsonHall’s ‘End-to-End Cloud Infrastructure Management Services’ market assessment report here or contact Guy Saunders.

NelsonHall recently attended the ‘Infosys Cobalt World Tour’ conference in New York and, as the world begins to open up again, it was great to engage with Infosys executives face-to-face.

Infosys presented its Cobalt Cloud strategy and use cases to increase awareness of the benefits to the marketplace and highlighted that its cloud approach is focused on achieving business objectives rather than simply moving current solutions to the cloud.

To set the context, Infosys launched Infosys Cobalt in 2020, which includes services, solutions, and platforms to enable cloud-powered enterprise transformation. The Infosys Cobalt Cloud Community currently provides a catalog of 225 industry cloud-first blueprints and 35k cloud assets curated from Infosys' experience in delivering cloud programs for G2K enterprises. The Cloud Community includes Infosys experts plus partners, clients, academic institutions, start-ups, gig workers, and cloud developers.

Expediting the move to the cloud

Infosys takes a three-layered approach to the cloud through Infosys Cobalt to develop new business capabilities to meet emerging business needs and faster time to market. It also aims to reduce multi-cloud complexity through a secure cloud platform, bringing elasticity to the resource layer. The three approaches are:

• Consumption Layer (Business Services): Infosys sees a new paradigm in the consumption layer, utilizing data analytics to derive business outcomes within the organization, including industry-specific solutions
• Platform Layer (Technology Platforms): Infosys aims to move clients up the value chain, including helping them transform data lakes to the cloud, refactoring apps to be cloud-native, and using PaaS
• Resource Layer (Cloud Resources): most clients start here with IaaS and cloud for consumption, network, and storage, and establishing virtual private cloud and connection between private, public cloud, and on-premise. This approach includes accelerating migration, taking native services from hyperscalers, and building on top of the cloud platform.

Infosys enables clients to create services consumable within their enterprise utilizing multi/hybrid cloud services, with platform technology enabling leaner operations with a heavy focus on engineering. Automation and IaC enable a developer-centric model that extends from DevOps to DevSecOps to NoOps in an agile manner. Key assets utilized in cloud platform engineering include Polycloud Platform, Cloud Automation Café, and Security Reference Architecture.

Enhancing security

Infosys enables enterprises to build cyber-resilient and compliant cloud ecosystems by adopting their ‘Secure by design, ‘Secure by scale’ and ‘Secure the future’ approach. Infosys assures ‘Digital trust’ through a structured execution process of diagnose, design, deliver and defend. From a Cobalt perspective, the blueprints and assets provided to their clients have regulatory and security compliance built into its solution and technical and financial governance. The security strategy utilizes strategic partnerships and pre-negotiated contracts in a platform security stack.

Sustainability is top of the agenda

Infosys looks to enable and accelerate sustainability solutions and drive impact through a business-to-business model and unlock long-term sustainability thinking across global enterprises. It aims to deliver the following benefits to its clients:

• Making an impact on the triple-bottom-line of people, profit, and prosperity
• Attracting a new wave of sustainability-minded clients, supply chain partners, and employees
• Enhancing ESG attractiveness to investors and brand reputation
• Securing resiliency in uncertain conditions.

Cloud is providing a vehicle for achieving carbon neutrality for its operations. Infosys offers Smart Buildings and Spaces services that enable the physical workplace to become digital by installing and managing Internet of Things (IoT) devices and sensors. Water management, carbon monitoring and control, solid waste management, energy assessment, and greenfield building consultancy are crucial sustainability competencies.

Outlook

Enterprises are accelerating their migration to private, public, and hybrid multi-cloud environments to satisfy greater demands for flexibility, scalability, resiliency, and security. This includes migrating on-premise infrastructure to hybrid cloud, including legacy application modernization to cloud-native systems. We expect Infosys to continue to build assets and cloud-first blueprints. In addition, in support of the Polycloud platform, we expect continued investments in the smart catalog and cloud-native services. The Cobalt suite of tools and assets enables enterprises to begin their cloud journey quickly and effectively with security in mind and an eye toward carbon-neutral outcomes.

As the world begins its slow emergence from the pandemic, cloud adoption is seeing its already rapid growth accelerate. NelsonHall forecasts overall cloud services to grow by 8% in 2021, with a CAAGR of 5.9% through 2025, both significantly higher than overall IT services market growth of 2.7% in 2021 and 3.6% through 2025. 

This forecast cloud growth also doesn’t reflect related services that project high growth thanks in part to the cloud, such as platform application services, which is driven by Salesforce and SAP S/4HANA in the cloud (projected to grow 5.4% CAAGR through 2025) and data & analytics which is a key beneficiary of cloud’s variable storage and compute capabilities (9.0% CAAGR through 2025).

As both hyperscaler and hybrid cloud offerings mature, the breadth of cloud-based offerings expands, and clients become more comfortable with the ability of cloud environments to meet security and regulatory requirements, the types of organizations adopting cloud continues to grow. To ensure that they are well-positioned to meet this growing demand, IT service vendors are increasingly pivoting their cloud offerings from a supporting capability to an umbrella offering in which the various tracks for cloud adoption are organized and managed as a cohesive capability.

As part of TCS’ Cloud Analyst Day event, NelsonHall spoke with TCS leadership about how the company is transforming internally to be better positioned to support their clients on an enterprise cloud transformation. Here I look at three aspects of TCS’ end-to-end approach to the cloud: its strategy and consulting capability to help clients define their cloud journey, the hyperscaler-dedicated business groups that have been stood up, and how digital workplace services are being transformed with the cloud.

Developing a Cloud Strategy

As clients have matured in their understanding of the cloud, an increasingly important focus is on the upfront cloud strategy and roadmap planning to balance migration risk and optimize the future state cloud environment. TCS is currently seeing six business drivers for its clients’ cloud adoption: M&A activity, application modernization needs, enabling a broader ecosystem, innovating business models, increasing agility & flexibility, and improved regulatory compliance.

To address these needs, TCS positions its cloud strategy across three key pillars:

• The first is focused on building the digital core for the enterprise. This activity focuses on modernizing the legacy application environment, including ERPs and data, and migrating these capabilities to the cloud. This represents the largest portion of its cloud work to date
• The second key pillar is innovating the business model. This uses the digital core as the foundation of an operating model transformation such as defining and moving to the retail bank of the future or identifying how analytics can transform healthcare delivery
• The final pillar is transforming and growing around a purpose-led ecosystem. This builds on a composable IT landscape with AI/ML at its core to move beyond business model changes and look at cross-industry ecosystems to build new business models. For example, rather than looking to increase the use of analytics in healthcare this would instead fundamentally rethink healthcare service delivery: what would an Uber for healthcare look like?

TCS’ cloud strategy and transformation delivers these services to its clients leveraging its Value Engine model that uses a cloud-agnostic approach to build the vision & strategy, business case, transformation roadmap and value realization plan tied to the specific value drivers for the client and its industry. The organization has four key capability areas: strategy & vision, multi-cloud advisory, data & analytics advisory, and cloud transformation office.

Once a strategy is defined, TCS focuses on translating this strategy into an executable plan. It combines assessments of the current state maturity with a broad portfolio of offerings including pre-configured SaaS offerings and migration assets to develop a roadmap of activities.

Centralizing Hyperscaler Capabilities for Business Transformation

Once a strategy and roadmap are developed, TCS has built dedicated full-stack capabilities to partner with its largest hyperscaler cloud partners to execute the cloud migration: AWS, Microsoft Azure, and Google Cloud. These dedicated groups provide a single concentrated unit to support AWS, Azure or GCP adoption regardless of the migration path.

As an example of the scale of these groups, the TCS AWS Business Unit has employees possessing ~7k certifications, ~200 AWS architecture blueprints, ~4k rules for migration assessments, and ~21 pre-configured solutions. These solutions span four key areas: migration & modernization, core on cloud (migration of core business functions such as ERP to cloud), user experience, and business solutions (pre-built TCS applications for specific industry use cases). It estimates it has helped ~200 clients migrate to AWS and has industry offerings pre-built across eight industries.

Enabling the Workplace of the Future

TCS has dedicated cloud practices supporting the digital workplace, including AWS, GCP, TCS cloud infrastructure unit, and Microsoft. The Microsoft practice leverages its domain knowledge across industries and a global talent pool of ~50k engineers trained on Microsoft technologies (of which ~20k are Microsoft Certified on Azure) to help clients utilize AI, automation, cloud, and new technologies in the Microsoft stack to drive growth and transformation journeys.

TCS  Cognix for Workspace helps enterprises create an intuitive, immersive, and intelligent workspace: a key to improved employee experience. It drives silent IT operations, augments support teams with meaningful insights, and enhances user experience through digital channels that are future-ready, agile, and resilient. In addition, it utilizes XLAs, knowledge management, enterprise social & gamification, and employee wellness.

TCS utilizes its Secure Borderless Workspaces Solution (SBWS), to provide a unified cloud workspace through its Digital Workplace Studio. It can be hosted on-premise, TCS private cloud, AWS, Google, Azure, Citrix Cloud, and VMware Workspace ONE. Key capabilities include consulting, unified collaboration, virtual service desk, and return to work offerings. SBWS also encompasses a wide range of human functions, including infrastructure, talent management, and employee engagement; processes, tools, and governance mechanisms; and collaboration and engagement practices to enable companies to realize the potential of the new world of work, today and in the future.

TCS has further created ignio AI.Digital Workspace, a self-healing, end-user experience management capability that proactively detects, triages, and remediates endpoint issues for a secure, highly productive and satisfying digital workspace experience.

TCS Positioning as an End-to-End Cloud Partner

Despite years of hype, the momentum for cloud adoption doesn’t appear to be ebbing in the foreseeable future. As clients become more sophisticated and strategic in their cloud adoption approach, it is imperative for cloud services vendors to develop holistic end-to-end offerings, specialized capabilities across hyperscaler partners, and differentiated assets that accelerate client time to value.

Through investments in assets that accelerate cloud adoption and provide differentiated business value, and an approach that places cloud at the core of its services, TCS is building the capability required to guide its clients to maximize the value from cloud migration. 

Coforge, the former NIIT Technologies, recently briefed NelsonHall about its Salesforce capabilities. In 2019, the company acquired Whishworks, which became the foundation of its Salesforce activities. Whishworks, one of MuleSoft’s top five strategic partners globally, services clients across sectors, with BFSI being its most significant target market.

London-headquartered Whishworks also has an office in the U.S., in Princeton, NJ. Its delivery model is India-centric, its primary delivery centers being in Hyderabad and Noida. It is currently experiencing high growth, enjoying revenue growth of 30% in its FY21.

Specializing its MuleSoft Portfolio

Since 2019, Coforge has grouped all its MuleSoft and Salesforce capabilities under Whishworks, which now has 430 Salesforce practitioners, including 300 MuleSoft ones. Whishworks offers a wide range of services, from technology consulting to managed services, and is also a MuleSoft VAR in the U.K. and India.

Whishworks is working on developing a specialized portfolio of services. Two examples of this are:

• Anypoint Platform 3.8 to 4.4 migration. MuleSoft is ending its support for Anypoint 3.9 by the end of 2021, leaving many of its clients with a mandatory migration. Whishworks has developed a fixed price offering for the migration, with pricing based on the number of APIs: it estimates the cost for a client with 50 APIs is around $100k. Whishworks highlights that some of its large clients have up to 1k APIs on different MuleSoft versions
• The use of accelerators. Whishworks has four connectors that are available on Anypoint Exchange, the equivalent of Salesforce’s AppExchange. Whishworks’ connectors provide access to the APIs of the applications. An example of this is extracting data from a web application to a mobile device: the connector reduces the amount of custom code required to connect the two applications. Whishworks’ most popular connector is its Microsoft Azure Storage connector, which the company offers free of charge to clients.

Delivery quality remains a key focus, and Whishworks is relying on several approaches. Whishworks uses a centralized technical design authority team, ensuring that delivery teams apply best practices and get their sign-off. Whishworks want to avoid an API development team bringing in their development personal style by using standardized approaches.

MuleSoft is now the Foundation for Salesforce’s Customer 360

Further growth is on the agenda for Whishworks, initially with MuleSoft. The company highlights that MuleSoft aligns with Salesforce’s professional services approach, i.e., focusing on software products and leaving services opportunities to its SI partners. Whishworks is, in Europe, one of the two preferred SI partners for MuleSoft’s Commercial Business Unit clients. It is looking to expand its MuleSoft expertise to the U.S., where the service opportunity is immense.

Whishworks is also looking to expand to the entire Salesforce product ecosystem, from its technical MuleSoft niche to functional products. The Salesforce strategy will help here. Salesforce has made MuleSoft’s Anypoint Platform the official software tool for integrating its vast and quickly expanding acquisition-led product portfolio. Anypoint Platform is more than the technical glue of Salesforce’s applications. It has become a topic relevant to business, with MuleSoft’s API-based integration technology at the core of Salesforce’s Customer 360 value proposition. With Customer 360, Salesforce promotes a comprehensive customer profile through consumer data centralization and analytics.

Along with Customer 360, Whishworks also adds skills around the various Salesforce products, initially focusing on Sales Cloud, Service Cloud, Health Cloud, and Financial Services Cloud. The company highlights that these clouds rely heavily on MulSeoft for interacting with third-party applications. Also, Whishworks has already developed several vertical solutions, such as claims management for insurance firms and a financial services sector cloud migration tool and service.

Whishworks will be adding other vertical solutions to its portfolio: we expect the firm will ultimately address the whole client base of the larger Coforge.

And we also anticipate Coforge will bring business consulting capabilities to help drive discussions with clients around their digital transformation initiatives. More than ever, this consulting-led approach is required to make a Salesforce project more than a traditional enterprise application project.

As clients begin to adapt to the new normal post-Covid-19, we see a paradigm shift in the approach to cloud adoption. Previously cloud adoption was driven mainly by cost reduction and improved agility; the trend is now toward market responsiveness, personalized experiences, real-time insights, innovating at scale, expanding into new markets, and launching new products and services. Covid-19 has seen clients accelerating migration to hybrid multi-cloud environments to support increased demand, flexibility, scalability, resiliency, and security to support business continuity. This includes migration of on-premise infrastructure to hybrid cloud, including legacy application modernization to cloud-native systems, or re-architecting for scalable private cloud deployment.

A NelsonHall survey of over 1,000 IT services buyers globally conducted earlier this year shows that just over a third of large enterprise infrastructure landscapes are housed in the cloud today. However, buyers indicated they expect to house 42% of their infrastructure landscapes in the cloud by 2022. As of 2022, buyers expect public cloud adoption to increase by 5% to reach 23% overall, with private cloud increasing 3% to reach 19% overall, and on-premise decreasing from 66% of overall infrastructure landscape in 2020 to 58% in 2022. This growth is only partially driven by public cloud adoption, meaning hybrid cloud is still the default option and will remain the dominant cloud adoption strategy in the future.

Infosys Cobalt enables clients to create new products and services

Infosys views the cloud as the foundation for broader digital transformation and is looking to drive grassroots-level innovation on industry cloud solutions and platforms. It has recently launched Infosys Cobalt, which includes a set of services, solutions, and platforms to enable cloud-powered enterprise transformation. This includes a set of IPs (e.g., Polycloud Platform, Infosys DevOps Platform, Infosys Innov8, Wingspan, and Infosys Enterprise Service Management Café), and ~200 business assets (across oil & gas, BFSI, telecom, media, healthcare & insurance, manufacturing, and retail sectors). In addition, third-party services, solutions, and platforms to accelerate enterprises’ cloud journey.

Infosys Cobalt enables businesses to redesign the enterprise from the core (DC modernization, app & ERP modernization, mainframe and legacy transformation, and technology standardization) and build new cloud-first capabilities (APIs, data and analytics, CX, industry 4.0, IoT, CX, and AI/ML-driven business and systems) in public, private, and hybrid cloud, across PaaS, SaaS, and IaaS landscapes. Infosys aims to combine the art (working with clients to identify and solve business problems) with the science (modernize the core and build for cloud-first) as the overarching framework for Infosys Cobalt.

Increasing innovation, speed to market, and security

One of Cobalt's key components is Infosys’ Cobalt Cloud community, which works from the grassroots level upwards across industries, organizations, functions, and technologies to develop reusable cloud assets to solve business problems. It includes technology and business innovators, partnering with clients and technology partners to help expand innovation. If required, it will co-create these solutions with partners and clients. Building on Infosys’ Be the Navigator program pioneered a few years ago, it seeks to replicate this with the cloud. In essence, everyone in Infosys trained and certified in the cloud can contribute to the Cobalt Cloud community in the form of solutions, accelerators, and building assets to help solve the client’s business problems.

Currently, the Cobalt community includes Infosys, its partners, and Infosys’ clients with plans to expand to startups, academic institutions, gig workers, and cloud developers. For example, Infosys has partnered with Rhode Island School of Design to improve UI/UX. Also, in partnership with Purdue University, Infosys is training 3k cybersecurity professionals over the next three years, who will go through Purdue training and certification, and then join Infosys as part of the program to create its own talent.  

Developing industry-specific blueprints

Infosys’ growing Cobalt Cloud Community currently provides a catalog of 200 industry cloud-first blueprints, curated from 14k cloud assets. Here, Infosys has created blueprints (reference architecture) across multiple industries. It takes these to clients to enable them to pick and choose from these components and then deploy to the wider market. 

These cloud assets are classified under four broad categories, which include:

• Business assets: include platforms, solutions, and services focused on industry verticals and sub-verticals. In addition, horizontal business capabilities and cross-industry business assets
• Engineering assets: platforms, frameworks, services, AI/ML models, and bots (e.g., Infosys Polycloud Platform, Infosys DevOps Platform, Cloud Native Development Platform, Infosys Wingspan, and ESM Café)
• Knowledge assets: includes frameworks, solution capability models, reference architectures, and process models for project implementation. These could consist of project documents, proposal templates, case studies, and large deal submissions
• Learning assets: learning modules as videos, playgrounds, quizzes, assignments, and assessments on technology, hyperscalers, and business solutions delivered through Wingspan. This enables Infosys to train and re-skill resources on cloud technologies.

These assets are made available on the Infosys Cobalt Cloud Store, providing a one-stop-shop for platforms, IP assets, offerings, and solutions. It operates on a marketplace model that enables clients to add their assets and solve their specific business challenges and pick and choose the services and capabilities they want.

Infosys further provides Cobalt Labs and Cobalt Playground at its global digital centers to help clients prototype and co-create new cloud-first solutions rapidly, utilizing its partner ecosystem. The assets, including solutions, platforms, knowledge, and accelerators, enable enterprises to move to the cloud and manage a hybrid multi-cloud environment through Infosys Cobalt's Polycloud platform (multi-cloud management platform with orchestration, brokerage, and AI-Ops). Polycloud allows a client to be cloud-agnostic while transforming into a cloud-native organization. It will enable AWS, Google, Azure, IBM, and other private cloud providers to operate within an enterprise concurrently, building and running applications in a cloud-agnostic way by facilitating portability across cloud providers.

