As Russia continues its invasion of Ukraine, analysts monitoring the war’s global repercussions have also noted Saudi Arabia intriguingly stating the kingdom would consider accepting yuan payments for oil sold to China.
Join Patrick M. Heffernan and members of multiple TBR teams Thursday, April 14, 2022, for a discussion on the repercussions of Russia’s invasion of Ukraine across consulting, IT services, cloud and digital transformation landscapes. TBR analysts will debate which vendors will most likely see a surge in business and opportunities and detail which vendors have been most exposed to negative fallout from sanctions, talent disruptions or overexposure to Russian markets. They will also look at whether a sustained conflict in Eastern Europe will stall, slow or accelerate digital transformation initiatives across the globe.
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Join Practice Manager Allan Krans and Senior Analyst Catie Merrill Thursday, April 21, 2022, for a review of TBR’s latest Cloud Infrastructure and Platforms Benchmark, including in-depth views of the IaaS and PaaS markets and how vendors are competing to address opportunities in emerging submarkets such as app development and integration. Our team will look at the cloud market through the lens of platform and infrastructure workloads and highlight leading vendor strategies that are driving the next wave of cloud adoption.
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In the near term, ceased or slowed operations in Russia and Belarus will not significantly affect the revenues or strategic directions of most IT services vendors and management consultancies. Firms will stay clear of Russia, understanding any lost revenues will be well worth forgoing to alleviate the risks of running afoul of sanctions or committing a public relations blunder by staying on in an increasingly isolated country.
Within Europe, management consultancies and IT services vendors with strong consulting capabilities (such as Accenture and Capgemini) will likely see near-term opportunities to provide crisis management, operational expertise and supply chain consulting. Some vendors may repurpose pandemic-created solutions to meet the logistical challenges brought on by the mounting refugee crisis. PwC, for example, could apply the design and technology used to ensure its employees’ safety and security while working remotely during the pandemic to assist Ukrainian refugee families trying to stay connected across multiple borders and amid changing circumstances.
Over the remainder of 2022, how the war in Ukraine will change IT services vendors’ and consultancies’ European operations depends on three factors: the length and resolution (or lack thereof) of the conflict; the macroeconomic fallout; and each vendor’s willingness to take risks with talent, acquisitions and clients.
The first two factors necessarily influence each other. A hot war sustained throughout 2022 would severely curtail broader European economic growth, likely keep inflation high, and shift spending by governments and commercial clients alike. Cybersecurity and supply chain opportunities may flourish, but overall reduced spending and economic activity would slow or reverse growth, at least in Europe. A cease-fire and stalemate, with a low-intensity insurgency in eastern Ukraine coupled with an uneasy rebuilding in western Ukraine, would likely produce additional opportunities around risk management, compliance and Industrial IoT. Again, the growth associated with those new opportunities would be tamped down by overall economic uncertainty.
In both scenarios, energy costs in Europe and globally will provide persistent headwinds. TBR anticipates that in the face of persistent macroeconomic pressures in Europe, vendors already active elsewhere will accelerate those investments. In APAC, IT services vendors and consultancies have increasingly invested in regional opportunities, notably the Australian public sector, automation-enabled BPO in Japan, and digital- and e-commerce-driven demand for customer experience applications in many countries in Southeast Asia. In TBR’s view, vendors with the most diversified footprints are the best positioned to absorb new risks — not a novel observation but newly important.
A quick resolution, followed by a return to some measure of normality, would likely alleviate macroeconomic pressures while bringing forward the third factor: appetite for risk. IT services vendors and consultancies would have the opportunity to hire (or rehire) Russian consulting and technology talent, move quickly again on acquisitions, and re-evaluate taking on Russian clients, particularly those pledging to help rebuild Russia’s credibility and good standing in the global market. Clients, both European governments and multinational companies, looking to escape inflationary pressures and find quick growth after a war-based shock to Europe’s economy may look to vendors, particularly the management consultancies, for assistance. And these vendors will be forced to decide whether or not to help high-value clients resume their business in Russia. As quickly as the world closed the Russian economic spigot, it could be reopened.
More than any other factor, leadership will determine how these vendors handle the war in Ukraine and its effects on their business, and TBR will be assessing leadership decisions, announcements and strategy shifts over the next few weeks for markers of the most likely near-term and 2022 outcomes.
