EY Managed Services protect clients from the bleeding edge of regulatory change

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EY views managed services as a ‘no regrets business’

Discussion of EY managed services strategy in context of EY’s overall operations kicked off the EY Managed Services Analyst Summit. EY Global Vice Chair – Markets Jay Nibbe touched on the rumors around the operating models with the cryptic statement that regardless of how EY looks from a financial reporting system, managed services will continue to be a strategic aspect of the EY business or businesses.

 

In Nibbe’s view, managed services are strategic to the pivot EY and its peers are making in the market. Nibbe described this shift as going from an advisory and compliance model to a report-advise-operate model. Data-driven insights are provided to clients, EY advises and assists with transformation and change management, and then EY operates the critical services through its ongoing managed services capabilities.

 

A $750 million investment underpins EY’s commitment to growing out its managed services portfolio, with more money to follow. Nibbe described managed services as a “no regrets business,” as in no regrets to continue investing in the space.

 

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‘Managed services’ is an improper label for its portfolio, according to EY

Global Vice Chair – Managed Services Paul Clark re-enforced Nibbe’s commitment, saying EY managed services was currently 18% of its total revenue, with a $360 billion total available market estimate. Clark also called managed services “a broad church” and stated EY is not after traditional ITO or BPO engagements.

 

Therein lies EY’s branding challenge. Many view managed services as a new label for the labor arbitrage outsourcing services that rose to popularity at the turn of the century. These BPO services were colloquially described as “handling the mess for less” and do not accurately depict, EY believes, the value proposition of the new suite of services infused with AI and resting on top of a standard data platform such as EY Fabric. For example, EY equated legacy BPO offers to bookkeeping whereas its service is accounting.

 

Most EY managed services engagements start with an advisory engagement. Pandemic pressures held a mirror up to customers’ operations as they struggled to continue their legacy practices amid remote working. Further, the increasing volume of regulatory change across the globe makes it hard for multinational enterprises to keep pace, increasing their risk of being out of compliance.

 

Regulatory change and associated business risk results in greater boardroom attention to operations, with a focus on making sure the business processes work. Handling the mess for less, EY asserts, does not resonate with the board when the current operations leave the company open to risk and regulatory fines for noncompliance. Savvy managed service buyers want to know the process will better monitor outside-in changes to their business environment and will provide advice on impact to internal operations.

A global data platform, EY Fabric is EY’s distinctive accelerator for managed services

EY said little about infrastructure technology, and yet the value propositions discussed throughout the day repeatedly referenced EY Fabric. A cloud-based data lake infused with AI and machine learning, the critical distinction of EY Fabric is that it is one global operating model. A single global operating model requires a standard set of business rules and inordinate amounts of data wrangling before any analytics can be applied against the data for business insights.

 

For years technology vendor events have brought forth clients to share their operating horror stories of trying to get right the standard data model. That EY, a global partnership, was able to settle on one global data model internally, and then drive it out to market is a testament to the EY operating culture, and a boon to its managed services practice.

 

EY Fabric automates data wrangling for EY clients. It then extracts data from client systems, normalizes the data in EY’s data lake and runs proprietary algorithms against the data. Finally, EY Fabric reports fact-based insights and change management recommendations to the client. From those advisory engagements flows the managed services agreements, where EY “lands” by addressing the topmost set of operational pain points, and then “expands” through that proof of value into adjacent service modules.

Critical alliances link EY Fabric to customer instances and orchestrate the services

EY is quick to say it orchestrates and deploys popular commercial software applications rather than builds software. Partners SAP, Microsoft and ServiceNow joined EY on stage at the managed services event. SAP represents the legacy application layer housing most EY client data that must be extracted and run against EY algorithms for business insights. Microsoft underpins the cloud-first EY Fabric and co-innovates with EY on the hooks into customer data. ServiceNow provides the base workflow shell for many of the EY managed services workflows.

 

Other partners exist to provide necessary information feeds, but these three underpin the platform. In emerging technology, EY uses its overarching theme of “making sure it works” to explain why it is reticent to embed software from smaller companies into its services. It stated it will integrate and orchestrate such offerings on behalf of clients, but it does not intend to be on the technology bleeding edge. Its focus, in TBR’s view, is to protect its clients from the bleeding edge of regulatory change.

