Peraton’s purchase of Perspecta: The latest move in the quest for scale in federal IT

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Scale is king

Peraton’s purchase of Northrop Grumman’s (NYSE: NOC) IT services business and pending acquisition of Perspecta (NYSE: PRSP) are clearly aimed at obtaining the scale necessary to compete for large enterprise and digital transformation deals, which have become common in the public sector IT services market.

Peraton is hardly the first in this space to make such transformative purchases. SAIC (NYSE: SAIC) made two large acquisitions in two years with Engility and Unisys Federal in 2019 and 2020, respectively; General Dynamics IT (NYSE: GD) purchased CSRA in 2018; and Leidos (NYSE: LDOS) perhaps started the trend with its purchase of Lockheed Martin (NYSE: LMT) Information Systems & Global Solutions (IS&GS) in 2016. As federal agencies seek to modernize and transform their operations to take advantage of emerging technologies such as cloud, 5G, AI, machine learning, and AR and VR, large monolithic deals, such as the Next Generation Enterprise Networks Recompete (NGEN-R), Defense Enterprise Office Solution (DEOS), Global Solutions Management – Operations II (GSM-O II) and Joint Enterprise Defense Infrastructure (JEDI), among others, illustrate the importance of being able to deliver these technologies and surrounding services at scale.

Companies such as Leidos, General Dynamics Technologies (GDT) and Booz Allen Hamilton (NYSE: BAH) have come out as the clear winners on the vast majority of multibillion-dollar deals like the ones mentioned above, thanks largely to their ability to deliver digital transformation at scale and proven past performance. TBR believes this trend is only going to become more pervasive in 2021 as the federal government pursues continued IT modernization across defense, intelligence and civilian agencies. Alternatively, if the federal government begins to move toward smaller contracts in terms of total value and/or duration, Peraton’s newly acquired scale would no longer be an asset. However, this is likely only a long-term concern, as the federal government shows no signs of ramping down contract sizes or duration for the foreseeable future.  

Why Perspecta had to die

Perhaps nothing illustrates the importance of scale more than the death of Perspecta. When the company was formed from the merger of DXC Technology’s (NYSE: DXC) public sector business with Vencore and KeyPoint Government Solutions in 2018, the clear intention was to create a federally focused contractor of scale that could compete for the large transformative deals that have become commonplace. Most important among these was the NGEN-R contract, whose predecessor, the NGEN contract, was held by Perspecta and represented nearly 20% of the company’s total revenue.

Despite this, Perspecta was unable to win the $7.7 billion NGEN-R, which was awarded to Leidos and will begin to ramp up in 2H21, leaving Perspecta with a loss of 19% of its total revenue, which cannot be replaced quickly enough to avoid steep losses year-to-year.

Losing the NGEN-R bid put Perspecta in a very difficult place, beyond the obvious financial burden. The company’s leadership has fielded tough questions from Wall Street about where the company is headed without NGEN-R. Perspecta has been unable to win any comparable deals, such as DEOS or GSM-O II, on which it has bid in the last year or two. Additionally, the company does not have as strong of a portfolio in emerging technologies as many of its competitors, and it is highly unlikely Perspecta on its own could have returned to growth quickly enough to appease its stakeholders. In this context, it is clear that Perspecta needed to die. With its pending sale to Peraton, there is opportunity to reemerge as a more formidable competitor in the federal IT services market, free from the burdens associated with its past failures as part of Peraton.

On Jan. 27, Perspecta announced its purchase by Peraton, a Veritas Capital portfolio company, for an all-cash price of $7.1 billion. This acquisition comes on the heels of Peraton’s purchase of Northrop Grumman’s IT services business, which closed Feb. 1 (outlined in TBR’s special report End game for Northrop Grumman’s IT services business). The resulting company, which will retain the Peraton name, will be a $7.6 billion to $7.9 billion business on a pro forma basis with approximately 24,300 employees, in TBR’s estimates.

Partnership with Palantir further unlocks IBM’s AI value

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Since Arvind Krishna took the helm as CEO in April, IBM has engaged in a series of acquisitions and partnerships to support its transformative shift to fully embrace an open hybrid cloud strategy. The company is further solidifying the strategy with the announcement that IBM and Palantir are coming together in a partnership that combines AI, hybrid cloud, operational intelligence and data processing into an enterprise offering. The partnership will leverage Palantir Foundry, a data integration and analysis platform that enables users to easily manage and visualize complex data sets, to create a new solution called Palantir for IBM Cloud Pak for Data. The new offering, which will be available in March, will leverage AI capabilities to help enterprises further automate data analysis across a wide variety of industries and reduce inherent silos in the process.

