This week TBR will publish recent insights on two of the management consultancies we cover: The Boston Consulting Group (BCG) and McKinsey & Co.

Regarding BCG, Analyst Kelly Lesiczkanotes, “Earning consistent rankings as a top employer and avoiding negative publicity enable BCG to attract and retain employees and to support innovation efforts and delivery of emerging technologies. As BCG works to increase brand recognition for its subsidiaries, such as the opening of a BCG Platinion center in Poland, it improves its value proposition to bridge new capabilities and offerings within clients’ legacy environments. Enhancing its core operations consulting services will continue to bolster BCG’s ability to develop and deliver solutions, particularly in mature vertical markets, such as financial services.

On McKinsey, Principal Analyst Patrick Heffernan puts a recent surprising physical storefront development into context of the firm’s larger strategy and vision, stating, “Clients’ expectations for transformation, including analytics, cloud, AI and other emerging technologies, match the capabilities and offerings McKinsey has developed in recent years, though the firm may need to begin offering implementation services along with its strategy consulting to withstand peers’ efforts in the space. In the wake of recent controversies, however, McKinsey is touting more internal transparency while exploring new ventures in verticals such as retail, specifically with its opening of a retail space in the Mall of America.”

Additional assessments publishing this week from our analyst teams

“AI will likely be the most controversial yet opportunistic emerging technology to impact the digital transformation continuum. There will be jobs that will decline as a result of automation, but more in toil as opposed to decision making or customer engagement. Overcoming the skepticism around the public perception that automation eliminate jobs is an ongoing task demanding enterprises and vendors increasingly educate the market on the broader ROI from the use of AI, including increased productivity, improved accuracy and compliance.” — Senior Analyst Boz Hristov, Digital Transformation Insights Report: Emerging Technology

“While TBR estimates T-Systems revenue growth will be flat through 2021, the company’s profitability will follow a positive trajectory. As T-Systems undergoes transformation efforts, including the establishment of one unit that will join Deutsche Telekom’s Business Customer segment and T-Systems’ Telecommunication services and Classified ICT businesses as well as the establishment of independent Security and IoT businesses, the company aligns its portfolio with client demand tied to higher-value services. Partnering with technology vendors provides T-Systems with digital and cloud platforms that scale its growth area offerings as well as lead to new opportunities. Building its offshore talent will help T-Systems sustain its portfolio improvements in the long term, benefitting from lower-cost delivery. While T-Systems historically is slow to execute and transform business operations, the company could potentially lose opportunities to competitors as transitioning businesses hinders its ability to generate consistent growth.” — Lesiczka

“Despite weak performance in 3Q19, Sprint is taking steps to become more valuable to T-Mobile ahead of the proposed merger’s closing. Sprint is optimizing costs through deeper digitization of retail and customer service channels as well as implementing more efficient network technologies. Inheriting Sprint’s evolving IoT portfolio would enable T-Mobile to become more competitive in the IoT market, while Sprint’s growing 5G footprint would augment T-Mobile’s coverage in major markets.”  — Analyst Steve Vachon

Senior Analyst  John Caucis reports on three federal IT services providers this week, each delivering robust, double-digit revenue growth amid the strongest federal technology market witnessed in many years. “The strongest performance was tendered by CACI, whose revenue rose 16.9% year-to-year to $1.36 billion in 3Q19, showing the tight alignment of its differentiated solutions with high-priority spending areas in the defense and intelligence markets. CACI is beating incumbents on large-scale program recompetes and defending its incumbency on its own legacy engagements, while the strength of its fiscal performance points to a high-value solutions mix highly relevant to its core customers. CACI’s $1 billion in acquisitions in 1Q19 is also boosting revenue, adding between $115 million and $120 million in inorganic sales in 3Q19 (by TBR estimates), though also generating margin pressures.