EY organizes its managed services into five broad categories

EY visually represents its managed services offerings as five suites that all revolve around data and AI, or the EY Fabric platform at the core. Some of the operational themes cut across suites, but how the portfolio is arranged is immaterial to the way in which EY pursues managed services.

 

For EY, the pursuit starts with determining the top pain points customers seek to address, then conducting a business assessment and presenting recommendations on how the EY managed services components can improve operational flows and reduce business risk in the process.

 

Each module has been written under the one global EY architecture in a cloud-first containerized fashion running on Microsoft Azure. As such, the mixing and matching of services integral to the “expand” element of a land-and-expand process becomes a function of activating new services, as proof of value has been displayed.

 

The core modular groupings of EY managed services are:

  • Finance and Tax is by far the largest segment of EY’s managed service portfolio, as expected from an advisory firm with tax and audit lineage. EY Fabric brings the potential of moving to a continuous audit function based on the ongoing AI monitoring of the regulatory environment that is then mapped against the client’s business parameters to create a custom set of action items for the client. EY Virtual Internal Audit is at the core of the disruptive capability. These capabilities augment internal audit functions, enabling internal teams to shift focus in real-time based on the automated advisory notices EY algorithms generate from reviewing regulatory notices.
  • Risk and Cyber grows in client importance with each passing data privacy law and well publicized security breach. Here EY relies on partnerships for threat monitoring to ingest into its AI engines to proactively push alerts and recommendations to its client base. EY claims its cyber practice is growing 30% year-to-year. EY sees the upside to these as cyber engagements continue converting to managed services clients.
  • Talent is an area EY expects to grow rapidly. Accelerated by the pandemic, these EY services are aimed as much at managing the regulatory environment for payroll across multiple countries as they are at improving user experience. From its global platform, EY provides a set list of standard forms employees need for various work verification requirements for home loans, among other things. Additionally, EY talent customers can offer EY tax preparation services to their employees as well as access to EY education modules called EY Badges for ongoing professional development.
  • Legal is a domain EY bolstered with the acquisitions of Pangea3 Legal Managed Services (part of Thomson Reuters) and Riverview Law. EY’s internal relationships with certain clients, including those more acquisitive in nature, allow the firm to lead itself into new engagements in an event-driven business. Leaning on its existing relationships and strengths around contract management and compliance, EY will create repeatable processes that help clients execute on legal managed services contracts.
  • Sustainability is a hot topic industrywide. It is where the notion of evaluating risk for competitive advantage comes to the fore. In anticipating the regulatory change, EY clients can evaluate the upside and the risk of existing businesses against the anticipated back drop of sustainability regulations globally. Additionally, increased scrutiny around the measurement and reporting of environmental, social and governance (ESG) metrics aligns with EY’s auditing resources to secure data management and sharing, validate data, and prepare reports from a standardized perspective.

Like many managed services, EY’s services have evolving commercial constructs

Multienterprise business offers are in a state of commercial flux as legacy license models give way to “as a Service” models. Most commercial contracts are between EY, as the solution orchestrator, and the client. Its strategic partnerships with Microsoft, SAP and ServiceNow also mean it can negotiate terms with greater flexibility and cooperation than most partners of those firms.

 

With customers, the EY value proposition revolves around outcomes and cost avoidance. Similarly, the value proposition is not about labor arbitrage, rather real-time access and insight from EY’s domain experts that are baked into the offer through AI automation and expert pattern recognition. In this sense, EY’s value proposition is strategic staff augmentation rather than data entry staff augmentation.

 

The explanations and use case examples for this strategic staff augmentation were clear at the event. The regulatory environment is moving too fast for individual firms to hire the requisite number of domain experts to reduce risk. It is better to rely on the outside experts ahead of the audits to reduce risk exposure and better inform the accelerating strategy cycles.

 

Examples offered by EY of this point included:

  • Over 57,000 regulatory alerts in 2021 and the $6 trillion cost of breaches; Virtual Internal Auditor handles those alerts in real time
  • $537 billion cost to enterprise for data integration/data wrangling, which EY Fabric does, with two-thirds of the enterprises surveyed intending to spend more in the future
  • A Talent entry point is to assume payroll responsibilities in the second-tier countries where enterprises operate, given EY has domain expertise in 160 countries under one global data model. Further, EY has a real-time chat bot that can answer strategic staffing queries for engaged leaders. EY claims this is the first of its kind in the talent management space.

