India-centric professional services rivals compete to prove themselves as front-runner in European market

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Vendors look to Europe for new revenue pipelines, but some are falling short

India-centric IT services vendors are looking to do more in Europe, utilizing a few different strategies to get there, including pursuing acquisitions, developing new offerings and building on-the-ground workforces. This allows them to diversify revenue streams geographically. TBR feels this push into Europe is a crucial move for India-centric vendors, to not only remain competitive with each other and advance their bottom lines but also to reap the benefits that the European market has to offer, such as new investment opportunities and a larger talent pool for recruiting.

Vendors look to Europe for new revenue pipelines, but some are falling short

The five leading India-centric professional services vendors — Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT) — explored new pipelines for expanding their presence into the mature and growing European market. Infosys worked to close the gap on HCLT in 1Q19, while TCS, Wipro IT Services (Wipro ITS) and Cognizant are feeling the pressure to conform to stay competitive.

Low cost, but little long-term value: Insight Enterprises’ plan to acquire PCM Inc.

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Insight’s acquisition strategy has led to strong services growth and a successful shift from the legacy VAR model

Insight’s last three acquisitions, of Cardinal Solutions, Ignia and BlueMetal, were all services companies that provided significant differentiation and skilled talent that legacy Insight lacked. The acquisitions were part of the firm’s 2015 digital innovation strategy, an attempt to shift its business model from a typical VAR to a true solutions and services provider. That strategy was largely successful, and Insight’s growth in services (greater than 18% year-to-year for the last five quarters) has outstripped nearly all of the firm’s major competitors, including CDW (Nasdaq: CDW), SHI and Connection (Nasdaq: CNXN). In January 2019 Insight announced the formation of a new practice called Insight Digital Innovation, which unites those three acquisitions under one umbrella, allowing Insight to deploy its 850 developers and architects on new IP and services engagements in a streamlined fashion. TBR believes Insight has been executing its digital innovation strategy extremely well, and the decision to invest in services and more highly skilled employees has been a key differentiator for Insight. Though the company’s overall top line has decreased year-to-year in recent quarters, this is due entirely to declines in product sales, which also face particularly difficult compares from a strong 2017-2018. Insight’s extremely robust double-digit growth in services revenue positions the firm to return to growth in 2H19 to deliver midsingle-digit overall growth for the year. TBR believes the firm’s pivot from its legacy business model is an example for other VARs to follow to combat the continual commoditization of hardware and software.

PCM represents a retreat to scale and a regression for Insight

Even considering Insight’s success in shifting away from its legacy model, the company’s plan to acquire PCM does make some immediate sense. Adding scale can be of significant value in a marketplace dependent upon volume selling, and Insight’s leadership touts PCM’s penetration in the small to midmarket segment, where they believe there is opportunity to upsell Insight’s higher-margin services offerings and in which legacy Insight has very little market share. Essentially, Insight is attempting to buy customers in hopes of increasing stickiness with those clients and continuing its services growth in a new market. Beyond its customer base, PCM has largely done nothing to adapt to the changing marketplace that VARs now face and seems to offer little in the way of differentiation. TBR believes purchasing customers is a dubious strategy at best, as PCM has been consistently declining in revenue over the last two years, indicating stickiness is already an issue with its customer base, and being acquired is likely going to send many employees out the door. Undoubtedly, many of PCM’s customers are loyal to the company due to their relationships with current PCM employees — if those employees become redundant or decide to leave PCM as it joins Insight, many of those customers may choose to follow them.

TBR believes the main benefactor of this planned acquisition is likely to be limited to the organization’s supply chain, given the likely increase in scale and efficiency, as well as the addition of about 1,100 highly skilled services and technical employees. Another interesting piece of this planned acquisition is PCM’s cloud hosting business, which seems to be one of the only offerings from PCM that is not matched by most every other VAR. However, in a special conference call regarding this planned purchase, Insight CEO Kenneth T. Lamneck indicated the cloud hosting business is going to get a very close look to determine if it will remain part of Insight once the acquisition is finalized. Though PCM’s cloud hosting business is relatively small, it seems more likely to provide growth than many other parts of PCM’s business and would allow for more opportunity to bundle additional higher-margin services and solutions. Ultimately, fully capitalizing on what PCM has to offer will be a difficult proposition for Insight considering the typical effects of such a large acquisition and Insight’s apparent strategy for growth.

