2019 Public Sector Predictions: Ethics compound complexity as federal agencies rush to embrace commercial IT innovations

The march of technology challenges humans to keep up, leading to difficult conversations for the many technology firms clamoring for a slice of federal IT modernization spend

In 2018 U.S. federal government policy and budget aligned to amplify excitement around the long-promised application of private sector IT innovations to public sector missions. We began to see action as government policies such as the President’s Management Agenda and National Defense Strategy combined with a bipartisan budget agreement to send a clear message that government agencies need to embrace cloud operating models and explore new technologies to reduce costs, move faster and serve constituents more effectively.

In a prevailing movement TBR calls Wallet vs. Will, the federal market’s pursuit of commercial IT represents a fundamental shift from traditional procurement models predicated on bespoke, costly and difficult-to-replace proprietary technology to a more agile model leveraging configurable off-the-shelf solutions enabled by open standards. In the old model, prohibitive cost was the primary impediment to moving technology forward, driving top-down commercialization models out from the Pentagon, or the wallet holder. In the emerging model, the axis has flipped as technology is no longer the problem but rather the will of the humans interacting with technology has become the main obstacle to keeping up with technological advancement.

As technology moves forward at breakneck pace, government policy and regulations will struggle to keep up. Law as the codification of an agreed-to set of ethical standards remains woefully behind as society struggles with the implications of technology development on myriad issues, from a citizen’s right to privacy to warfighting. In 2019 familiar market trends such as transformative M&A in the IT industry broadly and in the federal services market specifically will continue to reshape the market and create new disruptions. However, we believe that the continued ethical debate around emerging technologies, as much as who holds the innovative IP around those technologies, will help shape the competitive landscape in the years ahead.

IBM builds out concierge services so internal IT departments can satisfy the business

TBR perspective

The recent IBM Cloud Analyst Day continued a theme introduced at IBM Think 2018, with numerous IBM executives reiterating “the axis has flipped” in the market for IT solutions. Nowhere has the axis flipped more than in the relationship between IT and lines of business (LOBs). Where IT hardware and software were once costly components, the IT department served more as a security guard meant to ration the business use of IT. Today, with virtualizing compute and storage turning computing ubiquitous and 5G set to disrupt network virtualization, IT must shift to the role of concierge — listening to LOB demands and then stitching together the requisite IT assets to enable successful execution.

At IBM Cloud Analyst Day, IBM Analytics General Manager Rob Thomas discussed the concept of data virtualization, made possible by adhering to specific run times that allow for abstracting the requisite data from where it resides and transporting it to where it is needed with pervasive encryption, to deliver the business insights required for the LOBs. That vision is what IBM described as the “ladder to AI,” or the climb the business must make to infuse its operations and integrated IT stack with artificial intelligence (AI) insights, deploying all IBM AI assets from SPSS to Watson.


At IBM Cloud Analyst Day, IBM Analytics General Manager Rob Thomas discussed the concept of data virtualization, made possible by adhering to specific run times that allow for abstracting the requisite data from where it resides and transporting it to where it is needed with pervasive encryption, to deliver the business insights required for the LOBs. That vision is what IBM described as the “ladder to AI,” or the climb the business must make to infuse its operations and integrated IT stack with artificial intelligence (AI) insights, deploying all IBM AI assets from SPSS to Watson.



Virtualization flips the axis on technology monetization and adoption

An exclusive review of TBR’s ongoing market analysis and tailored services frameworks

Technology monetization strategies continue pivoting from transaction sales to subscription sales predicated on building viable consortiums to generate the ecosystem flywheel effect. There has been an obvious shift in the consumption of basic compute resources from capitalized instances owned and maintained by enterprises to software-controlled, multicloud environments delivering “cloud economics” to traditional environments. Join TBR analysts Geoff Woollacott and Bryan Belanger as they analyze this shift and its expected impact on the market.

