TBR Weekly Preview: April 22-26

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This week is one of the busiest weeks of the year for us, with plenty of earnings calls and scheduled benchmark publications.

Tuesday

  • TBR’s Cloud Professional Services Benchmark highlights the leading vendors — and strategies — in each cloud professional services market as well as how evolving customer demands are fundamentally disruptive to the market as a whole. Enterprises are increasingly looking for vendors to supplement labor-intensive activities with automation to speed time to delivery and keep costs at bay, forcing vendors to establish more repeatable software and delivery frameworks. While Accenture and IBM continue to lead the market, regional systems integrators and cloud vendors themselves continue to build their solution sets, aiming to close the gap the two leaders have on the market. — Senior Analyst Cassandra Mooshian
  • Under new CEO Hans Vestberg, Verizon is streamlining its operations and go-to-market strategies to highlight its strengths as a provider of premium network services. Verizon’s renewed focus on core services follows prior attempts to create growth engines via ventures such as Oath and go90, which ultimately fell short of expectations. TBR’s 1Q19 Verizon Initial Response will examine how Verizon’s restructuring strategies are impacting the company’s profitability and will include assessment on the operator’s early 5G initiatives. — Analyst Steve Vachon

Wednesday

  • Market challenges and shifting consumer preferences are impacting investments AT&T has been relying on to sustain long-term revenue growth. For instance, DIRECTV continues to shed satellite customers and struggles to retain DIRECTV NOW subscribers amid the multitude of other over-the-top services in the market. WarnerMedia and Xandr will serve as new growth engines but will face market challenges as WarnerMedia’s streaming service competes against rival offerings such as Netflix and Disney+ and Xandr is challenged by the duopoly of Facebook and Google in the digital advertising market. In TBR’s 1Q19 AT&T Initial Response, we will analyze how AT&T’s WarnerMedia and DIRECTV initiatives are impacting the company’s overall financial performance and assess the operator’s growth initiatives in areas including 5G, IoT and NFV/SDN. — Steve Vachon

Thursday

  • To drive cloud revenue growth in the next two years, Accenture’s Cloud practice will rely on its business-centric approach and ability to provide multicloud managed services. At the same time proper pricing scope and staff management are must-haves for Accenture to remain competitive. — Senior Analyst Boz Hristov
  • Industry specialization is becoming a central focus of Atos’ strategy as the company articulates and delivers digital value and customer excellence leveraging its technology expertise and partnerships in areas such as security, cloud, IoT and quantum computing. One of Atos’ strengths, which TBR will highlight in this quarter’s initial response, is its ability to strictly execute on the plans it sets for its financial performance over three-year horizons and present consistent messaging to the industry analyst community. — Senior Analyst Elitsa Bakalova
  • TBR expects Capgemini will sustain revenue growth through dynamic portfolio management while further improving profitability during 2019. Capgemini is positioning as a leading IT services vendor for clients facing mission-critical challenges. Capgemini helps clients reach their business goals by deepening industry specialization, approaching clients’ C-Suites and selling solutions across the portfolio. — Elitsa Bakalova
  • In TBR’s semiannual Global Delivery Benchmark, we report that to sustain revenue growth, vendors have been transitioning from human capital-focused to technology-enabled organizations. However, vendors increasingly struggle to balance navigating the automation-enabled services market with meeting stakeholders’ expectations, forced to use labor arbitrage again. — Boz Hristov

Friday

  • Digging into Atos’ Cloud practice, TBR notes that Atos seems to have solidified its cloud strategy and doubled down on its cloud go-to-market efforts over the past year, particularly benefiting from its partnership with Google Cloud and the Syntel acquisition in North America as well as opportunities to capitalize on bringing its cloud solutions and capabilities to Syntel’s customer base in the region, which is underpenetrated by Atos. The challenge, however, will be for Atos to establish, build and maintain brand awareness in North America, particularly as the region is arguably the most saturated cloud market globally.
  • We reported in 4Q18 that Fujitsu Services continued to rely on its Japan client base as a primary driver of revenue expansion. TBR expects the same will be true in 1Q19 as Fujitsu reorients its talent in Europe, impacting its sales strategy and access to clients outside of primary focus areas in onshore Europe. While the shift will improve Fujitsu’s marketing and sales efforts in onshore EMEA, Fujitsu Services revenue could face challenges from the losses in offshore areas.

