We recently talked to Tata Elxsi, the engineering and R&D services vendor headquartered in Bangalore, India. We discussed where the adoption of AR/VR is currently among enterprises, how the metaverse differs from AR/VR, and which B2B use cases enterprises will prefer in the short to medium term.

The current demand for virtual reality (VR) is primarily driven by the gaming industry. With the advent of Augmented reality (AR), there is currently strong demand by enterprises in support of training; for example, for equipment setup, and remote maintenance & repair. Demand here was boosted by the pandemic and remains steady, partly because of reduced factory floor personnel and operator attrition. While metaverse use cases often take part in a virtual world, the metaverse is not VR.

Metaverse Will Encompass AR

Recent news from Meta has been mixed, with the company suffering from slow user acceptance. Yet, like Meta, Tata Elxsi sees a promising future for metaverse adoption by enterprises over the next decade. It highlights that metaverse use cases will cover a broad range of functionalities such as payments (enabled by blockchain), digital twins, and training. From a conceptual perspective, the range of possibilities is limitless.

An example of a digital twin use case, in the automotive industry, is vehicle twins, which display sensor data for things such as engine temperature that can be monitored and used for prescriptive and predictive maintenance. Tata Elxsi sees digital twins being widely used across sectors, such as car leasing firms, banks, and OEMs expanding their financial services arms. This digital twin use case already exists, and its adoption is rising independently of the metaverse.

So where does the metaverse help, compared to AR? Tata Elxsi sees the metaverse as multi-channel, therefore integrating AR and other interaction means (e.g., web browsers and .exe files on desktops). It also highlights that the metaverse has a richer ecosystem and can handle several individuals (as opposed to only one in AR applications). The metaverse also includes virtual passive objects and AI-governed avatars. Tata Elxsi believes that 40% of assets and persons in the metaverse will be virtual.

Tata Elxsi believes that the metaverse opens new use cases, such as virtual corporate events, which AR cannot currently handle. For the firm, UX will play a big role in driving the usage of virtual events.

The Metaverse Has a Ten-Year Horizon before Enterprise Adoption

Tata Elxsi sees, over the next decade, technologies aggregating and complementing each other to form metaverse applications. A key element of the metaverse’s success will be standards and reusability, driving standardization of technology and faster implementations.

The emerging notion of AR Cloud will bring standard architecture and technologies that can be reused as part of AR and within a metaverse. An example of a standard common feature is the GPS-based location of a virtual building in the metaverse. Tata Elxsi points out the potential use of virtual buildings as training centers where employees gather to attend classes and workshops.

The extent of widespread adoption of metaverse platforms and AR Cloud will depend on several requirements, including the deployment of 5G to handle the bandwidth-intensive AR immersive experience. The weight of AR devices, which will decrease from 1kg to 20 grams in the next few years, will drive user adoption and price reduction.

On a ten-year horizon, Tata Elxsi highlights that the evolution of metaverse platforms will be self-governed and cannot be directed by one specific company (meaning Meta, in NelsonHall’s opinion). The metaverse will be a result of a mixture of new or yet-to-be-discovered technologies. Tata Elxsi is maintaining a flexible approach to the metaverse and will continue to evaluate technologies and use cases.

We recently talked to Infosys about how its Engineering and R&D services portfolio addresses sustainability and the circular economy, given the strong client interest in sustainable product design.

Infosys has accordingly evolved its sustainability engineering offerings from a series of capabilities into a portfolio that is articulated along three product lifecycle phases: design & development; manufacturing & operations; and aftermarket services, including product retrofitting and recycling.

Product Design and Development Is Core for Sustainability Engineering

Product and design development is at the core of any sustainability offering. Infosys’ design and engineering experience in this space ranges from energy-efficient products to sustainable products. An example of recent work is a radiant baffle, which Infosys initially designed for its internal needs. The radian baffle cools temperature by removing heat, mainly through heat transfer radiation. Infosys argues that the radian baffle internally reduced per capita energy consumption by 26%. The company points out that A/C equipment accounts for 40-50% of a building’s energy consumption in India, and Infosys  is now marketing it externally.

Infosys is also active in designing sustainable products. An example of a recent project is a green scoring dashboard that collects product-related components and parts information. It uses an AI model to determine a ‘green score’ based on the component impact on the environment and health.

Regulatory compliance is an important driver for sustainable product design. Infosys created its full material disclosure (FMD) dashboard designed for the chemicals industry. Chemical suppliers declare on the FMD dashboard the nature of chemicals supplied to the client. Infosys used FMD to identify restricted substances and for reporting purposes.

