NelsonHall recently attended Unisys’ Analyst and Advisor Event 2022 in Boston, MA. As IRL meetings and events begin to resume, it was great to engage with Unisys executives face-to-face once more.

The $1.2bn sale of its Federal business to SAIC back in February 2020 is being partly used to fund acquisitions and portfolio investments for Unisys’ digital workplace and cloud & infrastructure solutions businesses. Unisys has made three acquisitions to date: two have enhanced its digital workplace services capabilities, the third its cloud and infrastructure management services capabilities.

Unisys has well-established capabilities in cybersecurity, particularly Stealth and digital workplace services. There is now an increasing emphasis on cloud-native applications and taking a more consultative-led approach across Unisys.

There has been a nearly total refresh of the senior leadership over the last 18 months, with new appointments for CFO (Debra McCann; former CFO Mike Thomson is now COO), CTO (Dwayne Allen), CMO (Teresa Poggenpohl), CCO (Maureen Sweeny), and new heads for Digital Workplace (Leon Gilbert), Cloud and Infrastructure Solutions (Manju Naglapur) and Enterprise Computing Solutions (Chris Arrasmith). All are external hires (Naglapur came with CompuGain, acquired in December 2021). We note much greater diversity in the senior leadership.

The tagline for the event was ‘what’s next – accelerating success’. CEO Peter Altabef focused on Unisys’ new emphasis of driving outcomes that enable enterprises to be more profitable with supporting hybrid, cloud, and multi-cloud environments playing a pivotal role.

Digital workplace solutions: focus on the proactive UX

Leon Gilbert, SVP of Digital Workplace Solutions, highlighted the traction gained since his appointment in February 2021 and the increased focus on driving proactive experiences across the workplace and helping clients transform through next-gen capabilities. Unisys has enabled all existing clients with the latest technology, including journey analytics, at no charge. It also exited some non-strategic DWS contracts in 2021. Unisys claims to be enabling ~1.4m end-users with proactive experiences, up from 50k just 18 months ago.

Two recent acquisitions enhancing Unisys’ digital workplace services capabilities are:

• Unify Square, acquired last June for $150m, whose cloud-based PowerSuite solution for Enterprise Communications and Collaboration captures an individual's experience and can operationalize and improve that experience in real-time through analytics. Unify Square also brought in ~50 digital workplace consultants who can support Unisys’ consulting-led approach
• Mobinergy, a much smaller acquisition last November, has enhanced Unisys’ UEM capabilities and its positioning around modern device management.

There is an ongoing emphasis on VDI (Dell, VMware, Azure) and cloud-native VDI services to support secure and modern workspace environments and AIOps in support of first-time fix across field services, AR, and automation in service desks. Again, there have been several recent senior hires supporting these capabilities.

Priorities for Unisys’ digital workplace services include aligning offerings by geography, optimizing hybrid working models, and driving more outcomes-based engagements.

Driving application modernization and containerization

Unisys is also investing in its cloud and infrastructure business and recently acquired CompuGain, bringing 400 employees with capabilities across cloud-native, application modernization, and data analytics.

Unisys continues to invest in its CloudForte portfolio, including CloudForte CMP AIOps for AI-led operations. In addition, CloudForte Containers automate the end-to-end container infrastructure, application modernization, and DevSecOps deployment processes. This enables applications to be brought quickly into production and provides automation across the entire lifecycle, including security. It is also investing in Stealth and its hybrid cloud-managed security solution (MDR), providing AI-enabled threat response.

Unisys continues to ramp its investments across automation, self-healing, and AI/ML capabilities in support of cloud services.

Outlook

Unisys has overhauled its senior leadership team and is looking to pivot to a business-unit-led organization to increase traction in selected markets and geographies. There will be a stronger focus on using a consulting-led approach and on driving client outcomes: expect to see a further increase in dedicated business consultants. Also expect to see additional bolt-on acquisitions in support of application and data modernization capabilities, plus further developments in its CloudForte container services roadmap, and a greater focus on DevSecOps and automation enablement across the entire lifecycle. We also expect to see more joint-IP and GTM offerings with key hyperscalers.

With digital workplace services, expect to see greater traction across Unisys’ XMO organization, proactive experience, dedicated XLAs through the PowerSuite platform and partner ecosystem, and expansion of modern device management with Mobinergy capabilities. This should enhance field services, including AR/VR and immersive technologies. We also expect to see further acquisitions supporting digital workplace transformation advisory and a greater focus on AIOps and SRE-led operations.

Unisys will be rebranding this year: expect to see a greater emphasis on how Unisys’ offerings can support specific client outcomes.

John Laherty and Rachael Stormonth

As we have previously written, cloud services overall are poised to be the fastest growing area of IT services in 2021. The changing nature of cloud adoption, from non-production and non-critical applications to core business applications means that SAP environments will be no exception.

In our recently published SAP Cloud Migration Services market analysis, NelsonHall estimates demand for these services will grow by 12% in 2021, compared to 5% growth for SAP services overall. This growth is driven by the need for tangible cost reductions in an uncertain economic environment as well as a goal of modernizing IT landscapes to position for the expanded adoption of new and emerging technologies.

The adoption of S/4HANA to date has been restrained in part due to business case challenges for migrating from legacy landscapes. Migrating to the cloud helps address this, as the pivot from on-premise managed infrastructure to the cloud reduces IT operating costs and allows for adjusting cloud sizing as requirements change. And IT service vendors and cloud vendors are building capabilities and offerings to reduce the migration cost itself.

But migrating enterprise core SAP systems to cloud environments presents a three-headed challenge in the form of coordination between the three different service providers involved: the ISV (SAP), the hyperscaler cloud provider, and the systems integrator responsible for executing the migration and overlaying both business process and functional extensions. Collaborative relationships between the providers and coordination in service delivery are a necessity.

We recently spoke with Infosys and Microsoft to understand where they have invested to build complementary capabilities and how they integrate them to gain insights into how these challenges are addressed in supporting client SAP migrations to Microsoft Azure.

Investing in foundational SAP cloud migration capabilities

Microsoft’s investments in supporting SAP migration to Azure include project Embrace, launched in 2019, and a suite of tools and assets it has developed. Infosys, one of SAP’s Global Strategic Service Partners, looks to act as a bridge to facilitate the migration of legacy SAP workloads to Azure and add incremental capabilities on top of the foundational ERP system.

In 2020, Infosys introduced Infosys Cobalt to enable its clients’ cloud journeys. Infosys Cobalt offers ~14k cloud assets and ~200 industry cloud solution blueprints. Within Infosys Cobalt there are methodologies, solutions, tools, templates and accelerators to facilitate the migration of client workloads to cloud environments. Its SAP practice is working within this corporate initiative on a portfolio focusing on client SAP workloads. While migrating a full client application landscape to the cloud is broader than an ERP alone, Infosys estimates that of clients that have SAP environments, 90% of cloud migrations involve some element of their ERP as the core of a broader digital transformation.

Infosys and Microsoft have developed joint go-to-market plans aligned to client business objectives such as reducing cost through cloud adoption versus expanded capabilities through digital transformation.

Building complementary capabilities to support a variety of client journeys

Infosys has worked with Azure to refine its Safe Passage SAP migration approach to be applicable for migrating SAP to Azure environments, regardless of path chosen: migrating legacy ERP to Azure, converting the database or OS, or transforming from a legacy system to S/4HANA. Within Safe Passage to Azure, Infosys has four key assessment offerings, the first two offered free of charge, delivered with Microsoft Azure team support:

• Lift & Shift Starter Kit: this assessment allows clients to understand how their existing system would operate in Azure without any major database or application changes
• Landscape Conversion: leverages its S/4Assist asset to aid a client in understanding the value, effort and risks required to convert to S/4HANA
• Business Value Assessment: based on adoption of Infosys’ pre-configured industry-tailored solution housed in Azure, Infosys Catalyst, this illustrates for the client’s business units the value that could be realized through migration
• SAP on Cloud with Innov8 solution: migrating or converting the client’s ERP landscape on cloud and implementing Infosys’ ‘above the cloud’ solutions developed using AI/ML, IoT and blockchain technologies to apply intelligence to the business operations.

These offerings are supported by a mix of complementary Infosys and Azure assets. For example, while Azure offers assets to facilitate data migration and provisioning for new environments, Infosys has developed S/4Assist to assess legacy landscapes to understand the fit-gap to S/4HANA on Azure and CMO, which provides identification and remediation of custom code.

In addition to assets that span the breadth of migration approaches, Infosys offers Catalyst, a bundled S/4HANA offering tailored to the specific requirements of an industry, hosted on Azure. Catalyst offerings on Azure are available for 15 industries including CPG/retail/fashion, life sciences, oil & field services, automotive, utilities & resources, and high tech clients.

As part of its innovation offering, Innov8, Infosys has developed intelligent industry solutions hosted on Azure that can provide clients with increased intelligence in their systems while remaining on their legacy ERP systems or migrating to S/4HANA. Examples of Innov8 solutions on Azure include Smart Warehouse and intelligent cycle counting, Intelligent order management, predictive revenue assurance services, and on-time in-full delivery performance. Infosys has published these solutions on Microsoft Azure marketplace and they are ready for client consumption. The entire suite of Catalyst solutions and Innov8 solutions is now part of the Live Enterprise offering.

An example of a joint client project is one for a European automotive OEM. The client began its journey as a business imperative to migrate one of its lines of business from a legacy ECC instance. As part of the modernization and migration to S/4HANA, Infosys is also embedding predictive analytics and IoT within both warehouses and trucks. It is then using this as a spearhead to migrate the broader corporate SAP landscape to S/4HANA on Azure.

Positioning to maximize client value

The transformation of a legacy SAP ERP is a complex and risky endeavor for organizations. After decades of investment to customize a monolithic on-premise ERP to specific needs, transforming to a cloud environment and more standardized ERP can be a daunting undertaking. However, as the end of life for legacy SAP support comes closer, companies are faced with increasingly pressing needs to transform their legacy SAP systems to S/4HANA.

The simultaneous journey to cloud can accelerate the value to be realized but also increases the challenge. In order to help clients in this journey, IT service providers must demonstrate how they partner with both SAP and hyperscalers and have integrated their complementary capabilities to de-risk the journey and maximize the value realized.

As the rapid rise of the pandemic demonstrated in early 2020, a company’s ability to react and respond to the changing business environment is a critical capability. Even prior to the pandemic, a NelsonHall survey of ~1k IT service buyers showed ~60% placing high importance on increasing the agility of existing core productions applications. Companies are looking for agility in not just their technical foundation that lets them pivot to, for example, a distributed work model overnight or launch new products and services rapidly, but they are also looking for agility in their IT service cost models. Applying the variable cost structures of cloud to other services enables greater alignment of IT service costs to the business environment.

Coforge is positioning on its ability to deliver this agility to clients with a set of offerings being launched in 2021 that aim to simplify enterprise architecture. An umbrella offering it calls Architecture as a Service is comprised of three pre-packaged, composable offerings that become the foundation for a client to build an Office of Enterprise Architecture. Building this centralized business function ensures that decisions are made which align to overall business objectives and in a structured manner that ensures that individual decisions are consistent with the broader technical landscape strategy.

Coforge has developed three offerings which support this approach:

• Office of Enterprise Architecture (EAO): Coforge provides clients with a set of tools and processes for governance, including architecture review boards, and a dedicated staff to execute project reviews. The model is intended to be flexible to align the Coforge team to the specifics of the team required; for example, bringing niche specialists in blockchain or quantum computing to help facilitate specific proof of concept projects
• EAO + Enterprise Strategy Planning platform (ESP): Coforge’s EAO offering is supplemented by its enterprise strategy planning platform which provides a centralized management platform that aligns technology and business capabilities with business unit strategic objectives. See below for more details on ESP
• EAO + ESP + Digital Foundry: Coforge has a network of Digital Foundry studios, which offer a portfolio of assets and accelerators across areas including data, integration, AI and automation within a dedicated space that clients can leverage for design thinking, ideation sessions and hackathons. In essence, Coforge can provide an innovation center on demand for clients as well as point specialist talent. Coforge currently has physical studios in New Jersey, London and Noida, India and can provide access to assets in a virtual studio environment as necessary.

Coforge is looking to enable clients to build a customizable set of services based on their unique requirements. With a foundation of EAO services, clients can add recurring subscription services such as strategic planning, KPI management and reporting, as well as on-demand point capabilities including program architects, innovation pilots and design thinking delivery.

Coforge has a defined three-month initiation phase to kick off these engagements, starting with a startup and discovery phase to analyze existing processes, the technical landscape, business objectives, and gather KPIs and documents. It then works with the client in a collaborative model to develop the to-be model encompassing communication protocols, the architecture review board, operational cadence, decision methodology, and deployment roadmap.

In part, value is driven by structuring the enterprise architecture office to better align it to the objectives of individual business groups through the engagement of all stakeholders in the implementation process. This allows stakeholders to both provide their input as the future model is defined but also get better visibility into how the office operates.

ESP

Implementing ESP in addition to the EAO provides clients with a technical cockpit to provide common visibility and alignment across the organization. In particular, ESP provides visibility to enterprise strategy and its alignment to business units, processes and enabling technologies.   

The cloud-based proprietary offering captures details of the existing landscape as well as proposed initiatives for assessment. Once the current state is modeled, the enterprise model can be replicated and used to model transformational initiatives, revealing dependencies and how these changes will impact the enterprise.

It will ultimately encompass capabilities to capture and manage four key areas of data for use in assessing the alignment of initiatives:

• Architecture models: designs, business processes, data and orchestration workflows as well as CMDB and helpdesk data
• Project execution data: project execution metrics, testing and rework and SDLC throughput as well as the associated budget, ROI and timeline
• Strategic planning: capturing objectives, priorities and target delivery dates
• Operations: alignment to business functions including finance, sales, GRC as well as comparison to the broader market.