This week TBR will also publish 1Q19 initial responses on public sector-focused and healthcare IT services-centric vendors. Our senior analyst in these areas summed up developments in both as follows:

  • Recent and ongoing actions by benchmarked public sector vendors (e.g., Northrop Grumman, General Dynamics) illustrate the priority equivalence of portfolio reshaping, enhancing operational efficiencies, and optimizing supply and service delivery chains to maintain growth and competitiveness in an evolving government IT investment environment. Some providers are allowing low-value contracts on their books to expire without replacement to reposition their business mix upmarket and away from increasingly commoditized technology areas. Despite the turmoil generated by the 35-day partial government shutdown, federal IT vendors saw their primary customer beginning fiscal year 2019 with a budget for the Department of Defense (DOD) in place and, for the first time in a decade, without a continuing resolution. The enhanced stability and predictability of the DOD spending environment is buoying the outlook for defense-focused contractors across the board and generating confidence about 2019.
  • Healthcare IT services (HITS) vendors are finding increasing difficulty scaling revenues from existing provider clients simply on the coattails of prior health IT investments. Not only have health systems adopted a more judicious approach to their IT budgeting, but the burden is also increasing on health IT vendors to deliver maximum ROI with every engagement. Pockets of growth exist and new ones are emerging, even as the overall trend in health IT spend moderates. Average contract sizes are slowly expanding for several health IT vendors, particularly the electronic health record (EHR)-centric companies that are seeing more frequent services expansions with existing clients. The diversification of health IT contracts is also forcing vendors to streamline go-to-market approaches for selling wide-ranging solution categories and simplify the process for existing clients to work with them. The maturity of the U.S. EHR market (industry observers estimate 95% of hospitals and 87% of physician practices now have some kind of EHR system in place) is also pressuring HITS vendors to increase R&D to develop new solutions geared toward the impending industry adoption of value-based care and fee-for-value models of care remuneration and delivery.

Operators are partnering more deeply with webscales to support multicloud and hybrid environments

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Combined Cloud as a Service revenue for telecom operators in Technology Business Research, Inc.’s (TBR) 4Q18 Carrier Cloud Benchmark rose 13.2% year-to-year in 4Q18, primarily due to investments in new data centers and portfolio expansion in growth segments such as SaaS and hybrid cloud. All benchmarked companies sustained year-to-year Cloud as a Service revenue growth as significant opportunity remains for carriers to target businesses seeking greater cost savings, scalability and efficiency by migrating traditional infrastructure and applications to the cloud.

Combined IaaS revenue among benchmarked companies rose 11.2% year-to-year, driven by portfolio expansion and data center investments to reach customers in new markets. IaaS revenue growth will decelerate over the next several years, however, as operators increasingly emphasize supporting in-demand IaaS solutions from third-party providers such as Amazon Web Services (AWS) (Nasdaq: AMZN) and IBM (NYSE: IBM) over first-party IaaS platforms.

Other Cloud (which includes SaaS, PaaS and BPaaS) revenue rose 16.8% year-to-year, driven by the adoption of services including unified communications, CRM and office productivity solutions. Operators are capitalizing on the demand for SaaS and PaaS applications by cross-selling the solutions with IaaS platforms and other network services.

The bulk of revenue is being generated in APAC and EMEA as local operators benefit from data sovereignty laws that require cloud data be stored in local data centers, which is slowing the momentum of U.S.-based webscale providers. The Americas accounted for only 15% of Cloud as a Service revenue in 4Q18, as AT&T and Verizon are no longer competing in the IaaS market and Asia- and Europe-based operators are primarily targeting foreign-based multinational customers with operations in the Americas.

TBR’s Telecom Practice provides semiannual analysis of Cloud as a Service revenue in key segment splits and regions for the top global carrier cloud operators in its Carrier Cloud Benchmark. Operators covered include Bharti Airtel, British Telecom, CenturyLink (NYSE: CTL), China Telecom, Deutsche Telekom, Korea Telecom, NTT, Orange, Singtel, Telefonica (NYSE: TEF) and Vodafone (Nasdaq: VOD).