Combining IBM Cloud Pak for Data with Palantir Foundry supports IBM’s vision of connecting hybrid cloud and AI

A core benefit that customers will derive from the collaboration between IBM (NYSE: IBM) and Palantir (NYSE: PLTR) is the easement of the pain points associated with adopting a hybrid cloud model, including integration across multiple data sources and the lack of visibility into the complexities of cloud-native development. By partnering with Palantir, IBM will be able to make its AI software more user-friendly, especially for those customers who are not technical by nature or trade. Palantir’s software requires minimal, if any, coding and enhances the accessibility of IBM’s cloud and AI business.

According to Rob Thomas, IBM’s senior vice president of software, cloud and data, the new offering will help to boost the percentage of IBM’s customers using AI from 20% to 80% and will be sold to “180 countries and thousands of customers,” which is “a pretty fundamental change for us.” Palantir for IBM Cloud Pak for Data will extend the capabilities of IBM Cloud Pak for Data and IBM Cloud Pak for Automation, and according to a recent IBM press release, the new solution is expected to “simplify how businesses build and deploy AI-infused applications with IBM Watson and help users access, analyze and take action on the vast amounts of data that is scattered across hybrid cloud environments, without the need for deep technical skills.”

By drawing on the no-code and low-code capabilities of Palantir’s software as well as the automated data governance capabilities embedded into the latest update of IBM Cloud Pak for Data, IBM is looking to drive AI adoption across its businesses, which, if successful, can serve as a ramp to access more hybrid cloud workloads. IBM perhaps summed it up best during its 2020 Think conference, with the comment: “AI is only as good as the ecosystem that supports it.” While many software companies are looking to democratize AI, Red Hat’s open hybrid cloud approach, underpinned by Linux and Kubernetes, positions IBM to bring AI to chapter 2 of the cloud.

For historical context, it is important to remember that the acquisition of Red Hat marked the beginning of IBM’s dramatic transformation into a company that places the values of flexibility, openness, automation and choice at the core of its strategic agenda. IBM Cloud Paks, which are modular AI-powered solutions that enable customers to efficiently and securely move workloads to the cloud, have been a central component of IBM’s evolving identity.

After more than a year of messaging to the market the critical role Red Hat OpenShift plays in IBM’s hybrid cloud strategy, Big Blue is now tasked with delivering on top of the foundational layer with the AI capabilities it has been tied to since the inception of Watson. By leveraging the openness and flexibility of OpenShift, IBM continues to emphasize its Cloud Pak portfolio, which serves as the middleware layer, allowing clients to run IBM software as close or as far away from the data as they desire. This architectural approach supports IBM’s cognitive applications, such as Watson AIOps and Watson Analytics, while new integrations, such as those with Palantir Foundry will support the data integration process for customers’ SaaS offerings.

The partnership will provide IBM and Palantir with symbiotic benefits in scale, customer reach and capability

The partnership with IBM is a landmark relationship for Palantir that provides access to a broad network of internal sales and research teams as well as IBM’s expansive global customer base. To start, Palantir will now have access to the reach and influence of IBM’s Cloud Paks sales force, which is a notable expansion from its current team of 30. The company already primarily sells to companies that have over $500 million in revenue, and many of them already have relationships with IBM. By partnering with IBM, Palantir will not only be able to deepen its reach into its existing customer base but also have access to a much broader customer base across multiple industries. The partnership additionally provides Palantir with access to the IBM Data Science and AI Elite Team, which helps organizations across industries address data science use cases as well as the challenges inherent in AI adoption.

Partners such as Palantir support IBM, including by helping the company scale Red Hat software and double down on industry cloud efforts

As a rebrand of its partner program, IBM unveiled the Public Cloud Ecosystem program nearly one year ago, onboarding key global systems integrators, such as inaugural partner Infosys, to push out IBM Cloud Paks solutions to customers on a global scale. As IBM increasingly looks up the technology stack, where enterprise value is ultimately generated, the company is emphasizing the IBM Cloud Pak for Data, evidenced by the November launch of version 3.5 of the solution, which offers support for new services.

In addition, IBM refreshed the IBM Cloud Pak for Automation while integrating robotic process automation technology from the acquisition of WDG Automation. Alongside the product update, IBM announced there are over 50 ISV partners that offer services integrated with IBM Cloud Pak for Data, which is also now available on the Red Hat Marketplace. IBM’s ability to leverage technology and services partners to draw awareness to its Red Hat portfolio has become critical and has helped accelerate the vendor’s efforts in industry cloud following the launch of the financial services-ready public cloud and the more recent telecommunications cloud. New Cloud Pak updates such as these highlight IBM’s commitment to OpenShift as well as its growing ecosystem of partners focused on AI-driven solutions.