Virtualization and ongoing price point reductions shift internal IT departments from the role of security guard — rationing finite, costly resources — to the role of concierge — articulating the art of the possible to line-of-business users. In short, technology adoption will increasingly become a people problem addressed through consensus building around companywide business rules, while hardware has become a loss leader, as have some advisory services, to generate the long tail of sticky subscription services.

Don’t miss:

  • The general state of the technology monetization fabric and its disaggregation into discrete services components
  • The ongoing convergence of services providers, and the strengths and weaknesses of the conventional business models all struggling with the same pivot to participate in ecosystem flywheels
  • Common challenges needing market testing, given enterprise customers become increasingly unforgiving of monetization and service missteps


TBR webinars are held typically on Wednesdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal.

For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

Services Weekly Preview: December 3-7

As we wrap up the quarter, just a few key items are left including the four reports listed below, the Management Consulting Benchmark and predictions for 2019.

Here’s what’s coming this week:

Thursday: Our semiannual deep dive on DXC Technology’s healthcare IT services (HITS) practice includes our assessment that DXC’s long-awaited return to HITS growth remains elusive in the face of stubborn post-merger disruptions and poor contract performance. However, we had expected the company’s recent traction in APAC and select European markets would work in concert with rebounding IT spending patterns in the U.S.-based payer sector, the ongoing bull market in life sciences IT investment, and DXC’s acquisition of Molina Medicaid Solutions to launch a period of renewed HITS revenue growth. The report also includes scenarios on DXC’s acquisitions and the company’s activities in the Middle East.


  • In our mid-November initial report on Cisco Services, TBR noted that the company sustained growth in 3Q18 by attaching services to Cisco’s growth initiatives around next-generation solutions. Our full report will explore the drivers behind that growth and include scenarios around streamlining headcount in the Customer Experience business, which includes Cisco’s software, subscription and services activities; transforming clients’ IT operations at speed and scale utilizing predictive services powered by artificial intelligence and machine learning; and expanding cloud-related offerings by partnering with Google Cloud, SAP and Amazon Web Services.
  • With SAIC’s earnings release slated for Friday, TBR will be looking to see if the company conformed with our July assessment that SAIC needs to address federal priorities as a low-cost alternative in IT modernization, platform integration and training, as well as expand into underpenetrated areas of the federal market organically and/or through acquisitions.
  • Finally, our semiannual look at NTT DATA’s HITS practice will acknowledge that the 2017 acquisition of Dell Services’ healthcare assets was a major undertaking, but is now complete and has significantly enhanced NTT DATA’s capabilities across multiple healthcare segments. In addition, the report includes scenarios around alliances and virtualization in the healthcare IT space.

IBM-Red Hat economic implications: Is disruptive state the new steady state?

IBM’s assets combined with Red Hat’s business monetization models are a good bet to provide a scaled, secure and trusted platform, if IBM can adjust internally and convince its clients to do the same.

The market splash

When a blue-chip bellwether company buys a firm that broke the lock on proprietary operating system dominance something big is afoot. IBM’s market luster has faded somewhat, and the financial sharks are circling with calls for CEO Virginia Rometty’s head and for IBM to be broken up and sold off to warm the cockles of institutional investors’ hearts, who cannot see the market implications beyond 90 days. IBM has been here before, in the late 1980s when Digital Equipment Corporation had a higher market valuation than IBM based on a single architecture and operating system as opposed to IBM’s six or so disparate computing architectures and operating systems. IBM’s first effort to course correct with the 9370 minicomputer was essentially dead on arrival, but its second shot, the AS/400, lives on in server closets to this day as the iSeries.

But this new challenge is different, and IBM knows it. Its executives talk about how “the axis has flipped.” At TBR, we talk of the Business of One as others label this moment as Industrial 4.0. The core revolves around cheap compute. Moore’s law has been the fundamental economic axiom driving the rapid rise and fall of technology vendors for at least 60 years, though some say its effects are waning. Despite the undeniable shift, innovations around cheaper and cheaper compute, storage and networking sources will continue in ways fascinating to fathom, especially as quantum computing nears commercial viability. At once scale means nothing and everything in this Business of One era.