5G-readiness spend and webscale investment drove strong growth in deployment and professional services

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5G spend was pulled forward in key markets, supporting deployment and professional services markets

According to Technology Business Research, Inc.’s (TBR) 4Q18 Telecom Infrastructure Services Benchmark, operators in lead markets (U.S., China, Japan and South Korea) as well as a growing list of key operators in other developed markets have accelerated their 5G deployment timetables over the past year, primarily because 5G is a significantly more cost-effective solution to handle rising data traffic in their traditional connectivity businesses but also to remain competitive in their respective markets.

Vendor telecom infrastructure services (TIS) revenue benefited in 2H18 as operators pulled forward their 5G-related investment timelines, with increased spend on deployment and professional services to support 5G-readiness initiatives. The deployment services market is rebounding as operators densify their networks with small cells, bring new macro sites online and deploy fiber for backhaul in anticipation of 5G, particularly in the U.S. 5G is also a growth driver in the professional services market as operators leverage consulting services to develop implementation and business plans and vendors perform network infrastructure integration for the mass deployments of deep fiber, small cells and antennas that 5G requires. These trends supported revenue growth for Nokia, Huawei and Samsung and enabled Ericsson to mitigate the effects of restructuring in its Managed Services and Digital Services businesses.

Exposure to software-related services and webscales drives growth for select vendors, including Accenture and Ciena

Accenture and Ciena, among others, have strong traction in telecom operator and webscale customer segments. Among webscales, Accenture is providing outsourcing to manage back offices and integrating software. Accenture is also providing business, security and technical consulting to webscales.

Ciena capitalizes on growing demand for next-generation optical from communications service providers (CSPs) and webscales through its focus on optical R&D, which helps the company take share from more diversified vendors. Ciena also gains incremental software-related TIS revenue from its Blue Planet MANO (management and orchestration) and OSS offerings.

TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers.

Atos in the spotlight with digitally enabled vertical use cases

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SyntBots allow Atos to differentiate at points of disruption as the company gradually expands revenue share from digital services

A year ago, Atos aimed for Digital Transformation Factory (DTF) revenues to contribute 30% of the company’s total sales in 2018 and 40% in 2019. Atos hit that goal in 2018, and TBR expects Atos will reach its target for 2019 as well. TBR believes the transparency and visibility around Atos’ DTF portfolio make it a more believable use case compared to the offerings of industry peers, many of which fold digital services under a rather broad umbrella that encompasses legacy capabilities. Atos’ realistic outlook around DTF enables the company to provide guidance for digital services to grow at a CAGR of 2% to 3% through 2021, a goal that TBR believes the company will hit, especially as the recently acquired assets from Syntel, such as SyntBots, enhance Atos Codex (one of DTF’s four pillars) capabilities around AI and automation.

With SyntBots in place, Atos has certainly broadened its addressable market to better compete for digital services at scale across both IT and OT. Integrating traditional tools along with AI and machine learning, SyntBots allow Atos to reduce the complexity of clients’ IT architectures, providing the typical benefits of automation including cost reduction. TBR believes the true benefit, however, will stem from Atos’ ability to convince clients to reinvest cost savings in other areas, with Atos remaining the prime IT services vendor. According to TBR’s 4Q18 Digital Transformation Customer Research, extension remains the most natural jumping-off point to DT initiatives, as enterprises can experiment with disruptive technologies within familiar business operations, see their value in generating new business insights, and then use those insights to reimagine processes.

SyntBots’ Automated Operations and Product Engineering capabilities create additional entry points, which are needed to take advantage of with the “extension” phase of DT. Atos can engage with multiple CxOs at a single client to become aware of DT initiatives happening outside the CxOs’ current engagements and to stay top of mind when those initiatives move to the front burner — if not as the primary provider due to lack of a certain specialized capability, then as the conduit to a partner that can address the next initiative. While points of arrival to new technologies, such as AI and cloud, are rather common, we believe points of departure and points of disruption are areas where Atos has an opportunity to differentiate. Using legacy systems to build a repository of knowledge, rather than to just manage clients’ technical debt with the assistance of AI, is one way for Atos to compete at speed for DT-related opportunities.