In another recent project around traceability, Infosys developed a crop transaction application suite for farms in India. The applications start with farm registration, recording the crop transaction and payment, up to the warehouse management and logistics stages, with integration into the ERP systems. The suite thus traces crops across their transaction phases.

Tapping the Immense Brownfield Opportunity

Beyond product design and development, sustainability has immense potential in brownfield manufacturing and operations. In this space, Infosys focuses on resource frugality, primarily around energy consumption and water management. The company draws on its own experience from achieving carbon neutrality in 2020 in its campuses/delivery centers. It monitors, in real-time, equipment such as chillers and HVACs, generators, and elevators, along with sewage and treatment plants. Much of its effort has been collecting data from facilities (through IoT systems), analyzing them, and building predictive models. Infosys now forecasts its energy and resource consumption based on models that include weather and conducts budget deviation analysis.

An example of a brownfield project is with a cable manufacturer that had designed a new electric cable coating that increased electricity transmission by 15-25% and was incorporated into its new product. It wanted to address its client base of aging installed wires (70% are 25 years old). Infosys designed a robot prototype installed on the power lines that take photos to identify dirty and deteriorated areas and then conducts wire cleaning and coating.

IoT has a key role in sustainable manufacturing operations. An example of a project is where Infosys collects data from sensors and equipment on a given production line. Based on the data, the AI models will determine when the production line is not running and, when applicable, turn off the air handling unit, to save energy costs.

Aftermarket Services: Reuse and Recycling Are Next

In aftermarket services, IoT use cases have centered around remote monitoring and predictive maintenance. Other potential use cases include focusing on reusability, repurposing, and recycling.

In aircraft decommissioning, Infosys is working on identifying components that can be resold and reused and triaging the level of recyclability of other components. Regulations in aircraft decommissioning require parts to be identified and traced from decommissioning to reinstallation into a new plane. Infosys is developing a blockchain solution for this. It is also working with SAE International on developing electronic transaction standards for the aerospace industry.

Infosys has largely completed its identification of sustainability capabilities and is now looking to fill gaps in its offerings and develop service repeatability with methodologies and accelerators. Infosys is starting with maturity assessments to help clients understand where they stand in their product sustainability journey and where they need to invest.

We recently talked to TCS about the company’s involvement in connected plants, TCS’ terminology for digital manufacturing.

TCS has a broad connected plants portfolio, ranging from manufacturing IT systems, MES, Industry 4.0 and connected supply chain, to industrial control systems, and automation. The development of this portfolio currently emphasizes further specialization and digitalization. The specialization goes deep with, for example, a recent offering focusing on supply chain integration for discrete manufacturing clients that operate under a batch production mode.

Along with increased specialization, digital is a high priority for TCS. Areas of focus here include AI, digital twins, and edge-based automation. It recently launched its Neural Manufacturing initiative to spread AI use cases among manufacturing plants.

Neural Manufacturing covers the data life cycle from data collection and classification, to analytics and AI use cases, and knowledge management. TCS has created three modular solutions covering these areas: DMP, InTwin, and CPOA.

TCS Digital Manufacturing Platform Focuses on Data Classification & Dashboarding

Digital Manufacturing Platform (DMP) collects data from sources such as data historians, sensors and equipment, and RFID tags, connecting with applications such as MES through interfaces or APIs.

However, DMP goes beyond data collection. It also focuses on data classification by creating data models, metadata, ontology, and instances. Classification is primarily manual at this stage, with TCS working on its automation, though DMP can already upload spreadsheet-based asset hierarchies and graph tools. Complementing data classification, DMP has ~50 standard dashboards aligned by use case, and include standard metric and descriptive analytics.

TCS InTwin Digital Twin Platform Has ~120 Standard Algorithms

While DMP provides access to data, InTwin provides digital twin functionality using AI to help users make sense of their manufacturing data. With InTwin, TCS has created ~120 standard AI algorithms around standard use cases such as prescriptive analytics, anomaly detection, what if analysis, and image analytics. TCS helps organizations prepare the data for building and enhancing these AI models, including selecting which data to use or creating synthetic data as necessary.

AI models continue to be a priority for TCS. It highlights that organizations’ demands are expanding from point solutions, e.g., anomaly detection, to more comprehensive digital twin projects such as equipment simulation. The company can recreate the behavior of specific equipment and conduct what-if analyses.