In phase two of a client deployment, after the completion of the implementation and stabilization phase, ESP enables the automated capture and reporting of KPIs by pulling data from ERP or CRM systems. Coforge uses this data to develop industry-specific KPIs based on their experience and broader market perspective.

It is also proactively developing integrators to common packaged software products. Its first connectors to ServiceNow have been developed.

Coforge is also looking to minimize client lock-in. ESP is hosted on Azure, and Coforge has defined the services to be left behind at a logical transition point back to client personnel, if necessary.

Rollout and Roadmap

The rollout plan in 2021 for the components of ESP includes:

• Q1, launch of the strategy and planning components. Industry-specific accelerators and KPIs for insurance
• Q2, integration capabilities for other systems (such as ServiceNow) and embedding the use of market data in defining KPIs. Expansion of target sectors to BFS
• Q3, augmenting core cockpit capabilities with collaboration and AI capabilities. Addition of healthcare as a target sector
• Q4, adding adaptors to enable integration with ERP platforms. Expansion of target sectors to travel, transportation & hospitality.

Once rollout is complete, Coforge is looking for its EAO and EPS to be a fundamental capability in driving clients’ digital transformation initiatives, minimizing the risk of failure in achieving their objectives through the active management and tracking of such initiatives relative to their strategic intent, and also embedding agility into the foundation of the organization.

Maintaining alignment between the IT function and business units has become increasingly imperative. Coforge highlights EAO and EPS as a connective tissue ensuring that technology and architecture plans act as enablers, not inhibitors, for realizing business objectives.

Digital experience consulting has been a critical focus area for IT services clients over the last several years. NelsonHall estimates that digital experience consulting services revenues grew by 15.8% globally in 2019, and projects a CAGR of around 12% from 2021 through 2024, after the COVID-19 pandemic eases.

However, with COVID-19 still spreading, digital transformation projects with lengthy delivery timescales and indeterminate business value are currently vulnerable to deferment or cancellation. In a NelsonHall survey of over 1,000 CFOs globally, conducted in the early stages of the COVID-19 outbreak, they projected an average decline of ~2% in their companies’ spending on digital transformation initiatives in 2021.

Nevertheless, in an environment where their customers, employees and partners are forced to remain socially distant, connected to the outside world via digital channels, it is imperative for companies to continue to make investments in digital.

We recently spoke with everis, an NTT DATA consultancy focused on Europe and Latin America, to discuss its structured offerings for addressing customer relationships and internal service operations both during the lock-down and in the new world as we come out of it.

Customer Interactions Become Digital-First

everis highlights four offerings leveraging digital technologies where it can help clients quickly adapt their customer-facing operations in the current changed environment:

• Customer support: B2C organizations in many sectors are challenged with increasing inbound calls in their customer service operations; to help clients expand their use of virtual assistants in these operations, everis is offering a conversational platform called eVA that can boost the adoption of this channel and simplify its management
• Collections process:  with the economic disruption being caused by COVID-19, there are going to be customers unable to pay monies owed. For a company, the cost and effort of chasing after collections that will never be paid is sunk cost. The everis offering here is based on applying analytics and AI to collections data to help clients prioritize their collections effort
• New business sales platform: offerings that use COTS products include Sales Commercial Cycle Optimizer solutions based on Salesforce and Microsoft, leveraging pre-built tools, including CPQ configurations and templates
• E-commerce: everis has a number of offerings, including ones leveraging products from the likes of Adobe and Salesforce to support the expansion and modernization of clients’ e-commerce offerings, including ones to optimize the conversion rate.

Adapting Service Delivery for a Fluid Workplace

COVID-19 is also having a major impact on organizations’ internal operations; in the great shift to work-from-home, employee experience is evolving even faster than customer experience. everis has two tools to support employees operating in a work-from-home environment:

• everis Knowler, which can be implemented with Office 365 and Azure, helps employees access the institutional knowledge required for them to do their job
• TOGO, digital workplace offering to boost Microsoft Office365 and Teams adoption and improve collaboration and communication.

everis is also looking to help clients transform their service delivery in response to COVID-19 disruptions by:

• Reducing the workload of remote workers through the expanded use of automation in business processes, leveraging its Clonika RPA PaaS offering and commercial RPA solutions such as Automation Anywhere that can be implemented based on the highest value use cases defined as part of a consulting and assessment phase
• Working with clients to re-assess their digital properties and identify opportunities to transform these properties through standardization and integration on to a common digital platform. Developing a broader, cohesive approach across digital properties improves the ability to rapidly roll out new products in response to changing customer requirements. everis has developed a proprietary analysis tool, everis winder, that evaluates a digital platform to identify opportunities for transformation.

Digital Transformation as Response to a Crisis, Not a Victim of It

COVID-19 has caused global disruption. One of the ancillary impacts on enterprises has been a widespread re-assessment of investments to determine what is mission-critical in a time of economic uncertainty and what can be delayed until later. Digital transformation initiatives are often viewed as a discretionary budget item, to be undertaken only as time and money allow. However, with lock-downs temporarily pausing nearly all in-person and physical transactions, digital transformation initiatives should be viewed as a response to these challenges rather than budgetary line items that are victims of those challenges.  

everis appreciates that to help its clients weather this disruption, it needs to focus on offerings that address their most pressing needs, and that by tailoring digital transformation initiatives, it can enable clients to improve how they meet customer needs and how they perform their internal operations.

NelsonHall was recently invited to present at NASSCOM Technology & Leadership Forum 2020, one of my last foreign trips for some time, I suspect. While in India, in addition to presenting, participating on panels and conducting interviews, we had an opportunity to sit down with leaders from across the IT services landscape as well as venture beyond the Grand Hyatt Mumbai to delivery locations in Pune and Bangalore. And in all our interactions, innovation was a key theme.

In this blog, we look at several examples of ways in which leading IT services providers are enhancing their offerings through innovation.

Expanding the remote delivery services offered

In its 50-building campus in Bengaluru, Infosys has stood up their Experience Design Studio to support the delivery of experience design services globally. In addition to its acquisitions of WONGDOODY and Brilliant Basics to expand its client-proximate creative design capabilities, Infosys has created this dedicated studio to deliver design services housing ~160 designers (other locations that house the Infosys XD studios, WONGDOODY and Brilliant Basics bring the total Experience Design team globally to ~600). Capturing all of the necessities of design space, including open meeting spaces, client collaboration areas and plentiful white boards covered in the most artistic notes you will ever see, this dedicated space is co-located with the broader Infosys global delivery capability while also being set apart in a standalone space.  The studio houses multi-disciplinary teams which aim to apply skills of traditional design to broad systemic challenges; questioning, reframing and addressing issues through the combination of design, technology, and industry skills.

Significantly, the Infosys XD studio does not necessarily play a supporting role to designers located at client sites. It has its own client relationships, in particular for long-term engagements, such as with a U.S.-based logistics company that in 2017 engaged Infosys to help reimagine its business model. Another example is the work done for a tennis governing body, designing and shaping a new understanding of the sport that benefits fans, players and the media. The group is also working with the Indian Income Tax with the aim of simplifying the filing of tax returns.

These design capabilities provide Infosys with the ability to deliver end-to-end services to clients rather than ceding up-front strategic and creative services to consultancies and agencies; particularly at clients where it already possesses strong relationships.

Narrowing the focus

Wipro, with several years of S/4HANA services under its belt, has centered its SAP offerings around enabling an enterprise’s digital transformation journey, at the same time prioritizing SAP services in industries where it can be a top-two provider. These include:

• Leveraging its recent digital/design acquisitions, process and business consulting capabilities to facilitate clients on design-led transformation projects
• SAP products: S/4HANA, in particular hosted on hyperscale cloud, provides AWS, Azure and GCP and SAP SaaS products SuccessFactors, Ariba and Cloud for Customer (C4C)
• Industries: energy & natural resources, manufacturing, consumer industries, and retail. These are areas where it already possesses strong capabilities: it acted as SAP’s solution partner on SAP Model Company for Utilities and is now partnering with SAP on its food and beverage model company offering based, in part, on Wipro’s work with a large U.S. food manufacturer. Wipro is also a co-development partner for fashion & retail with SAP and the newly developed solutions will offer a range of functionality from fashion manufacturing to in-store merchandising
• Geographic markets: Wipro is narrowing its focus to mature markets where large historic SAP clients have yet to migrate. In addition to the broader North American and continental European markets, primary focus areas include Germany (where Wipro acquisition Cellent provides a strong local capability), Japan and Saudi Arabia. 

This allows Wipro to continue focus on large transformation engagements while targeting its innovation, partnership ecosystem, and offering development where it feels is best positioned competitively.

Developing assets to enhance service delivery

Another approach, and one demonstrated by two other services providers we visited, is to apply innovative technical assets to enhance well-established service offerings.

LTI has developed a platform called METIS to improve the efficiency and effectiveness of the software development and testing process. METIS connects with underlying SDLC tools to automatically create a knowledge fabric across the IT landscape. METIS then applies machine learning to create relationships between business functions, actions taken, the calls to associated applications and APIs, defects, production tickets and performance logs.

This mapping allows for better visibility on how changes to business functions impact the IT and business landscape. This improved visibility improves the efficiency of test execution and the coverage available for automated testing while reducing defects by identifying related defects. METIS also helps in improving developer productivity by providing architects and developers with analytics on running code. In addition to using METIS to improve its own application development services, LTI is also offering it as licensed software to provide a parallel revenue stream.

A similar approach is being taken by CSS Corp. Its largest business segment focuses on customer experience and enterprise support and it is applying intelligence to enhance these labor intensive services. Positioned as the first touchpoint with customers has enabled it to capture significant data which it is looking to leverage to better align IT and business and improve its service delivery. As an example, CSS Corp is creating an integrated digital service management and support ecosystem for a networking company where it delivers customer support services. For this company’s healthcare clients, CSS Corp was able to use automated tools to streamline the process of assessing and replacing equipment that has failed, accelerating delivery and reducing ticket resolution.

Further aligning IT offerings with business value

Leading services providers are also looking to be innovative in directly aligning their IT services with the client achieving its business objectives.

As part of its ADMNext offerings, Capgemini has developed a model which aligns the delivery of its application development and maintenance services to specific technology transformation and business objectives. The approach places these services as the foundation of a client’s transformation, freeing up client resources (budget and employee time) through the application of automation to allow for greater focus on transformation initiatives that evolve the client landscape. This transformation is positioned across three levels of internal change: technological transformation from modernizing the IT landscape; business transformation through transforming service delivery processes; and disruptive services by applying new and innovative technologies to fundamentally change business models.

Innovative offerings

TCS has had a dedicated innovation facility located in Pune, housing ~300 dedicated researchers separate from its broad service delivery campuses (further details on TCS’ research and innovation function is described here). This center looks both at building assets directly applicable to service delivery and broader research topics. Examples of current research topics include:

• Developing a digital twin for an enterprise that leverages machine learning to model how to optimize enterprise operations
• Machine learning targeting workforce management, fraud and money laundering detection and information and knowledge extraction
• Developing digital twins of human organs to eliminate animal testing
• Real-time recipe analysis of steel content to ensure optimal strength
• Cybersecurity for both cloud workloads and IoT
• Applying cognitive capabilities to tailor media to customer needs.

Summary

In our visits to the India campuses of these IT services firms, we were impressed with the level of investment they are all placing on innovation, both in developing new offerings and in transforming their core services.

Leading IT services providers are taking a range of approaches; all have a clear sense of direction as to how they are building differentiation and also gaining credibility in positioning as thought leaders with their clients.

User experience and user interface (UX/UI) consulting and design has traditionally been focused primarily on external, customer-facing web properties. However, the scope and focus of experience design services has expanded as companies realize design thinking and experience-centric design has greater applicability than solely in interfacing with users. In this vlog, David McIntire presents at NASSCOM 2020 on the changing focus of user experience services.

In a recent NelsonHall survey of IT services buyers, the most highly-sought benefit of digital transformation engagements was improving customer experience and customer satisfaction (highly important to ~68% of buyers globally). This focus has driven IT services vendors to invest heavily over the last several years in expanding their experience consulting and design capabilities. In the same survey, ~75% of buyers identified an ability to provide UX consulting and design as a highly important trait sought in vendors.

A major shift in client attitudes

These findings underpin a major shift in IT service client attitudes toward experience consulting and design: it is no longer an optional or standalone activity; it is now a core component of IT. Historically, digital experience consulting and design services were focused on a sub-set of a client’s IT landscape –primarily customer-facing digital properties such as e-commerce sites and client portals. Experience design projects became one-off initiatives to drive the redesign and development of these external-facing applications.

Now, experience is a factor in all application development work. Clients are as likely to seek experience consulting and design services for employee applications as they are for external applications. It is increasingly recognized that employee satisfaction correlates to the applications utilized in their day-to-day jobs; employees don’t forget the ease-of-use of the Uber app or Amazon website just because they are sitting at their work desk.

Experience focus is expanding

The focus of experience is also expanding. Experience is no longer limited to the interface of an application; it now spans the entire service delivery lifecycle; a customer’s experience is as much defined by how quickly they receive an e-commerce order as the interface used to place that order.

Clients are also recognizing the iterative, ongoing nature of experience design. Developing a user-centric application is not a one-time process; it is ongoing and must constantly evolve as customer demands evolve. Building processes and tools that allow for the capture of user feedback to drive iterative application enhancements is as important, or more, as the research required at the onset of a digital experience design program.

All of these factors make experience pervasive in nearly all IT-focused work, and this is resulting in a change in the services clients are looking for from IT service vendors. Rather than solely looking to vendors for consulting, clients will increasingly look for vendors to inculcate these experience design skills in the client organization itself. The expectations of vendors will not just be to deliver a design thinking session and quickly develop wireframes and lo-fi prototypes to be tested, but also build the capabilities to do this within the client organization itself.