While rivals such as Accenture (NYSE: ACN) maintain similar platforms, such as myWizard, Atos’ position as a “silent assassin within the North America market,” as Atos North America CEO Simon Walsh termed it, could certainly catch rivals by surprise and enable Atos to overdeliver in its digital services performance.

For the fourth consecutive year, Atos held its annual Global Analyst Conference in Boston, where the company continued to emphasize expansion in North America and the diversification of its global revenue base, as well as its desire to be closer to the U.S.-based IT industry analyst community. The company covered core areas of its three-year plan — codenamed ADVANCE 2021, which stands for “Atos Digital Value Advancing Customer Excellence” — and underscored its strategy to enable customers’ digital businesses by providing secure, data-driven ecosystems of multiple infrastructures, industry-specific services and technologies, and smart data platforms and services.

Sprint Disparages Itself to Boost Prospects for T-Mobile Merger

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“Quite frankly, this was a breath of fresh air,” Chris Antlitz, telecom principal analyst at Technology Business Research, told SDxCentral in a phone interview. “They are being marginalized, they can’t stay competitive, the network is not comparable, the competition has been out-competing them for years, and something has to give here.”

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IBM marries on-premises, private and public-cloud data

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Offering a multi-cloud, portable hybrid integration solution is important for IBM in a few ways, said Cassandra Mooshian, a senior analyst with Technology Business Research. It greatly reduces the perception of vendor or platform lock-in, which in the world of hybrid IT is attractive, Mooshian said.

“It underscores that IBM is willing to play in a multivendor world (rather than promoting IBM IaaS as the technology underpinning ICP and solutions atop it), it can help bring IBM to the table more often in enterprise and midmarket organisations now that it is ‘playing nice’ more often with peers, and it addresses a fundamental pain point that IT departments are facing, linking on-prem apps and data to cloud apps and data such that processes can become more efficient and customers can get the most business value,” Mooshian said.

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Infosys must learn from missteps over the past 5 years to become a partner of choice for managed services

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From time will tell to now is the time

In late 2013 TBR published The next 5 years: A successful strategy for Infosys that examined what it would take for Infosys to catch up with multinational corporation rivals such as Accenture and IBM. We believed Infosys needed to build up nearshore Americas capacity and capabilities, acquire consulting capacity in Europe, and invest in IP — and we were right. More than five years later, Infosys is aggressively executing in all of these areas. But success did not come easy, as the company witnessed a spate of executive departures, including its CEO. Additionally, revenue growth fluctuated: 5.8% in FY13, 11.5% in FY14, 5.6% in FY15, 9.1% in FY16, 7.4% in FY17, 7.2% in FY18 and 7.9% in FY19.  While Infosys is showing appetite to transform its sales strategy through aggressive hiring and training of sales and support staff, the company’s delivery framework remains fragile.

Investments in onshore and nearshore personnel in the U.S. and Europe, including the opening of Innovation Hubs (five in the U.S. and two in Europe) to support Agile-based projects, are positive steps forward. However, it appears these investment decisions were forced on the company by market demand and peer pressure. Recent purchases, including 75% of Netherlands-based ABN AMRO subsidiary Stater, Nordic-based Salesforce consultancy Fluido, and U.K-headquartered digital agency Brilliant Basics, suggest Infosys is well positioned to grow its revenue share from Europe-based operations from its current 24% to 30% in the next two years. These investments have taken a toll on company margins, which declined from 25.8% in FY13 to 22.8% in FY19.

Departing from a margin-first culture is not easy, especially as founder N.R. Narayana Murthy remains involved in board decisions, although behind the scenes. Infosys is trying to offset some of its resources investments by expanding proprietary and co-developed industry-centric IP, but monetization of such offerings is a challenge. Former CEO Vishal Sikka tried to rotate the entire 200,000-plus services workforce to act as a software-like company with the associated KPIs and culture changes, but he failed.