In mid-February, TBR met with EY-Nottingham Spirk Innovation Hub leaders and learned further details about the goals and operations of the relatively new center. The EY team included Greg Sarafin, EY’s Global Alliance and Ecosystem leader; Jerry Gootee, EY’s Global Advanced Manufacturing Sector leader; and John Nottingham, cofounder and copresident of Nottingham Spirk. Three weeks later, Gil Forer, EY’s Digital and Business Disruption leader; Woody Driggs, EY’s Americas Consulting Digital Transformation wavespace leader; and Shubhra Kathuria, Metaverse, NFT and Foundry Leader at EY wavespace, walked TBR through how EY has been delivering wavespace sessions in the metaverse. On the surface, EY presented approaches with stark contrasts between “not much that can’t be made here” and “mapping a client’s journey to the metaverse.”
Since TBR’s visit to the grand opening of the EY-Nottingham Spirk Innovation Hub in October 2021, the pace of engagements has stayed consistent with EY’s expectations, steadily increasing as the firm’s leadership, technology partners and clients appreciate the potential for taking innovation straight through to commercialization at scale. According to Gootee and Nottingham, many industrial clients have come to the Innovation Hub looking for both a strategy reset and guidance on how to innovate differently. Nottingham said manufacturing clients, in particular, have been “firefighting” through the current market due to supply and demand imbalances and a generally turbulent environment. Even while focused on operational challenges, these clients continue to be interested in looking to the future and understanding emerging opportunities. Gootee reinforced that EY’s role remains convening a value chain that can drive innovation for clients.
Both the EY and Nottingham Spirk professionals remain committed to commercialization at speed and scale, as well as strategies and business model transformations, product innovation and immersion, and the future of technologies and markets. Gootee, in particular, re-emphasized many of the priorities and characteristics described in detail in October. TBR asked specifically about the role of EY-Nottingham Spirk’s technology partners, such as Microsoft (Nasdaq: MSFT) and SAP (NYSE: SAP), which led Gootee to note that ideally three-quarters of the clients coming to the Innovation Hub will be led through by EY, while the remaining quarter will be shepherded by technology partners. In TBR’s analysis, no other IT services vendor or consultancy has a similarly tightly intertwined engagement structure, which allows and even encourages technology vendors to lead clients through this kind of digital transformation and innovation space.
Over the last seven or eight years, TBR has visited more than 30 innovation and transformation centers, soaking in the immersive experiences and trying out the funky chairs. The COVID-19 pandemic forced IT services vendors and consultancies to shift to entirely virtual engagements, and TBR has been predicting an evolution toward hybrid sessions since the start of 2021. Over the last year, TBR has attended some virtual analyst sessions, which included avatars and kind-of-still-beta versions of the metaverse. Just as the EY-Nottingham Spirk Innovation Hub broke new ground in innovation and transformation centers, EY’s wavespace metaverse is breaking new ground in an entirely new space.
“Digital twin is a decarbonization enabler” and in the next five years “people will generate carbon credits out of digital twin.” Sandeep Bhan, Atos’ global senior expert on digital twin made those assertions at the end of a LinkedIn webinar today in response to TBR’s question about the more-than-marginal business impacts possible through deploying digital twins.
As IT services vendors, consultancies and their clients increasingly talk about sustainability, TBR has kept a skeptical eye on what emerging technologies or consulting trends bring true change to decarbonization and what’s just hype. Bhan and his colleague Murli Mohan Srinivas, Atos’ global leader for Industry 4.0 & digital twin, made a compelling case that digital twin, as part of a greater toolkit, will be part of many companies’ sustainability efforts. Incremental improvements in operational efficiency enabled by digital twin and taken to scale could bring substantial energy and cost savings, potentially converted into tangible decarbonization results. As Srinivas noted, “Every 0.1% increase in asset availability in wind turbine translated to a few hundred thousand units of power generated, which directly translated, in terms of months … into millions of dollars of real energy.”
From TBR’s perspective, digital twin has been an emerging technology more hyped than understood or deployed. The title of the Atos webinar, “Digital Twin Demystified,” reinforces how the intricacies and impacts of digital twin remain largely underappreciated across the broader technology space. This combination of digital twin mystification and increasing hype around sustainability fuels TBR’s uncertainty around the long-term potential of both.
Listening to experts drill down on specific use cases and tie specific technology implementations with real-world business outcomes helps alleviate some of those concerns while uncovering additional questions around applicability beyond asset-heavy industries, demands on change management and talent, and prioritization of digital twin in any sustainability or digital transformation engagement. TBR will continue probing Atos and other IT services vendors and consultancies on their digital twin offerings and capabilities and will consider Bhan’s assertion about digital twin enabling decarbonization in TBR’s inaugural Decarbonization Market Landscape, (scheduled to publish in June).