“Booz Allen Hamilton’s (BAH) revenue rose 12.7% year-to-year to $1.82 billion in 3Q19, consistent with the company’s plan to aggressively execute on its FY20 growth objectives during the first half of the fiscal year (calendar 2Q19 and 3Q19). BAH is realizing balanced growth across its government-focused business lines. Growth in BAH’s Global Commercial business has been more variable but has stabilized and is on solid footing for continued expansion in 2020. Finally, Leidos’ revenue rose 10.1% year-to-year to $2.84 billion in 3Q19. The company’s backlog continues to surge to new highs owing to a strong sustained pace of net-new contract bookings across the defense, civilian and, particularly, healthcare areas. Leidos also successfully defended its position on a handful of large projects, including the $2.9 billion, 10-year NASA End-User Services & Technologies (NEST) program and the $927 million IT and logistics support contract with the Transportation Security Administration.”

Additional assessments publishing this week from our analyst teams

“With the Syntel acquisition fully integrated globally, Atos’ next step is to explain Syntel’s capabilities to its internal sales and delivery teams and existing clients to successfully cross-sell its solutions and to effectively deliver services for cloud revenue growth and improved profitability. TBR does not expect the stepping down of Atos CEO Thierry Breton on Oct. 31 and appointment of Elie Girard, previously deputy CEO and CFO, to change the company’s strategic direction or negatively impact Atos’ performance. Girard will continue to steer the strategic direction of the company over the next two years around delivering business outcomes for customers utilizing Atos’ technology and services expertise in cloud and cybersecurity.” — Elitsa Bakalova, Senior Analyst

“Throughout 2019, Cognizant’s emphasis on evolving from its traditional roots to a digital transformation leader has resulted in multiple acquisitions and a flurry of restructuring efforts, such as the Digital Transformation Office. The Digital Transformation Office’s latest announcement is a two-year plan, 2020 Fit for Growth, which will result in additional layoffs and reskilling efforts around key technology areas such as data, IoT, digital engineering and cloud. The 2020 Fit for Growth plan is Cognizant’s furthest reaching plan so far in 2019, impacting 12,000 employees and resulting in the divesture of nonessential businesses to free up capital for digital growth and improve Cognizant’s cost structure. TBR believes the success of Cognizant’s restructuring and go-to-market realignment will require active involvement of its partner ecosystem to rapidly expand the scale of its new offerings and strengthen its positioning against competitors in the digital space.” — Kelly Lesiczka, Analyst

“Ongoing restructuring efforts to improve delivery and cost structure enabled Fujitsu Services to grow revenues and profitability in 3Q19 but could set the company back relative to peers. However, the speed of Fujitsu’s transition will dictate the extent to which its portfolio and delivery network can generate profitable growth in FY22.” — Lesiczka

“T-Mobile will end 2019 on a high note, with the company’s annual postpaid net additions and adjusted EBITDA surpassing initial guidance expectations. T-Mobile’s momentum will continue in 2020 regardless of the outcome of the proposed Sprint merger, as the company’s widespread 5G coverage and expanding portfolio and service options will attract new customers.”  — Steve Vachon, Analyst

“AT&T’s 3Q19 earnings highlight the challenges the company is experiencing as a result of extensive expansion over the past five years due to the acquisitions of Time Warner and DIRECTV and the launch of AT&T Mexico. Market challenges and shifting consumer preferences contributed to AT&T’s revenue declines in most segments, and the company remains debt-laden from its large-scale investments.” — Vachon  

In July, Accenture announced a new Customer Experience Center in Stuttgart, Germany, focused on working with automobile manufacturers and their partners to accelerate the future of connected cars. With seemingly every IT services vendor and consultancy rolling out initiatives around automobiles, TBR spoke last week with Accenture’s Axel Schmidt, senior managing director and industry managing director, Mobility, about the new center to better understand why Accenture chose Stuttgart, how this center will differ from others, and what will be the core competencies and additional value the company brings to clients by having this new space.