TCS Cognitive Plant Operations Advisor Solution Supports Plant Operatives

Finally, with its Cognitive Plant Operations Advisor (CPOA) solution, TCS is targeting the world of manufacturing knowledge management. While many organizations have engaged in AI pilot activity to derive data from their manufacturing operations, few have engaged in knowledge management beyond document digitization. TCS uses several techniques to create this knowledge. The company uses NLP for semantics, captures knowledge from different data sources such as drawings, and uses methods such as fault tree models for root cause analysis.

Further Specialization and Investment are Underway

TCS continues to enhance its Neural Manufacturing software suite. The company has already moved beyond the development of point use cases and accelerators and has formalized its capabilities into more expansive software products.

And indeed, NelsonHall finds that the use of AI in digital manufacturing is relatively embryonic. AI opens many possibilities around data and a better understanding of the behavior of equipment and plants, bringing new possibilities such as equipment and plant simulation. The number of use cases is fast expanding. We are glad to see TCS is making the necessary investment in this strategic space.

The world of OT has been consulting-centric in recent years. Although their focus on digital manufacturing and IoT opportunities has intensified, enterprises have typically engaged their IT services partners mostly for use case identification, PoCs and pilot projects. Large-scale build projects have been uncommon.

But the pandemic has put digital manufacturing firmly at the top of the agenda and enterprises are now looking at optimizing their plant operations through remote work and increased automation. Cybersecurity concerns have also accelerated their focus on digital manufacturing. Manufacturing plants have heterogenous OT and IT systems; they rely on diverse equipment and ICT with different communication protocols and limited security capability. This OT/IT diversity in the shop floor makes monitoring and security difficult.

Several leading IT services providers, among them Infosys, advocate a comprehensive managed service approach to plant OT/IT and have developed comprehensive managed service offerings which include cybersecurity solutions. Managed service offerings start with the typical IoT use case of equipment monitoring, leveraging dashboards that allow the visualization of the health of one or multiple equipment assets, alerts and alarms for operators and maintenance field services.

In a development on its equipment monitoring offerings, Infosys has recently launched an OTSM offering, as part of its Cobalt Enterprise Service Management Café’s cloud blueprints, using ServiceNow’s OTSM tool and other technologies. The company highlights that clients do not have a clear view of equipment support responsibility; and operators on the plant floor do not know who to turn to when dealing with incidents related to equipment, HMIs, sensors, or networks.

Infosys is looking to bring to the OT world the structured approach common to service desk organizations. It articulates its OTSM offering around:

• Asset discovery: identifying assets on the shop floor, from hardware to firmware version, including obsolete assets whose replacement needs to be budgeted for, or out of support software products. Infosys is also mapping plant asset dependency, and impact on other equipment, to build contingency plans. It conducts this phase primarily remotely, with personnel manually going through control systems’ lines of code and also looking at study drawings. Automation is next, with Infosys working on an automated asset discovery, initially looking at IT and OT connected to networks
• Support governance and industrialization. Infosys is deploying the structured service desk approach to IT/OT to increase support coverage, bringing comprehensive visibility to support experts through dashboards, assigning tickets automatically, and building up a knowledge base to recommend resolutions.

Infosys’ offering will evolve both internally and in using ServiceNow functionality. Internally, Infosys is adding predictive maintenance use cases to complement monitoring ones. Externally, ServiceNow is working on integrating security software into its OTSM capabilities. With such functionality in the pipeline and many more coming longer-term, the service desk organization will evolve into a command & control center with automation at its core.

To achieve this vision of an automated support organization, Infosys will need to avoid the pitfalls of IT service desks and bring both flexibility and reactivity to operations. There are important benefits to be derived from the consumer experience now promoted in an advanced IT service desk, one that includes self-service, omni-channel communications, and knowledge bases. Client organizations should benefit from the democratization of digital manufacturing use cases such as remote monitoring, maintenance, and track-and-trace, to the shop-floor level, with empowered operators.

Client adoption of this OTSM offering will of course depend on the business case. Infosys is promoting this offering to its existing ServiceNow users. In particular, it is targeting support organizations that are structured around the ServiceNow tool and have the relevant processes and ServiceNow best practices. Nonetheless, OTSM’s pricing is based on the number of assets monitored, and will, at least initially, demand an investment by clients. To overcome this initial invest phase in the modernization of OT environments, Infosys is promoting transformational outsourcing involving multi-year contract agreements where OT modernization is funded by savings on operations management, a concept familiar to most CIOs.

