COVID-19 catches manufacturing and retail verticals flat-footed, limiting IT and service investment

While manufacturing and retail companies are capitalizing on some opportunities during the COVID-19 pandemic, they are also experiencing significant negative short-term impacts. Making matters worse, most companies in these verticals lack the agility and IT infrastructure necessary to adjust in the current environment. The result will be a severe slowdown in these sectors, which will delay or halt many IT projects and service engagements that could have long-term business value.

Service opportunities will take a hit due to the downturn in manufacturing and retail verticals

Early assessments predict the manufacturing and retail industries will be among the hardest hit by the economic fallout of COVID-19, for reasons related to supply chain disruption, government-mandated store closures, and inefficient operations for factories using a mostly remote workforce. TBR’s Management Consulting Benchmark includes industry revenue splits for the 13 covered companies, providing a view into which consultancies could be most exposed to clients’ economic struggles. Consulting, by its nature, loves chaos and uncertainty, but the clients themselves may struggle financially and delay or outright cancel plans to extend or transform their digital and IT environments. We cannot predict whether clients will need more or less from these consultancies, but we can understand their exposure. At the highest end, PwC and BearingPoint earned more than 27% of their management consulting revenues in 2019 from those two industries, with Europe-based BearingPoint the highest in the benchmark at 28%, in TBR estimates. At the lower end, Accenture (NYSE: ACN) was the only consultancy that saw revenues from those two industries at less than 10% of its 2019 total revenue (just under 9%), while EY came in at 15%. The remaining firms ranged from 22% to 26%, considerable exposure for two of only nine industries tracked in the benchmark. We can state with confidence that the consultancies that deployed automation internally, implemented asset-light strategies, and invested in remote delivery and robust remote employee structures will fare better than peers. From an organizational perspective, we will also likely see consultancies that have 20-plus distinct industry “specializations” consolidate into broader and more diverse verticals, spreading out the risk of any one practice suffering from another pandemic-like economic crash.

‘Every company is a technology company’ is new mantra for post-digital world

TBR perspective

“Every company is a technology company.” That combined description and imperative from Accenture Group Chief Executive—Technology and CTO Paul Daugherty made clear how the company sees its clients now and entering the post-digital future. All companies will need the technological savvy and innovative culture of digital natives while pivoting from pilots to execution. In simple terms, digital is everywhere, so every company must be able to execute digitally, including developing a digital core, optimizing operations and investing in new technology-driven offerings. For Accenture, maturation as a technology company has resulted in an increase in technology-centric headcount, paired with an emphasis on platforms and tools (see below analysis on myNav, myWizard and myConcerto). A new recently announced growth model has shifted former Accenture Technology leader for North America, Annette Rippert, to be the new Group Chief Executive leading the combined Strategy and Consulting services, further cementing Accenture’s role in moving its clients toward a future where “every company is a technology company.” Building on the technology mantra, Accenture can now bring leadership deeply rooted in emerging technologies applied at scale to its strategy, supply chain & operations and talent & organization consulting clients. Based on Rippert’s long-standing emphasis on Accenture’s relationships with technology partners, clients can expect ecosystems and alliances will factor substantially into the company’s strategic advice as the post-digital future nears. 

Following Daugherty’s presentation, Accenture CIO Penelope Prett emphasized the role cloud continues to play in Accenture’s own digital journey, even describing cloud as “mandatory to capitalize on innovation.” Prett noted that roughly 95% of Accenture’s applications reside in the cloud, with adoption of some legacy architectures still a challenge. Among the lessons Accenture has drawn from its own experience are the need to consider the pace of business change and the need to account and plan for interoperability and long-term simplifications. Echoing Daugherty, this imperative to move to cloud at scale and to innovate plays well into Accenture’s overall go-to-market strategy around technology enablement.

Overall, Accenture’s belief that “Every company is a technology company” raises questions about how the company will engage with its clients going forward. Accenture has excelled at developing talent with specializations and exceptional, often industry-specific skills. As the company shifts toward assembling teams with diverse talents and skills and takes those teams to scale, how prepared is Accenture’s middle management leadership? What resources have they dedicated to training the military equivalent of majors and lieutenant colonels? Prett spoke of teams assembling within hours, rather than weeks, which provides a tremendous boost to productivity, provided leadership can keep up.  