In June Insight Enterprises (Nasdaq: NSIT) announced plans to acquire PCM Inc. (Nasdaq: PCMI) for around $581 million in June, a deal that would add about $2.2 billion to Insight’s revenue, with about $1.6 billion coming from small to midmarket clients and $260 million coming from the public sector. The planned acquisition appears to be aimed at gaining market share with small to midmarket companies, a segment which Insight historically has not had much success growing organically. PCM also has 40 offices and just over 4,000 employees, which would give Insight a significant boon in terms of scale for both product delivery and sales. However, with 2,700 of those 4,000 employees currently in client-facing roles, TBR notes there are a number of redundancies in locations and employees across the two firms.

IoT is trending toward smaller, easy-to-replicate projects that will generate increased data over time

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IoT is not a technology, nor a market, but it certainly drives IT revenue

TBR estimates the contribution of the commercial IoT technique to the overall IT market will increase from $456.1 billion in 2019 to $1.7 trillion in 2025, a CAGR of 24.9%. IoT is not a technology or a market, but a technique for applying IT components, made more relevant by the increased ease of connecting sensors and collecting and processing data. It serves as a tool in the larger toolbox of traditional IT solutioning. As vendors and customers move beyond the stigma that IoT is exotic, untested and expensive and begin to understand that IoT is just an iteration of everyday IT solutioning, IoT is being implemented at an increasing rate, albeit slowly and steadily. While these projects are generally smaller, as customers leverage IoT to solve targeted problems and prove ROI, they are set to grow over time and expand into parallel projects, contributing long-tail revenue to vendors that are amenable to projects that are smaller in scope.

Several drivers will determine whether the growth needle moves toward lower or higher market performance. One is global economic health, including the impact of geopolitical challenges, which is out of the control of the customer and vendor community. If the U.S., Western Europe or China (or all three) faces an economic downturn, IoT projects are less likely to flourish. Increased tension between the U.S. and China could also drive economic challenges, in addition to hurting vendors’ ability to partner, limiting vendors’ market reach and reducing customer choice.

Vendors’ efforts to seek out cooperative and coopetitive opportunities, along with their willingness to tailor their go-to-market strategies around their core competencies, will also be a factor in IoT growth. The better vendors interact and interoperate, the easier it is to piece together solutions. Often those solutions will manifest as packaged solutions — a bundle of vendor components preconstructed to solve a horizontal business problem or vertical challenge.

Blockchain in the context of digital transformation: A slow-moving, inevitable revolution

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In fast-approaching fourth industrial revolution, bureaucratic labor will become as nonessential as manual labor became to the agrarian economy with the advent of the combustion engine. Blockchain technology will enable smart contracts throughout our economy and will be the red thread stitching together multi-enterprise business networks for frictionless commerce that will greatly reduce demand for bureaucratic labor. As one management consulting partner put it, “If you are not at the point of consumption or at the point of creation, then your job will disappear.”

In TBR’s latest Digital Transformation Insights Report: Emerging Technology, Senior Analyst Boz Hristov and Principal Analyst Geoff Woollacott describe in detail how blockchain technology sits firmly in the hype phase today and, in little more than a decade, has reasonably distinguished itself from cryptocurrency even as blockchain underpins that digital reality. Solving the coopetition paradox, revolving around establishing common governance and standards across competitive and cross-industry ecosystems, is the biggest challenge, yet offers the long-tail opportunity for vendors.

Additional assessments publishing this week from our analyst teams

IBM Services remains challenged by its internal portfolio and resource transformation, such as in traditional infrastructure management and technology support, and reported a fourth consecutive quarter of revenue decline in 2Q19. Pockets of revenue growth in constant currency in business and technology transformation areas, such as consulting, application management and cloud, indicate IBM Services’ portfolio transformation to higher-value services is working. While profitability will remain IBM Services’ core priority in 2H19, the company’s work with clients around advising, moving, building and managing next-generation technology solutions will continue to increase and begin to offset revenue growth pressures in 2H19. — Elitsa Bakalova, Senior Analyst

TBR’s IBM report highlights some of the recent developments in IBM’s Systems Hardware portfolio as the market awaits the newest refresh of IBM Z, which is likely to be announced at the end of 2019 and become generally available at the start of 2020. Hardware-centric investment trends are also highlighted, for both IBM’s traditions Systems Hardware portfolio and its investments in quantum computing. TBR’s financial projections in this particular iteration of the report include how TBR anticipates the Red Hat acquisition will impact corporate numbers. — Stephanie Long, Analyst