Palantir’s software, which serves over 100 clients in 150 countries, is diversified across various industries, and the new partner solution will support IBM’s industry cloud strategy by targeting AI use cases. Palantir for IBM Cloud Pak for Data was created to mitigate the challenges faced by multiple industries, including retail, financial services, healthcare and telecommunications — in other words, “some of the most complex, fast-changing industries in the world,” according to Thomas. For instance, many financial services organizations have been involved in extensive M&A activity, which results in a fragmented and dispersed environment involving multiple pools of data.

Palantir for IBM Cloud Pak for Data will remediate associated challenges with rapid data integration, cleansing and organization. According to IBM’s press release, Guy Chiarello, chief administrative officer and head of technology at Fiserv (Nasdaq: FISV), an enterprise focused on supporting financial services institutions, reacted positively to the announcement, stating, “This partnership between two of the world’s technology leaders will help companies in the financial services industry provide business-ready data and scale AI with confidence.” 

An Atos, DXC merger no threat to Indian IT’s appeal

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“‘If Atos acquires DXC Technology, three years of failed attempts by DXC Technology to turn around eroding revenues and thinning profitability would be forgiving …”‘ — India Times

More from Elitsa Bakalova

 

Atos’ DXC Technology deal will create second-largest IT services vendor

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“Atos will be closer to the size of Accenture which has reported $45 billion revenue in 2020. Atos will be larger than Tata Consultancy Services (TCS) which will have $22 billion estimated revenue in 2020. Atos will also be larger than IBM Services after the Global Technology Services spin-off at the end of 2021. IBM’s Services revenue will be $23 billion after the spin-off, TBR senior analyst Elitsa Bakalova said.” — YouStartups Networks

More from Elitsa Bakalova

Women in STEM: EY’s Kris Lovejoy on the importance of mentorship

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The STEM field is growing, creating tremendous opportunity for well-trained applicants. While STEM has traditionally been a male-dominated field, cultivating interest at the undergraduate level can help draw in more women who may have the necessary skills but have never considered STEM as a career path. In TBR’s monthly series Women in STEM, we discuss how female leaders have successfully pursued careers in STEM and are encouraging more female representation by passing on the lessons they have learned to other women who are pursuing this path.

Meet Kris Lovejoy, global consulting cybersecurity leader at EY

Kris Lovejoy took a nontraditional path to her current position as a cybersecurity leader and advocate of quantum developments at EY. Prior to working at EY, Lovejoy worked in IBM’s cybersecurity business for seven years and was CEO of BluVector, an AI-powered security automation firm, prior to its acquisition by Comcast in 2019.

Lovejoy holds a Bachelor of Arts degree in English from Lafayette College in Easton, Penn., but opportunities that arose at the beginning of her career led her to shift her focus to a career in STEM.

Inspiration can be found where you may not expect it

Lovejoy emphasizes the importance of those we entrust with our children during their formative years. “The importance of educators can’t be underestimated,” Lovejoy says. She notes that one of the most influential people in her decision to enter the STEM field was her high school French language teacher, Donna Matles, who “gave me the courage to recognize my own value during some very dark days.”

Don’t let the loneliness of male-dominated fields intimidate you

As a woman with more than two decades of experience in the male-dominated cybersecurity field, Lovejoy says, “Finding the courage to continue where one feels very alone has not been easy, but I and my colleagues in cybersecurity are optimistic that we’re bringing diversity to the field.” It is an unfortunate reality that women with vocal opinions are often labeled as difficult. “Many women, in my experience, don’t feel comfortable speaking out,” says Lovejoy. “Instead, we talk about concerns within trusted circles.”

Often, one of the biggest roadblocks to personal progress is ourselves. In Lovejoy’s opinion, a key way to overcome this roadblock is to “learn how to empathize with others, including those who perpetuate stereotypes. It’s a matter of recognizing that the people you’re working with are human beings, and you can help them see the world through a different lens.” In short: Changing the landscape of STEM requires not being afraid to speak up and ask questions when something does not seem right.

Innovation benefits from diversity

Perhaps the most impactful piece of advice from Lovejoy: “Innovation benefits hugely from diversity.” STEM fields are some of the most innovative fields, yet remain male-dominated. Lovejoy states, “Based on various major tech companies’ diversity reports, female employees make up between 27% and 47% of the workforce, with the percentage dropping much lower when it comes to actual tech jobs, even though women make up more than half of the U.S.’ professional workforce.”