In addition, Accenture’s evolving approach to industries will come under pressure from two forces. Clients, according to Accenture and its peers, increasingly look beyond their own industries for best practices, recognizing that emerging technology solutions typically start with horizontal capabilities applied within an industry and business context. Internally, Accenture must continue to share broad, industry-agnostic best practices across the entire company, even as it develops a common language, separate from industry. Secondly, ecosystem partners such as Google (Nasdaq: GOOGL) and Amazon Web Services (Nasdaq: AMZN) are not organized by industry, which may make it easier for Accenture to align with those hyperscalers. Though more traditional partners, such as SAP (NYSE: SAP), pushing an industry-led approach, through initiatives such as Model Company, may challenge Accenture’s ability to manage competing ecosystem pressures.

The Accenture Technology Symposium brought together over 200 Accenture (NYSE: ACN) clients, along with industry leaders and practitioners. Similar to last year’s event, Accenture discussed and showcased disrupting technologies in areas including cloud, blockchain, AI, automation and security while using client case studies and testimonials to highlight Accenture’s innovation-led approach to solving business problems.  

Quick Quantum Quips: Integrations and abstractions quicken quantum readiness

Welcome to TBR’s monthly newsletter on the quantum computing market: Quick Quantum Quips (Q3). Market activity heats up as more mainstream outlets begin taking notice of quantum computing developments as economic advantage nears. As that advantage nears, the integrations into the existing legacy network become more and more important for readying markets to exploit quantum computing to its fullest.

For more details, reach out to Stephanie Long or Geoff Woollacott to set up a time to chat.

March 2020 Developments

TBR scoured recent market announcements and found there is greater activity in ecosystem components beyond scientific discoveries and ongoing advancements into the competing systems architectures under development. Circuit abstractions and the ability to write algorithms independent of any specific quantum system knowledge due to the abstraction layer can accelerate application discovery for applied use cases in parallel to the ongoing scientific discovery needed at the system level to make quantum economic advantage a reality. Additionally, TBR is anticipating a happy accident may someday result in much easier-to-operate quantum systems. Not all scientific discovery proves intended outcomes, but as we’ve learned, sometimes a broken antenna can result in an “aha” moment.  

  1. Quantum Computing and Splunk announced a technology alliance for quantum-ready applications. Quantum Computing works on developing applications and tools for early quantum computers, focusing on the abstraction layers to allow developers to work on the code without needing to focus on the quantum-specific hardware details. The Splunk and Quantum Computing collaboration will enable the build-out of quantum-ready algorithms executable now on classical computers but ready for quantum systems once economic advantage is achieved. The initial partnership efforts will focus on network security, dynamic logistics and scheduling.
  2. Google announced a similar initiative ahead of active quantum systems called TensorFlow Quantum (TFQ) that brings Google on par with existing services from Azure Quantum and IBM Q. TFQ will provide an open-source library for prototyping quantum machine learning models. Integral to this development are quantum computer circuit simulations that will essentially become the virtualization or abstraction layer between actual quantum systems and their respective circuitry and these abstraction circuit standards.
  3. Cambridge Quantum Computing (CQC) announced support for Honeywell’s trapped ion quantum processor. Honeywell has rolled out a series of announcements this month around its technology. CQC adding a new optional python package, pytket_honeywell, will boost both companies. Honeywell needs to court developers, while CQC continues to expand the underlying quantum systems architectures its quantum software development platform supports. Currently, CQC’s pytket supports superconducting devices from IBM and Rigetti. The continued extension of software tool kits across the competing quantum architectures suggests there will be ample opportunity for peaceful coexistence of the competing architectures optimized for specific algorithms.
  4. Honeywell has entered the quantum systems market with a splash, claiming it will release a trapped ion quantum computer with a quantum volume of 64 by the middle of 2020. With more than a decade of research behind the announcement, Honeywell refers to its latest breakthrough as quantum charge coupled device (QCCD) architecture. At the time of the announcement Honeywell also mentioned JPMorganChase & Co. as an early customer for the system in addition to Honeywell Ventures’ investments in Cambridge Quantum Computing and Zapata Computing, two better known software and algorithm startups in the space.
  5. University of New South Wales announced a scientific discovery entirely by accident that can enable scientists to control the nucleus of an atom using electric fields rather than magnetic fields. The discovery was described as having been a “happy accident” that was the result of having blown up an antenna by pushing too much power to it. While unlikely to push the advancement of quantum technology in the near term, it may some day be added to the legion of happy accident discoveries from naturally inquisitive people that have brought great good to society.

If you would like more detailed information around the quantum computing market, please inquire about TBR’s Quantum Computing Market Landscape, a semiannual deep dive into the quantum computing market. Our latest version published in December. The next iteration will focus on the quantum-related professional services being deployed to increase business awareness and technical skills that will be in short supply once quantum’s economic advantage becomes reality.