Enabling efficient operations as SRE

As clients embark on their journey to the cloud, Infosys seeks to help them transform operations into a site reliability engineering (SRE) model. Infosys is taking an SRE-enabled approach as the default to manage end-to-end cloud services in a highly automated way through Polycloud. As clients move to the cloud and invest in, for example, containers, APIs, and microservices, clients need the cost of operations to come down through more tools-based automation. Infosys is bringing a de-coupled team structure across infrastructure, DevOps, and middleware into a single team to manage everything as code. Across assets, it is looking to deploy infrastructure as code, creating templates and models where the service catalog will improve architectures used to deploy infrastructure in the cloud, enabling a highly automated model to deploy workloads in the cloud. Infosys also works closely with the client to develop the right cloud strategy for business impact, allowing them to decide, for example, what to keep on-premise, what to put in the cloud, what to SaaS, etc.

Outlook

Infosys plans to build a Cobalt community of ~100k resources in the next 18 months, coming from Infosys, clients, partners, academia, startups, gig workers, and cloud developers. This includes expanding its dedicated resources curating assets from the cloud community.

It also plans to increase its cloud assets to ~100k across business, engineering, knowledge, and learning. In support of its strategic initiatives, Infosys is also deploying its Cobalt capability internally, utilizing several platforms, including Wingspan, for training and development. It is also working in partnership with academia, including Purdue University, to develop skill sets required, in this case, ~3k cybersecurity resources. We also expect Infosys to further invest in its Polycloud Platform, supporting multiple cloud services across IaaS, PaaS, and CaaS – providing everything as a service through its Cobalt Cloud Store. Polycloud also provides API-driven architecture for IaC to expedite SDLC, and through AI-Ops, it aims to move clients from a DevOps to No-Ops construct.

For all clients currently on Infosys Infrastructure Management Suite (IIMS), it is providing a roadmap to migrate all existing client deployments to the Polycloud version at no additional cost.

Finally, we expect Infosys to further invest in its Cobalt Labs to expand its localization initiative to support cognitive and AI services and foster greater co-creation and co-innovation with clients and ecosystem partners in support of cloud services.

As financial results that reflect a full quarter in the shadow of the COVID-19 pandemic are being released by IT service vendors, one of the key themes is that while discretionary budgets are being hard hit, clients’ investment in migrating to the cloud is not slowing. For vendors, clients’ cloud adoption has acted as a mitigator of other areas where clients have delayed new programs or delivery has been slowed by the move to remote working. Some specific examples:

• While IBM saw revenue decline across its other services, it reported strong growth in its cloud business (in part driven by its acquisition of Red Hat)
• TCS highlighted cloud as a growth driver, with its pipeline reflecting accelerated enterprise-wide adoption of cloud
• Wipro highlighted demand being driven by 3 Cs – cloud, collaboration and cybersecurity.

The reason for this is clear: companies are focusing on reducing operating costs in the face of uncertain revenues and an unknown economic recovery timeline. They are also looking at a significantly more distributed workforce for the foreseeable future.

Cloud migration is rising even in sectors that have historically been slow to adopt cloud. Financial services has long been a laggard in cloud adoption due to the myriad regulatory and security challenges, but this month has seen large cloud engagements announced by HSBC (with AWS) and Deutsche Bank (with GCP).

Cloud has long been one of the fastest growing, and most hyped, areas of IT services. But NelsonHall research shows that despite the ubiquity of cloud in discussions of IT services, it still has a long runway of adoption among large enterprises. And the approach to cloud migration is seeing changes that impact how IT service vendors shape their cloud offerings and capabilities.

Hybrid Cloud Penetration Still Has Room to Grow

NelsonHall research into the priorities and focus areas of over 1,000 IT service buyers globally conducted earlier this year revealed that while cloud has been a focus area, there is still considerable growth remaining.

Globally, our survey shows that just over a third of large enterprise infrastructure landscapes are housed in the cloud today, very much in line with the planned adoption rate identified in previous NelsonHall surveys. But our most recent survey indicates that buyers are now expecting to house 42% of their landscapes in the cloud by 2022.

And hybrid cloud will remain the dominant cloud adoption strategy going forward.

Vendors Need to Evolve Cloud Capabilities

While cloud adoption shows no signs of slowing, it is important to realize that how cloud is being adopted is changing. Whereas early cloud adopters focused on lifting and shifting existing applications, standing up non-critical or non-production workloads or adopting common SaaS-based enterprise applications, clients are increasingly focusing on more tailored cloud adoption to drive higher return on investment.

The first major shift is the increasing importance of cloud-native. In 2018, NelsonHall estimated 23% of cloud migration work focused on cloud native development and projected this would rise to 32% by 2020. In our more recent survey, the most commonly prioritized characteristic that buyers seek in their vendors is cloud-native development capabilities. This is highly important to 81% of buyers globally and is the highest prioritized capability in nearly all of the 18 sectors we analyzed.

The other major priority shift is the greater specialization or tailoring that buyers are looking for in SaaS-platforms. Adoption of SaaS-based applications has been a consistent priority for IT service buyers for some years now and this continues to be the case, with 66% of buyers placing high importance on implementing new SaaS solutions. But clients are now looking for SaaS products tailored specifically to function or sector requirements. After cloud-native development, prioritized vendor capabilities include vendors that bring their own digital application offerings and have in-depth knowledge of sector-specific digital offerings.

In short, buyers increasingly aren’t lifting and shifting to the cloud just to realize some level of infrastructure cost reduction; they are looking to leverage the cloud to improve their application landscapes through more tailored adoption strategies. They need vendors that can develop a customized cloud adoption roadmap which combines commercially available SaaS products that address specific needs and, when those aren’t adequate, the replacement of on-premise applications with custom cloud-native developed ones.

Vendors Need to Continue Cloud Investment

All of these trends provide a blueprint for IT service vendor investments to ensure maximum relevance for their clients. IT service vendors need to be building a bench of resources with cloud-native development capabilities as well as cloud consulting capabilities. They also need to be investing in an understanding of SaaS offerings that are tailored to specific sector or business functions as well as exploring developing their own niche applications for areas where they possess strong capabilities and client relationships. Cloud adoption may be maturing but it still has a long way to go, and this is one area where the pandemic has only increased demand.

We recently talked with Cognizant’s Salesforce Consulting & Solutions Group (CSG) unit, recently set up in Europe. The unit reflects ongoing investment by Cognizant in its Salesforce capabilities, with a more vertical focus, accommodating Salesforce’s growing product portfolio.  

CSG complements the capabilities of Cognizant Interactive and Cognizant Consulting by bringing vertical knowledge and consulting capabilities relevant to Salesforce. CSG has been in hiring mode, recruiting business consultants with experience in banking, insurance, pharma, retail and CPG.

Pushing towards verticalized offerings

Along with this vertical recruitment, CSG is formalizing its vertical knowledge with the creation of Salesforce-related vertical-specific blueprints. The unit is systematically identifying areas within each vertical that are prime for digital disruption, e.g. in retail and CPG, processes that used to be customer high-touch (providing in-store cross-selling opportunities) and that are now occurring over the internet (aiming to help retailers to find new ways of maximizing cross-selling). In total, CSG now has around 25 blueprints that can help it rapidly engage in discussions with clients.

CSG is helping Cognizant’s Salesforce practice to further sharpen its vertical focus through the creation of solutions that cover functional gaps currently not covered by Salesforce’s Cloud products, building on four existing solutions in retail banking, wealth management, insurance and life science. One example is a solution for collections, aligning Service Cloud with different geo-based regulations. The creation of additional solutions is currently a work in progress.

CSG is expecting to provide these solutions as part of its service portfolio and is confident this investment will help it differentiate its offerings and align with clients’ expectations in bringing a vertical-ready capability. In due course, CSG will consider if it needs to turn several of the solutions into software products with license and maintenance subscriptions.

Making the most of current implementations

Along with its vertical and consulting push, CSG is also helping Cognizant’s Salesforce practice around aftermarket services. CSG recently launched its Good-to-Great assessment service. During a two-week engagement, Cognizant assesses how Salesforce Clouds have been implemented from a process, technical and functional point of view, looking to maximize usage of the client’s investment in Salesforce’s Clouds. Good-to-Great relies on the traditional approach of checklists, its outcome being a report deliverable that includes suggestions for improvement.

Matching Salesforce in its investments

The company continues to focus on Salesforce Sales (with CPQ), Service and Community Cloud, and B2B (CloudCraze) and is targeting two growth markets: Marketing Cloud and Commerce Cloud among its large corporate clients, focusing on a 360-degree customer view. Looking ahead, Cognizant wants to invest in its capabilities around Salesforce’s September 2019-launched CPG Cloud and Manufacturing Cloud.

Several acquisitions have helped Cognizant growth its Salesforce portfolio and footprint. In late 2018, the company acquired two Salesforce service partners: ATG, a U.S. vendor specialized in CPQ and quote-to-cash processes, and SaaSfocus, an Australian vendor of significant size (~350 personnel at the time of the purchase), with a significant footprint in India.

In parallel, Cognizant has also adapted the structure of its Salesforce practice to include its MuleSoft practice (Salesforce acquired MuleSoft in 2018), adding 1.7k consultants.

With Tableau Software now part of Salesforce, Cognizant will have to consider if it should merge the two practices or keep its Tableau capabilities separate. Like other vendors, Cognizant is likely to face more similar challenges: Salesforce has given guidance that it will be a $16.9bn firm by the end of FY20 (ending January 31, 2020) and it continues to have appetite for M&A, even after its recent $15.7bn Tableau acquisition. This signals that Cognizant will have to further adapt its capabilities in the year to come.

David McIntire, IT Services Research Director, talks about NelsonHall's recently completed market analysis project on Cloud Advisory, Assessment, and Migration Services. In this vlog, he touches on the changing nature and scope of large enterprise cloud adoption, market size and growth, and where IT services vendors are focusing their investments.

Over the last several years, the public IaaS market has grown rapidly, with major public IaaS providers growing at 45% or more annually, as estimated by NelsonHall. However, large enterprises are only moving a small portion of their application landscapes to public cloud, maintaining larger application footprints in private cloud or on-premise environments.

This hybrid approach reflects an unwillingness to treat all workloads across their application landscape alike. The applications being migrated to public IaaS providers have frequently been non-production, disaster recovery, or non-critical workloads, as well as external-facing applications with significant fluctuations in demand.

However, as public cloud offerings mature, the migration of enterprise workloads to public IaaS has grown, both in quantity and business criticality. And, similar to the overall public IaaS market, the largest target for enterprise application migrations supported by IT service vendors has been AWS.

NelsonHall estimates that, in 2017, client migrations by IT service vendors to public cloud providers were in the following proportions:

While AWS maintains a dominant position in the overall public IaaS market, when it comes to large enterprises migrating their existing application landscapes to public IaaS, AWS is potentially vulnerable to losing market share to competitors. Much of this is driven by competitors’ growing capabilities, but another factor is AWS’s parent, Amazon.

Competitive threats

A tougher competitive environment could reduce AWS’ position as the default option for public IaaS. Some specific competitive threats include:

• Microsoft Azure, the second largest public IaaS provider, launched its Azure Stack offering in mid-2017. Azure Stack targets clients looking for a hybrid cloud, as most large enterprises are. Azure Stack offers paired public and private IaaS and PaaS offerings so that workloads can be moved between public and private environments with minimal modifications, and a common set of tools can manage applications across both
• Google Cloud Platform, which has undergone a major drive to grow its public cloud presence. Recent wins at Shopify, Williams-Sonoma and Home Depot reflect Google’s increasing clout in enterprise public IaaS
• Oracle, which was also slow to offer IaaS but is expanding its focus in this area. With a large footprint of clients with Oracle business applications that can be addressed, Oracle has an opportunity to grow rapidly.

However, these challenges might not impact AWS nearly as much as AWS’ parent itself.

Amazon’s impact

With Amazon’s dominant presence in retail and publishing, and its growing presence in media and entertainment, other companies in these industries don’t want to help fund their own competition – and these companies are increasingly looking to alternative cloud service providers (CSPs). IT service vendors are seeing a rise in companies either looking to migrate to other CSPs as alternatives to AWS, or even moving early-migrated workloads off AWS due to the competitive position of Amazon. As noted above, three of Google’s highest profile recent wins are all retail organizations.

This interest in alternatives to AWS by their clients is driving IT service vendors to expand their relationships with other public IaaS providers. For example:

• Oracle: Infosys has developed end-to-end Oracle Cloud offerings spanning SaaS, IaaS, PaaS and lift-and-shift for on-premise legacy applications. Also, LTI is focusing on building out a suite of offerings for Oracle Cloud
• Google: While nearly all IT service providers possess a strategic partnership with Google, TCS has a strategic relationship with Google driven by CEO-level engagement, and estimates it has delivered services on Google Cloud platform for ~35 clients. Also, EPAM has used its relationship as service provider to Google itself to develop Google Cloud offerings.

Summary

AWS appears poised to continue to dominate the overall public IaaS cloud market. However, when it comes to large enterprise application migrations, AWS is facing increasing threats, including those driven by its own broad business footprint.

NelsonHall recently had a briefing with senior management at Getronics to discuss the merger of Connectis under the Getronics portfolio. In this short blog, I look at what the Connectis business brings to the wider Getronics group, the aspirational growth targets that have been set by new CEO Nana Baffour, and some of the key focus areas for Getronics moving forward.

Baffour became chairman and group CEO of Getronics in August 2017, following its acquisition from Aurelius for €220m, by Bottega InvestCo, of which Baffour is a majority shareholder. The Connectis business was acquired by Aurelius in 2012, providing applications and managed cloud services for ~500 clients in the Iberian Peninsula and Latin America Markets. It has ~2,400 employees, and a turnover of €130m.

Up until now, Connectis and Getronics have operated as separate entities, but in November 2017 Baffour announced the merger and integration of the two businesses (with combined revenues of ~€500m) under a new global Getronics branding – clearly indicating a greater desire from the new owners to operate as one company. Baffour also announced an ambitious strategy to increase revenues to $1bn by 2020, with 70% from acquisitions providing access to new geographies (people, tooling, experience in IoT and big data) or new industries; and 30% organic growth, which by our estimates would equate to ~26% targeted growth, of which ~8% will be organic. This will be no mean feat.

What does Connectis bring to Getronics?

Getronics has traditionally provided workplace management services, networks, UC&C and managed cloud services (through the 2016 acquisition of Colt’s managed cloud business).

Connectis’ primary target geography is Iberia; it also adds scale in Latin America (Brazil, Chile, and Argentina). It brings in application services capability, and industry-specific IP in the airports sector (currently focused on Spain), including mobile apps for passengers. Connectis also brings some datacenter management capabilities, which are more obviously complementary to Getronics’ infrastructure-centric portfolio.

Getronics is looking to cross-sell Connectis’ industry IP into its core geographies, focusing initially on the U.K. and Belgium. There have been some early wins in the U.K. airports sector, with Getronics supporting clients both onshore and from Connectis’ airport sector application maintenance center in Spain.

Getronics is also looking to cross-sell its portfolio into Connectis’ Iberian and Latin America regions; local management will retain autonomy in terms of go-to-market, a reflection of the importance of having local client relationships.

Utilizing field sales capability to target IoT-enabled opportunities

Getronics is looking to further develop its extensive field services capability, both within Getronics and through the wider Global Workspace Alliance (GWA), which it leads with its partner CompuCom (read recent CompuCom blog here). GWA has a network of 38k personnel, including 15k field services engineers, and supports 9.9m managed workspace assets and 6m users.

One initiative to expand the use of its field-force is the development of IoT-based offerings, installing and maintaining sensors and beacons. Other examples include managing drones in remote areas of Spain to check that building regulations have been met. In support of this, Getronics is forging partnerships with sensor and actuator manufacturers.

Emphasis on digital workplace

Getronics is also evolving its traditional service desk proposition to help clients evolve to a digital workplace. This includes an increased emphasis on the UX, providing a self-service and persona-led approach; also the Solution Café concept, providing walk-in tech support and training facilities, to further facilitate self-service capabilities.

Bottega looking to acquire to build on Getronics

Under its new ownership, Getronics is likely to follow the same acquisitive path it followed under previous owner Aurelius (who made five acquisitions). Baffour has set an aggressive M&A strategy. Of the target $1bn revenues by 2020, 70% will come from acquisitions, and 30% from organic growth, which would equate to ~26% targeted growth, of which ~18% will be inorganic growth.  

So, what should we expect to see in terms of inorganic growth? Initiatives we might expect include:

• Adding capabilities that are complimentary to the aspirations around IoT-enabled product support. This might include small to medium-sized specialists in the utilities sector
• Further expansion in Iberia
• Baffour is also CEO of Grupo Cimcorp, a Brazilian IT infrastructure services vendor with 600 employees, and he may decide to bring it into the Getronics fold.

Getronics also has the potential to utilize its IP in the airports sector, across new geographies, and also its IoT Smart Spaces offering across health, transport, land use and malls.

We recently talked to HPE Technology Services (TS) about its recent Pointnext branding campaign. Despite the divestment of its Enterprise Services unit, HPE has retained very significant IT services capabilities, provided through Pointnext. Technology Services is a sizable unit with FY16 revenues of ~$7.9bn (for the period ending 31 October 2016), and has a headcount of 25k across 80 countries.

It would be tempting to view Pointnext as the product-related services arm of HPE, providing mostly support and IT consulting services, all within the context of product “attach” sales (i.e. service sales tied to hardware sales). And indeed, product support (and the attach sales model) remains a key element of the services provided by Pointnext, with IT consulting services providing a small part of the overall revenue.

Nevertheless, the services portfolio under the Pointnext brand is broader than product support and consulting capability. Pointnext wants to accompany the full project lifecycle: capabilities include consulting services, professional services, and run services (“operational” services). So how will Pointnext rebalance its service portfolio mix away from support? HPE won’t say but we assume consulting (directly) and professional services (both directly and with the help of the indirect channel/VARs) are a priority.

With the Pointnext brand launch, the business has also had a portfolio refresh on the digital transformation theme, largely around IT infrastructure, in areas including cloud computing (application modernization and cloud migration) and hybrid cloud (“hybrid IT”), big data and analytics, IoT edge devices (“Intelligent Edge”), and IoT.

With its refresh around digital transformation, Pointnext is counting on HPE’s own hardware and software portfolio transformation. It is also investing in expanding its portfolio – e.g. in advisory services (emphasizing workshops and assessments), and run services (pushing aaS consumption models), together with its cloud computing partner Microsoft with Azure.