“We must work harder to raise the status of women technologists and promote female role models if we are to attract more women to the industry,” says Lovejoy. In 2018 EY launched EY Women in Technology (WiT) to promote a steady increase in female leaders in technology. “WiT is the articulation and demonstration of EY’s commitment to achieving a greater level of gender equality in a technology-enabled world,” says Lovejoy. Because the gender disparity in STEM fields is a global issue, EY’s global scale, coupled with the efforts of the WiT movement, positions the company well to make an impactful difference. EY is also a member of the Global Innovation Coalition for Change (GICC), a UN Women initiative that brings together private sector companies, academic institutions and nonprofit organizations to improve women’s access to and participation in STEM education.

STEM disparity goes beyond gender

From an economic standpoint, access to STEM opportunities decreases in line with a student’s socioeconomic status. STEM fields often require access to technical tools or technologies to adequately learn the basic skills. Lovejoy highlights the EY STEM Tribe Platform, which was created in collaboration with Tribal Planet to engage people globally on social impact priorities. This platform enables students worldwide to engage in STEM learning activities on their mobile device, in an entertaining and game-like manner, with modules on everything from climate change and space exploration to 3D printing and AI. “The global platform was previously piloted in India to 6,000 girls, and then EY launched this pilot in two U.S. cities, Seattle and Atlanta,” Lovejoy explains.

Look to and learn from the pockets of success

While there is still a long way to go in reducing access barriers to STEM resources and increasing the number of women in STEM fields, there have been successes we can celebrate and learn from. For example, Lovejoy states that EY’s cybersecurity team in Saudi Arabia is made up of 46% women. While still technically the minority, this is a massive and surprising win in a region where it is often believed that women are given very little opportunity to thrive.

As we look to these successes and try and replicate them on a global scale, Lovejoy leaves us with one final piece of advice, “Find people that you work with — male or female, doesn’t matter — people willing to speak on your behalf and coach you when you need it.”

EY Blockchain Asia: The revolution starts now

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EY’s blockchain world

EY’s Asia-Pacific Blockchain Summit started with the firm’s Global Blockchain leader, Paul Brody, making three clear points. First, EY is committed to China and to the region, seeing huge potential for blockchain growth. Second, EY is committed to public blockchain as the long-term solution for most business and governments. Third, Brody’s concept of blockchain as the bridge between enterprises — as the tool to tackle the previously uncrossable chasm between different enterprises’ data and business processes — remains a driving force behind how EY sees the future of blockchain, in Asia and the rest of the world.

TBR’s December 2020 special report EY 2021: Hybrid and omnipresent discussed these latter two points: “Public blockchain, in Brody’s words, ‘will do for networks of enterprises and business ecosystems what ERP did for the single company.’ Brody added that conducting B2B [business-to-business] transactions over a public blockchain increases transparency and compliance with commercial terms.” The February event carried that discussion further, and specifically into Asia. 

EY and public blockchain in China  

Brody outlined a few major developments for EY in China, with all his comments reinforced by the subsequent panel speakers and EY professionals who provided additional color, both for the China-specific elements and developments impacting the entire region. In short:

  • EY has formerly joined the Financial Blockchain Shenzhen Consortium (FISCO) and made the firm’s EY OpsChain solution available on the FISCO BCOS (Be Credible, Open & Secure) platform.
  • EY intends to deploy its entire Ethereum suite of solutions to users in China.
  • EY has fully localized its blockchain entrée — blockchain.ey.com — for the Chinese market.

In addition, Brody touched on the opportunity blockchain presents in Asia, highlighting China and the Chinese market’s emphasis on digital payments as a precursor to blockchain adoption as well as a robust startup scene. He also highlighted three sectors where EY has been “making exceptionally large” investments: financial services, supply chain and the public sector, which underscored one of Brody’s main points around the importance of public blockchain as the core, foundational building block. He noted that “money and stuff are tokens … contracts are a mix of legal agreements and business processes,” so all business could be conducted on the public blockchain, which is EY’s focus on enterprise solutions. 

On Feb. 2, EY hosted an Asia-Pacific Blockchain Summit, a virtual event run by the EY Blockchain practice based in Singapore that included EY professionals and clients, startup executives, and industry experts who are primarily, but not exclusively, based in Asia. The three-hour event included a keynote from EY Global Blockchain Leader Paul Brody, a blockchain solution demonstration, and panel discussions covering the technology, including the challenges and opportunities associated with blockchain and the broader emerging technology space. The following is TBR’s commentary on noteworthy announcements and participants’ assertions made during the event as well as EY’s overall blockchain strategy.