Back in early 2018, we discussed with Accenture how the company had created its Industry X.0 unit to address client demand for product engineering services along with Industry 4.0 and emerging technologies such as AR/VR and digital twins. In Industry X.0, Accenture grouped its capabilities around digital manufacturing, embedded systems, PLM services, MES services, and other units.

Scale-Up Strategy

Accenture’s Industry X.0 unit has grown considerably in both size and capability, with several acquisitions and the set-up of Industry X.0 Innovation Centers.

In the past year, Industry X.0 has been strengthening its capabilities through various acquistions. Most of the acquisitions have been around product engineering and design, with a focus on the life sciences, automotive, CPG, and high-tech sectors; for example, London-based Happen brought in product design capabilities, Nytec in the U.S. strengthened the IoT product capabilities of Accenture, and Ziepuls in Germany brought in highly-specialized skills in areas such as automated car parking and ADAS architectures.

Accenture Industry X.0 has set up a network of Innovation Centers in key locations in major countries: to date, Detroit, U.S.; Sophia Antipolis, France; Bilbao, Spain; Essen, Germany; and Bangalore, one of its major global delivery hubs along with Shenghen, China; Tokyo, Japan, and Singapore. Some of these dedicated Industry X.0 centers are co-located with large Accenture Innovation Hubs; for example, its Houston Innovation Hub, which focuses on asset-intensive industries such as oil & gas, has specialist capabilities from Accenture Applied Intelligence (its analytics and AI unit), Industry X.0 and Accenture Interactive.

Digital Manufacturing Is Next Growth Area

Accenture Industry X.0 has been expanding its service portfolio beyond product engineering to industrial IT/digital manufacturing. The company is finding that client demand is shifting from brownfield to greenfield opportunities thanks to a resurgence in the opening of new plants in South East Asia. The phenomenon has accelerated, driven by the U.S.-China trade war leading some client organizations to invest in new plants outside of China. Accenture is also accompanying clients in setting up local factories close to customers, complementing mega-factories in South East Asia.

Accenture Industry X.0 is targeting large, transformational contracts where savings from operations (for example, by reducing energy costs from data center operations) are reinvested to fund digital manufacturing projects.

New Offerings and Change Management

Accenture Industry X.0 is going to market with offerings such as digital twins, automated visual inspections, and robotics. It is seeing increased client interest in the use of digital twins, and the number of use cases has expanded; for example, for the provision of training instructions and standard operating procedures to workers, as well as simulating the performance of plants. In parallel, Accenture Industry X.0 is investing in its visual inspection capabilities, driven by demand from discrete manufacturing industries in South East Asia.

Beyond the use of new and emerging technologies, Accenture Industry X.0 highlights that effective digital manufacturing requires a focus on organizational change. Accordingly, it highlights the change management capabilities in Accenture Consulting.

Accenture Industry X.0 is also increasingly helping clients discover innovations and best practices occurring in other industries. One example is the risk-averse chemicals industry, where some clients are looking to accelerate their digital transformation and are looking at use cases coming out of fast-changing sectors such as automotive.

Looking ahead, we expect Accenture to drive the coordination between Accenture Industry X.0 with other Accenture practise areas, notably the analytics and AI capabilities of Accenture Applied Intelligence, that will be key in making sense of the vast amount of available manufacturing data; the product design and UX capabilities of Accenture Interactive that will drive worker adoption of digital manufacturing; and Accenture Security, to help secure OT systems and equipment, some of which are of pre-Internet age. These other capabilities in ‘The New’ will be an asset for Accenture Industry X.0.

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.

There is an abundance of IoT platforms on the market. Many technology firms (e.g. IBM Software, AWS, PTC/Thingworx, Microsoft), major manufacturing firms (GE, Siemens, ABB, Bosch, Schneider Electric) and some large IT services vendors (e.g. Accenture, TCS, and Atos via Worldline) have invested in their own IoT platform products.

History is repeating itself, as the build or buy question becomes a key strategic decision at each new application cycle: we have seen this in the past with the ERP wave, and with CRM. However, not every situation is completely similar. The difference lies in the plethora of IoT platforms: up to 300 of them are available, in various forms, from solutions to fully-packaged COTS, vertically-specialized to horizontal, with small ISVs competing with the Amazons and Microsofts of this world. And already, Microsoft is gaining mind and market share with its Azure IoT Suite.