Vendor experience capabilities need to evolve

For vendors, this means that the digital experience capabilities they develop must also evolve. Having designers and design thinking specialists capable of driving client engagements is only half of the requisite offering. Vendors must also be able to build these capabilities in their clients while helping them understand the level of transformation required to maximize the value of building an internal experience design capability. The use of design thinking and rapid prototyping across the organization requires fundamental changes, including greater cross-functional collaboration, changing roles both inside and outside of IT, and expanded change management.

To facilitate this, vendors must be able to provide broad consulting that spans several components, including:

• Training client personnel to conduct design thinking sessions and design experiences
• Defining and implementing design libraries for use within the client
• Delivering organization, culture change, and change management services.

In parallel, there will continue to be specific activities where clients won’t realize the value of building in-house capabilities. Conducting dedicated user research or assessing the applicability of emerging technologies (such as chatbots and AR/VR) may remain specialized functions that clients look for vendors to provide. But with the ongoing, iterative nature of digital experience design, vendors will be tasked with evolving offerings to more cost-effective delivery; for example, offering these through an as-a-service capability.

Experience design is evolving from a niche function to becoming a foundational aspect of nearly all application work. Client demands are evolving in parallel, and successful vendors will expand their capabilities and transform their offerings to focus on enabling their clients in addition to delivering outcomes.

In NelsonHall’s 2019 survey of IT service buyers, when asked about the key capabilities sought in vendors, a significant majority cited a range of digital consulting capabilities. More than 65% of respondents placed high priority on capabilities such as the ability to take a business perspective to apply digital, provide a roadmap for adoption of digital, and undertake a digital maturity assessment. In parallel, clients are looking for vendors that understand the specific needs of their industry, including sector-specific applications or their digital platforms tailored to industry needs.

For IT service vendors delivering increasingly commoditized services using standard delivery tools, demonstrating these capabilities to clients can be a challenge.

In late 2018, TCS introduced a new brand and integrated service capability, TCS Pace, as part of a corporate thrust to differentiate its digital innovation capabilities from its core legacy services. To support the delivery of these capabilities, TCS has also begun rolling out specialized hubs called Pace Ports.

NelsonHall recently had the opportunity to visit TCS’ Pace Port New York and discuss the vision for the Pace organization and the Pace Port network.

TCS Pace

The TCS Pace brand was introduced in November 2018 as a consolidator of disparate capabilities: a brand identity encompassing its research, innovation and digital transformation capabilities, applied within a business framework. Beyond the brand, TCS is also integrating its delivery capabilities to offer a more seamless service for digital transformation engagements that span multiple offering areas. In a full-service play, TCS is also building close integration for capabilities that have not formally been brought under the Pace umbrella. And there are specialized CoEs dedicated to specific emerging technologies such as blockchain and IoT as well as TCS Interactive, where TCS’ core experience and design capabilities reside.

To ensure that it integrates a full suite of capabilities, stakeholders across TCS were engaged, including its CMO and CTO units, Business & Transformation Services delivery units, geography leadership teams, and vertical business units.

With a broad set of stakeholders, the performance measurement framework for Pace is primarily focused on outputs rather than financial results.

TCS Pace Ports

The Pace Port network has evolved from TCS’ innovation and co-creation location strategy. TCS’ first purpose-built space for client innovation discussions was its Executive Briefing Center in Mumbai, opened over a decade ago, followed by a customer collaboration center in Santa Clara, CA in 2012 which has since evolved into the TCS Digital Reimagination Studio.

TCS opened its first Pace Port in Tokyo in the fall of 2018. Why Tokyo? While Japan is relatively small in terms of revenue contribution, it is a priority country for TCS from a growth perspective, and one with unique market demands. The second Pace Port, opened earlier this year in New York, is clearly a major location.

Pace Ports are purpose-built facilities. These are dedicated spaces, co-located with one of two complementary functions:

• With an existing TCS office to enable collaboration between the Pace Port employees and the broader organization. The Tokyo Pace Port is housed in the same building as the TCS Tokyo office, on a new floor
• With academic partners to facilitate close collaboration with both academics and students in pursuit of specifically defined objectives. Pace Port New York is housed on the Cornell Tech campus on Roosevelt Island. While the Pace Port occupies a portion of a floor in the Tata Innovation Center, the remainder of the floor is populated with Cornell Tech graduate students, Ph.D. candidates, and teachers.

Pace Ports are a result of a collaboration across TCS. The local geographic unit acts as the owner of each location but partners with a lead vertical (manufacturing in Tokyo, retail in New York); however, Pace Ports are not exclusive to a single vertical. On the day of our visit to the Pace Port New York, they were preparing for a Life Sciences client event. It has an interactive display for identifying specific solutions based on business needs. Innovations that it showcases for the retail industry include ones for managing inventory and improving the shopping experience through the integration of digital and in-store capabilities.

In addition to the geography and vertical organizations, Pace Ports are also incorporating other capabilities. For example, they will have a rotating team from TCS Interactive for conducting design thinking and deliver experience design services.

Pace Ports are designed to be modular with movable walls that can be used to cordon off work areas, be opened up for a collaborative design thinking session, or removed for presenting to clients. There is also an informal area with couches, and in New York, chairs facing floor-to-ceiling windows overlooking the Manhattan skyline.

TCS has identified seven components that comprise the Pace Port network, with each location housing at least four. These are:

• TCS Digital Library: an interactive digital display that enables accessing knowledge captured globally
• TCS Rapid Labs: an innovation factory for quick turnaround proofs of concepts and MVPs
• TCS Think Space: design thinking space aligned to TCS Interactive
• TCS Agile workspace: modular, agile development working space
• TCS COIN Accelerator: processes and tools for collaborating with start-ups and partners
• TCS academic research lab: collaboration with local academics
• TCS innovation showcase: space for demonstrating TCS IP to clients.

Each Pace Port will have a mix of these features tailored to the local market; not many will have all. Features in the New York Pace Port include the innovation showcase, agile workspace, academic research lab, COIN accelerator, and conference space.

The Pace Port Tokyo was designed to be a physical manifestation of client innovation processes. Clients begin in an executive briefing room to enable problem definition, then move into the innovation showcase and IoT lab to see TCS offerings. This is followed by a TCS Think Space for design thinking sessions to develop solution ideas. The outcomes of these sessions are addressed by the development of PoCs leveraging the COIN accelerator before being handed over for MVP development in the agile workspace.

With Tokyo and New York up and running, TCS will continue to expand the network in 2020. Openings will include:

• Amsterdam, TCS’ first European Pace Port will be based on a new floor in the TCS offices and is envisioned to become the Digital Innovation hub for the region
• Toronto will be the largest Pace Port opened to date and will include all seven components, including collaborations with the Universities of Toronto and Waterloo
• Pittsburgh, located on the campus of Carnegie Mellon University in TCS Hall, a building built with an endowment from the Tata organization. The primary focus is research.

Other future locations include London, Sydney, Paris and others. Ultimately, we expect TCS to open Pace Ports in all its major markets.

Rapid Labs in Pace Ports act as innovation factories that deliver PoCs or initial MVPs using emerging technologies in an accelerated timeframe. A unique feature of the labs is their focus on leveraging new joiners on a rotational basis, thus enabling them to gain practical experience. Pace Ports’ collaboration with academic partners provides a strong pipeline of talent including, for example, the ~65 Ph.D. candidates and ~300 graduate students located literally across the hall from the TCS Pace Port New York at Cornell Tech which can be tapped for expertise in addressing client needs. Rapid Labs at Pace Ports follow the TCS Incubation Rapid process that has been used to produce innovations for several years.

Summary

IT service vendors with a large legacy services footprint have been investing heavily in recent years to develop their capabilities in digital offerings and demonstrate their innovation capabilities. Accordingly, many have been opening facilities that often have the words ‘innovation’ or ‘digital’ in the nomenclature, and most have used small acquisitions in this drive. In a few cases, the approach has looked somewhat piecemeal. TCS’ approach has been slightly different: it has taken a considered and organic approach in developing a full-service play, including strengthening its positioning around innovation with Pace and in setting up Pace Ports: 2020 will see an acceleration in the opening of these facilities. With the Pace initiative and its concept of ‘Business 4.0’, TCS has clear ambitions to be seen by its major clients as a full-service partner capable of supporting them in their digital transformation journeys.

NelsonHall has recently completed compiling and analyzing data from a survey of over 1k IT services buyers globally. This research is being published in a series of sector reports (all are available to subscribers here), spanning the 18 sectors analyzed, with geographic breakdowns incorporated within each.

While completing these individual reports we noted several themes that were fairly consistent regardless of sector or geography represented. In this blog, I look at four key trends pulled from this data that IT service vendors can use to better position their offerings to these buyers.

Digital Initiatives Get Specific

Finding: Sixty-nine percent of respondents globally identified digital initiatives as highly important to their future IT strategies. As a data point this may not be surprising, given the ubiquity of ‘digital’ and ‘digital transformation’ in business today, but in the previous round of this research, completed ~18 months ago, that proportion was 82%. Is digital really less important today to a significant proportion of IT service buyers?

NelsonHall’s perspective is that the overall aims and initiatives falling under the digital transformation umbrella have only increased in importance to buyers, but that there are two key take-aways from this change:

• Buyers have frequently not seen the intended business value from early digital transformation initiatives. Broadly defined initiatives with indirect business cases may not have achieved the desired outcomes, particularly given the frequent investments required in foundational activities (such as data clean-up and digital core migration), thus leading to doubt as to the value of these initiatives
• Buyers are more sophisticated and are focusing on specific digital initiatives and technologies rather than broadly defined ‘digital transformation’. As an example, manufacturing companies may not place as much priority on ‘digital transformation’ but they do place high priority on implementing IoT on the shop floor to enable predictive maintenance.

Vendor response: When communicating with clients and potential clients about digital initiatives, vendors should focus on specifics. This includes clearly defining the roadmap of initiatives to be pursued and quantifiable value that can be achieved.

Clouds Are Still Gathering

Finding: While ‘cloud’ is nearly as ubiquitous as ‘digital’ in today’s business lexicon, we estimate that only ~30% of large enterprise workloads reside in cloud environments. Despite the rapid growth of leading public cloud providers such as AWS, Azure, and Google, we further estimate that only 12% of large enterprise workloads reside in public cloud environments. When it comes to large enterprises, cloud adoption still has a long way to go.

This low adoption to date also translates into significant plans for investments in cloud adoption going forward. By 2020, companies globally are looking to increase the proportion of their workloads in clouds to ~35%. This will be primarily accomplished through greater public cloud adoption, projected to rise to ~17% of workloads in parallel. To fuel this rise, IT service buyers project their spending on cloud infrastructure to rise by more than 6% on average globally.

Vendor response: Vendors should not only recognize that their client base may be slower on the cloud adoption journey than expected (and tailor messaging to reflect this) but should also focus on helping clients understand the breadth of options for expanding adoption of cloud. This includes focusing on accelerators to simplify and de-risk cloud migration as well as building capabilities to support alternative paths to expanded cloud footprints: a majority of buyers place high priority on a vendor’s cloud-native development capabilities, and increasing use of SaaS was the most commonly identified sourcing change planned.

The Need for Speed

Finding: While digital transformation initiatives have a breadth of benefits highly important to companies, including reducing service delivery cost, increasing revenues, improving customer experience or improving competitiveness, the most commonly cited high priority benefit focuses on accelerating delivery of services. For the business side of companies this includes launching new products and services, a high priority for more than 80% of companies, and achieving levels of straight through processing and turnaround times, a high priority for ~60% of companies.

IT departments are also looking to accelerate services, with reducing new application time to market identified as a high priority by more than 90% of companies globally. To achieve this, companies are also prioritizing increased digitalization of operations and adoption or increased use of DevOps.

Vendor response: When defining the business case benefits for new initiatives, vendors should focus on speed, and how it fuels other benefits such as improved customer experience and competitiveness to drive incremental revenues. Initiatives and investments should also reflect this priority, such as focusing on end-to-end service design and expanding use of agile development and DevOps for both customer and internal-facing digital initiatives.

Know Me – or No You

Finding: When IT service buyers were asked what characteristics they most prioritize in vendors with whom they work, the answer was industry knowledge, a high priority to more than 75% of companies. Given the benefits being sought from digital initiatives, including improved customer experience and increased competitiveness, an understanding of the key service features unique to that industry is imperative. This prioritized knowledge extends to an understanding of sector-specific applications that can be applied to address particular needs.

Secondarily, buyers are looking to work with vendors who not only understand them but can also help them to understand their own customers. The next most commonly prioritized characteristic was UX consulting and design, reflecting the priority companies are placing on tailoring their offerings to the unique and changing demands of their customer base.

Vendor response: Vendors need to demonstrate their deep understanding of a client’s industry, including their business challenges and potential applications designed to address its unique requirements. Having a workforce that understands and can speak to client needs is important. Additionally, vendors need a dedicated UX capability to drive the process of understanding customer expectations and experiences and then tailoring offerings to those needs.

Summary

The priorities of IT service buyers are evolving, and vendors need to ensure their offerings and messaging align with these priorities. The clear take-away from our research is that vendors need to focus client messaging on the specific digital initiatives to be pursued; help clients in adopting cloud through a variety of avenues; focus on speed as a key benefit of digital initiatives; and ensure that they possess an understanding of industry imperatives.

At the recent TCS Innovation Day held in New York, NelsonHall had an opportunity to talk to TCS about how it approaches its research and innovation function, balancing longer-term open-ended research and more immediately applicable innovations to evolve how it delivers services. (For more on the event itself, see the blog by Andy Efstathiou here).

TCS has developed an overall approach that balances research into cutting edge areas, innovations to its services, and applying learnings from its innovation network of academics and start-ups.

Research: Focusing on Broad Themes & Long Term

TCS has been conducting its own internal research for ~38 years. However, over time, its focus has evolved. Initially, the research was primarily focused on technologies directly applicable to the delivery of application services, for example, code generation; TCS used its research capabilities to play an advisory role to the application development and testing tool maker Rational throughout the ’90s.