Lastly, on behalf of the entire TBR team, we hope you stay healthy and safe in these unique times.

COVID-19 pushes automation to the forefront of business strategies

Automation shifts from a discussion to an imperative across all industries

The decision to embrace automation typically requires an organization to engage in careful strategic planning and analysis over a period of time. On one hand, automation enables a level of efficiency, consistency and quality that manual deployment alone cannot achieve. On the other hand, skeptics have long questioned the point at which automation can go too far and how to find balance and decide which tasks should and should not be automated. That debate is now over, as the deployment of automated processes and technology is imperative to fill in the innumerable voids in a new reality where COVID-19 is not just part of our vocabulary but a new abnormal in which we all live. 

Past discussions of whether to automate were typically highly dependent upon factors like industry vertical, whereby sectors with a heavy manufacturing arm, for instance, were much more likely to embrace automation than others. Massive staffing shortages are now the primary driver behind the call for widespread automation, and the interest has manifested itself in multiple forms, such as the deployment of robots, drones and AI — technologies that are being leveraged by industry verticals across the board.

Staffing shortages have affected every grocery store and pharmacy, and many are relying on robots to transport goods from warehouses and stores to delivery vehicles. In agriculture, there has been an increase in the use of terrain-based robots to convert agricultural units into disinfectant sprayers. In manufacturing and delivery, Baidu (Nasdaq: BIDU) has partnered with Neolix to deliver critical items such as food and supplies to hospitals in Beijing with the use of the Apollo autonomous vehicle. Baidu has additionally applied AI algorithms to track the spread of infection and predict where the next hot zone may crop up so that local facilities are better prepared. While the number of riders of public transport has plummeted, railways, buses and subways still must operate even if on a skeleton schedule. The deployment of automated technology such as self-driving trains has increased dramatically, as has the use of robots to disinfect and clean cars.

The healthcare industry faces the most pressing challenges as it seeks to employ remote workforce programs and develop scalable solutions on an emergency-fueled time line. While some degree of on-site presence is unavoidable, the risk is being mitigated, in some cases, by the use of disinfection robots, which were deployed by Xenex Corp. to over 500 hospitals in China and are also now being shipped to Italy. Drone delivery of medication is anticipated to be the next wave of automation, and companies like Drone Delivery Canada (DDC) Corp. predict that they will become commonplace, and soon. DDC President and CEO Michael Zahra stated, “The company is in dialogue with governments at various ministries and levels emphasizing that the current situation is an ideal use case for our proven drone logistics solution to limit person-to-person contact; bring needed medical and pharmaceutical supplies to remote, rural, and suburban communities; transport blood samples to laboratories for testing; and deliver other relevant supplies.”

The application of automated technologies is clearly not confined to one area and will continue to ease the burden that COVID-19 has placed on all of our lives. When the pandemic eventually subsides, the silver lining to the shortages, panic and crippling effect on the economy will be that healthcare providers, companies and individuals will be more apt to embrace the use of automated technology in almost every aspect of their daily lives.

Click here to listen to this audio clip, COVID-19 Business Impacts | Remote Work, in its entirety.

Aligning assets with partners’ complementary solutions: 2019 strategy may be critical for Wipro in 2020

As we look at significant changes coming to the IT services landscape and focus on agile shifts toward a post-COVID-19 world, strategies launched in the last 12 months may prove to be critical for some vendors’ long-term success. Understanding Wipro’s February 2019 moves can point to how the company might perform throughout 2020. 

Wipro has significantly expanded its addressable market via alliances and has the opportunity to generate cross-selling momentum for strategic portfolio areas. Given Wipro’s lack of digital scale compared to peers, aligning its assets with partners’ complementary solutions will allow the company to build use cases that aid in direct-sales efforts, provided near-term initiatives focus on appealing to demand for Wipro’s emerging portfolio of value-add digital solutions and services, thereby expanding its wallet share in partner-led engagements.