Pointnext’s delivery is also evolving, with the unit moving further towards offsite delivery. Currently, ~ 60% of its delivery is done remotely. This number will increase, with more CoEs being created onshore and offshore to drive a factory approach, even for systems integration activities such as migration of mainframes to open servers, and to private/hybrid/public clouds. Meanwhile, Pointnext continues to hire onshore for its advisory services.

The topic of delivery is closely related to that of VARs and partners, which provide professional services for installing HPE’s products, and for providing L2 and L3 support. Pointnext highlights that partners remain a core element of its go-to-market approach and continues to create repeatable and packaged offerings that can be resold by partners. Examples include strategic offerings HPE Flexible Capacity, an aaS model for onsite servers/datacenters that is supported by HPE Datacenter Care.

In many ways, with its focus on packaged offerings, its inclusion of the indirect model, and its “attach” business model, Pointnext differs from most tier-one IT services competitors. Dynamics are at work in IT infrastructure services towards more packaged, standard offerings. So, let’s welcome the new HPE Pointnext brand as a vendor focused on making that happen.

CSS Corp. is a privately held Milpitas, CA-headquartered IT services and tech support vendor that NelsonHall estimates had revenues approaching $200m in FY16. The company has a new leadership team, many of whom are ex-Infosys, and it is now looking to expand beyond its core technical support offerings into the growing digital transformation and cloud migration market. 

CSS Corp primarily works with consumer-facing industries, with NelsonHall estimating that ~95% of its revenue derives from clients in retail, CPG, media/entertainment, telecom and high tech sectors. This is a client base that is aggressively pursuing digital transformation and cloud adoption, with an appetite for migrating existing production workloads, including core applications to cloud environments. These initiatives are also frequently originating outside of the CIO’s office on the business side where primary objectives are focused on customer satisfaction and revenue growth rather than operating cost reduction. CSS Corp is being aggressive in developing assets to support this workload migration.

To support clients’ adoption of public and private cloud environments, CSS Corp has developed a suite of tools to automate activities supporting cloud adoption, including:

• Assessment and planning: CloudMAP
• Migrating to the cloud: CloudPATH
• Management of hybrid cloud ecosystems: CloudDRIVE

CloudMAP

CloudMAP is used to help support decision making to determine how, where and when to migrate workloads. It is the evolved version of the CRAFT tool that CSS Corp has been using for ~3 years. Through an analysis of business processes, information flows, application dependencies, and technical architecture, CSS Corp uses CloudMAP to develop a migration plan. This plan includes:

• Optimal hosting strategy for different workloads
• Activities necessary to make each workload cloud-ready, whether it is rehosting with minimal changes, refactoring for scaling and performance, or replatforming to cloud native platforms
• Timing and effort of each workload’s migration.

CSS Corp says the CloudMAP approach has enabled clients to realize ~40% cost reduction in the assessment and planning and ~30% reduced time to market. 

CloudPATH

CSS Corp employs its CloudPATH playbook to support the migration of workloads to the cloud. CloudPATH is a suite of templates, tools and artifacts that are pre-built to support specific types of migrations, including:

• Windows and Linux workloads
• VMware workloads
• Oracle workloads
• Storage and DR
• Analytics as a service
• Full-stack, business service solutions such as e-commerce or digital marketing stack and content delivery on the cloud.

CSS Corp has partnered with cloud native providers such as CloudEndure, CloudHealth Technologies, SoftNAS, PlateSpin Migrate and Dome9 Security. CSS Corp says its clients are realizing 30-50% reduction in the migration effort through the employment of these assets.

CloudDRIVE

CSS Corp’s CloudDRIVE leverages ServiceNow and technologies such as Nagios and Solar Winds for monitoring and alerting,  and CSS Corp’s automation platform and analytics engine Active Insights.

CloudDRIVE automates hybrid cloud management functions including:

• Health and performance checks
• State and change monitoring
• Event processing and analysis
• Process management
• Orchestration, provisioning and brokering
• ITSM
• Predictive analytics.

CSS Corp estimates CloudDRIVE drives 30-40% operational efficiency improvements.

These offerings are the core from which CSS Corp is looking to evolve its client relationships from pure technical support to being a digital transformation partner. 

Yesterday, NTT DATA Inc. closed its acquisition of Dell Services, seven months after its initial announcement.

The acquired entity, now called NTT DATA Services on an interim basis, has some obvious benefits. For example, it:

• More than doubles NTT DATA Inc.’s revenues from $1.7bn to over $4bn
• Significantly strengthens the infrastructure/cloud business of NTT DATA Inc., which traditionally is supplied by sister companies NTT Com (telecom services, datacenter, and hosting), security (NTT Security) and IT infrastructure services (Dimension Data). Dell Services generated $1.68bn in IT infrastructure and cloud revenue in its FY 2016 (to January 29, 2016).
• Brings in sizeable applications and BPO businesses (~$1.16bn revenue in FY16), with specific strengths in healthcare (~50% of revenues of the former Perot Systems). The BPO capability, in particular, will significantly boost NTT Data Inc.’s own capabilities
• Brings in industry-specific capabilities in sectors such as healthcare
• More than doubles NTT DATA Inc.’s India delivery capabilities, from ~12k to ~26k personnel.

So, Dell Services is a strategic acquisition - but at $3.06bn, it is expensive.

Perot Systems did not thrive as part of Dell. After Perot Systems became Dell Services, its financial performance was mixed. FY 2016 revenues were down 5% to $2,84bn (similar size to Perot Systems in 2008, and in May 2010, Dell said its Services business with the addition of Perot) was generating quarterly revenues of $1,891m). And its operating margin was just 5.3%.  The acquisition is also margin dilutive. NTT Data Inc. is generating an EBIT margin of over 10%.

Our perception is that some of the distinctive capabilities of the former Perot Systems became almost invisible when it became part of Dell. As part of NTT DATA, it is back to being a services pureplay, and the application and BPO businesses, in particular, are likely to receive more investment.

Japanese Owners take long-term view

NTT DATA continues to execute on its active M&A strategy. Thanks to its Japanese ownership and financial backing of its majority shareholder NTT Group, NTT DATA tends to take a long-term view, focusing on revenue synergies rather than margin expansion in the near-to mid-term. For NTT DATA Inc., for example, the ambition was to achieve revenues of $3.4bn by FY16. With the addition of Dell Services, this target will be surpassed.

‘One NTT DATA’ integration ambitions

An NTT DATA priority in recent years has been to absorb and integrate all its acquisitions to a federated region-centric structure that has several areas of coordination, evolving its operating model from a holding company scenario.

In North America, NTT DATA Inc. has been relatively successful in integrating the likes of Keane, Intelligroup, and Optimal Solutions. The integration of Dell Services, a business twice its current size, poses more of a challenge. In addition to its size, it also means an organizational realignment to a vertically-oriented go-to-market. However, CEO John McCain highlights the project management capabilities brought in by Keane. And the restructuring is not being done with undue haste: Dell Services former CEO remains until January to support the handover, and there are five more months for the new organizational structure to be implemented (the new leadership becomes effective from April 1, 2017).

Dell Services will clearly be the glue for ‘One NTT DATA’ in North America.

This is not the end of NTT DATA's M&A activity

“The acquisition of Dell Services is another step toward achieving our vision of becoming a top five global IT services leader.” Toshio Iwamoto, President and CEO, NTT DATA Corporation

NTT DATA is currently a Top 10 IT services provider: its growth ambitions remain.

In international markets, NTT DATA remains a series of geographical organizations, with a presence in Germany, Spain/Latin America, and Italy, rather than an integrated firm.  It has a gap in the key IT service market of the U.K.

Will NTT DATA continue to make small to mid-sized acquisitions such as Spain’s everis, or, perhaps, like it is doing with Dell Services, acquire a more significant player which could be the glue for an integrated One NTT DATA EMEA?

Will there ever be a global One NTT DATA? We don’t think this is likely in the short term.

Dominique Raviart and Rachael Stormonth

Unsurprisingly, given its investment in, and focus on, Watson, IBM declared at a recent Alliances Analyst Day that 2016 is 'the year of cognitive'.

The intent of the meeting was to look broadly at how IBM is working with its key alliance partners, including SAP, Oracle, and Microsoft, and it is clear that IBM’s focus is on incorporating cognitive capabilities and broadening the suite of industry-targeted offerings with each of its alliance partners. Here I take a look at how this is taking shape.

SAP

SAP is IBM’s largest and most mature alliance, with ~36k IBM resources focused on SAP. IBM perceived that its SAP offerings, and in particular SAP HANA S/4, were behind the market a year ago and has invested in improving its capabilities. In pursuit of this, IBM is working with SAP to expand and mature its offerings, particularly in digital transformation. Investments include:

• 40 resources from IBM and SAP collaborating on building out offerings
• $1m in marketing
• Two digital transformation centers (Palo Alto and Waldorf).

To demonstrate commitment, the boards of both companies have been receiving regular updates on the progress of these offerings. With a target for CY 2016 set at 50 new S/4 HANA engagements, as of June, the companies had already signed 52 new engagements.

IBM is positioning against its end-to-end capabilities, in particular its capabilities in digital and enterprise application services, and especially large, complex engagements spanning multiple offerings requiring flexibility of financial approach. One of the case studies presented was an engagement in which IBM was brought in to complete an SAP migration that had hit problems.

But its biggest focus area and differentiator is its ability to integrate cognitive capabilities on top of SAP functionality tailored to specific industry requirements. Given IBM’s focus on cognitive solutions and the relative maturity of Watson capabilities, layering cognitive directly on EA solutions can act as a differentiator versus other IT service vendors, focusing their machine learning capabilities internally to improve processes such as application development and incident management. An example is the integration of its MetroPulse product with S/4 HANA Retail, to leverage cognitive capabilities (including data from the Weather Company) that enable retail companies to identify hyper-local demand and adjust inventories appropriately.

Oracle

IBM’s Oracle practice represents its second largest EA alliance. It has certified ~1500 resources in Oracle Cloud applications, with a target of 2k certified resources by end of the year. Over 5k resources have received training virtually from the Oracle University.

IBM is working with Oracle to develop horizontal Cloud Enablement offerings and has so far developed the following:

• Budgeting and Planning Cloud
• CX Sales Cloud
• CX Service Cloud
• ERP Financials Cloud
• HCM Cloud
• Innovation Management Cloud
• Procure to Pay Cloud
• Procurement Cloud
• Source to Contract Cloud
• Transportation Management Cloud.

This investment in resource skills and offerings has begun achieving results, with IBM realizing a 275% increase in Oracle cloud services YoY. It has 50+ Oracle Cloud engagements across 30 clients currently active, and cloud engagements represent 20% of its total Oracle EA revenues in H1 2016.

As with its SAP offerings, IBM is focusing on embedding cognitive capabilities and developing industry-specific digital transformation offerings with Oracle. It is building out 30+ offerings across ten industries such as Oracle Banking Digital Experience, Cognitive Electronics, Digital Retail, and Insurance on the Cloud. Additionally, it is looking at integrating Watson and Oracle to create new offerings to be formally launched in the coming weeks, including:

• Watson Procurement Intelligence
• Field Tech Services
• Talent Advisor
• Financial Smarter Advisor.

IBM is targeting 7% revenue growth across Oracle EA offerings through the end of the year, as well as growing to a total of 45 Oracle cloud clients.

Microsoft

IBM’s newest EA alliance is with Microsoft, a partnership that is ~2 years old. IBM views its Microsoft offerings as providing, unlike Oracle and SAP, a means to target smaller and mid-sized companies. IBM’s Microsoft practice has ~4,400 resources, and 75% have received Microsoft certification.

An example of IBM’s commitment to growing its Microsoft practice is its recently announced acquisition of Optevia, a small U.K.-based consultancy (~40 FTEs) focused on helping public sector clients implement Microsoft capabilities. While Optevia’s footprint is primarily U.K. and Europe today, it is expanding with an engagement in the healthcare space in the Middle East as well as pursuing work in North America, Spain, and Southeast Asia.

IBM’s Microsoft group spans Microsoft offerings across big data and analytics (Power BI), enterprise applications (Dynamics, AX, CRM), mobile enterprise and collaboration (Office 365, Lync Server, Skype for Business) and application development and cloud (SQL Server, .Net, Visual Studio, Azure).

IBM’s Microsoft offerings leverage cognitive capabilities across a number of industry verticals, including:

• Banking CRM
• Insurance CRM
• Constituent Engagement (Local government essentials)
• Auto Retailer
• Next Generation Field Services.

One particular area of focus beyond the expanded integration of cognitive capabilities is Surface Business Transformation, an initiative to leverage Surfaces and develop enterprise applications for them based on Windows 10. An example of this is what IBM refers to as a ‘Meet and Greet’ app. For example, rather than a bank waiting to interact with customers once they reach the teller window of a bank, an associate armed with an enabled Surface can meet them at the door, pull up their information (as the Surface connects to a CRM server in the back) and provide immediate guidance and support. IBM is the exclusive Microsoft partner for the banking, retail, and consumer packaged goods industries.

IBM is also looking at building out its cloud and application management capabilities in support of these offerings.

Cloud

With cloud hosting and management a strategic priority for IBM in addition to cognitive, IBM is looking to integrate its cloud services with its alliance partners. One facet of this is IBM’s introduction of Cloud Management Services for SAP and Cloud Management Services for Oracle. These services integrate IBM’s cloud managed services, including support and uptime service levels, with SAP and Oracle software.

IBM is trying to move cloud discussions beyond the IT department. It is slowly seeing business executives engage on cloud projects and it sees the presence of a change agent as a key driver for realizing the value of cloud investments. Case studies discussed included new senior leadership coming in and divestitures as examples of drivers that resulted in the transfer of workloads to cloud environments.

Application Management

While IBM’s traditional application management business may not be trumpeted as frequently as its strategic imperatives, application management still accounted for ~19% of revenues in Q2 2016 and those services are evolving to take advantage of the new capabilities offered by cognitive.

IBM introduced its Agent Assist around a year ago to its support teams or us in to diagnosing and resolving incidents. EA is a key target area for Agent Assist, and IBM has built a standard knowledge base across SAP that can be implemented at the onset of an engagement and then expanded over time with client-specific information. Agent Assist is being deployed across 500 application management services accounts with over 5k resources are being trained on it. The next step will be a fully cognitive automation platform that not only identifies the resolution to an incident but is also capable of resolving incidents without human intervention.

For application development work, IBM is introducing Coding Assist, to facilitate developing common code blocks for ABAP, BI, and HANA.

These technologies are not intended for IBM consumption alone, though; as their maturity increases, IBM is looking to turn these into client-facing as a service products.

The rise of self-service provisioning and automation of public cloud environments gives companies autonomy in managing their infrastructure and flexibility in meeting fluctuating capacity demands. From the perspective of an IT service provider, however, if clients can provision new cloud environments in a few minutes and then use the same screen to orchestrate and manage that cloud environment directly from the host, does an IT services provider play the same critical role in managing infrastructure as it once did?

NelsonHall has found that rather than decrease in importance, the role of IT service providers may actually increase as clients move to cloud-based infrastructures. There are three main drivers of this:

• The need for help in developing and executing a migration plan
• The complexity of managing hybrid cloud environments
• The use of cloud as a foundation for broader digital transformation

Advisory & Migration Services Critical

Whereas, a few years ago, public cloud environments were used to host non-critical or non-production environments such as development or test, companies are increasingly looking to leverage cloud environments as broadly as possible across the enterprise.

Accordingly, IT service providers recognize the criticality of getting engaged in cloud advisory and migration for their clients. ~60% of the vendors profiled in NelsonHall’s recent Cloud Infrastructure Migration & Management project have made investments in cloud assessment automation tools and ~65% have invested in migration automation tools. The majority (~60%) also have PaaS offerings, based on open-source tools such as Cloud Foundry and OpenShift, to support developing cloud-native applications.

IT service providers are positioned to drive the process of defining how to disposition various workloads, including replacing existing applications with SaaS solutions, developing new cloud-native applications, or migrating existing applications to cloud environments, as well as where each should be hosted (public cloud, private cloud, on-premise) and have developed tools and methodologies not available within any single company.

In particular, IT service providers are increasingly investing in automation tools, such as AppDynamics Application Intelligence Platform, to enable the discovery and categorization of application landscapes, producing detailed migration strategies. These automation tools can reduce assessment and migration planning effort by 80-90%, with case studies showing effort that was measured in weeks and months now measured in hours and days.

IT service vendors are also leveraging broad application-migration resource pools in low-cost locations, as well as automation tools such as NetIQ’s Platespin, to accelerate the migration of workloads to cloud environments.

In addition, IT services vendors are managing to capture significant cloud management revenues from application assessments and migration services, with vendors typically reporting from 40% to 80% of their on-going cloud hosting and management engagements arising from advisory and migration engagements. These migration projects are increasingly where vendors build the knowledge and develop the relationships necessary to provide on-going support of cloud-based environments and the workloads that reside in them. For example, TCS, solely targets its cloud management services at clients with which it has an existing relationship, or at organizations for which it provides cloud advisory and migration services.

Managing Complexity in Hybrid Clouds

Large, established companies have found that there is not a one-size-fits-all cloud solution, so hybrid clouds spanning public cloud environments, private cloud environments, SaaS products, and legacy on-premise applications are becoming the norm. Management consoles that enable a company to provision, orchestrate, and manage across a variety of cloud environments through a single interface are critical for consistent IT infrastructure management in this new complex cloud environment.

For example, AWS sees IT service vendors playing a key role in driving clients on the hybrid journey: assisting clients to re-factor legacy applications to operate in the cloud, building new cloud-native applications, and providing the management of cloud environments across AWS and private clouds. NelsonHall estimates that ~40% of AWS’ large corporate clients are leveraging a third party service provider to manage their cloud environments.

Indeed, all 14 vendors profiled by NelsonHall have developed cloud management systems leveraging tools such as Chef, Puppet, ServiceNow and other tools, bundled into single proprietary toolsets that automate management functions and can be leveraged at centralized low-cost delivery centers.

Migrating to cloud environments and leveraging these automated management consoles has enabled companies to typically realize a 30%-40% infrastructure hosting and operating cost reduction and a drop in the time to provision new environments from weeks to hours.

Enabling Digital Transformation

While companies are looking at hosting workloads in the cloud to reduce operating cost, in many cases that is not the sole objective. NelsonHall’s Cloud Infrastructure Migration & Management study identified the use of cloud as a foundation for a broader digital transformation as a key driver of cloud adoption. Indeed, in ~19% of instances it was listed as the primary objective.

As consumer expectations for personalization and agility grow and new cloud-native companies become competition, digital transformation is a major focus area for most established companies. These digital transformation initiatives are broader strategic programs that often begin with migrating and managing workloads in the cloud.

While the value of cloud-hosted environments is measured in reduced infrastructure and operating costs, broader digital transformation initiatives typically measure success in client-facing and strategic objectives such as speed to market for new products, improved customer service, and ultimately increased revenue.

Accordingly, IT service vendors with a consultative and applications-centric heritage typically position their cloud migration and management offerings as components within a broader digital transformation service rather than as key ends in themselves.