 

One of the clients speaking on the panel exports products to 140 countries and has localized presence in 50, with only three tax specialists. The Group Tax, Customs and Insurance head summarizes its contract outlook thusly: “We are not after a discount; we want to get it right.”

 

According to this client, the EY value proposition was that EY would return twice the cost of the managed service back to them in savings and cost avoidance. They stated that, to date, EY has returned close to $900 million in savings to the company.

Market implications

Tax and audit firms are extremely well positioned in the IT industry writ large. Tax and audit firms are the final translation layer between business process and automated data flows. They translate business rules into the bits and bytes orchestrated by traditional technology vendors. EY has a distinct advantage and value proposition that focuses more on business risk and strategic planning rather than cost savings.

 

Lone enterprises cannot afford to keep human resources staff also knowledgeable of the rapidly shifting regulatory environment. With this in mind, EY aims to become the real-time advisor to these internal operations through automated delivery of curated EY IP based on its domain expertise.

 

While EY managed services might cost more than the in-house labor, the managed service will reduce the liability of noncompliance and likewise boost the strategic planning scenarios ahead of expected regulatory changes.

 

The implications to EY competitors are broad.

  • India-centric vendors whose value proposition rests on labor arbitrage must show greater value in risk mitigation and domain expertise. Some are wisely partnering with EY in specific use cases where EY’s service provides an additional value layer to the India-centric client.
  • Traditional ITO and BPO vendors face a similar threat. Can these vendors, through alliances or staff hires, provide the domain IP EY is capable of curating and rapidly scaling on the EY Fabric platform?
  • Emerging technology vendors will be well served by entering discussions with EY on how they can integrate into the EY Fabric. While EY is selective, gaining the EY seal of approval would go a long way toward validating the long-term viability so critical to global enterprise decision makers.

 

Clark says the only thing holding EY back is more orchestrators. These orchestrators consist of project heads with the necessary domain expertise to curate client processes for ingestion into EY Fabric as well as orchestrator AI chat bots to be run against the increasing volume of regulatory changes flowing from the public sector as governments seek to keep up with the rate and pace of business change technology unleashes on the economy and environment itself.

 

Relative to peers, EY is better positioned to meet the challenge given the sound fundamentals it deployed in building out a single, global data platform to scale its managed services offerings.

PwC, the SEC, and sustainability

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From annual and manual to an automated, measured, and sustainable reporting

In early May, TBR met with PwC’s Casey Herman, the firm’s US ESG Leader and a longtime PwC Partner, to discuss PwC’s views regarding developments around sustainability and decarbonization. Herman explained that PwC’s clients increasingly understand the need to apply enterprisewide accountability to sustainability efforts, including bringing investments, measuring and reporting of standardized metrics up to par with financial disclosures and responsible corporate governance.

 

Unlike traditional accounting systems and processes IT, which have benefited from decades of development around ERP systems and recent advances in automation, sustainability reporting often remains “annual and manual,” in Herman’s colorful turn of phrase. For enterprises, he added, quantifying the impact of moving to sustainable operations, either through self-imposed changes or legal and regulatory compliance, will be key to change and success. And just as IT and financial decision-making benefits from consistent, reliable, and frequent metrics, sustainability will also need to move to a more frequent basis, with more standardized inputs and outcomes.

What clients need and what the SEC wants

Helping to accelerate that change — potentially — the Securities and Exchange Commission’s (SEC) March 21, 2022, release of proposed rules around climate change disclosures gave U.S. companies and consultancies, like PwC, a clear and defined rallying point for understanding near-term climate change strategies and goals. Road maps, data orchestration, change management and, of course, governance, risk and compliance can now all circle back to these proposed rules, expected changes and likely timelines. When TBR asked Herman what, other than the weight of the SEC, might compel companies to fully embrace these changes, he suggested that compensation metrics tied specifically to hitting sustainability goals will likely be the most compelling force. He noted that the market’s two greatest needs at present — automation and quantifiable results from shifting to sustainable operations — remained unmet, but the SEC’s proposed requirements could accelerate progress on both.