During the Atos webinar, Bhan and Srinivas made a few other key points about digital twin, including:
Over the quick 30-minute primer, the speakers made a compelling case for the company’s expertise, capabilities, and offerings around digital twin. TBR will continue following Atos’ efforts in the digital twin space and include our assessments and analysis in quarterly reports on the vendor, as well as in TBR’s Digital Transformation reports, when applicable.
In mid-February, TBR met with leaders from PwC’s core Products team for EMEA, including David Padwick, PwC EMEA Consulting chief operating officer; Ralf Jaspert, PwC Germany, Advisory Digital Products leader; and Nele Van Buggenhout, PwC UK Perform Plus Leader, to discuss TBR’s observations, based on multiple interviews with current and former PwC professionals as well as with PwC clients, that PwC Products has not been adopted as enthusiastically across Europe as it has been in the U.S. Not surprisingly, the PwC leaders told a more complete and nuanced story about Products in EMEA, the emerging role of software and managed services sales, and expectations for near-term growth, describing in detail to TBR how the firm expects the next few waves of PwC Products to play out.
Drawing contrasts between PwC US and PwC EMEA, Padwick noted that while PwC EMEA adheres to the firm’s global advisory strategy, at least two differences stand out. First, the PwC brand in the U.S., according to Padwick, is more technology-centric than the PwC brand in Europe, which influences how PwC EMEA consultants tailor their go-to-market messages in the region. Given the technology-centric nature of engagements in the region, combined with a higher volume of services, PwC EMEA’s sales structure has not been able to pivot to support business development through products and solutions. Second, PwC EMEA has focused on developing software assets to expedite the delivery of consulting solutions to clients and has not been designing them specifically to be sold, independent of traditional consulting engagements.
Padwick stressed that PwC EMEA contains “plenty of creativity, even without the scale” of the U.S. and that the various EMEA member firms and professionals have developed a “long list of [software assets] with applicability … and [PwC EMEA is] getting better at prioritizing.” While this initial characterization painted a picture of PwC EMEA trailing the U.S. to a significant degree, Padwick and his colleagues explained that the longer incubation periods and slower sales cycles do not preclude PwC EMEA from having a strong position with Products.
The PwC EMEA team walked TBR through a couple of specific offerings developed organically within the firm’s Europe practices. As far back as 2016, PwC had been working with financial institutions on stress-testing their risk and asset management systems, an effort Jaspert said had been codeveloped with clients, lending the resultant solution greater applicability and credibility in the market. This stress-testing solution as a product was a start and is now one of 47 consulting-centric products that PwC EMEA clients license directly from the firm.
Another solution, as described by Van Buggenhout, started with a 12-week coaching program encompassing a wide array of enterprise activities, such as sales and product development. Urged on by clients, PwC EMEA built a digital solution, Perform Plus, to capture daily performance information and ideas and employee well-being, enhancing clients’ internal teamwork. The COVID-19 pandemic accelerated PwC’s efforts behind the Perform Plus platform, which the firm has now deployed with 25 clients across EMEA, as well as the U.S. and Canada. Perform Plus is built on Google Cloud with a standard API that allows integration with other technology enabling it to handle a variety of platforms, including a recent large-scale deployment integrating a client’s daily Salesforce (NYSE: CRM) data.
For TBR, PwC EMEA’s decision to codevelop solutions with clients and let the consulting engagements drive the technology solutions (not the other way around) reflects the global firm’s lessons learned from the last 10 years as emerging technologies have permeated nearly every consulting engagement and clients have come to expect a technology-enabled solution to their business problems. In previous discussions with PwC professionals in Europe, TBR repeatedly heard comments indicating that clients do not perceive PwC to be a software company, but the European clients that have recently purchased PwC Products have become excellent use cases and reliable references for other European clients. The firm’s brand perception may be slow to change, but the quiet reality is that PwC is steadily increasing revenues tied to Products.
In mid-February, TBR met with senior leaders from PwC’s U.S. Cybersecurity, Risk & Regulatory practice, including Vikas Agarwal, the firm’s Financial Crimes Unit leader, and Arlene Laungayan, a director in the firm’s Cyber Risk & Regulatory practice. The PwC team brought TBR up to speed on developments across the firm’s range of offerings, focusing on the Risk Management Portfolio. PwC’s risk management strategy is driven by the firm’s Cyber, Risk & Regulatory leader Sean Joyce and his managing partner John Sabatini under consulting and firm leadership. The following reflects both the mid-February briefing and TBR’s ongoing analysis of PwC within the larger management consulting space.