Lackluster performance in traditional IT and telecommunications continues to weigh down T-Systems’ revenue, but cloud-based services will help revenue rebound in 2Q19. Strengthening its partner network improves T-Systems’ innovation as well as drives adoption of its cloud and IoT capabilities. For example, its recent partnership with Software AG allows T-Systems to underpin its Cloud Internet of Things platform with the Cumulocity IoT platform, expanding its delivery scale in Europe and North America.
— Kelly Lesiczka, Analyst

HCL Technologies (HCLT) emphasizes its engineering and R&D core services to support foundational revenues as the company balances acquisition integration with portfolio management. With the completion of its acquisition of IBM Software assets at the beginning of July, HCLT launched HCL Software, which we expect will help the firm deliver software and product solutions that bridge HCLT’s legacy services with its Mode 2 and Mode 3 emerging technologies and services, particularly for cloud, digital and analytics, and security. — Kelly Lesiczka

In our upcoming DXC Technology Initial Response, TBR will look at whether DXC has been able to overcome recent pressures stemming from completion of several large contracts without replacement and ongoing headwinds in legacy applications work. — Kevin Collupy, Analyst

Additionally, check out our recent insights into IoT and KPMG, available in our Special Reports section.  

Small IoT players likely to disappear or ‘get eaten by bigger fish’

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“According to analyst firm Technology Business Research (TBR), larger tech players are likely to decrease their IoT businesses and investments while smaller companies will ‘disappear or get eaten by bigger fish’ due to their non-differentiated portfolios.

“However, the last one and a half years have seen ‘increased sanity and smarter messaging around IoT’ which has led to a rise in smaller projects, which are likely to grow over time.

“‘Many IT and operational technology (OT) vendors were disappointed — and some incurred damage or had to scramble to realign — as the IoT opportunity failed to live up to inflated expectations prevalent between 2015 and 2017,’  said analyst Daniel Callahan.”

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Investments in acquisitions and startups enrich Capgemini’s next-generation solutions portfolio and improve its competitive position

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“Capgemini has taken multiple steps to enhance its portfolio to drive transformations through next-generation technologies and create business value for clients. The acquisition of Altran to deliver digital transformation in the industrial sector, enhanced relationships with Microsoft around Microsoft Azure solutions and with SAP around certification of industry innovation accelerators in manufacturing and retail, and investment in startups and joint commercial activities exemplify Capgemini’s recent activities to advance its competitive position,” said Senior Analyst Elitsa Bakalova. “Offering deep industry expertise improves Capgemini’s ability to address clients’ business-specific challenges. The company will continue to experience momentum in cloud services, with cloud revenue driven by offerings in the Capgemini Cloud Platform portfolio that support clients when building, migrating and managing applications and infrastructures in cloud environments. Offering each client its entire portfolio of solutions enables Capgemini to provide holistic transformational solutions and effectively compete with peers. The expanded partnership with Microsoft around Microsoft Azure solutions will enable Capgemini to increase cloud professional services activities, especially around cloud application development and maintenance.”

Additional assessments publishing this week from our analyst teams

Apple continues to pursue both service and hardware initiatives to maintain growth. The company is leveraging services and its wide install base to grow continuous revenue streams as device refresh activity wanes amid lengthening device life cycles and slowing hardware advances. While services are growing as a cornerstone strategy for Apple, the company also remains focused on maintaining its market perception as the most advanced smartphone producer. TBR expects the iPhone 11, which is slated to be released later in 2019, to have steady sales, but Apple will likely not see breakout sales like that of the iPhone X until the release of the 2020 model, which will deliver larger hardware upgrades such as 5G enablement. — Dan Callahan, Analyst

Google doubled its revenue over the past six quarters, surpassing $2 billion in 2Q19 as the vendor migrates customers to Google Cloud Platform (GCP) and attains particularly strong revenue growth from selling analytics. Google’s PaaS business will continue to drive revenue growth as enterprises integrate their hybrid environment with Anthos and leverage Google’s analytics, AI and machine learning offerings. In addition, Google supplements growth with G Suite as the company’s growing sales base brings industry-specific versions of the collaboration suite to market and cross-sells G Suite into GCP-oriented customer engagements. — Jack McElwee, Research Analyst

Cognizant has reworked its corporate strategy to emphasize the criticality of digital technologies to its growth plans. Pursuing acquisitions, such as that of Meritsoft, enables Cognizant to diversify its revenue mix, fostering new sources of digital revenues within key verticals. We expect Cognizant will maintain steady revenue growth year-to-year, largely led by demand around its digital operations capabilities.    — Kelly Lesiczka, Analyst