 

According to Herman, the proposed SEC guidance asks companies to do three things:

  1. Disclose climate-related risks that may have a material impact on assets and the business.
  2. Disclose, and subject to third-party assurance, Scope 1 and Scope 2 emissions, and disclose Scope 3 emissions if they are material or if the company’s sustainability goals include Scope 3. Herman added that Scope 3 is “an estimate, not a measurement,” which may be why the SEC has not added an attest requirement for Scope 3.
  3. Include a footnote in financial statements describing any historical costs and investments directly related to the impact and remediation of severe weather events and mitigating risks related to climate change — essentially, what has the company already spent on these efforts. Notably, because the SEC proposes this requirement be in a footnote, it too would be audited.

Herman speculated the timeline for adopting these requirements could be pushed beyond the presently proposed 2023 start date (reported in 2024) and that the phasing of the audit requirements may evolve through the public comment period and subsequent SEC revisions.

What PwC can do for clients: enable measurement, plan for success and implement change

After detailing PwC’s views on the SEC’s proposed rules, Herman circled back to how PwC helps their clients, outlining four essential services:

  1. Assisting clients with their reporting, valuation, and measurement of key metrics and KPI aspects related to sustainability — Based on the firm’s heritage and current capabilities, Herman noted, “we do this quite well.”
  2. Technology enablement of reporting, valuation, and measurement — Herman explained that most clients use non-enterprise grade technology for their valuation and measurement (the “annual and manual”), which lack automation, AI and dynamic decision-making tools. PwC, in TBR’s view, has invested heavily in recent years to accelerate and amplify the firm’s technology capabilities, including around automation, low-code, and AI platforms, positioning it well for the next technology evolution in sustainability.
  3. Net zero strategies and sustainable business strategies — Similar to valuation and measurement, strategic planning and governance are firmly within PwC’s wheelhouse.
  4. Implementation (of all the above) — Including organizational culture and change management, tax strategy consulting, and other related ESG services and solutions associated with sustainability and decarbonization.

In TBR’s view, PwC’s range of services reflect the firm’s evolution toward a technology-forward company still rooted in its core competencies and legacy values.

Regulatory pressures and consulting capabilities sustain sustainability

Sustainability trended before, and already the signs of a global recession, lingering supply chain challenges, and an ongoing war in Europe threaten to return sustainability and decarbonization to the back burner. TBR pressed Herman on what might compel change this time. Why will companies invest in new technologies and adopt new reporting requirements, other than to do the minimum to meet regulations? Herman suggested TBR follow the money. When metrics around decarbonization drive investor, lender and customers decisions, as well as potentially compensation, particularly within the C-Suite, enterprises will adjust accordingly and put meaningful investments into measuring and sustaining their sustainability goals.

 

In TBR’s view, two other intertwined forces may likely be accelerants to adoption: political pressures to meaningfully enact and then enforce the SEC’s proposed rules combined with consultancies and technology vendors leveraging those pressures to move their clients to act. Sarbanes-Oxley and Dodd-Frank come to mind when considering how regulatory pressures may create a favorable climate for consulting services around sustainability.

 

We believe, if the SEC’s rules reach adoption and credible, consistent enforcement, PwC may increasingly become a necessary sustainability collaborator for the firm’s clients. Even uncertainty around the regulations, timeline, scope and enforcement plays to PwC’s strengths in being positioned to provide clients with essential advice in staying on the right side of climate change while securing growth and reducing risk.

 

In July TBR will publish a Decarbonization Market Landscape examining the commitments, investments and actions to date around decarbonization by a select group of IT services vendors and consultancies. We will also detail the offerings those vendors bring to their clients to help with reaching decarbonization outcomes. Access this new report as soon as it publishes with a 60-day free trial of TBR Insight Center™.

Lenovo ISG is building the road map to become a market-leading infrastructure provider

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Lenovo is executing on ambitious growth objectives

At Lenovo’s ISG Analyst Summit, ISG Executive Vice President Kirk Skaugen expressed Lenovo’s ultimate goal is to become the world’s largest IT infrastructure provider, and the group is executing on strategies across all segments within its Infrastructure Solutions Group (ISG) to meet this objective.