According to Schmidt, customer behavior trends across the automotive industry, including increased specialization, expectations around connectivity, and even the number of times a buyer visits a dealership, have further emphasized the need for automakers to enhance their marketing and sales capabilities, a core consulting strength for Accenture. In combination with its manufacturing and supply chain expertise, the company can help carmakers understand what is possible with emerging technologies and what clients are increasingly demanding. In answer to the question, “Why Stuttgart?” Schmidt explained that an Accenture acquisition, Mackevision, was founded in the city and had strong ties to the automotive sector there. Schmidt anticipates Accenture will expand the center concept to other car hubs, and possibly other related industries such as travel and transportation, based on the company’s engagements with other manufacturers.

When pressed on how Accenture and its automotive clients have responded to the changing market for cars, including an increase in car sharing and the (hoped-for) emergence of self-driving cars, Schmidt noted that Accenture recognizes that “brand strength alone will not ensure future success in mobility.”  As Accenture has advised, clients that “want to gain relevant market shares in the market of mobility services need to act now and reposition their brand by using their sales reach.” In even broader terms, traditional manufacturers, according to Schmidt, “need to embrace new platform- and customer-centric technologies in order to remain successful. Furthermore, car manufacturers need to pivot their business model wisely from building and selling cars to offering mobility.” For some time now, Accenture has advanced the idea of “the new,” to include promising “the customer a seamless mobility experience by offering him in a comfy and affordable manner that kind of mobility he needs.”

Our discussion with Schmidt ended with a look to the future, when automobiles are essentially “software with hardware wrapped around it” and they become the “ultimate mobile device.” (TBR wonders if BMW will update its slogan.) Schmidt said the current 150 million lines of code per advanced automobile will be closer to 1 billion lines of code in an autonomous vehicle. Given everyday experiences with software in other elements of life — and the trend toward “low code” in some IT environments — I think a niche market will grow for no-code, unconnected, software-free cars. Keep that red Barchetta’s motor in working condition.    

Senior Analyst Nicki Catchpole reports this week on IBM’s cloud and software practice, noting: “While IBM’s 3Q19 overall results continued to experience a downward slide, its Cloud & Cognitive Software sector experienced immediate positive effects from the much-anticipated $34 billion acquisition of Red Hat. Red Hat’s OpenShift technology and channel-driven approach have boosted IBM’s cloud growth, expanded the broader IBM portfolio, and opened doors to new customers and markets. Post-merger, IBM is focusing on emphasizing its value proposition at the PaaS layer, with the intent to capture enterprise IT spend in the lucrative hybrid cloud market and position itself as the industry’s only true hybrid multicloud platform. While IBM still faces strong headwinds post-merger, TBR expects that another quarter of executing a cloud-native portfolio approach will position IBM for differentiation and continue to yield positive growth results in this segment.”   

Additional assessments publishing this week from our analyst teams

“Capgemini has sustained a midsingle-digit organic revenue growth trend over the past seven quarters, positively affected by strategic expansion into next-generation and industry-specific solution areas. Capgemini’s revenue growth will decelerate in 4Q19 due to potential softness in the banking sector and in the U.K. Capgemini indicated pockets of softness are developing, specifically in banking due to end-of-year budget management and in the public and private sectors in the U.K. due to uncertainty around Brexit. In September Capgemini’s board of directors chose Chief Operating Officer (COO) Aiman Ezzat to succeed Paul Hermelin as CEO in May 2020. While Ezzat will be responsible for the overall management of the company as CEO, Hermelin will remain chairman of the board. This will ensure a smooth transition in Capgemini’s top executive role. Ezzat has been with Capgemini for 20 years and has deep knowledge of the company from holding leadership roles, such as CFO and, most recently, COO.” — Elitsa Bakalova, Senior Analyst