Furthermore, given these critical roles that IT service providers play in supporting client cloud journeys, it doesn’t come down to making a fundamental choice between IT service providers and cloud hosters, as might be assumed. There are key complementary roles for both. 

Four years ago, at the time of the London 2012 Olympics and Paralympic Games, NelsonHall reported on the work Atos does for the International Olympic Committee (IOC) though its Major Events unit. See our previous commentary here. This week we visited its center in Barcelona to get an update on the work it is doing for the Rio Games starting next month,

The Olympic Games remain a fantastic opportunity for Atos to demonstrate it can handle complexity and scale for a very visible event. The numbers are humongous: 4bn viewers, 300k accreditations, 70k volunteers, 30k media members, 10.5k athletes - and also on the IT side: an expected 1bn security alerts, 200k hours of testing, 250 servers (equivalent to 1,000 physical servers) and 80 applications.

Major Events is a relatively small unit within Atos (we estimate revenues <€100m), with activity fluctuating significantly from one year to the other in terms of headcount and revenues. Major Events has diversified its client base from the IOC to other international sporting events, including the 2015 Pan American Games in Toronto. The unit is Spain-centric for historical reasons: Atos, then SEMA Group, had started servicing the IOC for the 1992 Barcelona Olympic Games. And in 2012, Atos acquired MSL Group a scoring and time group with sport domain experience, based in Madrid.

In addition to managing scale, Atos Major Events manages uncertainty: at the time of its contract renewal (until 2024) in late 2013, the company did not where the Olympics would take place in 2022 (Beijing) and 2024 (still TBD). The location impacts Atos significantly from a delivery perspective e.g. for the Sochi 2014 Winter Games, Atos faced IT labor shortage in Sochi and had to source personnel across Russia, and in Russian-speaking countries (i.e. Romania and Serbia). For the 218 PyeongChang Winter Games, Atos Major Events is facing a similar challenge, and will be relocating IT personnel from Seoul, 200km away. In total, the financial impact is significant (up to 20% in additional costs), all within the context of a fixed bid, done eight years before the event. Nevertheless, Atos highlights its margins on Major Events are positive.

Atos Major Events provides a full IT outsourcing service. This includes a SIAM role, working with ~30 technology partners (which it has not selected to work with, but has gained years of experience in joint work). In addition to its SIAM role, Atos provides systems integration services and software products (Games management System, including volunteer portal, sport entries and qualifications, accreditation service, and workforce management), as well as security services. Testing, of course, is a priority: “when we are finished testing, we start testing again”.

IOC Budget Shifting from Run Services to Digital

Reflecting a broader market evolution, the Rio Games take place in the context of shifting budgets: the IOC is looking to drive down costs on run services. IaaS (on Canopy private cloud) is a part of this change, with Atos using a Canopy datacenter in Eindhoven, Netherlands for the 2018 Winter Games. The biggest savings will come from removing the need for migrating 1k physical servers in a new onshore datacenter for each Games. Also, there a very significant space gain element. Obviously, the datacenter is located on the other side of the Atlantic for the Rio Games and Atos Major Events will be using dedicated leased lines for critical applications.

Delivery is also changing: the company will deploy its last onsite Integration Center (mostly providing testing services) for Rio 2016. Going forward, this center will be located in Madrid. As for Canopy/IaaS, the creation of a centralized remote center in Madrid will remove equipment migration needs, and associated costs. And Atos is moving back its application management work (~25 FTEs supporting its software products) from the host city to Barcelona.

What will remain in the host city is the Technical Operating Center (TOC), a command and control center providing IT infrastructure management, service desk, project management, security services. The TOC is significant (500 personnel of Atos, IOC and technology partners, over three shifts, operating 24/7 during the Games) but still needs to be onsite in the host city at this point.

The IOC is rebalancing its budgets towards digital, starting with mobility. In the London 2012 Games: just 1% of information was accessed through mobile. In Sochi, this number reached 80%! Rio will be the Games where visitors will attend one competition in one venue while accessing results of another competition on their smart phones. In total, ~8bn devices will at some point during the Rio 2016 Games access information provided by Atos Major Events.

In addition to mobility, Atos Major Events is working on integration with social media, and is investing in its media player (for streaming video, audio and data). It is also refreshing its software products to make them further user-friendly to the different communities and the media in priority.

What Else Will We See Next?

Digital will continue to be a priority for IOC, extending from mobile services to wearables and IOT (and therefore big data).

Another big digital push is services to the media and broadcasting industry. Provisioning of some level of media content is part of the plans.

To some degree, Atos is leveraging Atos Major Events capabilities in other units: certainly, in security, Major Units and the Big Data & Security unit are collaborating on methodologies, common IT architectures, and also on security scenarios.

There is also an element of cross-selling with the usage of Atos Bull SIAM software products and Bull Hoox encrypted phones. Looking ahead, Atos is considering using software products from its Unify subsidiary.

Our understanding is that Major Events is currently self-contained and uses the larger Atos, apart from security collaboration, on sourcing talent, for instance around testing. Will we see more experience sharing from Atos Major Events to the wider Atos? As Atos focuses more and more on being an integrated firm, to accelerate organic growth, this may happen. We also expect to see Major Events benefit from Atos’ investments in automation and AI over the next few years.

We would have liked to have heard more about plans around big data, analytics, AI and content, suspect that Atos is constrained contractually to disclose much about these.

In summary, the Olympic Games are a wonderful opportunity for Atos to showcase its capabilities around SIAM, project management, testing and security services, and to demonstrate it successfully handles scale, complexity and uncertainty, each time in a new location, every four years.

• The focus on IaaS and on Bluemix continues apace
• There is also accelerating focus on IOT from Watson IoT, the second industry focus for Watson after Watson Health, and The Weather Company: expect new offerings leveraging these over the next couple of years
• Cloud for streaming video is also a new area of focus
• For cloud intiatives, GBS continues to lag.

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"we are becoming a cognitive solutions and a cloud platform company"

As it undergoes a corporate reinvention, not for the first time in its history, IBM is positioning as being more than a “hardware, software, services” company; its current mantra is “we are becoming a cognitive solutions and a cloud platform company”. This positioning is reflected in the new segment structure:

• Cognitive Solutions: solutions software (incl. analytics, security, and social) and transaction processing software
• Global Business Services (GBS): the consulting, GPS and AM units, as before
• Technology Services and Cloud Platforms: the Global Technology Services (GTS) unit plus IBM’s cloud infrastructure and platform capabilities. This segment now includes WebSphere and related integration software products
• Systems: z Systems, Power and storage hardware offerings, and now also related operating systems software
• Global Financing, as before.

The priorities for investment clearly will continue to be Cognitive (e.g. the acquisitions of The Weather Company and of Truven for Watson Health) and Cloud Platforms.

Meanwhile, the GBS business, which has been kept very much in the shadows in recent years, has been increasing its focus on ‘Cognitive Solutions”, including setting up a cognitive consulting practice, and also strengthening its industry capabilities. Looking ahead, IBM has stated it intend to combine some Cognitive Solutions and GBS offerings in what it calls “Cognitive Solutions and Industry Services”.  

IBM asserts that this new structure is in support of its drive to both transform existing businesses and also address new opportunity areas (even build new markets) in areas such as Watson Health and Watson IoT.

IBM is also now providing additional revenue disclosures for revenues from “strategic imperatives” (analytics, cloud, mobile security, social), cloud, also as-a-service within each segment.

This provides a little more transparency on, for example, on the nature of its cloud revenues. Thus IBM reports it generated ~$10.2bn in cloud revenues in FY15, a growth, of which $4.5bn in as-a-service, of which approximately:

• $1.4bn from the Cognitive Solutions segment
• $1.8bn from GBS
• $4.0bn from Technology Services and Cloud Platforms
• $3.0bn from Systems

IBM is generating significant cloud revenues from:

• SaaS, with a range of IP
• Analytics/cognitive software: various IPs, with Watson key to the future of IBM. And IBM now sells Watson only on the cloud
• PaaS, with Bluemix fast becoming the platform of choice for developers
• IaaS, IBM claims its IaaS business grew by double digits in FY15

Continued Focus on IaaS and Bluemix

IBM continues to focus on IaaS (Softlayer and IBM Cloud Managed Services). In spite of the dominance of AWS, IBM still believes the potential for growth is huge, given the low proportion of applications hosted on the cloud currently (IBM estimates 10-15%). Inorganic growth continues to be part of the IaaS strategy, in particular for hybrid cloud, with moves like the June 2015 acquisition of Blue Box for its OpenStack capabilities.

In line with this hybrid strategy, IBM also recently signed a significant agreement with VMware to deploy VMware technology in its cloud datacenters to simplify the integration between clients’ private clouds and IBM cloud datacenters. Also relevant is the acquisition last October of Cleversafe for Internet-based object storage (for storing relatively inexpensively unstructured data and media files).

With PaaS, IBM continues to expand the functionality of Bluemix, which now has ~150 services and is onboarding 20k new registered users a week. Of course, the model of Bluemix relies on massive adoption; it is relatively inexpensive and will not materialize into revenue flows before many quarters. But the importance of Bluemix should not be downplayed. In many respects, IBM has produced with Bluemix a disruptive approach with its financial and product power. This is great news for client organizations.

Watson IoT and the Weather Company

IBM has several priorities for Watson IoT:

• Continue to develop the platform in terms of functionality, including expanding on communication protocols, on data provided by devices, on gateways (for ingesting other sources of data), real-time data visualization. IBM is applying cognitive APIs to its IoT platform: the intent is to detect sensors that are transmitting abnormal data and of course, understand the cause for those abnormal data.
• Driving its IoT effort towards verticalization: with use cases in telematics for the automotive and insurance sectors, and client examples across industries. The recently announced IBM-Cisco partnership on IoT analytics is looking at situations where devices have limited access to connectivity (e.g. containers in boats) and focusing on providing analytics at the device level, rather than within the datacenter
• Blockchain technology is also in IBM’s IoT horizon. IBM is helping a Finnish municipality creating a decentralized database, based on blockchain technology, for registering data across forestry and logistics firms. There is a security element to the blockchain approach. However, the business case for blockchain (vs. a centralized registration system) was not made quite clear in this use case. Expect to see an increasing focus by IBM on blockchain technology in the near future.

The Weather Company is another cornerstone of IBM’s IoT strategy. IBM expects a major differentiator will come from the combination of weather data with all sorts of external and internal data, which will drive use cases for many sectors, including the retail industry. This clearly makes sense at a high level but it is not obvious why IBM needed to spend $2bn in acquiring the assets of the Weather Company, rather than partner with it. It is not yet clear if competitors of IBM will be able to access data of the Weather Company.

We expect to see specific offerings that leverage the Weather Company start to be launched before the end of FY16.

Cloud Video

This January IBM launched IBM Cloud Video Services (services, analytics and software), enhanced by the acquisitions of Aspera, Cleversafe, Clearleap and streaming video service Ustream. Like weather, video is one of the richest and fastest-growing data sources, with some sources expecting it to comprise 80% of internet traffic by 2019. IBM is looking to benefit from the increasing use of video:

• In the media & entertainment industry. IBM is combining in IBM Cloud Video Aspera (for sharing large files such as videos) and Cleversafe for storing large data volumes.
• By marketing departments: positioning Ustream and Clearleap to help marketing departments stream videos as part of events and create buzz. This is the next phase for IBM Cloud Video.

Integrating IBM’s Cloud Initiatives

IBM provided us with consistent messaging for its many cloud computing initiatives. It has been acting fast on cloud computing (as indeed in all its “strategic imperatives”), using acquisitions as development accelerators. This approach provides speed and is indeed helping to strongly differentiating IBM but it is also expensive and requires integration work.

IBM is aware of this challenge and is aiming to bring together its platforms. It has created a Cloud Platforms unit, initially focused on Softlayer and Bluemix. The rationale is that IBM clients start their cloud adoption with IaaS and then expand to other offerings including Bluemix and then Watson. IBM released a new console/portal for Bluemix in February and is progressing on integrating the portals and service catalogs.

No mention of GBS

However, there was no mention of IBM GBS in the event, and the extent to which IBM GBS is aligned with any cloud computing initiatives from other segments is not clear. That could be a mid-term focus in IBM’s reinvention.

By Dominique Raviart and Rachael Stormonth

In short, 2016 started off with a bang, with two very large IT services acquisitions announced in the first quarter:

• Leidos acquiring Lockheed Martin’s IS&GS unit for $6bn
• NTT DATA is acquiring Dell Services for $3.1bn.

Compared with last year, the whole of 2015 saw just one multi-billion acquisition announced: that of IGATE by Capgemini for $4.5bn. We expect to see more large deal activity.

Atos and CGI Likely Bidders for Large Transactions in 2016

Among all IT services vendors, Atos and CGI are the most likely buyers: their business models are based on inorganic growth.

• Atos has clear growth ambitions. Its net cash position (estimated by NelsonHall) is ~€200m after the Unify acquisition. The U.S. continues to be a priority, in particular Managed Services, adding to the scale brought in by Xerox ITO
• CGI now has net debt under control (estimated at ~CDN $2.0bn) and can borrow up to CDN $1.7bn. CGI acquisition targets include around software IP, U.S. commercial and U.K. commercial.

Meanwhile, three other acquisitive vendors, Leidos, NTT DATA and Capgemini, have put a temporary hold on their M&A activities. Leidos and NTT DATA obviously will focus on finalizing and integrating their acquisitions, also on reducing their net debt (~$3.4bn and ~$6.5bn respectively). Capgemini has a lower debt (~€1.8bn) but less appetite for debt leverage than, for instance, CGI, and still needs to integrate IGATE and prove this acquisition is working. The company has denied any interest in acquiring Hexaware.

TCS, Cognizant and Infosys have the cash make large acquisitions. TCS does not have a track record in large transactions and does not need one: it still is enjoying industry-leading growth in spite of its size ($16.3bn in revenues in calendar year 2015). Cognizant has also enjoyed industry-leading growth but appears to be more large acquisition minded, even after TriZetto. For both Infosys and Wipro, inorganic growth is key to their 2020 revenue targets. Infosys’ target is $20bn (up from $9.2bn in CY 2015). Wipro’s target is $15bn (up from $7.2bn). Both have experience in small to mid-sized acquisitions. Neither has of integrating a large acquisition. 

CSC is in a different situation: acquisitions are a key component of its turnaround. Having acquired UXC to gain scale in Australia, it is now in the process of acquiring Xchanging which will bring in insurance software assets, inter alia. We expect to see more mid-sized acquisitions from CSC.

Finally, the network of companies that is Deloitte continue to make small acquisitions across the globe, many of them digital related.

So what themes will prevail in 2016? In short, all the current hot topics will remain

Gaining scale in India

Mphasis, Hexaware and Zensar are likely targets in 2016. And PLM service vendor, Geometric Ltd, whose largest client is ISV Dassault Systems, is also rumored to being up for sale. Valuation multiples in India defy gravity but firms like Hexaware and Mpashis are within reach, at ~$1bn-$1.5bn.

Mid-sized deals in U.S. Commercial

As we have noted above, the likes of Atos, CGI and CSC, also some of the Indian oriented service providers are interested in mid-sized vendors with a presence and IP in specific U.S. commercial industries, including utilities (but not energy, although there will be some fire sale opportunities) and healthcare.

BpaaS, or at least a BpaaS aspiration, is likely to be a feature of some of these deals. An early example this year is Wipro’s announcement in February it is to acquire HealthPlan Services for $460m.

Digital Capabilities and RPA IP: Small to Mid-Sized Acquisitions

Looking at smaller acquisition activity, obvious attractive targets will continue to be firms, often privately held:

• With digital services capabilities, including in digital marketing, UX, cyber security, and SaaS implementation services. In particular, we expect to see M&A activity around cyber hot up this year
• That have IP around RPA or cognitive intelligence.

Many of these targets have headcounts in the 50 to 200 range and are local players. Competition for these firms is high and includes the largest global IT services vendors, with Accenture having led this drive for the last four years.

The hunt even extends to very small firms. Giants such as Accenture and IBM are acquiring firms with specialisms in perhaps digital strategy or SaaS services that have fewer than 100 employees.

The market is getting further crowded; telecom service providers continue to acquire in security while the advertising sector has expanded its M&A scope from UX to SaaS services.

And what will we see in the mid-term?

IoT, IT/OT and Big Data Will Become Increasingly Important in the Mid-Term

IoT, also the integration between IT and Operational Technology (OT) will drive a lot of M&A investment in the years to come, initially around IoT platforms, with the intent to reach scale, create a vertical-specific IOT platform, or gain point capabilities e.g. device security testing, creating device-specific apps. In all likelihood, acquisitions will be small in scale; an early example is that of Radius by Luxoft.

On a large scale firms that have IP around big data will be attractive (while this was not an IT services acquisition, that of The Weather Company for $2bn by IBM was an interesting move that will prove its value in the longer term).

Accenture Drives M&A Activity in Digital Services

The topic of digital transformation services (DTS) has been dominating conversations and management focus for the past three years. Yet, quite surprisingly, it has not been a major focus of attention in M&A activity, apart from Accenture and Singtel.

Accenture acquired 18 companies in its FY15 for $800m. The majority of those were digital agencies or in DTS overall. And Accenture is very likely to make further acquisitions: the company has guided it is targeting acquisitions will represent 1% to 2% of its revenue growth in FY16. The company has the funding: it has a net cash balance of $3.1bn and will receive a further $0.8bn from Amadeus for the sale of its Navitaire business.

Deloitte has a similar M&A strategy to Accenture, though the Deloitte Consulting network also continues to grow its capabilities in traditional ERP services as well as acquiring digital agencies and security firms. Deloitte Consulting is a third of the size of Accenture  and has wider gaps in its service portfolio.

Among the Indian oriented service providers, Infosys, Wipro and HCL Technologies are also accelerating in DTS investments with each having made two to four acquisitions this year. Wipro and Infosys want to gain local capabilities in digital agencies for digital UX, HCL Technologies in specific SaaS skills. Wipro and Infosys are also investing in newer offerings such as BPaaS and automation.

Finally, looking at new offerings, Singtel made a significant move with its $80m acquisition of Trustware, a managed security services vendor with revenues of $216m. While telecom service providers have shown little interest in acquiring IT services capabilities this decade, managed security services is more of an adjacent capability –and is a high growth, potentially high margin, market.

Consolidation of the Public IaaS Industry Begins

Amazon Web Services continues to enjoy impressive revenue growth and very high margins. Microsoft with Azure, and Google Cloud are also growing well. The rest of the public IaaS industry is probably in a different shape. The IT industry seems to have decided that the public IaaS was no longer an open industry with large capex investments and few winners. M&A has been limited as a result and we are expecting more divestments. HPE is shutting down its public IaaS business (HP Helion Public Cloud) on January 31, 2016 and emphasizing its private cloud capabilities and its expertise in managing heterogeneous environments.