 

Lenovo’s ISG growth over the past two years has been strong, closing its 2022 fiscal year with over $7 billion in revenue, up from $5.5 billion in revenue in 2020, and a profitable operating income. Lenovo ISG is still relatively small compared to Dell Technologies ISG or Hewlett Packard Enterprise (HPE), which reported $34 billion and $28 billion in revenues, respectively, in 2021. But Lenovo’s rapid growth and road map position it to overtake smaller vendors in server and storage market share over the next five years.

 

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Lenovo’s growth strategy has two main facets, building ISG brand awareness and honing its business strategy across the core ISG segments. Lenovo ISG is about 10% of corporate revenue, compared to the devices business at roughly 84%, making building awareness critical to gaining share in infrastructure segments such as server, storage, hyperconverged infrastructure and high-performance computing.

 

Lenovo is expanding awareness of its ISG portfolio through corporate advertising and sponsorship initiatives as well as tactically through the company’s One Lenovo strategy. One Lenovo will integrate devices and infrastructure go to market more closely, particularly in sales and channel compensation, to ensure customers are aware of the full Lenovo portfolio and to incentivize business referrals across the two groups.

 

Honing the ISG business strategy to deliver growth across all business segments is a more detailed and complex endeavor that consists of several operational, product and go-to-market initiatives. Core initiatives include:

  • Become a trusted partner
  • Capture vertical-specific edge compute demand
  • Accelerate growth in CSP business
  • Differentiate in Enterprise and SMB (ESMB) with services and cloud capability
  • Build nuanced portfolios that address geo-specific needs
  • Leverage in-house design and manufacturing for competitive advantages

Become a trusted partner

Among the many themes emphasized during the summit, multiple Lenovo executives highlighted: Lenovo strives to earn and retain trust with its partners and, especially, its customers.

 

Skaugen made this point time and again with external evidence and KPIs Lenovo keeps at the forefront of its organization, such being partner of the year to Nutanix, VMware and Microsoft. The company also boasted its 93.6% on-time deliveries rate, which represents the accuracy of its delivery timeline estimates to its actual execution.

 

Regardless of the uncertainties created by global supply chain disruptions, Lenovo wants partners to know that they can rely on the company’s word, even if that means taking conservative estimates on delivery lead times and leaving deals on the table that have the potential to dilute customer trust of Lenovo.

Capture vertical-specific edge compute demand

Edge compute still has no dominant forces, but countless vendors are vying for market share in the emerging industry. Lenovo believes its portfolio spanning the data center to the edge to individual pockets with mobile devices differentiates it from competitors.

 

Beyond its expansive vision, Lenovo’s head of edge infrastructure, Charles Ferland, made it clear the company’s edge compute technology is itself differentiated with practical and customer-centric designing baked into the process of innovation. Lenovo believes its design strengths include physical features ranging from noise minimization and a broad range of form factor sizes to security features with encryption and tampering protection as well as connectivity and automation features.

 

Lenovo’s portfolios range from a “backpack fitting” form factor to high performance, compute-dense form factors that enable on-site AI inferencing and data-intensive applications. It will take a vertical-centric approach to building edge solutions with the help of its Project and Solution Services group, which has a long-standing history of developing vertical-centric solutions such as retail and quick-service restaurant capabilities. To date, Lenovo’s edge customers range from small nonprofits to large retailers with thousands of locations worldwide.

Accelerate growth in CSP business

Over the past five years, Lenovo has grown its cloud service provider (CSP) business, which designs and manufactures IT infrastructures for cloud service providers, to about $3 billion in annual revenues. The ODM business model is generally considered to be less profitable than the OEM model in sales, but Lenovo is well positioned to generate profitability since bringing its entire ODM process in-house.

 

In Lenovo’s “ODM+” model, the company provides in-house design and engineering services, builds the infrastructure in its own manufacturing facilities and provides global deployment services, giving Lenovo an opportunity to cut out costs from other vendors while providing customers with end-to-end service capability.

Differentiate in ESMB with services and cloud capabilities

Lenovo’s ESMB segment accounts for roughly half of ISG revenue and faces stiff competition from fellow OEMs as vendors fight for limited share as growth is constrained by cloud erosion. Lenovo’s approach to adding value in the ESMB segment is similar to competitors, focused on providing a portfolio of end-to-end, “as a Service” solutions and developing private cloud and hybrid cloud capabilities.