After setting the stage with an update on organizational changes and a description of some recent client engagements, including timely advice provided to clients on the secondary and tertiary effects of economic sanctions imposed against Russia over the invasion of Ukraine, Agarwal commented that while PwC has collaborated closely with the largest technology vendors, the professional services firm does not aim to “be a tech company.” PwC instead aspires to be “the best knowledge company, well equipped to merge knowledge with technology.”
In the context of risk and regulations, PwC is capable of helping clients understand key issues and challenges, develop meaningful content, and deliver services through a solution. Not surprisingly, Agarwal led the discussion with PwC’s The New Equation, and his description of PwC’s value and how it is delivered dovetailed well with both The New Equation and TBR’s evolving view of PwC as a firm. Risk and compliance may be one of the oldest service lines offered by PwC and its Big Four peers, so successfully pulling technology through to the heart of risk offerings requires balancing speed, efficiency and evolving client expectations for the tried-and-true characteristics of risk and compliance (consider that one of The New Equation’s founding principles, according to PwC, is that “when our better selves and the greatest aspects of technology are brought together, there is no opportunity too great for us to achieve.”).
While internal change continues to drive PwC’s evolution, Agarwal and his colleagues did note the importance of changing client demands, particularly as the total number of chief compliance officers has increased in recent years, particularly within the Fortune 500. CEOs and CFOs, in Agarwal’s telling, have become “sick of chasing the issues” and have looked to chief compliance offices to “solve risks in silos, but [to] tell the story at the top [and to] understand and communicate” to the full enterprise the criticality of risk and compliance to the overall business.
Dealing with multiple people within an organization around risk issues could be a winning strategy in two ways. First, the more people and personas PwC interacts with, the more the firm’s value becomes clear to its clients. Conversely, consulting on risk only with a chief compliance officer and a limited risk team potentially places restrictions on PwC’s overall relationship with the client. Second, maturity, with respect to risk, will vary across an organization, providing an opening for PwC to serve clients with appropriate solutions for their needs. Of course, being able to serve multiple stakeholders within a client and at various maturity levels requires a robust set of risk and compliance offerings.
Less than two weeks into Russia’s invasion of Ukraine, TBR’s assessment of the effects on the ICT market remains necessarily constrained. The majority of the largest ICT vendors TBR covers do not have tremendous local market and/or client exposure to Russia or Ukraine, so the impact of the war on ICT companies, if the conflict remains limited to those two countries, will be marginal — not insignificant, but marginal — with some exceptions, such as Ericsson (Nasdaq: ERIC), Nokia (NYSE: NOK) and SAP (NYSE: SAP). Longer term, absent either a miraculously positive or an existentially negative development (peace blooms or mushroom clouds), TBR expects the pressures detailed below will force IT services, cloud and software, data center and infrastructure, and telecom vendors to adjust their strategies and their business models.
Digital transformations slow, opening new opportunities
Already stressed supply chains will experience additional sand in the gears, slowing down deliveries of essential hardware and delaying build-outs of data centers, enterprises’ IT infrastructures, and even the physical towers needed for telecommunications. While IT services vendors and consultancies have sold digital transformation (DT) as a method of addressing business problems through agile application of emerging technologies, enterprises and their technology suppliers need the actual physical components to make the “digital” part of digital transformation work. A slowdown in hardware availability will convert into a slowdown in enabled applications and soon everything around DT will become slower and more expensive.
In this DT winter, consultancies advising on supply chain issues and global systems integrators (GSIs) and their technology partners enabling hybrid cloud while bolstering on-premises enhancements will flourish. Chip manufacturing investors will receive government backing and may find technology vendors across the entire ecosystem willing to make long-term commitments to mitigate the risks they are facing now. In a reversal of fortune from the last few years in IT, third-party maintenance specialists — the very boring techies who are keeping the old systems running while the young geeks play with AI and the metaverse — may see a boom as a constrained chip supply and slowed digital transformations make keeping the current technology operational increasingly important.