We are seeing this growing aversion to large capex investments reach the adjacent hosting industry: Equinix is buying Telecity for £2.3bn. On a much smaller scale, AT&T sold its managed application hosting to IBM and Colt its cloud/hosting unit to PE-backed Getronics in the U.K. And IBM won a $1bn IT infrastructure management deal (involves the transfer of 580 personnel) from Norway’s EVRY to develop a hybrid infrastructure based on IBM’s public IaaS SoftLayer.

Looking ahead, we expect several more regional vendors will follow EVRY’s approach and divest their capex-intensive hosting and datacenter activities. Similarly, we expect to see large telecom service providers either investing further in IaaS or exiting/selling the business.

We will soon publish a third article on our M&A expectations for 2016.

In its FY15 (ending March 31, 2015) this part of CSC achieved revenues of $8.1bn, and an adjusted operating margin of 10%.  

However, H1 FY16 revenues were just $3.55bn, and guidance for FY16 is $7.5bn. So this is a company still in negative growth, with no sign of topline recovery in either division: GBS revenues were down 13.4% y/y (down 5.7% in CC) to $1.8bn and GIS down a painful 19.8% (down 13.2% in CC) to $1.754bn.

Yet management is now talking about a resumption of organic growth (of 1%-2% in constant currency) by H2 FY 2017, with acquisitions expected to bring an additional 1% - 2% per year. Is organic growth likely? We think not.

While we believe CSC may well resume topline growth by H2 FY17 (for the first time in many years) we believe this will be driven by acquisition activity.

Since the arrival of Mike Lawrie as CEO, there has been a sharp improvement in profitability - and the drive continues. For example over the next three years CSC is targeting a margin improvement of 125 to 175 bps from delivery and workforce optimization. And in procurement, it is looking to take out another $300m in spend

But achieving topline growth in the legacy business? Let’s look briefly at the current portfolio.

GIS: still impacted by red contracts; may shed its data centers

While the number of red contracts in Global Infrastructure Services (GIS) is far fewer than the 45 when CEO Mike Lawrie, a handful still remain – and their impact continues: they will represent a revenue decline of 200m to $250m in FY 2017.

GIS has changed its market approach, only going after large deals very selectively. But strengthening the sales culture, for both hunting and farming, and account management is not something that can be done speedily, particularly in a global organization like CSC. The company has increased sales-related expenses to 5% of revenues and claims it is both retraining and hiring aggressively. However, it is hardly an employer of choice currently.

In recent years, GIS has standardized and streamlined its portfolio, and repositioned from large asset transfer deals to smaller deals, in line with a general market shift. CSC has sought to reduce delivery fragmentation across clients, and drive hardware, software, tool and process standardization. As it admits“[previously] we had volume but we did not have scale”. This will help in pricing – but enough to win enough new business to drive topline growth?

In what would be a dramatic move to move to an asset-lite model, CSC is now considering shedding its large estate of datacenters and moving to a co-location partner model.

GBS: Turning around US consulting and growing Celeriti Fintech both key

Within Global Business Services (GBS) the consulting unit has recently seen mixed performance in terms of topline growth and profitability. In Q2 FY16, the U.K. was back to growth (18% in CC) whereas the U.S. consulting was (down 5%). CSC is confident it can replicate its success in its U.K. consulting practice in the U.S. We are not convinced.

Elsewhere, GBS is expecting slight organic topline growth (up to 2%) in its Industry Solutions and Services (ISS) business in the banking, insurance and healthcare/life sciences sectors.

Key to this will be the JV with HCL Technologies (‘Celeriti FinTech’) in which CSC has put Celeriti and Hogan, and which addresses modernization opportunities in the banking sector.  It is too early to tell how successful this JV will be - but speed is of the essence, both in the platform development and in the sales efforts.

CSC did not address in the investor day how it is going to address its fast decline (~7% in CC in H1 FY16) in its application management and software testing businesses. Traditional application management continues to prove tough, even for some of the larger IOSPs. And the AppLabs acquisition has not helped CSC achieve the kind of growth in software testing that other vendors have been enjoying recently.

“Next-Gen” Offerings: Targeting 30% CAGR

CSC claims its “next-gen” offerings will represent ~$700m of its FY16 revenues (or just over 10%). They comprise

• Cloud $210m
• Cybersecurity $150m
• Big data $80m
• “Other next-gen”: $260m.

A targeted 30% CAGR means revenues of over $1.5bn by FY19 - excluding any contribution from acquisitions. And here the targets for the legacy business get a little cloudy, particularly in “other next gen”, also what is in scope in “cloud” (e.g. does it include BPaaS).

Overall, the aspiration to achieve organic revenue growth seems optimistic.

Acquisitive Growth Will Reshape the Portfolio

CSC is essentially a company that continues to look to reinvent itself. We believe any profitable growth in the next few years will be dependent on acquisitions.

The four that CSC has recently closed or is actively considering (we have written separately about all of them in other blogs) indicate where CSC is looking to reshape its portfolio:

• Fixnextix and (if it completes) Xchanging will boost the ISS and industry-specific BPS business in the BFSI sector
• UXC (again, if it completes) brings in additional scale in Australia, plus useful practices for ServiceNow and Microsoft Dynamics
• Fruition Partners brought in ServiceNow integration capabilities.

Together, these will mean an investment of ~$1.2bn…. above CSC’s guidance of acquisitions accounting for 15% of its capital allocation.

Before, CSC was talking about acquiring in areas such as cyber (for commercial, enterprises, not just in the federal). The emphasis now appears to be more strongly on GBS, and on industry IP, domain expertise and BPS in a few target sectors. While CSC has longstanding experience in both insurance software business and in insurance BPO, it has not historically really leveraged the former to build a BPS business: this would mean a shift in focus.

Another area where we might expect to see inorganic growth is in analytics.

We recognize that organic topline is not the Holy Grail when it comes to shareholder value: CGI provides a great example of a company that is superb at managing and integrating very large acquisitions every few years without achieving organic growth. In comparison, CSC’s track record in acquisition is mixed, and it does not have CGI’s “Management Foundation”. 

But CSC knows it needs to move fast. Will it reach $8.5bn revenues by FY 19? Possibly. Will it achieve this through organic growth? Probably not.

Dominique Raviart and Rachael Stormonth

Capita states it believes the acquisition would:

• Position Capita as a leading provider of technology-enabled BPS
• Provide a stronger platform for Xchanging to accelerate sales growth and to develop its offerings
• Enable Capita to secure £35m+ in cost synergy benefits
• Be immediately earnings accretive.

Capita has been in discussions with Xchanging since early August regarding a possible offer, upping its initial 140p offer to its final 160p proposal on September 24 - which Xchanging’s board confirmed it would be willing to recommend on September 29 should Capita make a firm offer. Capita was granted due diligence access and had until 5pm on November 2 to make an announcenent.

There is another suitor, Apollo, with whom Xchanging has been having discussions about a potential 170p offer. Will this announcement push Apollo into making a counter offer? Xchanging's share price has surged since the news of the potential talks (over 165p at the time of writing, though still below its one-year peak).

Xchanging has been contending with a range of issues, and its global portfolio lacks coherence, partly a reflection of its heritage in a few large and diverse “Enterprise partnerships”. Xchanging is currently between CEOs, Ken Lever having announced his intention in July to step down at the end of the year, and new CEO Craig Wilson not yet started.

If Capita were to complete, this would be its largest ever acquisition, dwarfing its second largest, the £157m acquisition of avocis this February (though there have been a number of £50m+ acquisitions since 2011, helping Capita expand into new markets or extend its IT capabilities).  So why is Capita so interested?  

In recent years, Xchanging has repositioned and invested to emphasize its capabilities in “technology-enabled BPS”- exactly what Capita is emphasizing with its own various BPO offerings.  Also, the private sector is increasingly important to Capita (over 60% of its current pipeline is in commercial sectors) and Xchanging would increase its presence in the Lloyds market, where Capita already has a presence for specialist services.

Looking in more detail at Xchanging assets that would be attractive – or at least very relevant - to Capita:

1. Xuber software suite for the non-life commercial market: the biggest investment to date (a whopping $200m+ in total investments since 2011), both in platform development and in acquisitions: in 2014, Xchanging invested £75.6m in acquiring Total Objects, whose binder software is now integrated into the Xuber suite, and Agencyport Europe,extending its software into the health insurance sector, with software for international private medical insurance and exposure modeling (acquisition was delayed), plus a further £11.7m on development of Xuber. Xchanging has found converting interest in Xuber to sales more challenging than anticipated, particularly in the U.S. Will Capita’s greater commercial clout help? It would inherit sales teams from Xuber, Total Objects and Agencyport Europe that need integrating into a single unit to cross-sell, where relevant, the portfolio. Would Capita place the Xuber business in its newest operating division “Capita Digital and Software Solutions”, or would it place it in an insurance sector division?
2. The Xchanging Claims Services BPS unit : Capita is already active with a range of specialist services in the London insurance market: this capability would neatly expand its portfolio
3. Xchanging’s business in Germany, where it provides investment account administration BPS for Fondespot Bank, will also be of interest to Capita, who is building a presence in the DACH region, via an acquisition spree in the CMS BPS market, also via an insurance BPS contract with Zurich. The complex administration services in Germany that Xchanging would bring in to Capita would fit well in its Asset Services division
4. Procurement: Xchanging has been through a significant change of direction with its procurement services in recent years, to technology-led offerings, boosted by the acquisitions of MM4 (which was U.S centric) and Spikes Cavell Analytics Ltd (SCAL, which was U.K public sector centric). These offerings may find traction in the Capita client base
5. Expanded offshore IT services capabilities: in India, Xchanging has centers in Chennai and Pune, Bangalore, and tier 3 cities such as Shimoga (Karnataka).  It also has a center in Kuala Lumpur, Malaysia, most providing IT infrastructure services to YTL Communications, and a smaller ADM unit in Singapore (where Capita also has a small presence, targeting the reinsurance sector). There is also some offshore BPO activity in India and Malaysia. Capita may rationalize some of these sites, but would certainly be interested in the expanded offshore application services and BPO delivery capabilities
6. IT services: Xchanging has some networking capabilities, with a client base in the education and health sectors, as well as Lloyds – this would fit well into the Capita IT Enterprise Services division, which has grown through a series of acquisitions in recent years

And less attractive to Capita?

• The Australian operations, where Xchanging’s New South Wales Workers’ Compensation contract was not renewed, and where its procurement business has not really gained traction.
• The U.S. business: Capita’s international efforts are currently focused on Northern Europe. It would be a major change of strategy for Capita to start targeting the U.S., and its management will be highly aware of other service providers who have tried and failed to penetrate the U.S.

But overall, Xchanging’s portfolio is particularly well suited to Capita's business and where it is looking to develop over the next few years. And the cost synergies from the head office rationalization are also a particularly good match.  

We thus believe is highly unlikely that, even if there is a higher counter offer from Apollo, the Xchanging board will change it recommendation to shareholders: Capita presents a better option longer term. Howver, a counter offer from another IT services vendor might be more attractive.

NelsonHall has just published a comprehensive Key Vendor Assessment on Capita. We have also historically included Xchanging in the KVA program.

This is a wise move, given the high growth rate of Workday. Although Workday does not break out its financial results between HR and finance, total company FY 2015 revenues were $787.9m (up 68% y/y), with ~700 global clients.

In FY 2015 Workday added 1,150 employees, ending the year with 3,750. An additional ~1,250 employees are expected to be added in fiscal 2016 to end the year with 5,000 employees. The bulk of the employees will be added in Europe and Asia Pacific as part of Workday's global expansion. By KPMG acquiring Towers Watson's resources in the U.K. and four key Asia Pacific countries, KPMG will be prepared with the right resources to support this high growth.

Clearly, KPMG is focused on HR transformation, having made five other related acquisitions since 2011: EquaTerra, Optimum Solutions, The Hackett Group's Oracle Enterprise Resource Planning practice, Zanett Consulting Solutions, and the Workday practice of Axia Consulting.

And now KPMG is strengthening its Workday implementation ability to rival HR consultancies and HR BPO vendors including Deloitte, Mercer, Accenture, IBM, Aon Hewitt, CSC, HP, and NGA HR. This is big business. Major Workday implementations to date include:   

• HP, with over 300k employees in >100 countries
• AstraZeneca, with 66k staff in 130 countries
• Sanofi, with operations in 100 countries
• Flextronics, with 200k workers in 25 countries
• CSC, with ~70k employees globally.

With the high growth rate of Workday, it appears there will be no shortage of client implementations to go round, with a good choice of vendors. Vendor selection will depend on a number of factors including prior experience, in-country resources, desire to engage an HR consultancy or an HR BPO provider, or both! 

• Revenue was $4,817m, down 15.5% y/y, and down 10% in constant currency (CC), reflecting key account run off and weakness in EMEA
• Segment earnings before taxes (EBT) were $194m, a margin of 4.0%, up 143 bps y/y.

Q2 FY 2015 revenue by service line (with y/y revenue growth) was:

• IT Outsourcing $2,871m (-20.2%, -10% in CC)
• Applications and business services $1,946m (-7.6%, -2% in CC).

HP ES contributed 18% of HP Group revenue and 8% of Group EBT (up from 5% last quarter)

HP Group is nearing the completion of its 2012 restructuring plan. In Q2 FY 15, ~3.9k people exited HP making the total reduction to-date ~48k. The program has a total of 55k people expected to exit by the end of FY 2015, so a further 7k departures over the next two quarters.

HP has maintained full FY 2015 guidance for Enterprise Services of a revenue decline of between 4% and 6% on a constant currency basis, with an improvement in H2.

So where are the positives in HP ES' performance this quarter?

• A significant improvement in revenue performance in the Apps and Business Services segment, with a CC y/y decline of just 2%. This is led by the BPO business. And some geos are showing flat to slight CC growth
• Signings were up year over year, even without the $2bn Deutsche Bank deal closed at the beginning of the quarter (see our commentary here).
• And “Strategic Enterprise Services” signings continue to grow.... though no details are provided.

But the problems continue at  HP ES’ ITO business. It not only continues to be impacted from contract runoff from three large accounts continues, but is also being challenged by the evolution in the market. Meg Whitman refers to “risk in the longer term sustainability of this profit level if we don’t do further cost reductions”. As such, the current intention is to streamline HP ES and take up to $2bn of gross annualized costs out of the business over the next three years in pursuit of a longer term EBT margin target of 7% to 9%. The likely charge represents around 9% of HP ES overall revenues - and 14% of the revenues of the ITO business.

The restructuring actions in HP ES and in particular ITO will include initiatives such as further offshoring, data center automation, pyramid management… the same actions highlighted by CSC earlier this week.

Nevetheless, Whitman has made a clear statement of commitment to the future of HP ES: "the Services business in ES - (and the) -  TS Consulting businesses are  becoming more strategic to the future of Hewlett-Packard Enterprise…. “increasingly, services is becoming the tip of the spear”.

Background

ITO Index data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations, and a further reduction in new-scope contracts. The ITO market has also been impacted by offshoring, with very significant reduction in prices and TCVs, and increasingly by cloud computing (and in particular public clouds).

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 2014 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% full-year). ITO spending growth was slightly negative in Q4 2014: it has been since Q1 2013. This is a bit of a surprise: when we did our initial spending analysis and estimates three months ago, we expected flat ITO spending in Q4 2014, not a (small) decline.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies, including North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal. In Q1 2015, growth in bookings was significant at +40%, driven by Europe. Activity in North America was stable and activity in fast-growth countries was limited.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts), and an estimated 72% of contracts with a TCV over $100m were new-scope in Q1 2015. The level of new-scope contracts varies from quarter to quarter significantly and therefore we cannot read too much into Q1 2015’s high level of new-scope contracts. However, it is worth pointing out that the level of new-scope contracts has gradually increased from 30% in 2012 to 40% in 2014. Q1 2015 therefore fits well with this trend towards a higher level of new contracts.

NelsonHall’s forecast for 2015

Despite Q1 2015 bringing good news in its three main KPIs (better economic conditions, contract bookings in dollar terms, and percentage of new-scope contracts), we believe the outlook for IT services in 2015 remains mixed.

Indian offshoring will have a continued deflationary impact on prices and spending across IT services. To a lesser extent, public cloud computing is also impacting spending in server management and datacenter services. Both adoption of offshoring and public cloud is accelerating: evidence of contracts has expanded from Nordics and the Netherlands to Germany, and adoption of public IaaS is also accelerating in the U.S. primarily, but also in Europe.

We are therefore predicting limited higher growth in IT services spending overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

You can register for the next ITO Index webcast scheduled for July 2nd, 2015 here.

The acquisition will enhance Accenture’s digital capabilities in analytics, cloud and mobility for federal agencies. It also will add agile delivery expertise. Agilex brings in capabilities in agile software development for digital solutions. The company currently serves a number of federal departments and independent agencies, such as the VA, DoD, DHS, and Department of Commerce.  Commercial sector clients have included Amtrak.

Agilex was founded in 2007 by the late Robert La Rose (who had previously founded Advanced Technology Inc. and Integic, both of which were subsequently acquired), Jay Nussbaum (ex. Citibank and Oracle) and John Gall and quickly attracted senior talent to its leadership. The company offers services around

• Mobile applications for activities such as field inspection, emergency response management, performance dashboards, biometric identification, asset management, case management, personal productivity, etc.
• Healthcare IT - for example Agilex was involved in the deployment of the NHIN CONNECT Gateway. Also m-health - for example in May 2014 it was awarded a contract by the VA to develop and implement an enterprise web and mobile application image viewing solution
• CRM solutions.

Agilex has grown from 20 employees in 2007 to about 800 today. Nussbaum and Gall will leave when then acquisition closes, while the company’s leadership team will be integrated into AFS.

So why the acquisition? 

• AFS is already one of the largest U.S. federal systems integrators – this is about continuing to evolve its capabilities to be at the forefront of newer areas of demand; quite simply, Agilex brings in capabilities around digital technologies – and digital is clearly among the top priorities of the government sector
• And governments, not just in the U.S., are looking with much more interest in agile delivery as they move away from massive monolothic projects (for example, agile delivery has been a key element in the U.K. in the development of a new Universal Credit system for the DWP)

Accenture’s 2013 acquisition of ASM Research expanded its presence in the military healthcare market (DoD and VA) - and Accenture has worked alongside Agilex in projects at the VA. 

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

Background

The data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations: in 2009, bookings were up to a very high level, but that of new-scope contracts were low (~20%). Unlike 2001 when the internet bubble burst, the 2008-9 crisis was about existing contract renegotiations, not about new deals.

Contract signings were high during 2009 and 2010. But then, booking levels declined to their lowest level since 2008, to ~$32bn. Meanwhile, the level of new-scope contracts continued to be low. In short, the market is quiet with few transactions, mostly renewals and recompetes. This signals a maturing market, also marked by the impact of offshoring (which is reducing prices and TCVs very significantly) and also - and increasingly - by cloud computing (and in particular public clouds).