“Atos’ new CEO, Elie Girard, will continue to steer the company’s strategic direction in the next two years, with a focus on delivering business outcomes for customers utilizing Atos’technology and services expertise in cloud, cybersecurity and emerging areas such as IoT and edge and quantum computing. Revenue and cost synergies from the Syntel acquisition will enable Atos to achieve its financial goals in 2019. Atos is positioned well to support its expansion in North America by cross-selling solutions to existing clients. TBR expects Girard, who has been with Atos since 2014, to emphasize execution of financial targets, especially around improving profitability through productivity and efficiencies.” — Elitsa Bakalova

“With its marriage to United Technologies on the 2020 horizon, Raytheon is on the cusp of a game-changing merger that will impact the federal IT and global aerospace sectors for years to come. In TBR’s 3Q19 Raytheon Intelligence, Information & Services (IIS) report, we will begin to examine the implications of the blockbuster, multibillion-dollar consolidation on Raytheon’s government services business. Despite early disruptions from the looming mega-merger and the loss of the Warfighter FOCUS contract, Raytheon IIS continues to post robust fiscal performance, owing to a steady stream of new classified projects in cyber and space, particularly in its core U.S. market but also overseas with its long-established roster of foreign governments the company counts as clients.” — John Caucis, Senior Analyst

“Leveraging its portfolio network to integrate cloud, digital and security capabilities as well as support delivery of software-driven services will help Cisco Customer Experience maintain growth and profitability. Additionally, Cisco’s increased acquisition activity will provide Cisco Customer Experience with access to a broader client base and enable it to more quickly develop cloud and IoT capabilities to bolster revenue streams in 3Q19.” — Kelly Lesiczka, Analyst

“HCL Technologies’ (HCLT) alliance and acquisition strategy helps the company enhance its portfolio to embed vertical and technical expertise and positions it for profitable revenue growth in 2020. Additionally, HCLT’s investments in talent, including fostering its ‘Employees First’ culture, supports the development of a digitally versed talent bench and will allow HCLT entryways into emerging markets.” — Kelly Lesiczka

“DXC Technology made several changes to its management team, including its CEO, following the retirement announcement of its current chairman, Mike Lawrie. New leadership across DXC will bring a fresh perspective and could help turn around its perpetual restructuring initiatives and financial underperformance. During the quarter, the company appointed Mike Salvino as president and CEO, and TBR believes his vision for the company complements DXC’s strengths and will align with much of his predecessor’s values, minimizing disruption, as Lawrie was involved in the selection process.” — Kevin Collupy, Analyst

“Azure has become a consistently strong revenue driver for Microsoft, but it is also notable that Microsoft has been able to sustain growth of its licensed Server software products by stressing hybrid IT environments and high-value use cases like expansive IoT deployments.” — Meaghan McGrath, Senior Analyst 

“Amazon Web Services’ (AWS) days of unrivaled public cloud PaaS and IaaS dominance may be numbered as key competitors such as Microsoft and Oracle rally together to unseat AWS. AWS is fighting to stem their progress, sacrificing margins to win customer workloads.” — Meaghan McGrath

“Comcast’s Cable Communications business remains in an enviable position in the U.S. telecom industry as it continues to sustain solid revenue growth despite increasing competitive pressures and shifting consumer trends. Central to Comcast’s success is the high subscriber growth spurred by the accelerated speeds of its DOCSIS 3.1 broadband services while being free of the burden of maintaining a legacy network portfolio, which is hindering wireline revenue growth for rivals such as AT&T and Verizon.” — Steve Vachon, Analyst

“The fruits of Verizon’s restructuring initiatives, which focus on eliminating nonessential costs while renewing emphasis on the strength of the company’s wireless business, were evident in Verizon’s improved subscriber growth and consolidated operating margin in 3Q19. Verizon’s emphasis on improving the value proposition of its unlimited data plans led to the company gaining its highest third-quarter wireless phone gross additions in five years, but churn is also rising due to stronger competition from T-Mobile and Xfinity Mobile.” — Steve Vachon