An integrated sales structure, paired with investments in price-competitive AI solutions and on-site presence, will help Infosys transform its brand identity. At the same time as Infosys builds a healthy pipeline, the company may need to calibrate stakeholders’ expectations around margins to sustain trust. — Boz Hristov, Senior Analyst

Reinforcing Verizon’s reputation as a premium wireless service provider will be essential for the operator to sustain revenue growth in the 5G era, as competitive pressures from T-Mobile will intensify, especially given the pending Sprint merger. Though Verizon will continue to trail T-Mobile in postpaid phone net additions over the next several years, Verizon will be able to sustain revenue growth by attracting customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. — Steve Vachon, Analyst

Sprint continues to undercut its rivals as the operator remains reliant on competitive pricing to attract subscribers given its subpar network coverage, though the company is moving away from more aggressive promotions, such as its previous Cut Your Bill in Half offer, to improve average revenue per user (ARPU). Sprint will continue to struggle to balance ARPU and subscriber growth, however, as many customers are unwilling to pay higher prices for the company’s network quality and Sprint is experiencing high churn rates from customers rolling off promotional pricing offers. — Steve Vachon

Public sector IT services spotlight: The U.S. federal earnings season continues the week of July 29 with three services-led defense contractors — Booz Allen Hamilton (BAH), Leidos and ManTech — releasing their fiscal results for the second calendar quarter of 2019.

As reported on Monday, July 29, Booz Allen Hamilton delivered 10.8% year-to-year growth during 2Q19, the first quarter of its fiscal 2020, and 100% of BAH’s growth was organic as the company continues to eschew acquisitions. BAH’s strong performance in 2Q19 reflects how ideally positioned the company is to serve its federal clientele, as well as a growing number of commercial entities, with a high-value, differentiated solutions suite spanning the strategy, mission and critical IT needs of public and private sector clients alike. As a result of its strong 2Q19 year-to-year growth, BAH is also likely to be the top-performing organic growth vendor in TBR’s upcoming 2Q19 Public Sector IT Services Benchmark (publishing in early October). BAH’s growth and margin performance (operating margin of 9.8%) in 2Q19 mostly outstripped that of the trio of federal competitors that released 2Q19 earnings and fiscal performance last week: Raytheon (YTY growth of 5.3%; operating margin of 9.1%); General Dynamics Information Technology (YTY contraction of 11.6%; operating margin of 7.1%); and Northrop Grumman Technology Services (YTY contraction of 0.4%; operating margin of 10.8%). We believe BAH’s performance relates directly to its solution set, which sits at the juncture of federal agency IT and mission objectives with a differentiating blend of consulting, technology and emerging solutions.           — John Caucis, Senior Analyst  

Leidos will release its earnings on Tuesday, July 30, and is expected to post top-line, year-to-year growth of between 5% and 7% to reach about $2.7 billion in 2Q19 revenue. Growth will derive from Leidos’ continued strong pace of new awards, net increases in volume across several high-profile programs, and improving win rates, which are accelerating the conversion of pipeline opportunities into bookings and revenue. Leidos should also be able to offset the wind-down of existing programs and some limited currency headwinds from unfavorable swings in the U.S. dollar. The company has guided for 2019 revenue of between $10.5 billion and $10.9 billion, implying a median 5% growth rate, and record backlog levels achieved in prior quarters positions Leidos well to achieve its projections. — John Caucis  

Finally, ManTech will release its 2Q19 fiscal performance and earnings after business hours on Wednesday, July 31. ManTech’s latest strategic acquisition (Kforce Government Solutions, or KGS) will add roughly $100 million in new revenue and expand ManTech’s opportunity set in the federal civilian segment, augmenting robust Department of Defense (DOD) and intelligence growth while inorganically boosting ManTech’s top-line growth (projected to be between 6% and 8% in 2Q19). ManTech’s top-line growth in 2Q19 should be significantly augmented by the KGS acquisition, as the purchase closed in April and immediately began to contribute inorganic revenue to ManTech’s top line. On an organic basis, classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal DOD and Intelligence Community clients continues trending upward. Prior to the KGS acquisition, ManTech tendered a 2019 outlook for full-year 2019 revenue of between $2.05 billion and $2.15 billion, implying growth of between 4.7% and 9.8% over FY18 revenue of $1.96 billion. KGS is expected to contribute between $60 million and $80 million in inorganic revenue during the latter nine months of FY19; this compelled ManTech to elevate its prior guidance for FY19 revenue to instead reach between $2.13 billion and $2.21 billion, implying growth of between 8.8% and 12.8% over FY18. — John Caucis  