IBM unveils 5-year full-stack quantum road map

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IBM’s quantum road map includes dynamic circuits in 2022

IBM (NYSE: IBM) spent the second half of the 2010s laying the foundation for its quantum business. This foundation predominantly focused on hardware development and hardening until the available quantum systems at IBM supported more sophisticated software capabilities. In the 2020s, IBM is now able to pivot its strategy toward more sophisticated aspects of quantum computing, mainly software and control, but with a constant current of hardware innovation to fundamentally support more sophisticated software innovation.

Reminiscent of Intel’s tick-tock development cycle, where the “tick” represented a new chip design and the “tock” represented software optimizations, IBM now has sufficiently stable quantum componentry within the systems to begin working on the next evolutionary step, which is the creation of dynamic circuits within the next two years. As IBM has  decided to build off existing, classical programming languages, Python is at the core of IBM Quantum’s software strategy. This provides IBM with access to about 8 million existing classical computing Python coders, who need minimal quantum-specific training to pivot into this new world of computing.

A key pillar of IBM’s quantum road map and a game-changer in scalability and speed to insight is the development of dynamic circuits, which IBM has listed as a 2022 goal on its road map. Dynamic circuits will enable quantum computation to more closely mimic classical computation in that if/then statements will become possible on quantum computing. Without dynamic circuits, quantum algorithms cannot pivot midway through a process. Therefore, one must run an algorithm through completion, analyze that data and then run another circuit based on insights gained halfway through the process. Dynamic circuits enable an algorithm to measure a qubit’s state — a 0 or a 1 — at a predetermined point in the process and react accordingly, reducing the need to rerun algorithms and reducing the time to insight as well as the volume of qubits consumed.

SOURCE: IBM

Market overview: IBM’s five-year quantum road map comprises developments across the entire quantum infrastructure stack, including hardware, software, services, ecosystem and use-case-specific goals. General focus areas include an emphasis on application modules through 2022 and on application services from 2023 to 2025. Underpinning these broad goals is the systematic development of hardware, software and services capabilities, much of which hinges on a quantum ecosystem IBM has invested in and built, the foundation of which is Qiskit and the IBM Quantum Network. Developing cloud-based solutions is a theme of quantum developments, as COVID-19 has both highlighted and accelerated the need and desire by customers to consume compute capabilities via the cloud.

Government stimulus and enterprise digital transformation will accelerate 5G deployments

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Government stimulus will accelerate 5G rollouts

An increasing number of governments worldwide are becoming directly and/or indirectly involved in ensuring new technologies, such as 5G, are widely deployed in their respective countries. This spend is, in many cases, tied to economic recovery packages to counter the impact of the COVID-19 crisis and is being justified based on economic, national security and public health grounds.

TBR’s research indicates governments worldwide will invest in excess of $2 trillion in the ICT sector over the next five years, starting in earnest in 2021. Of that $2 trillion, several hundred billion dollars will flow directly into the 5G market, primarily for the purposes of providing internet access to underserved and unserved people around the world as well as ensuring respective economies are able to transform to be relevant and competitive in the digital era.

China’s CSPs will maintain an accelerated 5G rollout in 2021; domestic vendors will be primary beneficiaries

Following the temporary shutdown associated with China’s initial battle with COVID-19 in 1Q20, China’s CSPs accelerated rollout of 5G RAN, deploying 700,000 5G base stations in 2020, in addition to the 100,000 base stations that were rolled out in 2019. China’s investment in 5G will remain elevated in 2021, with between 600,000 and 1,000,000 base stations set for deployment as the government makes 5G a centerpiece technology of its newest infrastructure development initiative.

These investments will primarily benefit China Communications Services (CCS), Huawei and ZTE, though Ericsson and smaller China-based vendor CICT are also taking part in 5G RAN builds. China’s government heavily influences CSPs’ contract allocation and prioritizes business for domestic firms. Huawei was allocated the bulk of business in the 5G cycle, increasing its share from the LTE cycle.

TBR believes China’s ICT ecosystem has sufficient chipsets to meet the country’s 5G RAN deployment targets in 2021, which suggests the supply chain encumbrances instituted by the U.S. government are not having a significant impact on China’s original deployment timelines.

CSP 5G Capex Spend 2019-2024E

The 5G Telecom Market Landscape includes key findings, market size, customer adoption, operator positioning and strategies, geographic adoption, vendor positioning and strategies, and acquisition and alliance strategies and opportunities.