Just over one year ago, Wipro expanded its alliance with Oracle by launching the QuMic platform, which accelerates integration of Oracle Cloud for clients, supporting migration of clients’ assets while also improving their ability to leverage digital tools and assets. To further strengthen its arsenal/portfolio/set of these digital-oriented solutions and platforms for clients, Wipro and Oracle deepened the partnership in November with the subsequent launch of the RAPIDS Digital Experience Platform (DXP), which caters to the evolving needs of telcos and communication service providers (CSPs). RAPIDS DXP combines Wipro’s existing DXP with Oracle’s Digital Experience for Communications solution to offer a multifaceted platform that provides CSPs with reference solutions to deploy use cases covering next-generation services like 5G, SD-WAN and IoT. Further, RAPIDS DXP offers an integrated digital experience omnichannel solution, allowing telcos to better engage with customers throughout their life cycles, from customer onboarding to customer billing. While the solution still leverages partner technologies, limiting Wipro’s share of the customer’s wallet, TBR believed this approach was a step in the right direction, with the potential for Wipro to increase the applicability of its to new entities — in this case, telcos — undergoing digital transformation initiatives. Further, an updated alliance with Oracle will also provide case studies for Wipro’s sales teams to aid in direct-sales efforts of Wipro emerging solutions, like DXP, which will be critical to the company’s ability to reduce its reliance on partner-led engagements and increase awareness of the company’s offerings among prospective customers seeking digital solutions and services.

One year on, TBR maintains its assessment that Wipro has taken the right strategic approach, even as we continue to look for definitive signs this strategy has begun paying off. In the post-COVID-19 environment, partnering will be even more critical and Wipro may have established an important foundation in February 2019 that will prove beneficial in the latter half of 2020. 

COVID-19: Impact on IT organizations

We asked 205 IT leaders who are decision makers for cloud purchasing about the current impact of COVID-19 on their companies and their expectations for the future. These responses were collected between March 17 and March 24. Initial findings show disruption to ongoing projects and increased importance of cloud capabilities in the future.

The impact of COVID-19 on the technology market is coming in waves. The first wave was the disruption caused by the shuttering of key hardware manufacturers in Wuhan province as China grappled with the initial outbreak of the virus in January. The impact was slightly delayed because of inventory levels within the supply chain, but in February and early March major hardware OEMs experienced shortages of key components for their data center infrastructure offerings. Just as those hardware supply chains are beginning to be replenished, the second wave of impact is occurring. As widespread business disruption occurs in Europe and the United States, it will affect customer demand for IT products and services. There is still much uncertainty about exactly how this disruption will play out, but it has caused vendors like Oracle and Microsoft to decrease or widen the range of their 2020 financial guidance. During the third wave of disruption, we expect long-term changes to spending patterns and business strategies.

TBR asked customers about the impact of the second (short-term spending patterns) and third (long-term spending patterns) waves of COVID-19 disruption.

For second-wave impacts, existing projects are slowing and new spending is frozen, but customers are spending to triage urgent COVID-19-related responses:

  • The majority of IT organizations are being impacted by COVID-19, with only 19% of respondents indicating they have not yet experienced changes to IT operations.
  • While 43% of respondents indicated existing projects are being delayed due to social distancing restrictions, companies are opening their wallets to maintain productivity as many employees shift to remote work. About 34% of organizations surveyed have spent on technology related to productivity as a result of the COVID-19 pandemic.
  • Cloud consumption is also up, with 17% of respondents indicating higher cloud usage due to data center component shortages and 10% indicating higher cloud usage due to labor impacts.

In the third wave, cloud delivery will play an even greater role after the COVID-19 outbreak has abated:

  • Disruption to normal business processes has highlighted the importance of having remote access to data, apps and collaboration tools.
  • While all organizations we surveyed are already using cloud technologies, 48% of respondents believe that the COVID-19 pandemic will lead to an increase in their cloud technology usage as part of long-term IT strategies. A lesser amount, 26%, are not expecting changes to long-term IT strategies at this time. The remaining respondents are unsure about the impacts to long-term strategies.

Today, only one thing is certain: uncertainty:

  • At this point, it is too soon to tell what the final impact on IT organizations will be in terms of technology spend and initiatives.
  • Companies are likely to take a wait-and-see approach to better understand impacts to revenue, profit and ultimately budgets before committing to new IT spend.
  • Cloud adoption, collaboration and employee mobility were already major industry trends prior to the COVID-19 pandemic; however, TBR believes the outbreak will accelerate the development of organizations’ business continuity strategies and remote workforce programs going forward.

The federal IT market braces for impact

Uncertainty underpins the short- and long-term outlook for the impact of the coronavirus pandemic on the federal IT space. Federal agencies and their IT contractors face disruptions across their supply chains, operations, procurement functions and fiscal management.