What are the strategies that clients and IT services vendors should be adopting? Should organizations buy the IoT platforms of the largest tech vendors, or adopt the more verticalized products of start-ups? And what about IT service vendors – should they maintain and accelerate their investment or turn to a SAP partner-like model, where they bring add-on functionality to the core products?

There is no definitive answer to these important questions, but here is our thinking.

Client organizations: no easy choice

From our discussions with clients, the current appetite is primarily for buying IoT platforms that are relevant to their specific needs. But some organizations have delayed (or ignored) the IT considerations. They are happy to procure IoT COTS from niche ISVs: their need for a relevant use case and fast implementation prevails.

We do not think this attitude will last. When they enter the large deployment phase and become more familiar with license, deployment and maintenance costs, many organizations will change their mindsets: the selection of ISVs that are likely to continue investing in their IoT platform products over the coming years will be as important as selecting platforms with the best functional and technical features. This inflexion point is getting closer. Our discussions with clients show that, for many, activity has moved from workshops and PoCs and they are approaching implementation phases.

Large organizations have several options: develop their own IoT platforms, based on open source software and customize from scratch; turn to the largest ISVs and customize their IoT platform products; or use small ISVs whose platform more closely matches their specific needs. Another alternative is to partner with an IT services provider and share the costs of a joint solution, with the vendor having the rights to resell the solution to other clients.

None of these approaches is without its cost implications; e.g. developing your own IoT platform inevitably means budgets for enhancements and maintenance. This approach is probably fine for the very largest manufacturers with big IoT budgets; however, for most firms, this approach is too costly. Of course, the current transition of software products towards APIs makes it somewhat easier to adopt new micro-services. But even with micro-services, organizations still need to maintain and enhance the IoT platform.

If selecting the IoT platform of a specialized ISV, one pragmatic approach is to negotiate access to the source code. This could address one potential problem (the ISV facing financial difficulties) but again means future enhancement and maintenance costs.

So, how about adopting the IoT platform of a large technology vendor with the hope that the platform will become more comprehensive and more verticalized over time? The cost impact in this approach is that clients can pay twice: the license or subscription cost plus custom development costs, with the related enhancements and maintenance. This approach works if the ISV has a product roadmap that eventually replaces functionality or technical characteristics initially developed by the client.

At this point, none of the alternatives is completely satisfactory.

IT services vendors: adopt the SAP-like add-on model in the long-term

IT services vendors that have developed their own IoT platforms are competing with technology vendors and manufacturing firms that have access to a level of funding they cannot match. IT services vendors need to make a structural decision in their IoT product activities: either structure their IoT platforms into separately-operating software companies, or gradually move to a SAP partner-like model, where they partner with tech vendors through templates, point technical solutions, or add-on code.

This approach is more sensible. There is no point in competing with Microsoft or AWS. Also, partnering forces IT services vendors to invest in what differentiates their offerings rather than spreading thin their IoT R&D budgets. More importantly, this SAP partner-like approach is also solving the pain points of clients that are willing to adopt the non-verticalized IoT platform products of the large technology vendors. We think this approach is the future. However, it will take time before IT services vendors adopt this approach, and create relevant products.

Clients: be ready to migrate!

In the short-term, selecting the right IoT platform is not an easy solution. Organizations will need to show flexibility in their IoT programs, and be willing to migrate IoT platforms over time. This is hardly new in the IT industry: we had this phenomenon two decades ago, when organizations rushed into buying the CRM applications of Siebel, rationalize later to SAP and Oracle (after it bought Siebel), and are now migrating to cloud-based platforms.

We were recently briefed by Accenture on the creation of Industry X.0 within its Accenture Digital organization. The discussion far exceeded the scope we were expecting of Industrial IoT, and it signaled Accenture’s expansion in Engineering and R&D discussions (ER&D), with bold ambitions not just from a product design perspective, but also from a manufacturing and product aftermarket perspective.

In 2017, Accenture made the following changes to the high-growth Accenture Digital:

• Accenture Analytics integrated the AI capabilities of Accenture and was renamed Accenture Applied Intelligence
• Accenture Mobility, which housed both mobile app development and IoT, was split. The mobile apps business was merged with Accenture Technologies’ Application Services unit, based on the rationale that this activity no longer requires to be incubated within Accenture Digital.

However, Accenture Interactive was left untouched, with its focus on service design, UX, CX, digital marketing, personalization, content strategy and development, and commerce services.

The creation of Accenture Industry X.0 was based on the IoT capabilities of the Accenture Mobility unit. It integrated several units from across Accenture, including its embedded systems capabilities, its PLM services units (both of which from Accenture Technologies) and its manufacturing-specific capabilities (MES services, and PLM services).