 

Lenovo is rapidly expanding its portfolio of TruScale subscription offerings, which currently includes storage, hybrid cloud, multicloud, virtual desktop infrastructure and SAP solutions, in addition to device-specific offerings. Beyond adding use cases, Lenovo will expand the capabilities of the TruScale platform with more options for metering, AI-based insights, and enhanced user interface for management and automation.

 

Like peers, Lenovo has built a portfolio of private and hybrid cloud solutions leveraging alliances such as Microsoft Azure Stack and VMware-based cloud offerings. Lenovo’s strategy diverges from peers in the storage space, where Lenovo offers cloud services through its partnership with NetApp, including the ONTAP operating system and NetApp Cloud Volumes services. Other vendors, such as Dell Technologies and Pure Storage, are rewriting their storage operating systems to run on major public clouds or acquiring software companies that specialize in cloud management.

 

Regardless of vendor alliances used in building solutions, Lenovo intends to be an end-to-end cloud solutions provider and the accountable point of contact for customers.

Build nuanced portfolios that address geo-specific needs

Lenovo believes its competitive advantage is its positioning as a global vendor that can deliver on localization. With its focus on bringing design services and manufacturing completely in-house, Lenovo can provide local customization for its products that meet the specific needs of the region, including power specifications and component configurations. Lenovo’s presence with headquarters in both the U.S. and China gives it the ability to separate its businesses for the two countries, including software design and hardware manufacturing, to navigate geopolitical pressures seen across the market.

 

Partner strategy is also a key piece of tailoring the IT infrastructure portfolio to specific markets, particularly in China, where local vendors dominate market share compared to global ISVs and CSPs that hold a commanding presence in other markets, requiring a deep and specialized partner base.

 

Following the successful implementation of a joint venture with NetApp in China, which began in 2018, Lenovo also announced it is expanding its partner investments with a new APAC-based technology solutions business, PCCW Lenovo Technology Solutions Limited (PLTS). Lenovo will own 84% of PLTS, including 80% direct interest in its partner PCCW. PCCW Solutions is an IT services provider with over 4,000 employees specializing in systems integration, application development and operations, which will be complemented by Lenovo’s infrastructure portfolio and close-to-the-box services.

Leverage in-house design and manufacturing for competitive advantages

Throughout the event, Lenovo made it clear that despite challenges in 1Q22, the company’s supply chain and vertical integration is one of the most valuable assets it has. As part of its ODM+ model, Lenovo has its own in-house design and manufacturing capabilities, which allows it to supply hyperscalers but also leverage processes to optimize cost in ways traditional OEMs cannot.

 

Lenovo utilizes the Root of the Tree Model, which uses adaptable base models that act as the “root” and can therefore be modified to bifurcate into distinct products fill various performance and use-case niches. Significant advantages of this model — and key tenets of the philosophy — are the reuse of design and the commonality between products, which unlocks otherwise inaccessible component procurement scale and simplifying assembly, ultimately lowering cost. Powerfully, this reuse of design and components can be leveraged across portfolios, across ISG products as well as between ISG and CSG products, such as reuse of XPUs, motherboards, cabling or even certain chassis.

According to Lenovo, high-performance computing clients are taking full advantage of its robust, in-house design capabilities. For next-generation exascale supercomputing, Lenovo emphasized two primary factors that differentiate its approach from competitors: the modularity of its systems and its energy efficiency.

 

Competitive exascale offerings mainly consist of large rack-sized units, many of which are larger than standard server racks, weighing in at thousands of pounds. Customers can purchase Lenovo’s exascale servers down to the server, enabling smaller customers without large capex budgets to acquire and access the same technology at lower scale to large enterprise customers.

The other differentiating factor is Lenovo Neptune, a direct, warm-water-cooling system that eliminates the need for refrigeration, thus reducing power consumption. By decreasing energy consumption, Lenovo Neptune subsequently reduces energy costs, which aligns with its environmental objectives to lower emissions.

Conclusion

Lenovo’s ISG division remains small versus market share leaders, but the company is invested in building the business into a formidable competitor. With a multifaceted strategy starting at the corporate level, with One Lenovo initiatives, product-centric development strategies, and a robust design, manufacturing and supply chain, Lenovo is well positioned to maintain, and even accelerate, its revenue and profitability growth.