Cybersecurity commands center stage (hopefully, for real this time)
In every survey TBR has conducted around IT services and digital transformation, buyers have prioritized cybersecurity as a top three — and frequently No. 1 — concern. And yet, enterprises underinvest and remain vulnerable, humans fail to take precautions and fall prey to ransomware attacks and worse, and cybersecurity remains more talked about than acted upon. Russia’s invasion of Ukraine will change that. While pre-invasion predictions anticipated an aggressive Russian cyber campaign, the first week of fighting featured exclusively kinetic military action, with limited, negligible cyber strikes. Analysis conducted in the middle of combat rarely survives intact once the smoke clears, but TBR believes a couple of scenarios could account for Russia’s relative cyber silence. The most encouraging one is that Ukraine’s defenses worked. While NATO, particularly the U.S., shared near-real-time intelligence in the lead-up to the invasion as a means of applying diplomatic pressure and denying Putin a war narrative suited to Russia’s needs, the West and Ukraine would be less likely to share cybersecurity victories in the same way military successes have been touted and with the same divulgence of critical intelligence. A less-encouraging scenario would be that Russia is saving its cyber strikes for an anticipated second stage of the war, when the shooting slows and economic and political wills are tested. Cyberattacks that take critical energy infrastructure offline in Western Europe would be damaging now but would have a greater effect on NATO countries’ populations during a prolonged economic slowdown tied to a standoff in Ukraine. In either scenario, consultancies, GSIs and technology vendors providing cybersecurity services and infrastructure will benefit from renewed concentration in the C-suite on cyber risks, provided those vendors have invested in country-specific, locally sourced, certified talent.
We expect cloud vendors to experience limited financial and operational disruption as a result of Russia’s invasion of Ukraine. Most cloud and software vendors generate a small percentage of their revenue from the two countries combined and maintain limited direct investment, partly due to Russian business regulations. The larger potential impact, in terms of the cloud market, is a slowdown in adoption and investment. The effects of the invasion on the global economy, COVID-19 recovery, and energy markets are all still uncertain.
During the last prolonged economic downturn in 2008, the cloud market was still very early in its development and still quite a small part of most customers’ IT environments. That challenging economic environment was a boon for cloud adoption, largely due to the cost reduction and capital expense avoidance benefits it could provide to customers. The general perception and value of cloud have evolved since then to be more focused on agility and innovation rather than just cost savings, a change we believe may again benefit the cloud market.
In times of uncertainty, cloud’s ability to help customers change business processes, gain greater insight into data, and ensure IT services are available regardless of geolocation have proved invaluable. While prolonged economic uncertainty could pressure IT budgets, we expect cloud to remain a priority given the value customers have realized especially during challenging times. The cloud space may not directly benefit from this invasion as it did with COVID-19, but we expect its growth will continue.
The most obvious and direct impact of the war is the disruption of revenue streams for cloud vendors with business and footprints in Ukraine and Russia. Especially in Ukraine, business operations have been all but halted as citizens flee, protect their families, and defend their nation from the Russian military.
While the magnitude is not overly significant to most cloud vendors due to the relatively small size of Ukraine in population, economy and overall cloud adoption, certain global vendors, specifically Microsoft (Nasdaq: MSFT), have a sizable presence and generate revenue streams within the country. Microsoft announced a partnership with the Ukrainian government for cloud services and security in 2014 and in 2020 was discussing plans to invest up to $500 million, including two new data centers, to service the Ukrainian market. That investment has not yet come to fruition, but Microsoft’s relationship with the Ukrainian government has intensified as it works to thwart cybersecurity threats arising from the war.
Russia is certainly a larger economy, but also should not lead to material pressures for cloud vendors during the war and its aftermath. As the aggressor, Russia does not face security threats like Ukraine does, but sanctions have wreaked havoc on Russia’s economy. With the ruble plummeting, Moscow Stock Exchange closed, and financial systems facing chaos, the IT and cloud spaces are impacted along with every other industry in Russia. The effects are mitigated by the fact that cloud adoption has been quite low in the country. Europe in general lagged the U.S. in the acceptance and implementation of cloud solutions, and Russia is even farther behind.
According to industry estimates, 5% or less of IT spend in Russia is cloud related, well below worldwide rates in the 25% range, which means that Russia accounts for less than 1% of the total cloud market opportunity. For the U.S.-based cloud leaders, the revenue effects are mitigated even further by the regulatory challenges of competing in the country. Similar to China, Russia’s laws prevent direct operations by foreign firms. Local providers like Yandex, SberCloud and Mail.ru control a majority of the market. Microsoft and Amazon Web Services (AWS) (Nasdaq: AMZN) have partnered with some of these local providers to participate in Russia, but we do not believe those relationships have grown into significant revenue streams. The war will mean cloud revenue will be delayed further for AWS, Microsoft and other leading global cloud providers, and some vendors might opt to shutter their operations in the country.
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