The combination of these units has implications: Accenture’s IoT services offerings were based on use cases, with the intention of creating a systematic map of use cases based on COTS or on its own software products. Industry X.0 has broader ambitions, both in product design and manufacturing:

• In product design, Industry X.0 is emphasizing its digital and agile approach to products, using the now well-established mix of ideation workshops, design thinking/UX, and MVP. It is expanding its capabilities in embedded systems, as well as its mechanical engineering capabilities. Acquisitions are likely to further boost expertise. Accenture is expanding in the world of ER&D services, where the likes of Altran, Alten, and HCL Technologies dominate. The surprise is that Accenture Industry X.0 is taking a full capability approach; we were expecting a narrower emphasis on embedded systems, and IoT
• In product manufacturing, Accenture Industry X.0 is taking a more defined approach. With its MES and SCADA systems capabilities, the practice addresses the IT side of manufacturing plants, and also manufacturing strategy.

Going forward, the strategy of Accenture Industry X.0 includes deploying analytics and AI, looking at use cases such as product quality and production throughput improvement. Product quality is a high priority for using deep learning, e.g. image recognition to identify defects within products.

Product design is the revenue growth part of Accenture Industry X.0’s value proposition, whereas with product manufacturing the emphasis is on achieving cost savings. Accenture is emphasizing its prototype to manufacturing approach, helping clients create prototypes that can be moved to the production phase. Accenture also has a sourcing branch in the Special Economic Zone of Shenzhen, close to Hong-Kong. It is also ready to do short series manufacturing, either directly or through contractors.

Finally, along with product design and manufacturing, Accenture Industry X.0 is also starting to develop its ‘support’ services, e.g. applying new hardware such as robots and drones to reduce the reliance on human-intensive activities.

Accenture is taking a well-articulated and comprehensive approach to the ER&D services industry that we have not often seen with its peers. Apart from the vision, can Accenture deliver on its product design and manufacturing strategy, given the fact that ER&D service specialist vendors have a well-established geographical presence and a track record in the industry? Accenture certainly has a track record in execution. Also, it is likely that M&A will be an important element of its growth strategy. With >70k vendors operating in the ER&D services industry, Accenture certainly has space for its ambitions.

T-Systems recently held an analyst event which specifically covered the IoT capabilities of parent company Deutsche Telekom AG Group (DTAG) and its own Digital Division. Here are the key takeaways.

IoT Connectivity Services

IoT is clearly important for DTAG and for T-Systems for connectivity reasons: NelsonHall estimates that most of its IoT revenues come from traditional SIM cards and connectivity services over 2G, 3G, and 4G networks.

DTAG is accelerating its deployment of IoT-enabled networks. A priority is the existing 2G, 3G, and 4G networks in the 14 countries (mostly Eastern and Central Europe, along with Germany and Austria) where DTAG provides fixed and/or mobile communication services (‘Natcos’). DTAG is expanding its network through signing roaming agreements in Europe. In countries where roaming is not legally allowed or is a grey zone, DTAG is setting up local partnerships: Brazil and China are now live. The U.S., where DTAG operates through its majority stake-owned subsidiary, T-Mobile USA, is a work in progress.

IoT communication protocols bring an additional layer of complexity. DTAG has selected Narrow Band IoT (NB-IoT), rather than adopting other communication protocols such as LoRa, and Low-power Wide-area network (Sigfox). DTAG is accelerating its deployment of NB-IoT across eight countries in Europe and the U.S., and by 2018 should have completed its NB-IoT deployment in nine countries. Other Natcos will follow.

Next on the agenda is NB-IoT roaming agreements in geographies where DTAG has gaps: e.g. the U.K. and France. These will take more time to finalize, largely because the industry has not yet agreed on charge-back mechanisms.

Partnership Adoption

DTAG has IoT ambitions that extend beyond pure connectivity to the full IoT stack: from sensors and gateways, to data collection, analytics, and use cases. To achieve this, DTAG initiated an internal transformation three years ago and opened up to partnerships with other technology vendors.

An early consequence of this openness was around IoT platforms, evolving from a proprietary approach to a partnership with Cumulocity, a Germany ISV acquired by Software AG in 2017 under the Cloud of Things brand. T-Systems is now also standardizing around Microsoft for its Azure IoT Suite. Cloud of Things targets horizontal and also more standard needs, while with Azure IoT Suite the company is targeting the more complex requirements of large enterprises.