Today, however, the focus of TCS research has broadened into nine areas that impact both its business but also the core businesses of its clients. These research areas are:

• Physical sciences
• Software systems and services
• Life sciences
• Embedded systems & robotics
• Cybersecurity & privacy computing systems
• Behavioral, social & business sciences
• Data & decision sciences
• Deep learning & AI
• Media & advertising, computing foundations.

This work is conducted by a dedicated research team of ~1k employees, including 200 employees with PhDs and 400 with advanced degrees. This research is funded through a dedicated annual spend of ~1.5% of revenues. In 2019, that totaled ~$300m.

As an example of one of these areas of research, TCS has a dedicated team of ~100 employees working on genomics across several labs in India. The primary focus of this team is currently next generation diagnostic techniques. Areas of focus recently have been identifying early indicators for babies at risk of premature birth (which kills 1 baby every 30 seconds globally), as well as early screening for other rare genetic disorders.

These research areas may not have a direct impact on TCS offerings, but they could be applicable to client offerings; genomics is not only applicable for the pharmaceutical, life sciences and healthcare provider sectors, but even insurance. TCS is developing non-invasive diagnostic procedures for diseases such as diabetes, Parkinson’s and certain cancers as well as measures for wellness to enable early risk detection and better alignment of premiums with individual lifestyles.

In addition to being applicable to client business, this type of research helps position TCS as a thought leader in these industries, and NelsonHall research shows that 78% of IT service buyers globally place high importance on industry knowledge when selecting a vendor to work with.

For this research, TCS takes a three to four-year time horizon on research projects and prioritizes outputs such as patents and published research rather than the monetization of outputs. Any monetization is accomplished when research is moved into the innovation pipeline.

Innovation: Focusing on Short-Term Service Evolution

Whereas research takes the long-term view, TCS’s innovation practice seeks to convert research into innovations that can be applied directly to the services offered to its clients.

To identify the opportunities with the highest value potential, TCS has focused on building out a governance process to provide a detailed structure for determining which research can be converted into innovation programs. The innovation governance process comprises nine stages to develop, review, and approve new innovations. Within this process, there are three separate review stage gates to determine whether an innovation initiative should continue. This review process includes a stage in which new innovations are pitched to senior corporate leadership, including a roadmap to production readiness and a projected ROI.

TCS estimates that on an annual basis, of ~200 innovation ideas which begin the funnel process, 10-20% of them will make it through all nine stages. TCS is focusing its innovation on assets to support the delivery of services rather than products to be sold to clients, such as its BaNCS line of banking products. Given the amount of ongoing maintenance and handling required to keep software products relevant, the return on these is viewed as lower.

Assets that have been produced by TCS innovation programs include ignio, its cognitive platform, and Mastercraft, its delivery automation platform supporting agile development, DevOps, data quality, and application modernization.

COIN: Tapping External Innovation

In addition to its internal research and innovation efforts, TCS taps into its Co-Innovation Network (COIN), consisting of academics, venture capitalists and start-ups, to identify new opportunities. Academic institutions with which TCS partners include:

• University of California, Berkeley
• MIT Media Lab
• University of Toronto
• Carnegie Mellon
• Cornell Tech     
• The University of Tokyo
• Indian Institute of Science.

To facilitate collaboration, TCS is even co-locating portions of its research within academic spaces. As an example, the soon to be opened PACE Port Innovation center in New York is located in Cornell Tech space on Roosevelt Island.

TCS has a dedicated team working with venture capitalists and start-ups to identify new capabilities, though it doesn’t take equity positions in the start-ups with which it partners. TCS maintains the objective of always working with best-of-breed partners, so it doesn’t want to be invested in one company if it feels another product is superior.

TCS works with start-ups in three ways. It supports start-ups developing a broader path to the market – partnering on engagements and helping with go to market. It also uses start-ups within the delivery of its services, filling gaps, or expanding its own capabilities. Finally, it uses start-ups to build out its own offerings. TCS is identifying sector-specific processes for which to build offerings and then acting as an orchestrator, stitching together individual start-up products into a cohesive end-to-end offering.

As an example, TCS was engaged by a client to build a mobile banking process in 12 weeks. It took four weeks to identify the component start-up products and eight weeks to integrate them into a cohesive, end-to-end offering.

Summary

TCS places significant priority on research and innovation with a dedicated budget and a team of specialists looking at possibilities in both long-term research and innovation directly applicable to its services.

Understanding that a research function can be applied to both its own offerings and client situations provides TCS with a broader perspective and positions it with clients as thought leaders in their industries in addition to evolving its services.

In late 2018, TCS launched its TCS Pace brand as a way to differentiate its innovative offerings and capabilities from some of its legacy core offerings for which it has long been known (such as application and infrastructure management). TCS has long focused internally on building a research and innovation engine, and now Pace gives those innovations a name.

In recent years, many IT services firms have been aggressively acquiring new capabilities in creative areas such as design.

One of the key challenges they face in acquiring such firms is managing what can be a significant culture gap between the flexibility of small creative firms and the regimented, industrialized nature of a global IT services firm. Successful acquisitions strike a balance between maintaining the autonomy of the acquired firm, keeping the talent engaged, and integrating capabilities into the broader company to realize the value being sought through the acquisition. Rather than allowing an acquired firm to continue running fully autonomously or being fully subsumed into the broader organization, acquirers are looking at a blend: combining a common foundation, direction and values while maintaining a level of autonomy in how services are delivered.

Based on our conversations with a number of IT services firms and representatives of acquired firms, this blog looks at some of the more effective approaches being adopted to balance autonomy and integration when assimilating newly acquired capabilities.

Maintaining Autonomy

Leveraging Existing Brands

Maintaining autonomy in branding of newly acquired capabilities signals to both employees and the market that this is a unique capability within the broader IT services firm’s delivery portfolio. This is a common approach for design agencies that have developed their own brand awareness. Examples where IT services firms have maintained the brands after acquisition include Infosys’ WONGDOODY and Brilliant Basics, TCS’ W12 Studios, Tech Mahindra’s BIO Agency, and Wipro’s Designit.

Acquiring firms are also frequently allowing acquired design firms to maintain their own go-to-market initiatives. While leveraging the acquired capabilities to support existing engagements, broaden relationships with existing clients, and reach new clients are the main drivers of these acquisitions, global IT services firms are recognizing that design agencies have relationships and visibility of opportunities they lack. In these instances, the design agency leads the client relationship while leveraging the broader IT services firm to offer a much broader portfolio of offerings.

Maintaining separate branding is particularly important for acquiring firms that lack a strong consulting heritage. While the companies above all come from an IT outsourcing heritage, competitors with a more consulting-led heritage have built distinct branded design business units integrated with their consulting capabilities rather than continuing stand-alone brands after acquisition. Examples include Capgemini Invent and IBM iX. Accenture’s Fjord sits somewhere in the middle: a part of Accenture Interactive with a number of design agency acquisitions rolled under the brand of its first major design agency acquisition, Fjord.

Maintaining Dedicated Delivery Locations

In M&A situations, the opportunity for cost synergies from consolidating real estate is a common cost saving measure. However, IT services firms are instead frequently maintaining dedicated design agency space to minimize the disruption to the existing employee base and help demonstrate the acquiring firm’s commitment to the acquired firm’s culture. When TCS bought London-based W12 studios last year it was already in the process of building out a creative design thinking space in London. Even with the space complete, the W12 team has so far remained in its small home-like Camden offices a few miles away. Infosys is building a design studio network, including a Design and Innovation Hub in Providence, Rhode Island, while WONGDOODY (Los Angeles, San Francisco, New York and Seattle) and Brilliant Basics (London, Dublin, Berlin and Amsterdam) has maintained its own studio locations.

Maintaining Career Trajectories and Expanding Opportunities

In order to retain their new creative employees, acquiring IT services firms are also often maintaining many of their former employer’s career development structures. Smart acquirers are actively seeking to minimize the impact on the processes and procedures that directly impact the career growth of their newly acquired talent.

Furthermore, they are leveraging their scale to emphasize to their new employees the range of new career development opportunities available in a global organization. These can include working in new geographies and/or new industries and adding adjacent skills. Allowing employees to see new opportunities to apply their expertise in new ways can provide an incentive to remain, post-acquisition.

Pursuing Integration

Building a Common Toolset

One of the key challenges of acquiring a niche firm is the application of its capabilities to a broader, global client base. This is a particular challenge when a large firm makes a series of acquisitions. Different groups across different markets, deploying different tools, processes and methodologies can mean inconsistent outcomes. Acquiring firms need to build a global toolset of common templates, assets and methodologies to act as a common denominator across geographies and delivery units.

Accenture has rapidly expanded its creative capabilities since its acquisition of Fjord in 2013. To ensure consistency of delivery across these geographically diverse units it has developed its product design kit (PDK), a bundled set of proprietary assets including style guides, front-end development accelerators, accessibility standards, design templates, code snippets, pattern libraries, and usage and content guidelines to support design engagements.

Leveraging the Best of Both Parties

As part of building that common foundation, it is important to identify and keep the best of what each organization brings. Imposing rigid structures onto an acquired firm may reduce the value that can be realized, and applying the processes of a small, nimble boutique in a global context may not work.

Successful integration requires taking the core capabilities from the acquired firm, industrializing them and then training the broader workforce of the acquirer on these new approaches. Following Tech Mahindra’s acquisition of the BIO Agency in 2016, it launched ‘BIO University’, with BIO employees delivering training to employees based in Tech Mahindra delivery centers on the skills, processes, and methods derived from those used by the core BIO team but tailored to a global organization. This initiative expanded the design-skilled resource pool from 150 employees based in London and New York to 650, including ~400 in India.

Accenture and Fjord undertook a similar global training program: Fjord estimates that, in addition to its ~1.1k dedicated design specialists, another ~50k Accenture employees have undertaken some training on design principles about which they can speak knowledgeably with their clients.

Building an Organization within an Organization

For serial acquirers, it may not make sense to let each newly acquired creative firm maintain its autonomy in branding and approach as described above. Rather, the acquirer can build a dedicated business unit to house each of these organizations together. This business unit balances global commonalities in delivery methodologies, tools and skills without imposing the greater standardization that comes with integrating creative groups into non-creative business units. IBM iX, Wipro’s Designit and Accenture’s Fjord all play this role as a landing spot for each new creative acquisition.

When Wipro acquired Designit in 2015, the design firm had ~300 employees based across seven countries. By 2018, Designit, now Wipro’s strategic design unit, had grown its headcount to ~500 employees across thirteen countries thanks to both organic and inorganic growth.

Summary

As IT services firms have looked to expand the breadth of services offered to their clients, they have frequently looked to grow through acquisition of niche capabilities, particularly creative firms. To make these acquisitions successful, firms must be mindful of cultural differences and understand how to balance integrating capabilities and allowing the acquired firms to maintain a level of autonomy.

Platforms have been increasingly important in B2C digital transformation in recent years and have been used to disintermediate and create a whole raft of well-known consumer business opportunities. B2B platforms have been less evident during this period outside the obvious ecosystems built up in the IT arena by the major cloud and software companies. However, with blockchain now emerging to complement the increasing power of cognitive and automation technologies, the B2B platform is now once again on the agenda of major corporations.

One IT services vendor assisting corporations in establishing B2B platforms to reimagine certain of their business processes is Capgemini, where B2B platform development is a major initiative alongside smart automation. In this interview, NelsonHall CEO John Willmott talks with Manuel Sevilla, Capgemini’s Chief Digital Officer, about the company’s B2B platform initiatives.

JW: Manuel, welcome. As Chief Digital Officer of Capgemini, what do you regard as your main goals in 2019?

MS: I have two main goals:

• First, automation. We’re looking to automate all our clients’ businesses in a smart way, transforming their services using combinations of RPA, AI, and use of APIs to move their processes to smart automation
• Second, to build B2B platforms that enable customers to explore new business models. I see this as a key development in the industry over the next few years, fueled by the need for third-party involvement in establishing peer-to-peer blockchain-based B2B platforms.

JW: What do you see as the keys to success in building a B2B platform?

MS: The investment required to establish a B2B platform is significant by nature and has to be seen in the long-term. This significant and long-term investment is required across the following three areas:

• Obviously, building the platform requires a significant investment since, in a B2B environment, the platform must have the ability to scale and have a sufficient number of functionalities to provide enough value to the customers
• Governance is critical to provide mechanisms for establishing direction and priorities in both the short and long-term
• Building the ecosystem is absolutely critical for widespread platform adoption and maintaining the platform’s longevity.

JW: How do the ecosystem requirements differ for a B2B platform as opposed to a B2C platform?

MS: B2B and B2C are very different. In B2C environments, a partial solution is often sufficient for consumers to start using it. In B2B, corporates will not use a partial platform. For example, for corporates to input their private data, the platform has to be fully secured. Also, it is important to bring a service that delivers enough value either by simplifying and reducing process costs or by providing access to new markets, or both. For example, a B2B supply chain platform with a single auto manufacturer will undoubtedly fail. The big components suppliers will only join a platform that provides access to a range of auto manufacturers, not a separate platform for each manufacturer.

Building the ecosystem is perhaps the most difficult task when creating a B2B platform. The value of Capgemini is that the company is neutral and can take the lead in driving the initiatives to make the platform happen. Capgemini recognizes humbly that for a platform to scale, it needs not only a diverse range of partners but also that Capgemini cannot be the only provider; it is critical to involve Capgemini’s partners and competitors.

JW: How does governance differ for a B2B platform?

MS: In a fast-moving B2B environment, defining the governance has to proceed alongside building the ecosystem, and it is essential to have processes in place for taking decisions regarding the platform roadmap in both the short and long-term.