March marked the end of Infosys’ first year in its three-year go-to-market strategy, during which it vigorously shifted the composition of its sales to digitally enabled awards, which contributed 31.2% of total sales in FY19. Navigating the dynamically evolving IT services market will not be an easy task as the company balances execution with operational efficiency to meet stakeholders’ expectations. While the company had the last five years to stabilize its performance and realign portfolio and skills to market demand, the accelerated cycle enabled by adoption of digital transformation initiatives has invited many new participants into the IT services space, forcing Infosys to look for blind spots.

Infosys is far from reaching the scale of Accenture and IBM. However, the company still has a chance to secure a top 3 ranking among its India-centric peers either by doubling down on what it does best — participating on the services supply side — or becoming an exclusive partner for managed services to one of the many consultancies aggressively moving into the IT services space.

TBR published initial findings on Infosys’ 1Q19 quarterly earnings in its recent Infosys Initial Response. TBR will dive deeper into Infosys’ resource management strategy in the April 2019 edition of TBR’s Global Delivery Benchmark. 

Thoughts from the blockchain intellectual junk drawer

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“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10. Don’t let yourself be lulled into inaction.” — Bill Gates

I think about this statement from one of our industry titans often in the course of my work, and I am starting to think it might need updating. This struck me hard listening to EY blockchain lead Paul Brody give a quick flyover of EY’s blockchain activities during the EY Global Analyst Summit held in Boston April 10-11. The event was very much a teaser for the upcoming EY Global Blockchain Summit.

General ledger history and blockchain as record keeping 2.0

Blockchain is a distributed ledger. It is a multienterprise business ledger and an evolution of the general ledger that has underpinned independent business record keeping for centuries. I consider the rate and pace of change and Gates’ quote above in that context when comparing general ledger adoption to blockchain adoption. Here are my log length — or rough cut — guidelines for calibrating the time it took for ubiquitous adoption of general ledger accounting, all sourced one evening for my idle curiosity on Wikipedia and Investopedia.

Luca Pacioli gets credit for creating the concept of double-entry bookkeeping in 1494 in Italy. As one would expect on Wikipedia, there’s debate about the timing, with some saying it was earlier. Log length the date to 1500.

The bigger challenge for me was searching for when general ledger accounting saw ubiquitous, global adoption. There is much written about public policy activities in the early 1900s in Brazil, which was not an economic powerhouse at that time, so one I would consider to be a laggard. In 1914 Brazil’s legislature sought to move its government to double-entry bookkeeping. However, that initial move did not really become codified until 1924. Log length that date to 1900.

In my opinion, based on this casual research, it took roughly 400 years for the general ledger to reach global adoption as a business and regulatory best practice. Throughout those 400 years, we had business cycles. We had disruptions. We had public policy leaders in deliberative bodies reacting to disruptions.

Are we overestimating or underestimating blockchain?

Blockchain has been around a little more than a decade. IBM has made big splashes with food trust, shipping and finance networks and now talks about the network of networks. In 2018 I attended EY’s global blockchain event and listened to what EY was doing with Microsoft around what is now called the Xbox network. I returned from this and other emerging technology events around quantum and been told to “lay off the caffeine,” that these technologies are years away. I regularly temper my timetable, thinking I am overestimating the two-year horizons and not heeding Gates’ prescient advice from the ‘90s.

And then I stand in the back of the EY main event with about 15% of the other attendees and get blown away by Brody as he speaks in a cadence reminiscent of the iconic Federal Express commercial to run though the progress EY and its customers have made in a year. I wonder in the moment if I am underestimating how soon blockchain will be delivering real business value to major enterprises and the small business partners with the technology vision and managerial agility to adjust their business models to these new record-keeping efficiencies.

The only thing I am certain about is uncertainty in an industry I’ve thought intensely about for over 35 years. The digital age is here in its embryonic form. It is more than a business rebirth; it is a societal rebirth in that digital changes business, government and daily human activities. Birth can be a wonderful thing, but labor can be a very painful process. Change management, as we hear time and time again at analyst events can, likewise, be a very painful process.