T-Systems is also transforming itself. Its Digital Division is now the organization driving IoT engagements and portfolios, and on the delivery side, it is using the capabilities of other DTAG units.

Digital Division is also looking at external partners, its first three channel partners for IoT, targeting large enterprises, being SAP, Accenture, and IBM. Digital Division also wants to expand its focus on the mid-market, initially in Germany, and also geographies where it has a telecom services presence. Digital Division highlights that this at an early stage, but has big hopes for the future.

Towards More Packaged Offerings

One implication of this extended partnership approach is that Digital Division is focusing increasingly on making its IoT service portfolio more standardized, with more packaged and repeatable offerings.

Verticals are a priority for DTAG, while Digital Division has created ten ‘industry solutions’ around three categories: mobility and fleet management, public & health, and smart city. The company intends to create solutions/semi-packaged applications that can be reused across clients.

DTAG is taking a project-led approach to these industry solutions rather than creating them upfront, with the intention of making the solutions more relevant to its clients. This does not mean that DTAG is becoming more cautious with IoT investments: for instance, it is deploying 10k beacons across parking spaces in Hamburg to assess where parking is available. Driven by client interest, Digital Division is now planning to roll out these beacons across major cities in Germany and across Europe (e.g. 27 cities in Hungary, 23 in Romania, 17 in Croatia).

A New Role for T-Systems?

The new structure and partnership approach that Digital Division is leading may be the prelude to a new organizational structure at T-Systems: the company recently announced it is moving its sales force to a separate unit and is carving out its IT Division. T-Systems is also progressing with its adoption of standard packaged offerings, a journey the company started with public cloud.

Looking ahead, a new T-Systems might emerge, where the company will become more of a software product/solution service company focused on digital, and developing its channel. To some extent, Deutsche Telekom is signaling this change, with the Deutsche Telekom/Telekom brand being more visible in digital and security. Things are moving apace at T-Systems, which is fast becoming a more focused company.

ER&D vendor Altran yesterday announced the acquisition of India-centric Silicon Valley-headquartered Aricent. Altran will be paying $2.0bn for Aricent through a capital increase of €0.75bn, the remaining ~€1bn in debt.

In the year ending June 30, 2017, Aricent had revenues of $687m and an EBITDA margin of 27.9%.

This is a significant acquisition for Altran, strengthening its position as the largest ER&D vendor globally. The combined company will have revenues of ~$3.1bn, and 44k employees, including ~12k in India. Altran, which already was the largest ER&D vendor in Europe, is now also a major player in North America, with revenues not far from those of HCL Technologies.

With this move, Altran will achieve several of its strategic ambitions: by 2020 to reach €3bn in revenues, an adjusted EBIT margin of 13%, and a global delivery network of over 10k.

As well as adding scale in North America, Aricent will also strengthen or fill Altran portfolio gaps in several key areas:

• Strengthening its capabilities in the telecom industry and in semi-conductors
• Bringing in expertise in software product development, internet technology development, and UX design (though the Frog subsidiary).

This is a highly complementary and strategic transaction. So why hasn’t the market’s initial response been warmer? Altran’s share price fell by 6% on the day of the announcement.

High Debt Level and Capital Increase

Much of the negative reaction relates to the capital increase (€0.7bn) vis-à-vis Altran’s market cap (~€2.4bn), and its increased debt (€1.3bn after the capital increase). Altran’s CEO has stressed that the target is to reduce its debt level from a leverage of 3.25 down to 2.5 within two years. The debt level will be high, but this is in the context of lowest interest rates ever.

What about Germany?

One likely impact of acquiring Aricent is that Altran is now unlikely to reach another objective, of deriving €500m in revenues by 2020 from Germany; this was also a key priority, along with the U.S. We estimate that in 2017, Altran will have revenues of €270m in its Germany/Austria business unit, half-way to its objective.

Does this matter? Well, yes; Germany is by far the largest ER&D service market in Europe, with half of its spending done by the automotive sector. While the German automotive ER&D market has been a difficult one in the past two years, resulting from changes in legislations, the reduction by Volkswagen Group (the largest spender in Europe) of its R&D spending, and price pressure, it remains a strategic country to be in for ER&D services vendors.

How Healthy is Aricent?

Altran management has not provided an indication of recent organic growth at Aricent, highlighting instead the rapid change in Aricent’s portfolio, which until the early 2010s had been very telecom-centric and had suffered from anemic spending in the sector.