About three years ago, NelsonHall complemented its ITO Index approach based on contract data with a quarterly spending analysis of IT services, professional services (i.e. consulting and systems integration) and ITO. Our quarterly spending analysis has several benefits: it provides a quarterly view on how ITO spending is going to evolve, while our contract signings analysis provides more of a 12 to 18 month view of how ITO spending will change.

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% in full-year).

Meanwhile, for the first time since Q4 2012, ITO spending growth was in positive territory in Q4 2014 (up by almost 1%) and down 1% for full-year 2014. This final quarter improvement in spending growth results from better economic conditions in mature countries.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies as well as in North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts): an estimated 40% of contracts (with a TCV over $100m) in full-year 2014. This is better than 2013, when new scope contracts accounted for ~35% of bookings (and 30% in 2012). This level is at the higher end of the traditional range and is good news.

What does NelsonHall forecast for 2015?

The outlook for IT services in 2015 remains mixed, with the improving economic conditions driving some spending. For ITO specifically, the higher level of new-scope contracts will also have an impact on spending.

However, the economic environment in mature economies is only somewhat better. It is positive for India, unclear for China and Brazil, and clearly negative for Russia. In addition, offshoring will continue to further drive prices down, resulting into lower spending.

We are therefore predicting limited higher growth in spending in IT services overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

SAP

IBM’s largest partner has been, and remains, SAP. IBM conducts SAP-related work around GBS, including C&SI and AMS, Systems & Technology (including AIX servers, cloud computing and storage, now that IBM has sold its x86 server business to Lenovo). As always with IBM, no idea of scale was provided. Yet, 60% of SAP services work is project services and the remaining AMS.

Activity in SAP services remains driven by large ERP implementation in fast-growth markets, adoption of SaaS applications, especially in the U.S., and of new technologies, e.g. mobility and big data (along with SAP HANA). Work around SAP instance consolidation is less prominent. Interestingly, the success of SaaS applications in HR and CRM is resurrecting best-of-breed discussions, a topic that had disappeared in recent years.

Nevertheless, the vast majority of SAP services activity remains on-premise and implementation-related. IBM wants to increase its focus on SAP newer technologies: the company has invested in growing the number of consultants on SuccessFactors to 1.5k and is also accelerating on hybris.

SAP HANA is also a priority: IBM is officially certified for hosting SAP HANA.

SAP’s shift towards newer technologies is also inducing changes at IBM. IBM GBS EA’s SAP practice is investing in a skill shift towards more PMO and handling more complex engagements involving on-premise, cloud and SaaS services. Another area of investment in its SAP project business is towards Indian offshoring and onshore factories, selectively.

Oracle

A rising partner is Oracle, with whom IBM provides services from two main units: its Oracle practice, as part of Enterprise Application, itself a unit of GBS; and GTS, around Oracle middleware and databases.

Interestingly, Oracle shares with SAP the same strategy towards newer technologies. Differences exist, however:

• Like SAP, Oracle is undergoing a change towards SaaS and mobility. And like SAP, Oracle-related work is largely related to traditional on-premise implementations. IBM GBS’s Oracle practice is working on further strengthening the relationship with Oracle, investing in retail (former Retek) and omni-channel. Meanwhile, the Oracle unit is also investing selectively in professional services around Oracle software products specifically by geography, e.g. iflex in Middle East/fast-growth economies
• Unlike for SAP, IBM is investing selectively around Oracle SaaS products, focusing on two main initiatives: a ‘retail in a box’ offering, which combines a pre-configured Retek application hosted on IBM’s cloud; and the HCM Fusion Cloud application.

Mobility

Meanwhile, mobility remains an important driver for growth. This is where IBM's recent alliance with Apple comes into play: IBM is to develop 150 standalone apps in the next months that it will sell as software products. IBM’s apps are verticalized and target specific feeds: one such targeted app will help plane pilots to estimate their fuel needs for a given flight, based on parameters including weather conditions during flight duration, including time to take off and land.

The agreement with Apple on these standalone apps is mutually exclusive and IBM will only develop apps as "products" for iOS and not for other OS including Android. Yet, as part of traditional custom projects, IBM is to continue to develop apps for all OS.

Other terms of the agreement include reselling Apple mobile devices, and providing repair and maintenance services, including spare parts in countries where Apple is not present. Interestingly, IBM is open to buy the existing mobile device estate running on Android or on BlackBerry OS and replacing them with iOS devices, when necessary.

Work conducted with Apple is nascent at this point.

Along with this initial agreement, IBM is developing its apps strategy and also developing on a custom basis (whether on its IBM MobileFirst products or on SAP Fiori/Oracle OVD technology), to integrate with SAP and Oracle ERP applications. The offering is a work-in-progress but remains an important long-term development plan.

Tackling Increasing IT Complexity

IBM highlighted the similarities between the strategy of Oracle/SAP (i.e. cloud computing, big data and mobility) and its own strategy. And indeed, the three companies are well aligned. Nevertheless, from an IBM point of view (e.g. the SAP practice within GBS), the move towards cloud, big data and mobility has very considerable implications in terms of reskilling and the sales model, and even more in terms of handling complexity.

And perhaps one overlooked aspect of the move towards SMAC is that the world of IT is not getting simpler but largely more complicated. IBM's service mix (as well as Accenture's) around SAP and Oracle applications shows the co-existence of on-premise applications, SaaS applications, technical upgrades with SAP HANA driving new usages, and of course mobile apps, as well as public cloud, virtualized servers, and hybrid clouds. This increasing complexity is accelerating: as mentioned earlier, SaaS discussions are bringing back the notion of best-of-breed. In addition, IT services vendors are now reporting that SaaS implementations are becoming more comprehensive and more costly.

A lot of this growing heterogeneity has driven in the past five years the emergence of the cloud orchestration notion.  Cloud orchestration is a useful activity to handle complexity. Yet, in principle, this growing IT complexity seems in contradiction with what IT departments and also IT services vendors have aimed to achieve in the past 10 years, through process standardization initially, through IT vendor consolidation, and  IT product standardization. The question therefore remains how to reconcile complexity with a need for standardization and lower costs.

Looking ahead, it is becoming clear that the next economic slowdown will drive further standardization, similar to 2008-2010 when SAP clients invested heavily in SAP instance consolidation. The big question is therefore how to do this now, rather than in 5 years. The question remains open but NelsonHall argues several broad principles should be applied, including:

• Asking businesses to re-use existing tools, software, hardware or resources. In particular, IT departments have a role to play in offering a limited choice of, say, three standard technologies for one given business requirement. Limiting choice will optimize personnel usage and drive license cost down/maximize reuse
• Evaluate and measure on an ongoing basis the usage and impact on service desk/technical help desks, as well as proceed to code quality audits
• Be flexible by managing increasing heterogeneity. For instance, clients may want to maintain IT standardization in applications such as ERPs that are integrated with many other systems, while allowing more customization of little-integrated ones, e.g. SaaS CRM or mobile apps.

Background

The data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations: in 2009, bookings were up to a very high level, but that of new-scope contracts were low (~20%). Unlike 2001 when the internet bubble burst, the 2008-9 crisis was about existing contract renegotiations, not about new deals.

Contract signings were high during 2009 and 2010. But then, booking levels declined to their lowest level since 2008, to ~$32bn. Meanwhile, the level of new-scope contracts continued to be low. In short, the market is quiet with few transactions, mostly renewals and recompetes. This signals a maturing market, also marked by the impact of offshoring (which is reducing prices and TCVs very significantly) and also - and increasingly - by cloud computing (and in particular public clouds).

About three years ago, NelsonHall complemented its ITO Index approach based on contract data with a quarterly spending analysis of IT services, professional services (i.e. consulting and systems integration) and ITO. Our quarterly spending analysis has several benefits: it provides a quarterly view on how ITO spending is going to evolve, while our contract signings analysis provides more of a 12 to 18 month view of how ITO spending will change.

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% in full-year).

Meanwhile, for the first time since Q4 2012, ITO spending growth was in positive territory in Q4 2014 (up by almost 1%) and down 1% for full-year 2014. This final quarter improvement in spending growth results from better economic conditions in mature countries.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies as well as in North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts): an estimated 40% of contracts (with a TCV over $100m) in full-year 2014. This is better than 2013, when new scope contracts accounted for ~35% of bookings (and 30% in 2012). This level is at the higher end of the traditional range and is good news.

What does NelsonHall forecast for 2015?

The outlook for IT services in 2015 remains mixed, with the improving economic conditions driving some spending. For ITO specifically, the higher level of new-scope contracts will also have an impact on spending.

However, the economic environment in mature economies is only somewhat better. It is positive for India, unclear for China and Brazil, and clearly negative for Russia. In addition, offshoring will continue to further drive prices down, resulting into lower spending.

We are therefore predicting limited higher growth in spending in IT services overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

First CEO TK Kurien opened by describing Wipro’s view of the market:

• Enterprises were created prior to the current digital era. As a result, customers cannot engage easily or effectively with legacy enterprises operating with old style operating models and operations systems
• Operations vendors (IT services and BPO) will be disrupted. “Slow and certain”, Wipro’s previous model, where offerings were developed and tested to assure quality outcomes, is no longer a successful strategy. Wipro describes its current model as “Fast and Uncertain”, where ideas are tried, then adapted over time, as a flexible strategy more appropriate for rapidly changing times
• The journey with clients to a digital operational development cannot be undertaken at full maturity. It requires Wipro, partners, and clients to slowly adapt while also continuing to provide current services. To accomplish that Wipro needs to maintain and aggressively grow existing operational relationships. Wipro will aggressively pursue new business to establish larger market share, because existing clients provide a base from which transformation can be launched (i.e., upsell). Kurien did not discuss how he intends to pursue new business before transformation. Presumably aggressive pricing and terms would underpin such a grab for marketshare
• Traditional BPO will be disrupted, with value levers extending beyond labor arbitrage and simple process re-engineering. While this has been a theme for several years in the industry, Kurien indicated community sourcing (open source software, cloud computing, and shared services) as opposed to vendor specific offerings will drive enterprise operations much more so in the years ahead than has been the case to date.

To address these trends, Wipro is changing its own approach. Key initiatives include:

• Digital POD, Wipro’s methodology for clients designing new operations environments (both platforms and processes).The process draws on strategy, design, and technology. Wipro is building technology and design capabilities in concert with partners to support clients’ evolving business strategies. Specifically Wipro is currently building three digital POD centers in London, Bangalore, and the Bay area of California. These centers will work on client engagements designing new operations environments for clients. As examples of how this might work, Wipro referred to several tier one banking clients, hit hard by the financial crisis and culling businesses and operations, who are redefining their business models to adapt to changing regulations and competitive conditions. Automating manual processes, modernizing legacy platforms, and maintaining ongoing delivery requires third party help from a combined IT/BPO vendor. An early example of what Wipro wants to do, according to Kurien, is a top 4 bank in the U.K. that Wipro has helped over the past three years improve its retail customer support using platform and operations change and support. During that time the client moved up from fourth to first in customer satisfaction ratings.
• Alliances and partnerships:
  • Open source: Wipro has committed to invest over the next two years to further develop its open source capabilities. Open source development has become a key area of investment for banks and other global 100 companies. Open source is used by enterprises for its low cost and ability to deliver custom functionality.
  • Wipro is building on its existing experience and joining open source communities to better identify best resources, also to help formulate community priorities
  • Corporate VC fund to invest in tech start-ups. Wipro has made three investments so far
• Move its own business model from labor arbitrage to process arbitrage (global standardization and greater automation of processing). Wipro has seen their clients’ focus for operational change shift from cost of resource to total cost of ownership (TCO), over the past few years and believes this trend will continue and accelerate.

Wipro articulated that, as a company, it is responding to the fact that businesses in its target sectors (banking, healthcare and retail, to name just three) are having to change their entire operational delivery methodology to adapt to the changing environment. Wipro also highlighted that this requires to talent - both technology and operations talent.

And, like many other IT services providers, Wipro is looking with increased interest at alliances and partnerships. Partnering however requires a wide net to succeed. Most partnerships are weak, some are strong, and a few drive strong value creation.

The challenge with partnering is how to drive partners forward to execution when they have competing demands/opportunities. Successful partnerships require the alignment of goals and culture, which in turn requires due diligence on potential partners and clear signalling of intentions and values.

Participation in communities, such as open source, is table stakes to access and due diligence, but not the trigger to execution. Wipro has indicated it will support partners by identifying sub-domains where it will be active. Wipro has a large client base, something developers typically do not. Wipro can create a market for open source developers’ services, while providing its clients with quality assurance and scale.  IT and operational support. In the long run, we believe Wipro will need to selectively partner with relatively few organizations and people for open source capabilities. Ultimately, Wipro will need large scale in-house complementary resources to capitalize on engagements. Leveraging the independent resources of alliance partners to deliver operational change to clients will demand that Wipro bring its own operational scale to the table, not merely IT skills. 

Visa formed an alliance with Monitise in 2009 to provide Visa with mobile platform development services. The agreement runs through 2016. As part of the agreement, Visa made a capital investment in Monitise and received 14.4% of the company's equity. Over time, Visa has reduced its ownership to 5.5%. Visa has now contracted with J.P. Morgan to evaluate its options for its ownership stake in Monitise.

According to Visa, the reduction in ownership is consistent with Visa’s investment practice to seed emerging players and, over time, reduce such investments. Visa has also announced it intends to continue increasing its investment in its own in-house mobile payments development capabilities and reduce its use of external resources for those purposes.

Visa’s announcement caps off a weak year for Monitise in the stock market (down 59% for 2014 as of September 18). Does the market know something or is this a natural development in the growth of Monetise, as Visa has indicated?

First let’s consider Monitise’s business results to date:

Among the positives:

• Revenue growth of 105% CAAGR over the past five years to the FY year end June 2014
• Transaction volumes has grown 3,300% over the past four years to 4,000m per year to year end June 2014
• The number of registered users has grown 3,000% over the past five years ended June 2014
• Numerous partnerships and markets entered over the past five years around the world. The majority of these partnerships are with tier one players in their respective markets, providing uplift to Monitise in its quest for adoption

Among the challenges:

• Monitise is still loss-making
• It recently changed its business model from a mobile payments platform provider model to a subscription based “content” enhanced mobile payments provider. Here content means the ability to provide sales and marketing content to users and to analyze transaction data in support of sales and marketing campaigns
• Mobile payments remains a demonstration project at most banks and businesses. It has not yet turned into a driver of revenues or profits (for tier one global enterprises)

Where Monitise is going and why Visa is reducing its relationship:

Monitise is moving into more intimate relationships with merchants and enterprise clients by providing them with content enhanced services. Monitise has made this initiative very credible by:

• Starting a partnership with IBM in August 2014, which leverages IBM’s IT development and services staff also its cloud delivery infrastructure. This partnership means Monitise can scale delivery as much as the market might require
• Hiring senior staff from Visa to manage and grow Monitise’s business in the U.S. and Europe
• Partnering with Mastercard (including an equity investment from Mastercard) to drive emerging market growth

These moves create a direct conflict with Visa because Visa wants to deliver content to its clients and Visa is a direct competitor to Mastercard. To succeed, Monitise needs to continue its aggressive acquisition of users and transactions. If Monitise can establish content leadership in the emerging markets, it will have created a unique and highly valuable asset.

To create that content leadership, Monitise needs to do more than acquire users and transactions, it needs to understand the mind of the emerging market consumer. There is no one emerging market consumer profile. Each market has unique characteristics, economics, and tastes. Creating content that can adapt to multiple markets requires extreme discipline at the taxonomy creation stage, and extreme autonomy at the individual country level. Monitise will need to partner both aggressively and effectively to accomplish that. 

Alliance Data's Epsilon division has ~$1,5bn in revenues; Conversant has ~$600m. 

Alliance Data is acquiring Conversant to enhance its Epsilon business. Epsilon generates revenues primarily from labor based, offline: data acquisition, analysis, and marketing services. Conversant generates revenues primarily from automated processing, on line: data acquisition, analysis, and marketing services. Alliance Data believes that Conversant is in a faster growing segment of its market, with solutions that provide higher operating leverage. 

Each company brings technology capabilities which will be integrated after the merger. These capabilities include:

• Conversant:
  • In-house data set combined with client acquired data 
  • CommonID, which identifies an individual consumer across multiple devices (e.g., desktop, mobile, tablet) and channel
  • Ability to dynamically send personal ads to the correct device ant the correct time
• Alliance Data: Agility Harmony, a digital messaging platform with the artificial learning and analytics to inform a digital marketing campaign, combined with the ability to manage and execute a digital marketing campaign.

The acquisition will provide more purchase data (from additional channels including: display, mobile, and video) to put through Epsilon's marketing analytics platform, Agility Harmony. The increase in data throughput will develop greater insights by Epsilon into consumer behavior. Conversant also brings a greater number of clients to Epsilon, to whom Epsilon hopes to sell additional services. 

Conversant is an excellent acquisition for Alliance Data. The ability to engage consumers across multiple channels and devices, while also maintaining identity awareness, is not generally available today. Most of today's on-line marketing organizations are facing consumer push back and brand deterioration the more they continue to make identity errors and push the wrong offerings, to the wrong people, at the wrong time.

Alliance Data is also aware of its limitations. It intends, according to its CEO Ed Heffernan, to continue to pursue opportunities in niche markets rather than take on major payments vendors in major markets. Its specialty areas include:

• Geographic: Canada and Brazil
• Industry: travel, SMBs, and specialty retail

Successful integration of these two offering sets will create a unique database of transaction level data in some of the fastest growing, high margin markets in consumer buying. As long as Alliance Data can successfully integrate the two cultures, the businesses should succeed. It is a good sign of what the Conversant management thinks about the merger that the CEO of Convergent will tender his shares for all Alliance Data stock (not taking the cash option). 

• Usage of Wipro IP and recommended COTS tools across the client’s operation for various tasks including ITSM, change management, demand management, problem management
• Analytics, based on data from ITSM applications, including number and categories of tickets, incidents, problems and nature of tickets (i.e. applications or data). This data analysis is used for root cause analysis and to help predictive and prescriptive maintenance, and to identify incident patterns
• Adoption of Wipro best practices e.g. preventive maintenance through pro-active event monitoring and event correlation; automation of repetitive tasks; usage of KM tools
• Consulting services to perform root cause analysis in the case of events, across applications and IT infrastructures
• Monitoring of several key business processes and of the underlying applications, IT infrastructure and networks to quickly identify where problems lie. Wipro has developed its business level agreements (BLA) approach, where the company is taking some for responsibility for the availability of business processes: such responsibility ranges, depending on client requirements, from monitoring flow of data exchange across applications (and informing clients) to, in the next future, being responsible for application availability (provided Wipro also manages IT infrastructures.)