B2B platform governance is not the usual two-way client/vendor governance; it is much more complex. For a B2B platform, you need to have a clear definition of who is a member and how members take decisions. It then needs enough large corporates as founder members to drive initial functionalities and to ensure that the platform will bring value and will be able to scale. Once the platform has critical mass, then the governance mechanism needs to adapt itself to support the future scaling of the platform, often with an accompanying dilution of the influence of the founder members.

The governance for a B2B platform often involves creating a separate legal entity, which can be a consortium, a foundation, or even multiple legal entities.

JW: Can you give me an example of where Capgemini is currently developing a B2B platform?

MS: Capgemini is currently developing four B2B platforms, including one with the R3 consortium to build a B2B platform called KYC Trust that aims to solve the corporate KYC problem between corporates and banks. Capgemini started work on KYC Trust in early 2016 and it is expected to go into scaled production in the next 12-24 months.

JW: What is the corporate KYC problem and how is Capgemini addressing this?

MS: Corporate KYC starts with the data collection process, with, at present, each bank typically asking the corporate several hundred questions. As each bank typically asks its own unique questions, this creates a substantial workload for the corporate across banks. Typically, it takes a month to collect the information for each bank. Then, once a bank has collected the information on the corporate, it needs to check it, which means paying third-parties to validate the data. The bank then typically uses an algorithm to score the acceptability of the corporate as a customer. This process needs to be repeated regularly. Also, the corporate typically has to wait, say, 30 days for its account to be opened.

To simplify and speed up this process, Capgemini is now building the KYC Trust B2B platform. This platform incorporates a standard KYC taxonomy to remove redundancy from, and standardize, data requests and submission, and each corporate will store the documents required for KYC in its own nodes on the platform. Based on the requests received from banks, a corporate can then decide which documents will be shown to whom and when. All these transactions will be traceable in blockchain so that the usage of each document can be tracked in terms of which bank accessed it and when.

The advantage for a bank in onboarding a new corporate using this platform is that a significant proportion of the information required from a corporate will already exist, having already been supplied to another bank. The benefits to corporates include reducing the effort in submitting information and in being able to identify which information has been used by which bank and when, where, and how.

This will speed up the KYC process and simplify data collection operations. It will also simplify how corporates manage their own data such as shareholder information and information on new beneficial owners.

JW: How does governance work in the case of KYC Trust?

MS: A foundation will be established in support of the governance of KYC Trust. The governance has two main elements:

• Establishing the basic rules, in particular, defining how a node can be operated and specifying the applications that can be run on top of the platform to create questionnaires and how the platform will integrate with banks’ own KYC platforms
• Providing the means for corporates to submit information, enabling the mixing of data from multiple countries while respecting local regulations. This includes splitting the information submission between the various legal entities of each corporation with data potentially only hosted locally for each legal entity.

Key principles of the foundation are respect for openness and interoperability, since there cannot be a single B2B platform that meets all the business needs. In order to build scale, it is important to encourage interoperability with other B2B platforms, such as (in this case) the Global Legal Entity Identifier Foundation (GLEIF), to maximize the usefulness and adoption of the platform.

JW: How generally applicable is the approach that Capgemini has taken to developing KYC Trust?

MS: There are a lot of commonalities. Sharing of documents in support of certification & commitments is the first step in many business processes. This lends itself to a common solution that can be applied across processes and industries. Capgemini is building a structure that would allow platforms to be built in support of a wide range of B2B processes. For example, the structure used within KYC Trust could be used to support various processes within supply chain management. Starting with sourcing, it could be used to ensure, for example, that no children are being employed in a factory by asking the factory to submit a document certified by an NGO to this effect every six months. Further along the supply chain, it could also be used, for example, to support the correct use of clinical products sold by pharmaceutical companies.

And across all four B2B platforms currently being developed by Capgemini, the company is incorporating interoperability, openness, and a taxonomy as standard features.

JW: Thank you Manuel, and good luck. The emergence of B2B platforms will be a key development over the next few years as organizations seek to reimagine and digitalize their supply chains, and I look forward to hearing more about these B2B platform initiatives as they mature.

Yesterday morning, DXC announced its intended acquisition of Luxoft in an all cash transaction of $59 per share, around $2bn. This represents a 48% premium over Luxoft’s average closing share price over the previous ninety days (and ~86% premium on Friday’s closing price). The deal is expected to close by end June 2019.

In recent years DXC (including as CSC) has made a number of acquisitions that have expanded its ServiceNow, Microsoft Dynamics, and recently Salesforce capabilities and formed the bedrock of its Enterprise & Cloud Apps (ECA) practices. This is different: the Luxoft transaction is closer in feel to its 2016 acquisition of Xchanging, which brought in Insurance sector capabilities, or the more recent acquisition in the U.S. of Molina Medicaid Solutions. In all three cases, DXC is acquiring a company that has specific issues and challenges but that also expands DXC’s own industry capabilities; Luxoft will in addition expand DXC’s capabilities around Agile/DevOps.

Luxoft is a company in transformation

With revenues of $907m in FY18 (the year ended March 31, 2018) and nearly 13k personnel, Luxoft is a mid-sized firm. DXC is presenting Luxoft as a “digital innovator”, but it is a company that is grappling with significant client-specific and market challenges. Until FY17, it was highly successful, enjoying revenue growth in the range of 20% to 30%. FY18 saw a slowdown, still to a very solid level of 15.4% (of which we estimate ~7% organic), but FY19 has seen flat growth.

In particular, Luxoft has been hit hard by its dependency on the investment banking/capital markets sector, in particular on two clients: UBS and Deutsche Bank. Back in FY15 they accounted for over 56% of Luxoft’s total revenues (~$294m). Since then, Luxoft has been growing its share of wallet in other key accounts, and the combined revenues from clients 3 to 10 have increased from $123m in FT15 to ~$208m in FY18, a CAGR of ~19%, with clients 5 to 10 growing at nearly 30%. In FY19 Luxoft is expecting around 13% revenue growth from these accounts (to, we estimate, ~$235m).

But while it has been very strong growth in its other top 10 accounts, Luxoft has since FY18 been impacted by declining revenues at both UBS and Deutsche Bank (the later by 13.4%). H1 FY19 saw a 11% y/y decline and these two accounts now account for just over 30% of total revenues. Both have been insourcing some talent. While Luxoft believes that the UBS account is now stabilizing, Deutsche Bank is more challenged, and the account remains an issue: revenues are likely to decline by ~44% in FY19 to ~$90m, or <10% of total revenue, with a further contraction in FY20.

Outside these two, Credit Suisse is also a major client and Luxoft is clearly exposed to the slowdown in the European capital markets/investment banking sector. But elsewhere in financial services, there are much stronger opportunities in the near-term in the wealth and asset management sector, particularly in the U.S. and there is the potential for DXC to help Luxoft expand its presence in the Australian banking sector.

Luxoft has been looking to diversify its sector capabilities in recent years, in particular beefing up its offerings to the automotive sector, developing relationships, mostly in Europe, with tier-one OEMs and suppliers such as Daimler, Continental, and Valeo. Automotive & Transport is a hyper growth business for Luxoft, delivering nearly 43% growth in FY18, but for a company the size of DXC, this is a small business it is picking up: FY18 revenues were $158m. (FY19 revenues are likely be ~$220m, boosted by Luxoft’s acquisition of embedded software specialist Objective Software, which has brought in some U.S. client relationships. Some of these are large accounts (four of the top 10 accounts are in the automotive sector.  And one is a common account to both DXC and Luxoft.

In its Digital Enterprise unit, which is servicing all other verticals, Luxoft has been driving its offerings to more digital offerings, at the same time looking to reduce its exposure to low-margin work. Revenue performance in the Digital Enterprise Unit has been erratic with a strong performance in FY18 followed by a 13% decline in H1 FY19 though Luxoft claims to be confident that it has completed the transformation of the unit.

In brief, among the capabilities that Luxoft will bring to DXC we see:

• Significant agile development capabilities, enhancing DXC’s application services business.
• Some analytics capabilities
• Some product engineering services capabilities in the automotive sector, plus some experience in IoT-centric projects
• Offerings around UX design (in June 2018, Luxoft acquired Seattle-based design agency Smashing Ideas from Penguin Random House).

Luxoft has also been developing its capabilities in blockchain, an area where we suspect DXC has little experience, with pilots in the healthcare, government (evolving in Switzerland) and automotive sectors.

And, of course, Luxoft has a sizeable nearshore delivery capability in Eastern Europe. Luxoft’s delivery network has its roots in Ukraine and Russia. In reaction to the 2014 Ukraine-Russia crisis, the company initiated its Global Upgrade program with the intent of de-risking its profile and increasing its presence in other nearshore locations, in particular in Romania and Poland. Since FY14, Luxoft has decreased its headcount in Ukraine from 3.6k to 3.1k and in Russia headcount from 2.3k to 1.9k.  In parallel, Luxoft has significantly increased its presence onshore with now 1k personnel in North America and made its delivery network far less risky for clients. DXC highlights that it will be able to help Luxoft scale its delivery footprint in The Americas and India.

DXC is betting Luxoft will help accelerate its topline growth

While Luxoft has been grappling with declining margins – partly, but not solely due to the declines at Deutsche Bank and pricing pressures in other accounts – DXC is emphasizing the topline opportunities, rather than cost synergies. Given DXC’s track record in stripping out costs, we imagine Luxoft employees will be glad to hear this.

DXC is targeting revenue growth from:

• Luxoft achieving 15% revenue growth over the next three years
• Revenue synergies of $300 to $400m over this period, representing 1% to 2% of additional revenue growth for DXC

To achieve this, DXC is looking to cross-sell, for example, the:

• Product engineering capabilities of Luxoft to North American and Asian automotive clients and other sectors, e.g., high-tech, manufacturing and healthcare in priority
• Digital capabilities of Luxoft into DXC’s client base. DXC claims that all of Luxoft’s business is, by its definition, digital, thus adding nearly $1bn in revenues to DXC's own $4bn digital business, and expects to grow this $5bn business by another 20% annually
• Managed cloud and digital workplace capabilities of DXC into the Luxoft base (where, however, there are typically well entrenched incumbents).

DXC is also looking to broaden the use of Luxoft assets, taking FS and automotive capabilities and applying these to industries where Luxoft has not historically had a large presence. As an example, Luxoft has developed data visualization assets for FS clients, capabilities it believes that could be applied to other sectors.

How will DXC and Luxoft Integrate?

One key question is how DXC will manage the integration. In the short term at least, Luxoft will remain an independent company, retaining its brand and senior leadership (DXC intends to have retention plans in place for key Luxoft execs). For DXC to ultimately position as an end-to-end and global IT services organization, able to offer clients a full spectrum of services ranging from digital transformation advisory and concept testing through to IT modernization in all its key geographies and target markets, there will need to at least appear to be an integrated go-to-market and also a standardized global delivery operation that leverage this newly acquired assets.

David McIntire, Dominique Raviart, Rachael Stormonth

NelsonHall recently attended Atos’ Technology Day in Paris, where we heard updates on its digital technology initiatives, including key partnerships with Siemens and Google, and new AI product developments.

Extending partnership with Siemens

Atos gave an update on its ongoing investment with Siemens, a seven-year-old partnership that was recently extended to 2020 with the addition of an extra €100m in funding (pushing the total amount of funding to €330m). The partnership focuses on data analytics and AI, IoT and connectivity services using the MindSphere platform, cybersecurity, and digital services.

Also, we were encouraged by what appeared to be a renewed interest in integrating the platform by Siemens, with Siemens now partnering with Infosys to develop applications and services for MindSphere. Developing the MindSphere platform and growing the business beyond Siemens will be a critical factor for growth in Atos’ IoT business.

Google partnership update

Atos presented on its partnership with Google, announced in April 2018, framing the partnership around AI. Within the partnership scope, Atos’ initiatives are to:

• Develop its Canopy Orchestrated Hybrid Cloud to integrate Google Cloud platform (which will become Atos’ preferred cloud computing choice)
• Create a ML practice using Google Cloud’s ML APIs, and develop vertical-specific algorithms
• Use G Suite as part of its Digital Workplace offerings.

The first Atos/Google co-lab has now been opened, with two more set to follow: in Boulogne, Paris (opening in fall 2018) and Dallas, TX. Each of these labs have 50 specialists, 25 from Atos, 25 from Google.

AI product developments

Atos announced the release of its Codex AI product suite. The suite aims to act as a workbench for client development on AI and the management of AI applications. The advantage of Atos’ suite is its ability to push and manage the AI algorithms across a number of architectures in an infrastructure-agnostic manner, which we found particularly interesting with regard to edge computing.

Edge computing has a multitude of applications for IoT services. Even now the amount of data sent by IoT devices can strain the ability to communicate data back for analytic model development, and in some cases data just cannot be communicated in a timely manner. Edge computing aims to reduce the amount of data that needs to be sent ‘home’ by providing some computing power for running algorithms at the device end. Linking back to the Codex AI suite, a key selling point of the edge computing box will be the ability to have models developed at HPC stacks, then use algorithms developed on the suite to be run at the edge.

Other future-looking announcements included the release of an updated version of Atos’ Quantum Learning Machine (QLM) and a prototype of hardware for an edge computing box.

Comparing these announcements to 2016’s ‘2019’ ambition plan, it's clear to see Atos has the potential to overperform on Codex expectations. The Codex business, which encompasses business-driven analytics, IoT services, and solutions including MindSphere and now the Codex AI suite, had a revenue target of €1bn by 2019, up from ~€500m in 2016. Codex experienced very significant growth in 2017, delivering revenues of ~€760m, in part due to its acquisition of zData in the U.S. We expect to see further acquisitions in the Codex business, as projects from MindSphere and the releases announced at this event ramp up.

In sum, the strengthening of key partnerships, AI product developments, and the slow build of the Quantum business, establish a foundation for the long-term growth of Atos’ digital and data-orientated business.

Mike Smart with a quick report from DXC's 'Delivering on Digital 2018' client event.