IoT is a piece of a larger IT strategy and should not be treated as a unicorn

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Let us begin with the bad news: Many IT and operational technology (OT) vendors were disappointed — and some incurred damage or had to scramble to realign — as the IoT opportunity failed to live up to inflated expectations prevalent between 2015 and 2017. Many anticipated far more rapid growth than was reasonable, given that IoT is neither a technology nor a market, but a technique or a class of solutions. Many also thought that version 1.0 of horizontal IoT platforms was a fast and easy sell. An early victim was General Electric (NYSE: GE), but TBR expects other large names to narrow their IoT businesses and investments, if they have not already, and several smaller names to disappear or get eaten by bigger fish as they find themselves spinning their wheels in the mud with nondifferentiated portfolios.

The good news: Starting in late 2018 and continuing into 2019, TBR has observed the IoT opportunity recovering as lessons from the difficult times have led to increased sanity and smarter messaging around IoT. We believe that the pace of IoT project implementation is increasing, but that the mix has shifted to smaller projects. Over time, however, the number of active projects will grow and the amount of data they produce will also grow, leading to an accelerating growth curve.

TBR believes a few significant realizations and realignments are driving acceleration:

  • IoT really is not a market (although that is the easiest way to describe it) nor a technology. It is a technique for applying technology. It is not a very novel technique, but rather an evolution of IT solutioning that includes sensors. More vendors and customers are coming to understand what IoT is and are avoiding the perception of IoT as something that is new, novel and complex, making it easier for vendors to leverage IoT to help customers overcome business challenges. With IoT being treated as one tool in the larger IT solutioning toolbox and the focus turning to solving the end problem, rather than defining the technology needed to get there, vendor-customer relationships are back to business as usual. Vendors do not have to get bogged down in education cycles as much because customers understand IT solutioning, and vendors can focus on delivering solution components instead of getting embroiled in discussions on the perception of IoT as a discrete and transformational technology and the complexity, hesitation and perceived risk that stem from that.
  • IoT is not easy. This is true for two reasons: because customer organizations are complex and have numerous stakeholders with differing priorities, visions and systems, and because IoT is rarely implemented in and of itself. IoT is more often tied with existing or new systems, such as product lifecycle management, supply chain management, enterprise resource planning software, or a multitude of specialized software from ISVs. Adoption is largely from the bottom up in organizations, but customer IoT champions and vendors are realizing that adoption must be supported from the top down to extract maximum value from IoT. Customers are increasingly adding CIO and chief digital officer (CDO) roles to guide holistic, consistent transformation, and vendors are investing in sales strategies targeted at the C-Suite, such as innovation centers and improved messaging. To answer the second challenge, vendors are learning that they cannot address everything alone and must partner to tackle the variety of interconnected systems and build best-in-class solutions.
  • Being the best at a few select components of IoT is better than being OK at everything. Thousands of vendors are attacking the IoT opportunity, culminates in a busy, confusing and hypercompetitive market for customers. Winning vendors are finding their swim lanes and exploiting their niches, such as self-service Amazon Web Services (Nasdaq: AMZN), application-focused Oracle (NYSE: ORCL), embedded-driver Dell Technologies (NYSE: DELL) and things-focused Bosch. These vendors are increasingly known for being the strongest in their chosen niches, and their narrower focuses not only make them prime targets for systems integrators to pull into solutions but also make partnerships easier, with joint go-to-market efforts proving to be a winning strategy for vendors to employ beyond their legacy customer bases. 
  • Packaged solutions are emerging. With customization comes cost and complexity, anathemas to the customer base, especially large customers. As vendors begin packaging components together for shared applications or to address common challenges, costs are beginning to develop boundaries, helping customers understand exactly how IoT can be used and what to expect in terms of ROI. TBR expects packaged solutions to drive steady market growth moving forward. Each solution has its own growth curve, with some being quite rapid—but taken together, these solutions are delivering accelerating but moderate growth.

The 3Q19 Commercial IoT Market Landscape looks at technologies and trends of the commercial IoT market. Additionally, TBR catalogs and analyzes more than 520 customer deals by vertical, uncovering use trends, identifying opportunities, examining maturity, and discussing drivers and inhibitors.