Near-term turbulence is inevitable

Defense majors Northrop Grumman and General Dynamics, on March 19 and March 23, respectively, published 8-K filings updated with assessments of the potential negative impact of the coronavirus on their businesses. Risk factors are far-reaching and extend beyond company fiscal health, including diminished employee productivity and contract performance, supply chain disruptions, increased cost of and diminished availability of investment capital, temporary suspension of operations at customer facilities or work sites, and reduced demand for company products and services stemming from possible economic downturns in the U.S. and abroad. These contractors and others issuing similarly cautionary remarks have further noted they cannot predict the full impact of COVID-19 on their business or the industry at this time.

TBR foresees additional near-term challenges in the form of purchasing delays and deferred starts (and thus revenue recognition) on recent awards as the entire procurement cycle shifts to the right, along with project execution on programs already underway. Travel bans or restrictions will further impact project delivery and impede business development efforts.

As the federal IT market moves into calendar 2Q and the fiscal reporting season for calendar 1Q20 begins in late April, COVID-19 will be a major factor driving revised outlooks for 2020 fiscal performance for contractors amending their guidance (and we expect many, if not most, will be compelled to do so). During its earnings release on March 19, Accenture revised its projections for fiscal 2020 global top-line revenue and growth from its previous forecast of 6% to 8% growth over fiscal 2019 to a new projection of 3% to 6% top-line growth over fiscal 2019 (both ranges in local currency).

Raytheon Technologies is another federal contractor that is particularly vulnerable to the impact of COVID-19. Raytheon’s legacy defense business will face the same challenges as its defense sector peers as the COVID-19 situation plays out, but as the merger with United Technologies (UT) includes the integration of UT’s Pratt & Whitney and Collins Aerospace operations, Raytheon will be highly exposed to the aerospace sector. The commercial aviation market has been particularly hard-hit by COVID-19-related travel bans and restrictions, and the negative effects will linger for years. This underscores the urgency for Raytheon to complete the merger quickly and fully assess the potential impact of the inevitable decline of the global aerospace sector.

Two Back, Three Forward: How will this pandemic change digital transformations? A few early signs

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

508,572, Accenture’s global headcount, as of FY2Q20. Investing in a local presence could pay off significantly for Accenture as COVID-19 sweeps across the globe and makes travel nearly impossible. As TBR Senior Analyst Boz Hristov pointed out in TBR’s initial response to Accenture’s earnings last week, 60% of Accenture’s workforce in India and the Philippines is already working remotely, a number expected to rise in coming weeks. For both local and global clients, the company’s massive scale and proven connectivity should lessen the strains on sustained operations through the pandemic.

12%, TBR’s estimate of Dell Technology Services’ contribution to overall company revenues. With Services far outpacing the growth rate of corporate-level Dell Technologies (5.5% year-to-year in 4Q19 in contrast to 0.8%), TBR expects Services to increasingly become both a lead-in for Dell Technology engagements and an area where the company invests, including through acquisitions and headcount growth. As TBR Senior Analyst Kevin Collupy noted last week, “Dell Technologies Services’ profitability remains above the overall company figure, highlighting the importance of repeatable and standardized services to the company’s profitable growth expansion, and their criticality in offsetting commoditizing core product areas.”

Three Forward

55.7%, IBM’s management consulting 2019 revenues, according to TBR estimates, in three industries likely to be hit hard by COVID-19 fallout. As detailed in our upcoming Management Consulting Benchmark Profile: IBM, the company earned nearly 60% of its 2019 revenues from the banking, consumer goods and manufacturing verticals. Defaults and bankruptcies, supply chain chaos, and depressed consumer spending in a global recession will negatively impact those clients. Spending on consulting may stay constant or even grow — confusion breeds consulting opportunities — but more likely these clients will not be contributing such a large percentage of management consulting revenues by the end of 2020.

6, habits of digital transformation leaders, according to EY’s Tech Horizon survey. TBR analysts previewed the survey findings with EY and noted the substantial shift by EY itself from a firm with technology capabilities to a firm deeply rooted in delivery technology solutions to clients. The six habits were not surprising (they echoed findings in our December 2019 Digital Transformation Insights Report: Voice of the Customer), but in an upcoming special report, we will be highlighting specific findings that resonate most with consulting clients and the consultancies themselves.

$3.67B, annual revenue generated by Egyptian ICT sector exports. According to the Egyptian Information Technology Industry Development Agency (ITIDA), the country’s IT sector has become a substantial part of the overall economy, contributing both jobs and export revenues, primarily from software, app development and maintenance, and technical support services. Why is this important? First, because TBR will be meeting with the ITIDA later this week to learn more. And second, because this global pandemic will force companies to rethink their supply chains for everything, including outsourced IT services, potentially creating opportunity for Egypt’s IT sector to continue growing. Much more to come on this.