As a follow-up to our research project focused on SAP HANA and S/4HANA services that was completed last fall, NelsonHall recently had a briefing with Infosys to take an in-depth look at components of their migration toolset and understand how it is automating the activities of existing SAP clients migrating to HANA or S/4HANA.

SAP is focused on speed and agility in HANA and S/4HANA as a key benefit of adoption, and in parallel, Infosys is looking at ways to improve the speed of the migration itself. It uses tools to automate as much of the migration process as it can to further augment the business case for migration. Its toolset combines tools from SAP itself with home-built tools, and spans the lifecycle of a migration including discovery, migration preparation, deployment roadmapping, architecting, migrating, and deploying.

These toolsets are deployed regardless of whether the HANA database is being adopted to support an existing ECC suite or the entire application stack is migrating to S/4HANA. While SAP tools address migration and adaptation of standard code, SAP doesn’t offer tools to address custom code and configuration. To address this, Infosys has developed two core tools to accelerate the migration of HANA and S/4HANA conversions:

• Infosys HANA Code Migration & Optimization (CMO)
• Infosys S/4 Assist

HANA CMO

Built on a foundation of SAP tools and augmented by proprietary IP, CMO analyzes the impact of migration to HANA database or S/4HANA simplifications on custom code and recommends remediation for any errors identified; it displays a tabular list of all identified errors, and also highlights errors that the tool can remediate automatically and those that require manual remediation. For those identified as candidates for automatic remediation, the tool can correct the code automatically based on a built-in rule engine. CMO has intelligence to scan the code and perform appropriate code changes based on issue type.

As a part of the remediation, CMO adds inline documentation to code, with an audit trail for the code changes performed. Once the code is remediated it can then raise an automatic request (SAP Transport) to schedule the code to be deployed to higher environments. In addition to remediation, CMO also has capability to optimize performance of the custom code to ensure it leverages the full benefits of HANA DB and S/4HANA.

Infosys HANA CMO also has a dashboard capability that provides real-time visibility to stakeholders on the progress of the migration.

CMO can be used to migrate existing SAP environments to either SAP HANA (Suite on HANA) or directly to S/4HANA. It is also applicable for migrations to cloud-based Suite on HANA or S/4HANA environments. The tool is configured at the onset of an engagement to factor in the target environment in its assessment and remediation recommendations.

Infosys has used CMO across ~20 clients to date and says that clients have realized the following:

• > 80% of custom code compliance errors have been automatically remediated
• > 50% of custom code optimizations done automatically
• > 70% reduction in custom code remediation effort
• > 70% reduction in the duration of code migration effort.

For one large American beverage and snack company, the initial analysis of the impact of migration to HANA showed ~4.5k custom code line items impacted, which would require ~500 man-days of effort to remediate. Using CMO, Infosys was able to complete the custom code remediation in ~72 man-days, with the automated code remediation completed in ~4 days.

S/4 Assist

For clients that are converting directly to S/4HANA, Infosys has developed S/4 Assist to accelerate the assessment and conversion. As the business case for adoption of S/4HANA has been challenging to date, Infosys is seeing clients with little appetite to even undertake an assessment of their existing environment in preparation for conversion. S/4 Assist was developed to accelerate developing a detailed understanding of the current landscape, effort for migration and business case, reducing the typical technical assessment effort from 2-8 weeks to 4-6 days.

To reduce the cost of an assessment further, S/4 Assist is designed to be used for analysis by a team located in an Infosys delivery center rather than being on the client site. The application consists of two components:

• Infosys extractor program: an agent deployed locally to a client environment, where it is able to extract business process, custom code, security, infrastructure, functional and UI details without extracting sensitive data
• Infosys S/4HANA Impact Analyzer: a cloud-based system where the extraction is uploaded and analyzed. The output includes a dashboard view of the impacts of a migration, including:
  • Summary: the potential functions of S/4HANA that can be implemented for the client – recommendations tailored to business processes and functionalities which are used by the client
  • Conversion readiness: potential errors and warnings resulting from migration along with their cause and remediation
  • Business process impact: how defined business processes are impacted by the migration, including opportunities to improve processes through adoption of innovations
  • Functional and UI check: the business functions and transactions impacted by the migration, including the impact of using Fiori for UI
  • Technical analysis: custom objects and interfaces impacted and requiring remediation
  • Security analysis: users and roles impacted by migration.
  • Infra analysis: add-ons impacted and sizing report for S/4HANA.

These outputs are provided in a number of formats, including as a dashboard, in a table, or via charts, all supported by detailed Excel spreadsheets. Infosys sees S/4 Assist’s key value drivers, relative to other assessment tools such as SAP Readiness Check, as:

• The ability to look in more detail at technical and functional impacts of conversion
• The ability to analyze interfaces and impacts on other systems
• User impacts (whether relative to security or UI)
• The opportunity to identify innovations that will further increase value in adopting S/4HANA.

Infosys has used S/4 Assist with ~8 clients to date. Typically, it has seen the overall duration of S/4HANA migration assessments drop from 4-8 weeks to 1-2 weeks.

Summary

While HANA and S/4HANA represent a small proportion of the overall SAP landscape today, it is growing rapidly. NelsonHall estimates that the global market for HANA and S/4HANA services was ~$7.2bn in 2017 but is projected to rise to $14.1bn by 2021, representing a CAAGR of 18%. It is also going to increasingly see existing large enterprise SAP clients migrating to HANA and S/4HANA rather than the greenfield and SMB clients making up a disproportionate segment of the market today.

By developing a suite of assets that provides clients with visibility to the impact of migrating, and also reduces the migration effort, Infosys is positioning itself to support these large enterprise clients as the value of migrating becomes clearer and the end-of-support deadline for legacy SAP environments in 2025 creeps closer.

NelsonHall is conducting an analysis of the needs of IT services clients to understand their IT and business priorities and how the growth of digital is impacting their business. In a survey of ~1,000 IT services clients across 17 industries and every region of the world, NelsonHall has identified distinct patterns of user intentions, both in terms of how clients plan to change their external IT spending, and how they assess the capabilities of their IT services vendors. Here, I examine how IT service buyers project their IT spend patterns to evolve in the coming year.

2018 IT spend to remain relatively flat

The most commonly cited projection by IT services buyers is for overall IT spend to remain relatively flat. Fifty-two percent of companies project 2018 IT spend to be within 1% of their 2017 spend. This spend correlates closely to expectations of revenues. Fifty-three percent of companies project the level of IT spend relative to revenues to remain flat.

Thirty-four percent of companies project overall IT spend to grow in 2018 by >1%. However, the average growth of these companies is 2.3%, with only 1% of companies projecting growth greater than five percent. While all regions and industries contain some companies projecting growth, there are areas where growth is concentrating.

Geographically, the U.S. and APAC possess the highest proportion of companies projecting growth. Approximately 38% of companies in each region project IT spend growth. The U.K. has 33% projecting growth, while 29% of continental European companies project growth.

Looking across the seventeen industry sectors, only three have a majority of companies projecting growth:

• Media (70% of companies project IT budget growth >1%)
• Retail (58%)
• High tech (53%).

Five other industries have >40% of companies projecting growth in 2018 IT budgets: life insurance, retail property and casualty insurance, logistics, pharmaceuticals, and retail and commercial banking.

Each of these industries is tasked with responding to disruptive competitive threats as well as the growing use of digital in delivering customer services. Given these dual imperatives, it makes sense to see greater allocation of operating costs to IT budgets.

External IT spend is concentrated on applications and consulting

While overall IT spend is primarily flat or growing slightly, external spend is projected to see significantly less growth. Only 5% of organizations project overall external IT spend to expand across 2017 and 2018 by more than 1%, while 55% project it to change less than 1%, and 37% project it to fall between 1% and 2%.

However, this doesn’t apply to every type of IT service. Three IT service lines are projected to experience growth of >1% in spending by >30% of companies:

• Application services (34% project growth >1%)
• Application testing and requirements assurance (31%)
• Consulting (30%).

The overweighting of spend toward these IT service lines correlates directly to the IT priorities that companies have articulated.

Companies are looking to reduce IT costs and shift budgets to value-add digital initiatives

Among the business and IT priorities identified by companies, a clear pattern emerges of a focus on expanding the use of digital and automation. The objectives of these initiatives are to both reduce internal operating costs and respond to evolving external requirements including changing customer, competitive, and regulatory compliance demands.

Business objectives identified as high in importance by a significant proportion of companies include:

• 72% are looking to increase the rate of automation in operations
• 68% are looking to reduce the cost of operations
• 67% are looking to digitalize operations.

These business objectives align with commonly pursued IT objectives:

• 89% are looking to introduce AI and cognitive technologies
• 69% are looking to increase the use of SaaS in support of new initiatives
• 67% are looking to increase the proportion spent on new initiatives rather than maintaining and running existing systems.

With these objectives, it is no wonder that external spend is being targeted at application services and consulting. Companies are looking to vendors to help implement solutions (such as SaaS and cognitive applications) that can reduce operating costs and shift the constrained IT budget dollars to initiatives with direct business value such as improving digital customer engagement platforms.

As discussed in a previous blog post, these IT budget constraints and targeted priorities are driving specific capabilities that vendors need to demonstrate – namely industry acumen, digital consulting, and SaaS implementation capabilities. 

RPA software offers users the tantalizing possibility of being able to simply 'hit record and go' at the beginning of an enterprise automation initiative. But organizations that are seeing the greatest returns are slowing the initial process down, and framing their initiatives as they would treat any major technology migration.

At UIPath’s recent User Summit in New York City, one of the hottest topics was the right pace of RPA implementation, with UIPath’s customer and partner panels devoting a considerable amount of time to the topic. And the message was clear: RPA is a technology that encourages an implementation rate faster than the customer might want to sign up for.

That very idea is a strange one for most veteran IT and business executives, who are used to IT project implementations going slower than expected, with fiscal returns further in the future than they might have hoped. So when a technology like RPA does come along that promises to enable users to ‘hit record and go’, why shouldn’t beleaguered line of business heads take those promises at face value and get moving with automation today? After all, automation is often part of a larger digital transformation initiative, with expectations that projects will be self-funding through savings. Shouldn’t technologies, like RPA, that generate material cost reductions be implemented as quickly as possible?

It’s a fair question. But there are four simple reasons why RPA projects should still be managed in a stepwise fashion, like any other IT or business project:

• Technical debt mounts quickly in too-quick RPA implementations. The ‘hit record and go’ philosophy might offer some minimal return in a short period of time, but federating the automation creation process means that multiple users often create similar automations for similar tasks, wasting time and resources consumed later in consolidating different versions of the same robot down to a single bot. In addition, individual users often create related-task bots based on their original automation scripts, multiplying the task of bot consolidation later. Often, organizations find that they have to start over completely, and only then do they undertake a more formal approach
• Installing RPA through a traditional project framework brings stakeholders together. Automation is a technology that has the potential to bring IT and business stakeholders together in an enterprise service delivery partnership – or drive them apart with turf battles and finger-pointing. Establishing rules up front for which business units should be involved in automation design, which in automation coding, which in automation governance, and which in automation innovation establishes ground rules that all parties involved can respect and buy into for the long term, avoiding larger-scale conflict that can emerge when the process is entered into too quickly up front
• Designing for scale demands both innovation and centralization. As automation demand scales both in terms of breadth of services within the organization and the number of workers involved, the need for centralization of automation design and deployment increases commensurately. Innovation can actually proceed faster in many organizations being managed from a CoE or automation ‘lighthouse’ than through trial and error at the desktop level. Add in the additional demands on automation systems that result from global organizations demanding localized automations and in-language service, and that scale factor becomes a critical component in achieving peak fiscal return from an RPA initiative
• Most RPA providers rely on integration partners for ‘right-speed’ deployment and support. Across the RPA sector, strong partnerships have evolved between RPA software developers and major integrators and consulting service providers, and for good reason – the latter bring experience in change management, process design, and implementation at scale to the former’s technological innovations. This has quickly become a proven combination, and one that is returning significant fiscal and operational value to enterprise-scale organizations. Short-circuiting that value return chain by cutting partner perspective and capability out of the equation might again save some dollars and time in the short run, but will end up being more costly as RPA is scaled up.

RPA presents IT and business leaders with an alluring combination of immediacy of access, significant potential fiscal returns, and low to non-existent stack requirements on deployment. Organizations that have jumped into the deep end of enterprise automation from the ‘hit record and go’ perspective might see some immediate fiscal returns, but ultimately, they are selling short the full promise of professionally-managed automation projects executed in partnership between lines of business and IT. Providers like UIPath that are emphasizing speeding up implementation are doing so with a structured framework in mind – so that once the process is designed for scale, and implementation rules and procedures are put in place, the actual software component of the solution can proceed into deployment as quickly as possible.

But in the end, a few additional weeks or even months spent in up-front work can better enable enterprise-level organizations to achieve their peak automation return. Moreover, this approach saves costly rework and redesign stages that inevitably stretch a ‘hit record and go’ implementation out to the same project timeline, or often much longer, than a more structured approach. As strange as it may sound, the best practices in RPA deployment involve slowing down… in order to go faster. 

We recently met with Sopra Steria to discuss the broad topic of intellectual capital and accelerators. We came away impressed with Sopra Steria’s approach that is both very new (launched early 2017) and also broader in focus than technical accelerators.

Earlier this year Sopra Steria launched its Digital Enablers initiative. Digital Enablers has several aspects: creating API-based/-like micro-services for external clients, for internal needs, and for creating a sense of a community internally focusing on digital, based on Inner Source principles.

Micro-services/web services

Sopra Steria’s micro-services approach has two main elements: one is based on the historic focus of Sopra to create software products (“solutions”, with core banking, real estate, and HR software products, and through its ISV subsidiary Axway); the other on the understanding that new ways of programming based on open source software, APIs, and web services require new software services. Those new software service will co-exist with software product.

