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.

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.

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.

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.

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

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

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

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

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

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

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

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

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

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

IBM is generating significant cloud revenues from:

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

Continued Focus on IaaS and Bluemix

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

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

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

Watson IoT and the Weather Company

IBM has several priorities for Watson IoT:

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

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

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

Cloud Video

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

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

Integrating IBM’s Cloud Initiatives

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

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

No mention of GBS

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

By Dominique Raviart and Rachael Stormonth

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

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

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

Atos and CGI Likely Bidders for Large Transactions in 2016

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

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

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

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

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

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

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

Gaining scale in India

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

Mid-sized deals in U.S. Commercial

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

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

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

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

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

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

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

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

And what will we see in the mid-term?

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

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

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

Accenture Drives M&A Activity in Digital Services

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

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

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

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

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

Consolidation of the Public IaaS Industry Begins

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

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

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

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