Aricent has been through a reinvention, closing small geographies, and expanding its client base, from telecom equipment manufacturers to telecom service providers, and then semi-conductors (in chip design, through the $180m SmartPlay acquisition), and to automotive, relying initially on its network/connectivity expertise. In 2015, Aricent also expanded to software product/internet technology development.

Despite this reinvention, Aricent still derives 54% of its revenues from the telecoms sector. Semi-conductor/industrial has become significant (19% of revenues), Frog/UX design (16%), and product/technology development (11%) is a rising segment.

We note that Aricent has an IP partnership with an unnamed ISV: while IBM has not been announced as a partner, the structure of the deal is similar to the HCL Tech and Tech Mahindra IP partnerships, with Aricent acquiring $250m in software assets over four years, and already having a flow of revenues of ~$50m in LTM. We assume this flow represents software development fees from IBM.

Overall, a Bold Move

In short, this is a highly complementary and strategic acquisition. It does leave Altran exposed to financial stress, should market conditions deteriorate. And indeed there is some uncertainty in the automotive sector in the U.S., and in France around the key PSA account. But Aricent is not a major player in the U.S. automotive market.

Well done Altran for this incredibly bold move!

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.

We recently met with the head of Capgemini’s Digital Manufacturing unit to get a perspective on the challenges in manufacturing and how Capgemini is helping to address them.

Digital Manufacturing (DM), one of Capgemini’s newer strategic offerings, is a virtual service line across Capgemini units, having both portfolio and delivery responsibility.

So What Does Digital Manufacturing Offer?

Capgemini created DM to focus on the notion of Industry 4.0 that originated in Germany: in short, the digitalization of the manufacturing sector. The concept is broad and DM has a range of offerings, taking advantage of its dual positioning in IT services and engineering and R&D services, and the growing overlap of capabilities between the two (e.g. connectivity, cyber-security, cloud computing, analytics, and manufacturing applications).

In more detail, DM targets both the product side of manufacturing (with themes including PLM services, 3D printing, and digital asset management), and the production side (with themes including control systems, manufacturing intelligence such as product quality and preventive/predictive maintenance, and digital operations covering mobile apps, and augmented/virtual reality). IoT is also part of the service portfolio, and covers both product design and production.

Product Services

PLM services are a priority, and draw on the strengths of Capgemini in application services. DM is focusing on both traditional PLM activities (product modelling and collaboration) and also on newer activities (e.g. automated feedback into product design, based on data collected by sensors, and from capturing UX, starting with sentiment analysis). Work done by colleagues in Capgemini’s DCX offering and in its testing service line will help, we believe.

Other priorities include:

• The deployment of IoT-based predictive maintenance. This is important to DM: predictive maintenance is one of the earlier IoT use cases in manufacturing.
• 3D continuity, targeting existing products, taking a reverse engineering approach, and creating a digital version of a product. This is more than putting the design of older products into a PLM application, and Capgemini is also expanding this approach to manufacturing equipment under digital asset management, with the intention of digitizing the full product-to-production cycle. This links nicely to DM’s other service focus: production services.

Production Services

Within production, DM is focusing largely on manufacturing operations across discrete and process industries, both requiring adherence to manufacturing processes and guidelines. To enforce process adherence, and individual-based variations, DM wants to help clients deploying sensors and communication modules on manufacturing equipment or assets. This sounds simple, but DM points to the high heterogeneity of the installed base, largely a result of equipment cost and longevity (up to 30 years). From a DM standpoint, each machine is unique and requires its own communication module and communication interoperability. This brings another challenge: once you have connected manufacturing equipment to a network, the next step is security services, and how to secure equipment that does not have security capacity at the edge.

So How Is Digital Manufacturing Addressing Those Opportunities?

DM is taking a selective approach, specializing in industrial IoT, and also on digitization of the product to production process. It is also expanding its service portfolio, from project services to remote monitoring services. IP and repeatability are next: DM has several IPs that the various Capgemini units have developed and it continues to identify others internally. Examples of existing IP are:

• Digital Asset Lifecycle Management with U.K. ISV Aveva, hosted on AWS
• 3D modeling, based on open source software Open Cascade
• eObjects, an IoT middleware platform.

Looking ahead, DM believes it has barely scratched the surface in the product and production side of manufacturing, with other opportunities also available in the manufacturing supply chain.

NelsonHall will comment further on this in a separate profile of Capgemini’s IoT capabilities, to be published soon.