Launched in May 2013, Wipro continues to enhance ServiceNXT. Additional features that have been added include:

• Insightix: Wipro has built on its existing analytics service based on data collected from ITSM and other tools. With Insightix, Wipro aims to identify applications and IT infrastructures that are costly to support (as measured in tickets and other events)
  - The service comes an application portfolio management approach to link application cost (in terms of support) with their importance to end-users and lines of business
• DevOps: in the context of agile projects with very frequent releases, Wipro has selected tools from HP (QC and QTP), IBM (Jazz) and Microsoft to automate testing (HP), deployment to UAT, and put into production of new releases
  - Wipro is putting a lot of emphasis on developing its DevOps approach as it is finding that 30% of new ADM project are agile-centric
• BLAs: as part of one engagement with an energy client , Wipro has worked on identifying several processes, including daily process milestones for energy trading and monthly closing milestones. Expand on its custom work with this specific client, the company is also capturing process knowledge, which it wants to offer as an accelerator to clients. Examples of such business processes include:
  - Retail stores: customer order fulfillment
  - Health insurance: percentage of claims auto adjudicated
  - Across industries: on-time invoice processing; on time delivery of spare parts; on time closure of predicted stock out.

Wipro believes that ServiceNXT has been instrumental in wining 14 contracts for a combined TCV of $1bn in the past 10 months. Two contracts stand out: Carillion (construction, U.K., 10-year, February 2014)) and Corning (manufacturing, U.S., May 2014,).

In the case of Carillion, Wipro has taken over the full IT including applications and IT infrastructures and some level of BPO work (F&A, back-office, HR, and sales administration), from a U.S. centric incumbent. The priority of the contract is to drive further cost savings, which Wipro is doing through the rollout of ServiceNXT across business to drive standardization and productivity. In the mid-term, once the transition is over, Wipro is to work with the client on a BLA approach to monitor key business processes. It is also to drive more synergies with ServiceNXT (used for ITO) and the BPO productivity framework used by Wipro’s BPO operations.

The Corning contract is IT infrastructure services-centric with some application management activities around SAP Basis. The priority for the contract is to drive cost savings through deployment of ServiceNXT across business units.

Wipro positions ServiceNXT for managed services contracts and with contract lengths of at least three years. Overall, Wipro is finding ServiceNXT fits contracts where it is taking over responsibility from the client to manage applications and IT infrastructures.

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ServiceNXT is an example of a new offering which applies a number of levers to substantially reduce the cost to serve in large IT infrastructure management and/or applications outsourcing contracts, while also focusing on the delivery of business-oriented benefits to clients. Several vendors have refreshed their offerings significantly: in the case of Wipro, ServiceNXT is a brand name for a productivity effort that the company has been pursuing for several years. With applications contracts, ServiceNXT is focused on run-the-business services as opposed to change-the-business services embedded in a multi-year contract. This shows that productivity improvements can still be found at the support and run level.

An increasingly common feature in ServiceNXT and other vendor offerings is the business process approach, in this case with its BLAs, where it monitors key business processes of a given client. At the moment, only a handful of vendors are currently on this path, but this approach is likely to become more widespread, at least in the larger vendors. Wipro is investing in building some level of pre-defined scenarios to accelerate adoption of business process-led AM services.

With ServiceNXT, Wipro is building its analytics approach to the application level, as opposed to a set of applications. Again, this is part of a long-term where several vendors, but far from all, are now adopting a single application view of application management. This is important as understanding at the application level paves the way for application-specific SLAs and analysis.

All in all, Wipro with ServiceNXT is one of the leaders in productivity improvements around AM and ITO.  It appears to have boosted Wipro’s success in securing very large outsourcing contracts.

NelsonHall recently published

• An analysis of the application outsourcing capabilities of Wipro
• An updated Key Vendor Assessment of Wipro, which looks at various initiatives to boost revenue growth and increase the number of very large accounts.

For more information on either, please email [email protected]. 

Indeed, CSC is looking to reduce its revenue contribution from traditional IT infrastructure management services and instead drive revenue growth from an increased ‘as a service’ orientation. ‘Emerging Services’ of importance to CSC include:

• Cloud enablement
• Cyber security
• Mobility based platforms
• Application rationalization and modernization: CSC is looking for growth here to offset the cannibalization of traditional IT IM revenues as IaaS activity takes off
• Service integration & orchestration
• Virtualization services/Unified Communications.

In particular, the latest extension to CSC's partnership with IBM builds on CSC's acquisition of ServiceMesh, its subsequent partnership with Microsoft to integrate its ServiceMesh Agility Platform with Microsoft Systems Center, and its global partnership with AT&T, and involves incorporating IBM's SoftLayer IaaS service and Bluemix web and mobile application development platform into CSC's ServiceMesh Agility Platform. In return, IBM will add CSC's ServiceMesh Agility Platform to the IBM Cloud Marketplace. In particular, the new partnership speeds up CSC's implementation of its strategy in a number of key areas, including:

• Cloud enablement and service integration, within its CSC Center of Excellence for IBM Products and Solutions, CSC plans to certify up to 2,000 consultants, project managers, architects and developers over three years on selected IBM technologies such as SoftLayer and Bluemix cloud services, as well as IBM developer and integration tools such as WebSphere and Cast Iron
• Mobility-based platforms, where CSC will offer elements of the IBM MobileFirst application development portfolio service, combining the IBM MobileFirst portfolio with CSC's mobility services to offer a mobile healthcare program for its Lorenzo healthcare software product, and similar mobile programs in the banking and insurance markets
• Application management and testing, where CSC will extend app development service to IBM mainframe Z environments. Additionally, CSC will add a DevOps tools to its portfolio for app development, and establish a global testing practice for IBM Rational services virtualization.

Potentially this could have a major impact on the rate of hybrid cloud adoption in highly regulated industries such as financial services, utilities, and the government sector.

The technique allows companies to mark or tag their data and use an intelligent cloud management system to store files in the appropriate location. For example, if a business needs to ensure that all of its financial data is stored in a specific cloud data center, the associated files are tagged appropriately and the cloud management system ensures that the files are stored in the correct location(s).

Bit of a mixed bag from Wipro this quarter, generally positive, but with a few areas where we would hope to see improve over the next few quarters.

Looking at overall topline performance, revenues were towards the higher end of prior guidance of $1,715m-$1,755m, and the 9.6% reported y/y growth was the best quarter’s growth since Q4 FY 12. However, the constant currency growth of 8.1% was lower than that achieved in the previous two quarters.

Operating margin continues to see y/y improvement (2.8 pts to 22.8%), reflecting, inter alia, continuing improvement in utilization (now at 77.9% excluding trainees).

Wipro has introduced a new service line reporting segment, called the somewhat splendid “Advanced Technologies and Solutions” (seems to be comprised of the former Analytics and Information Management segment plus around $70m of business from other service lines such as Global Infrastructure Services, and Business Applications Services). Whatever the segment may include, it is not yet a growth engine for Wipro, having contributed between 11.5% and now 11.3% in the restated segment breakdowns for the last five quarters.

This segment restatement makes assessment of any new developments in y/y growth patterns difficult. Three service lines delivered double digit growth this quarter: infrastructure services (16.7% growth, ~$63m in incremental y/y revenue, over 40% of the total incremental revenue, Business Application Services the other major revenue engine, with $50m in incremental y/y revenue, and ), BPO, which had a very strong quarter of nearly 21% growth.

Looking at the verticals, media and telecoms had its best quarter for years, continuing to accelerate from the 10.5% CC growth achieved last quarter. This sector group has more than just stabilized; it is now delivering growth above overall company levels. A recent outsourcing win at Sanoma (see here: http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203303&fv=2) illustrates Wipro winning cost-take out IT outsourcing deals in the challenged media sector. The Energy & utilities sector slipped below double digit constant currency growth for the first time in years - but the Atco win (the largest in Wipro's history, see here http://research.nelson-hall.com/sourcing-expertise/search-all-content/?avpage-views=article&searchid=29555&id=203338&fv=2) will return its E&Ubusiness to being its fastest growing vertical. 

The Americas region (which for Wipro has predominantly been the U.S., though the Atco deal will soon increase its footprint in Canada) delivered its best topline growth, both as reported and in constant currency, for several years, reflecting improving commercial sector market demand. Topline growth in Europe slowed down slightly (in constant currency) – but for Wipro, Europe is not a new growth market: it is already generating around 30% of its revenues from the region. The India and Middle East business performed better than expected (up 13.4% y/y), as the elections did not have the negative impact that had been anticipated.

This is the first quarter in a year that Wipro has increased its headcount, with nearly 1,400 new net hires (the year-on-year increase is just 234). Does this indicate renewed confidence? Or are the new campus hires partly being done to contend with increasing attrition? Wipro reports its attrition in parts: excluding its India/Middle East business and BPO, voluntary TTM attrition is now up to 16.1% (Wipro doesn’t report involuntary attrition). BPO quarterly attrition was 11.8% (slightly down, but still an annual attrition of over 28%). A rough estimate puts Wipro’s voluntary TTM attrition, excluding the India and Middle East businesses, where attrition will be higher, at around 17.5%.

We also note Wipro has been making steady progress recently in increasing its share of wallet in some of its largest accounts but this quarter, the revenue contribution from clients 2 to 5 is down, from 13.2% to 12.7%.  

Revenue guidance for next quarter is in the range of $1,770m to $1,810m, a y/y growth of 8.5% to 11.0%. With a number of large outsourcing deals coming online over the course of this year, we would hope to see Wipro return to double digit growth within the next two quarters.

Q2 2014 revenues (and revenue change) by activity, excluding reimbursables, were:

• North America: $233.2m (+8.7%)
• International: $84.7m (+10.6%)
• Merchant services: $108.3m (-4.1%)
• Netspend: $116.8m (n.m., acquired Q2 2013)
• Intersegment: ($5.1m) (-59.1%).

TSYS grew its revenues slower than it grew its transaction volumes in:

• North America (transactions +20.7%)
• International (transactions +13.3%)
• Merchant services (transactions -8.0%, a slower shrink)

TSYS is facing pricing difficulties in its core businesses and volume/revenue shrink in what should be its primary growth engine. Its overall revenues have primarily grown due to its acquisition of Netspend.

TSYS has announced a new CEO (starting on July 31, 2014) who will face the task of putting its organic business back on track for revenue growth at profitable margins. Since the payments market is strong overall, if TSYS focuses on aggressive contract pursuits at good prices, it should be able to resume revenue growth with good margins. 

Q2 2014 revenue (and growth both on an actual and CC/organic basis) by service line was:

• Managed Services: €132m (+5%, +9%). Half of the CC organic growth this quarter resulted from hardware reselling as part of a large IT infrastructure management contract
• Consulting & Systems Integration: €97m (-10%, -4%). Tieto continues to suffer in its AM unit, which represents half of revenues of C&SI. Meanwhile, the company is recording double digit growth in its growth business, which include its Customer Experience Management and transformational consulting
• Industry Products: €97m (-7%, +2%). Industry Products enjoyed good growth in healthcare (a key priority offering) and welfare, but suffered in the financial services sector in Russia and Latvia, as well as postponed decisions in oil & gas
• Product Development Services (PDS): €60m (-24%, -19%). Tieto still suffers from its two largest clients, assumed by NelsonHall to be NSN and Ericsson, insourcing their R&D service activities. The company is developing its client base in California, but not fast enough to stabilize the business.

Tieto continues to be a recovery story in terms of profitability: EBIT reached 5.6% of revenues, and 7.8% excluding one-off items. The company has maintained its midterm objective of reaching a 10% EBIT margin, including one-offs. While all units in IT services have decent profitability and increasing, Product Development Services (PDS) continues to drag profitability of the company overall.

The recent announcement of massive lay-offs by Microsoft in its Nokia handset business did not seem to worry Tieto management. Nokia is no longer a major client, since it has stopped and sold its Symbian business. NSN remains a top 2 client for Tieto’s Product Development Services unit. 

One can't blame the company for having migrated delivery location to offshore: offshore ratio for PDS is 61.6% (Q2 2013: 60.8%) while it stands at 42.0% for IT services personnel. However, one can certainly blame the company for not having diversified earlier its client base.

Revenue growth has unfavorably impacted by the performance of PDS (-19% in CC/organic). Excluding PDS, IT services revenue growth was up +3% (EVRY +2%). The company is satisfied with the performance of its Managed Services unit and is really focusing on its project services business, which includes C&SI and Industry Products. In C&SI, it is getting back to basic with high focus on utilization rates, portfolio management (mobile and omni-channel overall, transformation consulting). Tieto acknowledge it needs to make its application management cost-competivive, largely through automation, something it has achieved already in its Managed Services business (IT infrastructure management).

The comparison with Capgemini comes to mind. Capgemini has the same levels of offshoring as Tieto. Like Tieto, Capgemini is more of a C&SI company than an IT infrastructure management one. Capgemini finally increased the cost competitiveness of its AM offering in 2012/2013, and seems very optimistic about recent wins and its pipeline. Also both companies focus heavily on portfolio management, something Capgemini started much earlier. There is no reason therefore that Tieto could not replicate the apparent success of Capgemini in AM and C&SI.

Both companies have a R&D services business of roughly the same size. Yet, Tieto has suffered for years from the state of the European telecoms equipment manufacturing industry. Capgemini is now beginning to experience the pains of Airbus having completed its major airplane design and development programs. Capgemini has taken action and launched its Global Engineering Services unit last year, which may help balancing work. Tieto could not indicate when its PDS unit would stabilize. Development relationships with new client is a priority. In all likelihood, Tieto will be under pressure to fix or sell the business. The stock of Tieto is down 6% today, after the results, with much questioning on PDS.

Although the bill has passed through the Duma, it still needs to be pass in the Federation Council of Russia and President Vladimir Putin before it comes into effect. If put into law, all internet companies operating in Russia will be required to store the personal data of Russian citizens within Russia’s borders by September 2016.

This decision by the Russian parliament to put pressure on internet companies follows recent stories and whistleblowing about NSA spying and data seizures. This is not the first time Russia’s isolationist nature in regards to the internet has affected users within the country, for example blocking sites that offer news labelled as extremist and requiring internet writers with more than 3,000 daily visitors to register with the government. In the latter case, only those writers whose pieces are hosted within Russia are susceptible under the law. The new law would require blogs and social media to be hosted within the country; an open internet would not be able to operate without strict enforcement.

The data center outsourcing market in Russia is immature. NelsonHall estimates the data center outsourcing market size in Eastern Europe is less than 20% of that of the U.K. despite having almost 50% more internet users.

Clients looking to remain with their current data center supplier will put pressure on vendors to expand their operations within Russia if the cost of expansion is viable. Vendors slow to take up operations in Russia will lose out to those that can support operations, i.e. the larger IT infrastructure vendors who already have Russian operations/partners or Russian centric suppliers.

This is not the first time regulations have forced a number of vendors to expand their data center operations. For example, the German Federal Data Protection Act (FDPA) forced some cloud providers to operate German data centers for storage of some personal information. The subtle difference between the German and Russian attempts to force center location is built on cause: in the case of Germany the law was conceived to help quash data privacy concerns; with Russia it can be seen as data control.

IT outsourcing spending growth is different and is much less cyclical. Growth in spending has varied between -2% and +4% again since 2008. It is well known than organizations turn to outsourcing when they want to lower their costs, usually when facing poor economic conditions: this is driving spending. 

Is this really so?

NelsonHall advocates that the dynamics of how clients spend their ITO budgets have fundamentally changed:

• Indian offshoring is by nature reducing prices by a factor of two to three. Adoption of Indian offshoring has expanded from the U.K. and U.S. commercial sectors to reach Norway, Sweden, Netherlands, and, to a lesser extent, Germany and France
• Cloud computing is also having a deflationary impact on IT outsourcing spending
  - For the most part, from a client perspective, building a private cloud whether in its own datacenter or in that of a third party, mostly means virtualizing servers and allowing fast provisioning. With this in mind, private cloud adoption is a technological enhancement, not a revolution that will lower costs dramatically
  - Public cloud computing is a different story: it is used mostly for new applications, whether apps or web sites and tends to be used for development environments, as opposed to production environments. Public clouds tend to capture spending of new projects and less of current production environments management services. However, it is fairly sensible to predict that over time public clouds will be used for production environments and impact overall ITO spending.

The prospect of a resumption in ITO spending growth to up 4%, under favorable conditions, is unlikely. In the mid-term, NelsonHall expects therefore that ITO outsourcing growth will not exceed +1.5% to +2% in good economic conditions and probably -4% during bad ones. On average, flat growth is to be the norm, assuming good market conditions last longer than periods of economic unstability.

From a vendor perspective, on average IT services vendors with an onshore background will not grow their ITO revenues beyond 0% to 1%. Meanwhile, some India-centric majors will continue to enjoy growth of 20% and above in the short term.

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NelsonHall tracks the ITO market on a continuous manner, through 2 ways: contract awards and spending in the previous quarter. Those two metrics are complementary.

• Contract signings help understanding the dynamics of the market in terms of volumes, prices, content i.e. new scope vs. existing scope, geographies and verticals. ITO bookings help predicting how spending is going to evolve in the next 3 to 5 quarters.
• Spending is unlike the booking metric, a backward-looking metric. It provides a view of how IT outsourcing spending has evolved in the past quarters. It is a precise metric..

In short, ITO bookings provide indications on future trends. Spending help refining our analysis, based on historic data. With those 2 KPIs, we think we are as much equipped as one can be to understand how IT outsourcing spending is going to evolve in the next quarters.

NelsonHall provides –freely- - the finding of its analysis on the short-term future of ITO spending, as part of its quarterly ITO Index Calls. For more information, please refer to Guy Saunders or attend our quarterly ITO Index calls: 

• CS is to proceed to a €12m convertible bond issuance (maturity 5 years, conversion price per share: €3.6; interest rate: 4%; delivery: July 2014). As part of this issuance, Sopra agreed with DUNA & Cie, the largest shareholder (45.1% of shares) of CS, to buy 45.1% of all convertible bonds issued. In addition, the company has guaranteed the full bond issuance
• Sopra has been granted by DUNA a  first offer status, meaning that if were DUNA were to sell its stakes in CS, it would have to start negotiations first with Sopra
• Sopra is have one member of on the Board of Directions, acting as censor
• Sopra is to help CS improve its financial performance, further develop its existing "industrial and commercial collaboration" in aeronautics and defence, and expand to new offerings including security, space & energy.

In an article by Les Echos, Mr. Eric Blanc-Garin, CEO of CS provided further details about the agreement with Sopra:

• Sopra could own, once bonds are converted to shares, a 7.5%-16% stake in CS
• DUNA & Cie has 4 years, starting from July 2014, to sell its stake to Sopra.

CS is a public sector and aerospace specialist providing IT and engineering services e.g. embedded systems; real time applications; PLM services; cyber-security. The company is headquartered in the suburbs of Paris and has a large office in Toulouse.