The company is investing in creating new services focusing initially on horizontal activities. Those new services will become the IP of Sopra Steria, with an intent to create reusable products or services. As an example: Sopra Steria is currently finalizing a SSON service that targets custom applications development activities, with the intent of providing an authentication service off-the-shelf, maintained by Sopra Steria over the life of the application, and public cloud-hosted.

Sopra Steria is working on application container security, expecting Docker-like application container technology usage to expand. As part of this adoption of Docker, Sopra Steria will commit on the security of container layers, as part of its security SLAs.  

Another initiative in progress is in the use of AI-based chat bots for service desk activities.

Sopra Steria plans to release one new service per quarter, relying on volunteers that share their time between client projects and those new services. The team size for each new service ranges from five to ten personnel, as part of a virtual API development factory.

Adoption of Inner Source Principles

Sopra Steria’s intellectual capital initiative goes beyond its micro-service approach. The company is promoting internally the principles of Inner Source. Inner Source is a collaboration approach used by the open source software communities (e.g. Apache Software Foundation, Linux Foundation) and several large organizations, to drive open communication, collaboration, and software quality.

Sopra Steria’s initial step was to make internally available tools for open communication (code, documentation, defect management, and more importantly reliance on all volunteering contributors), and for software quality (code reviews). The company is using open source defect management, wiki, and repository manager GitLab, Red Hat’s OpenShift, for container based software deployment, as well as an internal Sopra Steria agile/DevOps software development workbench named, continuous development kit (CDK).

The intent of the Inner Source approach is to bring together volunteers on the topics they are interested in. Topics range from mainstream technical accelerators (e.g. around Java, SAP, and .NET technologies) and new areas (blockchain demos or data science algorithms). Sopra Steria is keeping a loose handle on topic selection, and allows developers to work on what their topics of interest.

The company launched its Inner Source initiative on March 30, and already had ~1k projects in progress, with 2.1k registered users. Given Sopra Steria’s size, this is rapid early take up of the Inner Source program.

So, where does Digital Enablers fit within Sopra Steria’s overall corporate strategy? Digital Enablers is considered to be of strategic importance, not just because of its potential to create a source of revenue in the long-term, but also in driving career interest and making the company attractive to millennial talent. We will be monitoring the progress of Digital Enablers in the coming quarters.

CGI recently briefed NelsonHall on its capabilities for the manufacturing sector and how it is addressing opportunities around digital manufacturing/Industry 4.0.

CGI’s service portfolio for digital manufacturing addresses the manufacturing sector also other industries with similar needs around supply chain and distribution operations, including retail/distribution, and life science/pharma. Key clients include Michelin, STMicro, Carrefour, Schneider Electric, BMW, ThyssenKrupp, DSM, Airbus, BRP, Sanofi. CGI focuses on several offerings

• Supply chain optimization and transformation
• MES and its MES operation center
• Data management, including analytics
• Digital, including IoT and mobile.

CGI has experience in MES implementations and migrations around Invensys/Schneider Electric. Globally, the company has ~2.8k supply chain experts, of (which 350 are based out of its Supply Chain CoE in Lyon, France) specializing in supply chain optimization and transformation. Digital comes into play around data, mobility, security, and IoT. The integration of MES systems with internal systems brings a wealth of data and a key focus is capturing and analyzing data from these.  CGI is currently developing use cases, for example using IoT for predictive maintenance, and energy management.

Many manufacturing clients are headquartered in Europe, principally in France, Germany, Netherlands, and Sweden. While its client proximity model remains a major feature of its approach, CGI is also driving coordination of its manufacturing expertise across geographies.

Work on IP identification and creation continues. One example of CGI’s IP in manufacturing is a solution that supports the sharing of product design data across teams. CGI initially developed this for Volvo Cars, to drive collaboration with its then new owner, Chinese automotive OEM Geely.

A key asset is its Manufacturing Atlas methodology for conducting projects that focus on process, material, asset, and information optimization and standardization. CGI estimates it has used the methodology with ~ 100 clients. One example of a project is one for Dutch life science firm DSM, for whom CGI provided upstream consulting around manufacturing IT, and MES standardization. The engagement led to a MES application management contract. Recent work for DSM includes the creation of use cases and the implementation of an IoT solution, connecting industrial valves, collecting and analyzing data, creating a predictive failure model.

Another example of service expansion is cybersecurity services around devices, as part of a seven-year contract with DSM.

Digital brings new engagement models and in September CGI France will launch a CoE in the Lyon region focused on intelligent supply chain, showcasing existing technologies and use cases, which it can use for conducting workshops and sharing best practices. The CoE builds on the ~10k personnel the company has in France servicing major manufacturing clients including Michelin, Schneider Electric, Carrefour and Auchan (retail), Sanofi (pharmaceuticals), Total (oil), and Renault Trucks.

This follows other investments by CGI France: in 2015/2016, it set up a retail and consumer goods CoE/client showcase in Lille and a digital transformation CoE in Montpelier & Toulouse.

We will be commenting on the launch of CGI’s Global Supply Chain Center of Excellence in Lyon and on the company’s progress in its service portfolio expansion globally later this year.

NelsonHall recently completed an analysis of the digital transformation capabilities and offerings of selected IT services vendors. While all vendors are investing in offerings under the ‘digital transformation’ umbrella, their investments range from industry-focused offerings using proprietary IP, to packaged solutions, to digital strategy consulting.

One area of focus seems counter-intuitive to growth of digital: where clients are pushing more of their business to be digital, IT service vendors, positioning themselves as ‘digital transformation partners’ are investing in growing their non-technical capabilities.

User Experience

A major focus in early digital transformation initiatives was on transforming the customer experience and many service providers made significant investment accordingly in these capabilities, some acquiring UX specialists, and many building out dedicated spaces, usually location proximate to clients, used for collaborative design thinking workshops.

Examples of vendors who have acquired digital specialists include:

• Accenture: has been on an acquisition trail for four years now. Investing billions of dollars. Recent acquisitions have included three specialists in Europe: MOBGEN in the Netherlands, Tecnilógica in Spain, and dgroup in Germany
• Capgemini: acquired two U.S. consultancies, Fahrenheit 212 in early 2016, Idean in February 2017
• Tech Mahindra: acquired U.K. digital marketing agency BIO in June 2016
• IBM: in 2015 and 2016, acquired expand digital consulting capabilities, including two digital agencies in Germany ( Aperto, headquartered in Berlin and ecx.io, based in Dusseldorf) and Resource/Ammirati, a U.S. digital marketing and creative agency.

Others are primarily building organically. For example, HCL has built its Digital Process Experience & Consulting organization by hiring individuals from a variety of consultancies and agencies. It now has a ~150 FTE organization in which under 5% were internal transfers.

Digital-Physical Convergence

Organizations are moving up the value chain of digital transformation, from digitizing existing processes to completely reimagining business processes and customer interactions. In some early adopter industries such as travel and retail, this has included the convergence of digital and physical, for example, an airline’s mobile app interacting with beacons located within an airport to customize the information presented to a user based on their current step within the journey. This expands the scope of transformation to frequently include how people interact with physical objects, not just a screen. This has been another driver in some recent acquisitions: some design agencies possess skills in designing for the physical realm that IT service vendors lack. A smart vending machine requires the design of not just the underlying digital interaction but also how the machine operates.

For some vendors with a product engineering heritage, this has meant a priority on acquiring human-machine interaction capabilities. For example, Luxoft made two acquisitions (Populus in 2014 and Pelagicore in 2016) targeted at expanding human-machine interaction capabilities for its automotive sector clients.

Business and Process Change

Where the success of traditional IT services is primarily quantified in reduced IT operating costs, the business case of digital transformation often relies on broader benefits such as increased revenue or improved customer satisfaction. Identifying and achieving these benefits requires skills and expertise beyond a technical offering, including industry specific knowledge and business process capabilities.

As the scope of digital transformation initiatives increasingly expand beyond customer interactions to transforming internal processes or even an entire product/service lifecycle, these business and process skills will grow in importance. Adding new digital technologies to a client’s business process has limited impact alone; the value is maximized by adapting business processes to better leverage the digital capabilities.

While not yet seeing the level of investment that UX has, vendors are starting to build out these capabilities. Accenture acquired Kurt Salmon for its retail sector digital consulting capabilities. Sopra Steria has organized so that its digital transformation spans three distinct capability areas: technology champions, industry digital champions and UX champions.

Change Management

The greater the impact of a transformation, the greater the need to manage how that change is rolled out to the impacted population. Clearly planned and targeted communication help minimize that resistance to change. As digital transformations expand across an organization, and various groups are impacted differently, the structured management of that change grows in importance. The collaborative, design thinking sessions that shape these transformations are going to increasingly require greater focus on how the change is rolled out.

While the traditional IT consultancies typically have well established change management capabilities, for those vendors coming from outsourcing services or product engineering backgrounds to be positioned as an end to end digital transformation partner, change management will need to be an area of investment.

As their major clients focus increasingly on transforming more of their operations through the application of digital technologies, large multi-service IT service providers should also look to be able to support them deal with the human impact of digital transformation.

NelsonHall’s market analysis of digital transformation services, is available to subscribers here. 

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. 

Large M&As in 2016: IT Conglomerates and Defense Firms Divest IT Services Arms

Large-scale M&A activity in 2016 was characterized by:

• IT conglomerates disposing their IT services businesses (HPE and Dell)
• Defense firms selling their U.S. federal IT services activities (Lockheed Martin and L3)
• Telecom service providers divesting their datacenter business (Verizon, CenturyLink).

There has been a lot of water under the bridge since the late 2000s, when hardware conglomerates were acquiring IT services firms, looking for higher margins. Several of those conglomerates have now divested their IT services arms (HPE, Dell; and, in BPO, Xerox). Having said that, there is no universal business model in the IT industry: IBM, Fujitsu, (and to a lesser extent Hitachi and NEC, both in Japan) are tier one IT services vendors, currently ranking number one and three, respectively. We believe this trend is long-lasting and expect further service divestments by hardware vendors.

Divestment of IT services arms has spread to other sectors, e.g. the U.S. defense sector, where Lockheed Martin is the largest transaction. Recent transactions also include CACI’s acquisition of L3’s National Security Business (a $550m transaction, with the acquired unit having $1bn in revenues), and Honeywell’s sale of its government services division to private equity KBR (for $300m). Looking ahead, how the Trump administration will impact government services spending is difficult to predict.

NTT DATA Acquires Dell Services. Other Telcos Selling Datacenter Businesses

In a previous blog (here), we discussed how telecom service providers  retrenched from significant M&As in IT services in recent years. Today, there remain just a few significant telecom service providers with presence in IT services: NTT Group (through subsidiaries such as NTT DATA, and Dimension Data) and Deutsche Telekom (with T-Systems). BT Global Services has largely refocused its IT services presence to the U.K., although it remains present globally in network services.

Other telcos have been reconsidering their datacenter assets: Verizon is selling 29 datacenters to Equinix, for $3.6bn. This is a major change in Verizon’s strategy: Verizon had acquired Terramark, a hosting and cloud computing vendor in 2011 (for $1.4bn). Also in the U.S., CenturyLink is divesting its datacenter and co-location business for $2.3bn, to private equity. On a smaller scale, Colt in Europe sold its 12 datacenters to PE-backed Getronics.

In 2017, telcos will continue shifting their assets from IT services (and from their capex intensive datacenter business) towards media companies, internet vendors (mirroring Verizon’s likely acquisition of Yahoo), and overall market consolidation (Europe remains fragmented, while the U.S. has now become concentrated, the latest M&A being that of L-3 Communications by CenturyLink for $24bn).

SaaS, Digital Marketing, and Cyber Drive Continuous Flow of Tuck-In Acquisitions

SaaS, digital marketing, and cyber-security continued in 2016 to drive a continuous flow of tuck-in acquisitions. Accenture was the most active acquirer in this space, with $930m spent on acquisitions in FY16. Outside of Accenture, most major IT services vendors made up to three investments in digital and security during the year.

M&A Predictions for 2017 of Top Ten IT Services Vendors:  Accenture Continues Digital Buying Spree. CSC and NTT DATA Focus on Integration

Looking at the top ten IT service vendors, apart from Atos and Accenture, we are not expecting any large transactions to occur.

In more detail, our expectations for the M&A focus of each of the leading IT services vendors are:

• IBM’s focus will continue to include infrastructure cloud computing (sitting at the intersection of IT services and hardware), and smaller SaaS service specialists
• Accenture has been the most acquisitive vendor in recent years, as it has pivoted its offerings to what it terms “The New”. We expect Accenture to remain very active in 2017
• CSC and HPE ES new co: one would expect there to be a pause while the integration takes place (also a $5.5bn net debt); however, there could be small to mid-sized acquisitions bringing in industry IP
• Fujitsu has been on acquisition freeze since 2009 (KAZ). We expect this will continue, as Fujitsu continues to face headwinds across its technology units
• NTT DATA: in North America, the focus will be on integrating Dell Services. There may be small scale acquisitions in Europe and APAC. NTT DATA has a significant geographical gap, the U.K., and is also absent in the French market. While the depreciation of the GBP makes the U.K. an attractive hunting ground for consolidators, attractive firms are likely to be smaller specialists, not of the mid-to-large scale that NTT DATA has tended to pursue
• TCS has succeeded in outstripping market growth without being dependent on acquisitions. The need to reduce dependency on H-IB visas could be a driver for investments of some kind to increase its onshore presence in the U.S.
• The Deloitte/DTT network has an acquisition strategy similar to that of Accenture, with a strong focus on digital firms. DTT is transitioning from country operations to larger geographical entities (e.g. DTT in U.K. and Switzerland is absorbing affiliates in Belgium, Netherlands, Denmark, Finland, Iceland, Norway, and Sweden, into Deloitte North West Europe). This increased scale could help in acquiring larger targets
• Capgemini has completed its integration of IGATE and made clear it wants to acquire digital firms in North America in retail/CG/wholesale industries. It is constrained by its €2.3bn net debt and a recent €500m increase in its share buy-back program
• Cognizant, under some pressure from PE, will accelerate its digital tuck-in acquisitions, which have been relatively modest
• Atos had a quiet M&A year in 2016, WL finalizing the acquisition of equens, and Atos North America acquiring Anthelio. The company has financial freedom with a net cash position expected to reach €0.5bn by 2016-end and an additional €3.5bn in potential financing in the 2016-2019 period. We expect the focus will continue on gaining scale in target U.S. America commercial sectors
• CGI is also likely to be more active in 2017, having been somewhat quieter in the last two years than it had indicated in closing a transaction with the “right firm at the right location”. U.S. commercial remains a priority, as is IP/software products. CGI’s preferred mode historically has been a large acquisition every few years. The recent acquisition of Collaborative Consulting indicates a different approach, and that smaller specialists in target regions, such as New England, or sectors, such as BFSI or utilities, are now more likely.