Scale: Vital and trivial at the same time

Scale means nothing amid the development of new ideas.

Scale means everything when it comes time to ensure business commerce can leverage the new ideas in ways that protect brand, customer privacy and regulatory compliance.

IBM understands this as well as, if not better than, any of its competitors. The challenge for IBM is the same one faced by Satya Nadella when he took over Microsoft: how to change a deeply ingrained and highly successful corporate culture to align to these new, seemingly contradictory market realities. A lot of economists get lost in the buzz of hypergrowth for scaled public cloud revenue. Public cloud, at its core, is nothing but a commodity utility offering. It has never been the IBM play, and it ought not to become its play now. The company’s domain is enterprise IT, not easy storage of family photos or digital music. Amazon, Azure and Google (“Amazurgle”), and emerging regional rivals, can meet these demands, especially when such companies derive the bulk of their revenue elsewhere through advertising or e-commerce.

What IBM has to learn is how to compensate the management layers on companywide execution rather than on siloed execution. You cannot hold firm on razor sales when to lose that sale means risking a lifetime of highly profitable razor blade sales.

The technology assets IBM stands to gain in the acquisition are well documented, particularly in a recent commentary by TBR Senior Analyst Cassandra Mooshian. But TBR has covered IBM and Red Hat for years, and after one particular Red Hat analyst day, TBR summed up Red Hat CEO Jim Whitehurst’s business strategy as “deja vu all over again.” Essentially Red Hat aimed, and is still aiming, to do in the PaaS layer what it did in the enterprise operating system layer. Red Hat’s success with this strategy would prove a boon to IBM, and IBM’s long working history with open-source communities should allay many (but obviously not all) of the concerns within those communities around the business following the proposed acquisition.

AWS shakes up the private cloud infrastructure market with Outposts

Outposts enable AWS to meet clients’ demand for private cloud

Amazon Web Services (AWS) unveiled at re:Invent in Las Vegas its new Outposts on-premises cloud infrastructure, which will enable AWS to become the sole cloud infrastructure provider for its clients. The underlying Outposts infrastructure closely resembles AWS’ public cloud data center infrastructure. Since the infrastructure will be similar, it is conceivable AWS will be able to tie customers’ public and private clouds together seamlessly, fulfilling customers’ desire to deal with one less vendor for their IT needs. AWS will deliver, install and maintain Outposts for customers.

The sheer volume of AWS public cloud customers creates a large base to sell Outposts to and takes aim directly at private cloud data center providers. Outposts will also directly compete with Microsoft Azure, and will generate accretive hardware revenue for AWS.

An advantage AWS has over infrastructure vendors is economies of scale, which will enable AWS to sell massive infrastructure volumes for low margins — much like an original design manufacturer — and become a price leader against OEMs such as Dell EMC and Hewlett Packard Enterprise (HPE). AWS also plans to arm its channel partners with the necessary capabilities to sell these infrastructure solutions, further enabling large sales volume. Moreover, AWS is better equipped than other infrastructure vendors such as Dell EMC and HPE to attach the necessary services to provide connectivity between public and private cloud environments due to its expertise in the public cloud space — and will gain the higher-margin sales to boot. IBM has strong services capabilities but lacks the commoditized infrastructure and customer volume to match AWS’ strategy. TBR notes that pricing details of Outposts have not yet been determined.

VMware gets a piece of the AWS Outpost pie with the VMware Cloud variant

VMware and AWS collaborated to provide VMware Cloud on a variant of AWS Outposts, which will be offered by VMware as a managed service. As this creates a conflict of interest for Dell Technologies, TBR believes Dell Technologies has its sights set on the higher-margin sales generated from VMware Cloud and will forego the loss of lower-margin hardware sales to gain it.

Although AWS’ announcement may seem like bad news for the private cloud infrastructure OEMs, the good news for them is that AWS’ Outposts will not hit the market until 2H19, giving the infrastructure players some time to develop solutions that can compete with AWS as it moves into the data center hardware market.