CS had in 2013 revenues of €162m down 6.2% at CC/CP in 2013. Headcount was 1,791. Operating margin was 0.2%. Application service account for 90% of revenues. 80% of revenues are fixed priced. The company is heavily focused on defense spending, with its largest clients accounting for 29% of revenues in 2013.

The company derived in 2013

• 52% in revenues from the defense, space and security sector: Services provided include services around command centers, security, logistics and space applications, as well as increasingly, cyber-security
• 38% of revenues from aeronautics, energy and manufacturing:. Services provided include embedded systems , real time computing and PLM services. Key clients include Airbus Group, Praatt & Whitney in aeronautics; and CEA, IRSN and EDF in energy.

CS has faced in the past years a decline in revenues from its key clients in the defense sector, as the French Army reduces its spending.

The company has take several measures including

• Geographical expansion towards North America
• Sectorial emphasis on aeronautics, energy and manufacturing
• Scope re-definition including
  - 2007: the sale of its IT infrastructure management activities (€138m in revenue and headcount of 1.4k) to BT France for €60m
  - 2012: the sale of its transportation unit (€31m in revenues, headcount of 200) to SANEF, a highway operator, for €15m.

CS has been on restructuring mode for several years. in the past 2 years, the company has raised capital through several means including, in 2012 the sale of its transportation unit (for €15m), a capital increase in 2013 (€15m raised) and now through this convertible bond issue (€12m).

In 2014, CS has accelerated its transformation plan with:

• Increased sales activity
• More focused R&D effort to drive more products sales
• Cost cutting and streamling of processes.

Sopra continues its M&A activity after the recent offers to acquire Steria and the HR Access service line of IBM France. CS has been struggling for year and has only returned to break-even operating profitability in 2013. As a result, CS has a low market cap, €36m before the announcement. At this point however, it is still unclear how much Sopra will spend in total to acquire the full CS. 

CS has a different profile from Sopra. It is more positioned on technical IT and engineering services e.g. real time applications and embedded systems, where Sopra has a background in services around business applications. Sopra is only marginally present in embedded systems, servicing mainly client Airbus. CS is therefore a nice service expansion for the company. It also expands the vertical capabilities of Sopra into the defense sector.

The companies have worked together in two significant contracts:

• Sopra acting as sub-contractor to CS in designing the architecture and integration of a new application named SIA (Army information system). The purpose of SIA is lower IT costs (€3.5bn per year) of the French Army and drive its simplification.  SIA has an overall of €750m and aims to converge systems of three French Armies towards a single system. The contract is reported to have a value of €100m. It involves a reported 130 personnel, in Chartres de Bretagne
• The two companies were awarded in 2013 a consulting contact around the SIMAD project for the development of a system related to maintenance of aircrafts. CS was lead on this €32m contact with Sopra and SQLI as contractors. 

The challenge for Sopra will be to restore the profitability of CS, which CS has struggled to achieve in years. With Steria, Sopra had mentioned it was hopeful its own sales activtity was likely to absorb the bench of Steria. In all  likelihood, Sopra believes it can do the same with CS, whose headcount is just 1,700.

The French IT services market is going an incredible acceleration towards its consolidation. Major 2014 M&A transactions include Atos with Bull; Sopra with Steria; Capgemini with Euriware. Last year, Econocom had acquired Osiatis while TCS had purchased Alti. While many had announced the consolidation of the French IT services market, it had been slow to occur, until this year. Nevertheless, France still has a high number of mid-sized standalone IT service vendors: GFI Informatique. of course, but also Devoteam, Neurones, Groupe Open, Aubay, Businesss & Decision, or SQLI.

Bull had 2013 revenues of €1,262m and an adjusted EBIT of €45m, a margin of 3.5%. It had a net cash position as of end of 2013 of €213m. Headcount is ~9k, of which 5k in France. It would bring to Atos a tax loss carry-forward of ~€1.9bn (mostly for its French and German operations), which Atos is currently examining.

Bull has a very wide portfolio of offerings ranging from hardware, software and services. It also has a vast geographical presence with operations in 50 countries. The company has a portfolio of 1,900 patents of which 600 in the U.S. Bull spends 6% of revenues in R&D and employs 700 R&D personnel. 

The company was until 2013 aligned around three main business units:

• Innovative products & computing solutions (e.g. higher performance computing servers, and related services, IT infrastructure management including hosting and cloud computing) €820m (-1.9%)
• Business integration solutions (e.g. C&SI and AM): €312m (-4.6%)
• Security solutions (security and critical systems design and architecture, consulting and integration): €130m (+5.9% y/y).

The company recently announced its 'One Bull' program to re-balance its portfolio (around complex systems integration, high performance computing, security and big data), reduce its cost structure and simplify its personnel contracts (with notably the standardization of contracts and internal mobility). Part of the One Bull program also relied on divesting geographical operations where Bull was breaking even or loss-making or transforming then. Overall Bull, expected 2017 revenues to remain at the same level as 2013 but its adjusted operating margin to double to 7.0%.

Service capabilities brought by Bull include:

• Consulting & systems integration:
  - Specialized defense services (including the Scorpio project with the French Army Scorpio program)
  - Legacy modernization capabilities
  - Presence in Poland and Brazil
• Managed services:
  - Hosting (Agarik)
  - Maintenance and support of third party technology products from EMC, other and own Bull products as well as datacenter, server and storage consulting services around IBM, EMC and Intel products
  - IT infrastructure management: Bull was awarded by ErDF in 2013, along with Osiatis/Econocom a Microsoft Exchange, SharePoint and Lync project with 160k users
  - IaaS: Bull also owns a JV, Numergy, with SFR and CDC, which targets SMBs (€6m in revenues expected by 2014), whose services it marketed under the Le Cloud brand
  - Datacenter, server and storage consulting and integration capabilities
• Big data: higher performance computing high end hardware, as well as entry-level Bullion appliances
• Security: software products (Evidian line of software products).

Atos is to:

• Integrate the different units of Bull into its own Consulting & Systems Integration, and Managed Services units
• Move the cloud computing capabilities of Bull into Canopy
• Move to Bull its own security and big data capabilities and marketing them under the Bull brand.

Overall, Atos is expecting 1% organic growth through cross-selling and a more dynamic service portfolio resulting from the acquisition.

Atos is estimating cost synergies to €80m, of which:

• €30m from One Bull program (which it plans to execute in 24 months, rather than the 30 months planned by Bull)
• €30m G&As (with Bull having a ratio of G&As to revenues of ~25% before the effects of One Bull and Atos targeting by 2014 G&As in the 9.5% - 10.0% range)
• €20m in hardware procurement and real estate savings.

Atos is to:

• Reconsider the Bull’s divestment plans in several geographies (apart from operations representing €25m in revenues in 5 countries). Atos has highlighted it has critical mass in countries where Bull had high overheads and will help improve costs
• Accelerate profit improvement in its French unit, Bull adds €690m in revenues in France and Atos is expecting the additional scale to help improve its own financial performance in the country
• Spend €100m in restructuring costs, of which €50m to €60m, will be accrued in the accounts of Bull before the acquisition.

After the acquisition, Atos will have pro-forma revenues of €9.9bn, of which

• Cloud services: €392m
• Big data and security: €490m
• Managed Services: €4,690m
• Consulting & systems integration: €3,190m
• Worldline: €1,115m.

​From a financial perspective, Atos is making an expensive acquisition. The €620m values Bull (based on its 2013 performance) at a PER of 41. The company has a history of flat revenue growth and limited net margin (net margin of 0.8% in 2013). However, Bull is financially sound with a net cash position of €213m. 

The stated rationale for the acquisition has centered on cloud computing, big data and security, (35% of revenues of Bull, including hardware and software). Yet, Bull brings a very wide portfolio that includes computing products, a legacy mainframe product and OS base, as well as security software products. Thierry Breton, CEO of Atos is a former Bull CEO and he therefore must have a strong opinion on what Bull could bring to Atos. One big question mark is to understand what is left of the legacy products into Bull's current offering: NelsonHall estimates it at ~€200m. Also, the HPC line of products (NelsonHall estimated: €170m in revenues) seems to have been successful but requires significant R&D effort. We therefore expect divestments targeted around non-core hardware elements, and potentially software. Bull would reduce Atos' dependence on IBM or HP hardware, potentially making it more price competitive in cloud deals.

The impact of the €1.8bn tax carry forward element is to be fully understood. It may represent a significant tax reduction incentive in its French and German operations for Atos.

Atos' management continues to pursue a very bold M&A strategy: buying Bull, maintaining its offer for Steria, and ready to use the forthcoming June IPO of Worldline for acquisitions in the payment sector. Meanwhile, Atos remains committed to growing in the U.S. With Bull, Atos is now almost the size of Capgemini: something that was unlikely several years ago. There is no question that Thierry Breton has brought Atos to the European tier-one league. Logical next steps for the company are expansion in the U.S. market and the adoption of a sizable India-centric delivery model.

Sopra's rationale for the acquisition includes:

• Expanding its geographical presence from France to the U.K., Germany and Norway
• Gaining a new service portfolio in BPO services and IM.

Sopra is to launch a public exchange merger where Sopra offers 1 share of its stock for 4 Steria ones. The offer values each Steria share at €21.5 (based on a Sopra Group share at €86.16), a 40% premium to last Friday’ value of €15.74, and about 12 times Steria's forecast 2014 earnings.

The combined entity will have Sopra's founder and president Pierre Pasquier as chair and Steria's Francois Enaud as CEO.

The acquisition will be a major service expansion for Sopra, which had remained very application service centric: systems integration accounted for €730m in revenues in 2013, consulting: ~€95m; and application management: ~€530m.

In the past three years, since the IPO of Axway, Sopra Group has made several ISV acquisitions, of which the major ones were Callatay & Wouters in Belgium, and HR Access in France. In 2013, software products and related IT services accounted for ~€340m in revenues.

By comparison, Steria has an extensive portfolio of services, including IT infrastructure management (~€526m), BPO services (€316m), consulting & systems integration (~€649m) and application management (€263m). In fact, Steria brings Sopra capabilities in areas where CEO Pierre Pasquier had in the past expressed it did not want to go into e.g. IT infrastructure management for margin reasons. in todays presentation on the merger presentation, Pasquier's position on IM had changed, commenting that more clients are asking for AM services or SaaS applications together with the underlying IT infrastructure services.

In all likelihood, the potential acquisition of Steria for €722m in shares was a deal Sopra could not refuse. If we look back to 2007, Steria acquired Xansa for €680m in an all cash transaction. Today's valuation includes all the operations of Steria in France, Norway and Germany.

The big benefit of the Steria acquisition from a Sopra perspective is that it finally solves the company’s lack of internationalization. While Sopra Group has been successful in its domestic market with good organic revenue growth and operating margins, it has struggled to grow its U.K. and Spanish operations (both have remained at ~€80m in revenues). And Sopra's profitability in the U.K. and Spain has been hurting the company for several years. Steria brings a U.K. business with revenues of €692m and a 10.0% adjusted operating margin that is on the verge of high growth thanks to the ISSC2 contract.

Steria also brings a good country unit in Norway which has been performing decently.

The big question market remains its operations in France, where Steria had ben preparing for significant redundancies in back office and support activities. Interestingly, Steria France has put on hold its job redundancy program as Sopra France is expected to absorb some of the personnel on the bench through existing contracts and through removing subcontractors. SSG appears confident of being able to resume growth in Steria France rather painlessly.

Looking back, Steria has had a rather successful journey since 2002 and its first major acquisition, that of Integris/Bull. The company managed to increase its profitability year after year in spite of an unfavorable economic environment, adoption of industrialization and standardization and offshore. The acquisition of Xansa was a strategic (and expensive) move but it was impacted just nine months later by the U.S. subprime crisis impacting the global economy. However, Steria was was not able to cross-sell BPO and offshore to its client base in Germany and France. The company has clearly a competitive advantage it was not able to make us of. Currently, Capgemini now uses an Indian offshore leverage of 20% in its French operations. Steria does not. That is possibly the most major drawback of Steria’s performance in the past 15 years.

Sopra/Steria combined will become the third largest European IT services vendor, though some way behind Atos and Capgemini.

Consolidation within the European IT services market has been on the cards for some time, so today's news should not be too much of a surprise. Will we see further mergers or strategic partnerships in Europe this year?

LMT continues to boost its civilian aviation capabilities to diversify from core defense and government sector business where revenues have been declining. IS&GS revenues were down 5% in 2013 to $8,367m.  Beontra is its second acquisition in this sector in six months, following that of Amor Group, a supplier of airport products and services last September. Amor had an impressive year in 2012, with 27% organic growth. It brought to IS&GS products in civil airport operations which complement IS&GS’ civilian pilot training capabilities that it acquired in 2011 with Sim Industries.

• Revenue £4,288.1m up +5.6%, up +6.7% at constant currency (CC)
• Operating profit was £143.8m, a margin of 3.4%, down 330 bps

The decline in profits was anticipated with a warning given by the company to this effect only a few weeks ago. In this period, Serco reported a net exceptional charge of £90.5m, reflecting principally the Electronic Monitoring settlement and one-off costs, together with an estimated £21.0m of other indirect costs in relation to the UK Government reviews.

As forecast by the company in its H1 announcements, growth slowed down, in H2 2013. In fact it halved.

Contract wins in H2 2013 included an ITO contract extension for the EU and an FM contract with the Canadian defense. But BPO contract wins completely dried up in H2 2013. This perhaps reflects the problems of Serco’s Global Services division which was most impacted by the electronic monitoring debacle, reporting -350bps decline in operating margin.

Serco admits that clients did not want to talk to it until the issues had been resolved. New contracts have started to come in once again (such as the Lincolnshire Council contract) since Serco settled the matter with the U.K. government.

Apart from the MoJ expenses, divisional margin came under pressure from upfront expenditure on existing contracts. These included:

• A ~£15m working capital investment in transformation for Shop Direct in 2013 and further anticipated but smaller outflow in 2014. Returns are expected to begin from the contract in year 3 (FY15).
• Suffolk Community Healthcare redundancy cash costs of c£5m; no effect expected in 2014.  

It has not been an easy year for Serco in some of its international businesses either. In Australia, a change of government and policy has resulted in revenue attrition in its contract with the Department of Immigration and Citizenship for which Serco runs a number of detention centers.

In America, the outlook remains uncertain due to Federal funding challenges around programmes and contracts, but Serco has won a number of new contracts in the region, including the $1.25bn 5-year federal Eligibility Support (ES) contract by the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (CMS) but this is likely to be at relatively low margin.

Serco has done well to achieve topline growth despite its annus horribilis. 2014 will be a year of repair and rebuild for Serco. The new CEO, Rupert Soames, and a number of new non-executive board appointees, are likely to go to start with a major review of the business. Serco's strategy of diversification should help with this activity, providing it with a broad set of options for rebuilding the business.

Serco has updated its guidance for 2013 and 2014 following its clearance by the U.K. government to bid for new contracts.  Serco expects a mid-single digit percentage organic decline on 2013 revenue due to:

• Lower levels of incremental work won across the group to date
• Attrition from contracts lost such as electronic monitoring
• Volume reductions in its Australian immigration detention services contract
• Assumptions as to the extent to which it will be successful in securing further rebids and extensions as well as new bid opportunities during the year
• Adverse currency movements in 2013.  The impact of this has reduced revenues in 2013 by ~£50m and profits by £8m.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2013 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal programme.

Serco's ongoing portfolio management resulted in further non-core disposals in 2013. These businesses contributed £43m of revenue and £7m of profit up to the point of disposal last year and will not contribute to revenue and profits in 2014.

In 2014, Serco expects:

• Continuing additional costs of £10m a year related to the corporate renewal programme within its adjusted operating profit
• One-off costs incurred in 2014 of ~ £15m for external advisers and other directly-related costs of programme implementation, including initial training and systems set-up
• A further restructuring charge estimated at £10-£15m will be incurred in 2014 to implement reductions in headcount and related costs.

Market consensus for 2014 Adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

The profit warning came on the same day that Serco announced clearance by the U.K. government to bid for new contracts. Serco announced that it expects a mid-single digit percentage organic decline on 2013 revenue due to a number of factros including:

•     Lower levels of incremental work won across the group to date
•     Attrition from contracts lost such as electronic monitoring
•     Volume reductions in its Australian immigration detention services contract.

Adjusted operating margin is anticipated to decline by ~50 to 100 basis points on 2012 due to greater than previously envisaged margin reduction resulting from the revenue impacts described above, and the incremental costs of the agreed corporate renewal program.

In 2014, Serco expects continuing additional costs of  up to £40m related to the corporate renewal programme, external advisers and further restructuring.

Market consensus for 2014 adjusted operating profit is currently £277m but Serco anticipates a result that could be 10-20% lower than this for ongoing activities, on a constant currency basis.

Serco's financial woes have been compounded by a change of Government in Australia, its second largest market. Tony Abbott, the new prime minister, has pledged to stop the flow of boat people into the country by shifting the work to overseas centers. This has resulted in a decline in volumes in the detention centers that Serco manages under contract for the Department of Immigration and Citizenship.

On another front, in January, Serco's health provision in Suffolk was criticized after a four-month NHS review found services were being provided safely but improvements were needed. The areas for improvement were reported to include staff morale, recruitment and retention, communication with GPs and commissioners, equipment stores and procedures at the Ipswich care co-ordination centre.

Serco has been implementing a major corporate renewal plan as part of its negotiations with the Cabinet Office. As well as extensive management changes, and a renewed and refreshed code of conduct and governance, Serco has committed to creating a  separate division for its U.K. Central Government work to increase focus and openness for Government as a collective customer.

Other key measures include:

• Enhancing transparency and access, with reporting of operational and financial contract KPIs, and greater engagement of customers at contract and departmental level.
• Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of its whistle-blowing process to the highest international standards
• Measuring the progress of attitudinal change throughout the organization with ongoing independent culture and ethics reviews.

In 2013 TSYS continued to enjoy strong revenue and earnings growth. Growth in the merchant business is continuing to accelerate, based partly on:

• Competitor weakness (others such as First Data will report in early February and will indicate whether that trend will continue) 
• Merchant dissatisfaction with card schemes and the desire to obtain a processor with fewer if any issuer loyalties.

The international business grew at 5.8% in fiscal Q4, the strongest of any segment. This growth occurred in spite of headwinds from currency exchange rates due to a strengthening dollar. If the dollar moderates, TSYS will have very strong double digit growth in its international business, where its long-term growth opportunities lie. 

The next few years should see international growth for TSYS accelerate to even higher levels (20% and 30% growth rates). The payments business, in particular merchant acceptance, is certainly not subject to the rules of the "new normal". The question is whether high growth rates and low capital charges from regulators will draw in new competitors to the payments business - but the complexity of the business would make it very difficult for most would-be entrants.