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.

NelsonHall estimates the Smart Energy IoT outsourcing market to be worth ~$260m in 2016, sitting third behind the Connected Car and Smart Manufacturing IoT markets. Smart Energy is of major importance, with government policy around the world strongly influencing its widespread adoption, and here I take a brief look at the background of the Smart Energy IoT market, and at some of the work currently being carried out by outsourcing vendors in this space.

The emergence of Smart Energy IoT

Energy generation is underpinned by relatively large and isolated fuel burning power plants (around 60% through the burning of natural gas and coal). However, through the use of the Internet of Things (IoT) and other related technologies this will be replaced by distributed grids.

These distributed grids enable a more flexible network topology, with distributed energy generation relying heavily on the use of renewable energy sources such as solar. These smaller energy generators can be used to form microgrids rather than relying on a costly nationwide grid to transmit the entire energy load large distances from source to distribution end point. IoT is used to monitor the performance of each individual source, e.g. down to the level of each individual solar panel. 

As well as being used at the source, IoT is being used heavily at the end point, and in particular for smart meters. Smart meters can send usage readings to the utility provider at much greater frequency than traditional meters, which in turn gives the utility better forecasting of power consumption needs and the ability to perform remote management.

The early stages of these smart grids are already in progress. Government initiatives are helping the spread of smart meters, in particular in China, where current estimates show that by 2017, 95% of households will have a smart meter installed. And a 2012 EU Energy Directive has the target that by 2020 smart meters will be rolled out to 80% of EU households.

Smart Energy IoT outsourcing initiatives

IT outsourcing vendors are working on a variety of Smart Energy IoT initiatives, including:

• Atos’ work with ERDF to build an automated meter management system
• Capgemini supporting BC Hydro to implement a smart meter program
• Capgemini, with its SES platform to provide end-to-end smart metering services, currently in use by E. ON Elnät in Sweden and BC Hydro
• CGI, supported by Telefonica, providing smart meter rollout and the building of the U.K.’s smart metering shared infrastructure for utility services
• Dell’s use of Dell Edge Gateways to build a reliable IoT solution for microgrids for ELM
• HCL using predictive analytics for an oil and gas client to reduce the number of failures and the required time to fix hardware
• IBM working with a North American energy company to develop smart grid and meter technology which allowed consumers to save ~15% on normal energy usage
• TCS including pipeline monitoring with image analytics
• Tech Mahindra developing an IoT gateway and cloud portal to monitor PV farms for an EU solar equipment manufacturer
• VirtusaPolaris testing the uses of IoT for smart water utility management as part of a mini-smart city with the International Institute of Information Technology, Bangalore
• Wipro’s work with a U.S. smart meter manufacturer at Wipro’s smart energy lab.

Outlook

With current utilities aging badly and lacking the investment that would enable them to cope with increasing demand loads and move towards distributed energy generation from renewables, the need to cut down on leakage, maximize production capability and capacity, and make the most of energy sources will become ever more important. And in turn, the use of IoT in the Smart Energy sector will become increasingly important in the coming years. NelsonHall forecasts the Smart Energy IoT outsourcing market to grow from its 2016 level of ~$260m to approaching $1bn by 2020.

NelsonHall has reported previously on how Tech Mahindra is developing its performance engineering capabilities through its Tech Mahindra Performance Engineering (TMPE) practice. TMPE has transitioned its services portfolio from performance testing initially to performance engineering, shift-left, and production (see here), helping client organizations to take performance into account at the software design phase. Also, TMPE unveiled SPARTA, its performance testing framework. SPARTA is the equivalent of a traditional functional testing framework and is part of TMPE’s program to automate most performance-related activities (see here).

And now, in the past year, TMPE has expanded its service offering to Internet of Things (IoT) performance testing with IoT-Performance Test Assurance. This is a niche offering: TMPE has had two main client engagements (with a healthcare device manufacturer and an automotive OEM), and a number of small engagements.

Interest from clients is growing quickly, and performance as much as security is one of the main concerns regarding IoT. But does IoT require a different approach to traditional performance engineering and testing?

The Challenge of IoT Complexity

One of the fundamental differences between IoT and a business application is its complexity. IoT systems require integration with many different technologies, going through the traditional IT infrastructure level (servers in the datacenter), networks, and applications (IoT platform). Add to this device diversity/embedded systems, different communication protocols, and the high volumes of data, and this adds up to a much more complex situation. Plus, the architecture of IoT means that interfaces are more frequent and usage of emulation/service virtualization more spread.

This is the theory, but how does it work in practice? To find out, TMTP has developed a methodology around a ‘typical’ IoT process. For example, for an electric car IoT implementation, performance services focus on:

• Stress testing: early morning, during the 7:00am to 8:30am period, when many drivers start their vehicles, therefore putting pressure on networks and servers
• Spike testing: during normal conditions of vehicle usage, for continuous synchronization of data between the vehicle and the datacenter
• Spike testing again, this time for handling emergency situations, e.g. a car crash, for critical communications
• Performance testing cases: endurance/soak testing (for making sure the systems can handle the volume of data provided by cars over a long period of time), stress testing (to understand the upper limits of the system), and resilience and failure testing.

To address IoT performance testing needs, TMTP has developed an accelerator for automating the process, OSPT Framework. OSPT has several elements: a UI, open source-based monitoring tools, simulator and service virtualization assets, and reporting and analytics.

And More Complexity Ahead...

Clearly, IoT performance testing is at the beginning of its journey. Complexity is increasing with storing data, across public and private clouds, around telecom protocols, APIs and interfaces. Obviously the lack of standards in the IT industry will trigger many testing needs. And there is more to come, not only from an IT perspective, but also from use cases: e.g. autonomous/self-driving vehicles will require fast vehicle to vehicle communication. Yet further complexity comes from different communication protocols co-existing and the need for further speed of processing from vehicles’ CPUs.

From a testing service point of view, IoT performance engineering and testing is a white space, with few testing services vendors having expanded their testing offerings in a structured manner. It is therefore refreshing to see Tech Mahindra Performance Engineering taking the lead here. As always, we welcome the creation of an accelerator to drive service industrialization and repeatability.

NelsonHall has commented about the Security Services practice of Tech Mahindra in a different blog to provide a full view of Tech Mahindra’s non-functional activities.

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.

Smart Cities is one of the fastest growing segments within the burgeoning internet of things (IoT) outsourcing market. Currently worth just ~$140m, NelsonHall forecasts the global market for Smart Cities IoT outsourcing to grow by 75% CAGR over the next five years, taking it to ~$2.15bn by 2020.

IoT is being applied in commercial buildings and homes, and in urban infrastructures such as utilities and traffic management. IoT integrated into urban infrastructures will enable cities to gather, store and share data about how citizens interact with the city, with the aim of increasing efficiency through better control of the environment. This can take many forms: for example, in the case of Smart Streets, IoT can be used to monitor vehicles, gathering data such as speed, direction, license details, and number of passengers. Using cognitive computing and big data analysis, traffic flow can be improved and streets can be made safer and be better designed.

When combined with the use of connected vehicles, the entire road network can be transformed. Research conducted by MIT’s Senseable City Lab looked at the use of intelligent slot-based road intersections which automatically adjust vehicle speeds to coordinate arrivals at intersections and remove the need to stop and wait at traffic lights. While this reduces average journey time per car, secondary benefits include reduced pollution and less vehicle wear and tear.

Similar thinking can be applied to other city infrastructures such as sewage and water treatment, parking, and street lighting.

In buildings, efficiencies can be made by better understanding energy usage within the building and relaying this information to building control systems. In one case, TCS implemented an IoT-based solution into large industrial cooling units for an Indian building owner. By monitoring the coolers’ flow rates, inlet and output temperatures, and equipment status (in addition to temperature throughout the building and the local weather conditions) TCS was able to achieve energy savings of around 4%, in addition to reducing the chiller downtime by 10%. TCS has enabled the solution to be reusable and to work for building heaters as well as coolers.

Additionally, safety and standard of living can benefit from IoT through the use of connected smoke alarms, door locks, and smart lighting, windows and blinds.

While the consumer market has been relatively slow to integrate these technologies into buildings, the commercial market is growing faster, with capital investment in the integration of IoT solutions into existing building management systems starting to deliver returns.

Inhibitors to applying IoT much more widely across cities include the difficulty of coordinating across government agencies, and the constraints of outdated regulations. Hence, extensive Smart City development is for now limited to specific, focused initiatives such as:

• India’s Smart City Mission project to build 100 smart cities
• Dubai 2021, a smart city strategy including over 100 initiatives and a plan to transform 1,000 government services into smart services
• Barcelona’s smart metropolis strategy
• Australia’s Commonwealth Smart Cities Plan.

IT outsourcing vendors active in the Smart Cities space include:

• Accenture – working with Chicago CityWorks and Seattle for smart buildings
• CSS Corp – working to improve airport efficiencies and thermostats in retail buildings
• IBM – with its Smarter Cities challenge
• Dell – working with Fujian Province, China and an unnamed hotel to improve boiler efficiencies
• NIIT Technologies – working with an insurance provider to discover what electricals are in use in buildings
• PTC – working with All Traffic Solutions for connected traffic safety equipment
• Tech Mahindra – working on smart cities in Dubai, Milton Keynes (England), and a number of Indian cities
• TCS – providing building chiller/heater management and airport customer tracking
• Virtusa – working with an airport for customer tracking.

Smart City initiatives are emerging fast, and the related IoT outsourcing market is growing alongside. After E-Healthcare and Smart Retail, Smart Cities is the third fastest growing area of IoT adoption globally.

• 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).

IoT can be used to build connected vehicle systems to enable:

• Vehicle-to-vehicle communication so that vehicles can update each other on road conditions, allow vehicles to properly maintain safe distances, etc.
• Vehicle-to-OEM communication so that vehicle manufacturers can build stronger relations with drivers. Using data on the use of a vehicle, the manufacturer can perform remote diagnostics and predictive and preventative maintenance
• Vehicle-to-third party communication facilitating new business models; e.g. telematics for car insurance, smart parking, navigation systems, entertainment streaming services, smart fueling stations
• Vehicle-to-infrastructure communication connections to traffic lights, toll stations, dynamic speed limits.

The use of these systems will change how vehicles are bought/sold, managed, driven and maintained, with the primary aims of increasing safety, added revenue for OEMs, a better driver experience, and efficiencies for third parties.

The consumer IoT market for connected car systems can be subdivided into categories including driver assistance, safety, and in-car entertainment. Currently the largest segment of the connected car market is dedicated to increasing the safety of motoring, either through the use of telematics systems or for accident reporting.

An easy entry point into the market is in the development of driver scores through the use of telematics. For a relatively small investment, black boxes can be installed to measure acceleration, speed, position, and cornering. Vendors can use ADM capabilities to develop driver scores which can be used by insurance providers or for fleet tracking. The majority of vendors operating in the IoT space have some form of telematics or fleet management offering, including relatively new entrants such as NIIT Technologies.

While the use of telematics, predictive maintenance, and fleet management may currently be the largest application of IoT, the biggest opportunities are in building driver assistance and in-vehicle entertainment. In the self-driving space, fully self-driving vehicles have the chance to change multiple industries dramatically in years to come. If vendors can support manufacturers in developing near 100% reliable onboard real-time analytics (provided that regulation supports their use), the potential market for the autonomous vehicle is enormous. Apart from consulting and systems integration of these systems, the building of connected applications that require real-time analytics, and platforms and infrastructure to support the influx of data is a huge opportunity. The obvious caveat to this market becoming established is the issue of security, following recent revelations of system vulnerabilities enabling attackers to take control of a vehicle’s acceleration and braking, for example.

However, on the assumption that before long the self-driving vehicle market will take off, vendors have been working with vehicle OEMs and banks to extend the use of in-car entertainment systems – e.g. to provide shopping facilities. From a car’s infotainment system, passengers will be able to secure tickets to an event, or pay for a drive-through, automatically using beacon technology. Vendors working in this space include:

• Atos’ work with Renault to use Renault’s R-Link tablet for in-car shopping
• Accenture’s PoC with Visa for ordering fast food (pizzas).

In the wider connected vehicle space, vendors are primarily supporting clients in maintaining transport infrastructure and providing asset management. Examples of this include:

• Capgemini’s Linear Asset Decision Support solution used by National Rail that uses data from a number of sensors, including carriages fitted with rail fault detectors for preventative maintenance
• CGI supporting ProRail by developing the Train Observation and Tracking System (TROTS).

The connected vehicle space has had some of the largest adoption rates of IoT, mainly due to the easily demonstrable benefits to end-clients and third parties, and the numerous potential applications. NelsonHall estimates that the connected vehicle IoT market is currently worth $250m and forecasts 43% growth (CAGR) over the next five years, taking it to $1.5bn by 2020.

A major market analysis report on IoT will be published very soon as part of NelsonHall's IT Services program. To find out more, contact Guy Saunders. 

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.