It took 400 years, multiple business boom and bust cycles, and countless public policy iterations for economic regulatory activity to stabilize, for the most part, after the great depression of 1929. Business models can now change far more rapidly than our deliberative bodies adapt their regulatory oversight practices. I used to think blockchain would spread at 10 times the rate or be ubiquitously adopted in 40 years. But I’m beginning to think that is a gross overestimation given how badly I underestimated what I thought was possible in a year. It makes me wonder if the signature Gates quote is ripe for refinement.

I look forward to learning more from Brody and the rest of the EY Blockchain team on April 16 in New York.

5G will push CSPs to accelerate and broaden their NFV/SDN-related initiatives

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According to TBR’s 1Q19 NFV/SDN Telecom Market Landscape, leading operators will accelerate and broaden their network transformations en route to deploying 5G and becoming digital service providers (DSPs). Softwarization, virtualization and cloudification are foundational aspects of a DSP’s network.

5G is greatly enhanced when using virtualization, especially when enabling and maximizing the benefits of network slicing and achieving better radio access network (RAN) economics. Though most operators intend to initially deploy the non-stand-alone (NSA) standard of 5G, which tethers 5G radio with evolved packet core (EPC), an eventual upgrade to the stand-alone (SA) standard, which tethers 5G radio to a 5G core, will become a reality in the early 2020s.

5G core is inherently virtualized, and communication service providers (CSPs) will be keen to prepare their networks to maximize the benefits of utilizing a fully virtualized network architecture, which includes, but is not limited to, increasing agility, flexibility, visibility and cost efficiency.

In 2019 Rakuten will become the first fully virtualized DSP in the world. Should the company’s approach to network architecture work, it will legitimize and embolden other CSPs to double down on their network transformations and hasten their migration to white-box hardware and cloud-native architectures.

CSPs are under pressure to invest in NFV/SDN to reduce total capex and opex spend as well as introduce new services and stay competitive in the data-driven digital economy, which is increasingly dominated by webscale and over-the-top players. This pressure will prompt more CSPs to spend on NFV/SDN during the forecast period. TBR expects 27.5% of total CSP capex and external opex spend will be allocated to NFV/SDN by the end of 2022.

Commercial IoT: Maturation solves some problems but also creates challenges

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The evolving IoT partner ecosystem

Because IoT solutions integrate the physical and informational aspects of business, almost all IoT solutions include diverse components from multiple vendors. TBR uses the term “component” to include all contributions: hardware, software, and professional and cloud services. When IoT started receiving a lot of attention more than three years ago, vendors attempted to gain first-mover advantage in the IoT market by vying for customer attention with claims of providing end-to-end IoT solutions, even though almost all of those solutions incorporated components from several vendors. Many vendors claimed all of IoT as their turf, leading to market confusion, channel conflict, and vendors’ failure to communicate their differentiating advantages.

The past year has seen many vendors dial back their claims of IoT dominance, while an increasing number of component vendors, including OT vendors, have more clearly communicated their specialized contributions to effective IoT solutions. As vendors have increasingly focused on their strengths, reducing the overlap of claimed expertise, it has become easier for them to partner to create complete solutions. At the same time, as vendors have gained experience and devoted resources to researching and cultivating their individual partner ecosystems, they have become more knowledgeable.

In delivering multiple-vendor solutions, component vendors are challenged to be recognized and compensated for their contributions. This is leading to an increase in “ingredient marketing,” where component vendors communicate to customers the value that their components contribute to solutions. Systems integrators, usually the vendors with the greatest exposure to customers, are facing a conflict between their claims of differentiating IoT intellectual property and the increasing visibility of components. Increasingly, solutions are delivered as bundles, sold by value-added resellers, ISVs and independent hardware vendors (IHVs), posing the same challenge to component vendors.

In 2Q19 TBR’s Commercial IoT Practice will be expanding its research into how the maturation of the IoT market is playing out for customers and vendors and how vendors can refine their go-to-market (GTM) strategies and tactics in light of the evolving market. The diversity of IoT solutions, the involvement of operations technology (OT) in both the purchase and delivery of solutions, and the enormous IoT ecosystems all pose challenges to predominately IT-oriented vendors.