5G has been the primary focus in the telecom industry thus far in 2022. Communication service providers (CSPs) in key countries, especially the U.S. and China, continued their aggressive, nationwide public network deployments of the technology while a broad range of CSP and non-CSP entities participated in the nascent private 5G market opportunity.

Edge computing also gained momentum in the telecom industry in 2022, with select telcos such as Verizon building out edge computing environments to support their vRAN initiatives, and hyperscalers such as Amazon Web Services (AWS), Azure and Google Cloud Platforms building out metro and far edge sites at an accelerating rate.

Revenue growth from 5G and edge computing remains tepid thus far in 2022, but new use cases for these technologies are likely to emerge and scale as the digital ecosystem evolves.

Prediction No. 1: Supply-demand imbalance delays pace of 5G market development

Supply chains remain a challenge in 2022, especially for sourcing certain components such as semiconductors. But overall, the supply chain recovered over the course of the year. The ongoing zero-COVID policy in China as well as geopolitics remain a risk, but aside from a major event occurring, the supply side of the ICT industry should continue to normalize. The new focus areas in supply chains going forward are supplier diversification, friend shoring and resiliency.

Prediction No. 2: Hyperscalers scale out edge cloud

Hyperscalers have been active in the edge computing market in 2022, especially in the metro and endpoint device domains. Hyperscalers are still trying to figure out an economically and technologically feasible way to scale far edge infrastructure to support their growth initiatives. Ultimately, TBR believes hyperscalers will establish deep partnerships with shared infrastructure owners, such as towercos and data center REITs (real estate investment trusts), to site their edge stacks closer to endpoints.

 

 

Prediction No. 3: Government becomes leader in 5G spend among nontelecom verticals

Activity in the government domain to leverage private 5G networks has been significant in 2022, especially at the national level. Government entities are exploring a broad range of use cases for 5G in the disaster recovery, public safety and first responder, and defense segments of the market, and CSPs are playing a role in many of these engagements. The U.S. Department of Defense’s $600 million 5G contract remains the largest publicly disclosed contract to date globally for private 5G networks, and it will continue to support growth in the private 5G market over the next few years.

 

 

 

 

Predictions is an annual TBR series examining market trends and business changes in key markets. 2022 covered segments included cloud, telecom, devices, data center, and services & digital.

Federal fiscal 2022 (FFY2022) has been a good year for the federal IT market, even as IT spending was somewhat impeded by lingering effects of the pandemic, the rise of macroeconomic inflation, budget uncertainties and delays, and the ongoing disruptions to supplies of computing components.

 

The Biden administration’s federal IT budget request for FFY2022 was roughly 18% higher than for FFY2021; the actual growth figure will likely be closer to 10% after the final budget is enacted. Cloud-centered IT modernization, cybersecurity enhancement, and accelerating adoption of digital technologies (e.g., analytics, artificial intelligence, machine learning) featured heavily in federal IT outlays in FFY2022 and will again in FFY2023.

 

Prediction No. 1: Increased U.S. federal cloud spending upends the IT services market

Senior Analyst John Caucis: In the federal enterprise IT realm, TBR observed a significant ramp-up of activity on behalf of traditional federal systems integrators (SIs) to enhance alliance ecosystems in 2021, particularly with commercially centric cloud vendors. Commercial cloud providers bring to the table not only cloud technologies but also the best practices learned implementing cloud in commercial instances. Federal SIs know the rules of engagement when navigating the usually onerous federal technology procurement environment.

 

Federal agencies are expected to spend over $11 billion on cloud technologies in FFY2022, 30%+ higher than the total value of federal cloud outlays in FFY2021 and 70% higher than cloud spend in FFY2020. Double-digit increases in IT spending are expected across civilian agencies in FFY2023, and spending on defense-related technology will also expand at a healthy pace — with the growth driven in large measure by cloud-related investment.

Prediction No. 2: Vendors prepared for flattening defense budgets and accelerating civilian spend will see early gains

John: Trepidation about defense spending cuts was largely dispelled by the Biden administration’s budget request of $722 billion for the Department of Defense (DOD) for FFY2022, representing a $17 billion increase from FFY2021. For FFY2023, the administration has requested $773 billion in total defense outlays, including cybersecurity-related spending north of $11 billion, up from $9.8 billion in FFY2021.

 

DOD spending on commercial cloud solutions is also expanding, as the Pentagon establishes enterprise IaaS and PaaS environments and lays additional groundwork for general-purpose clouds in the coming years. Investment in analytics to enhance combat-related decision making also continues to expand.

 

In the civil arena, the Biden administration requested $65 billion in IT spend for FFY2023, up 11% over FFY2022, including a similar 11% increase in civil cybersecurity outlays.

 

 

Prediction No. 3: Investment in advanced digital technologies will accelerate across all federal sectors

John: Digital solutions will underpin federal IT modernization initiatives, and agency outlays to update and enhance their IT infrastructures vis-à-vis digitally transformative technologies will expand in FFY2023 and beyond.

 

For example, in June 2022 the Office of Management and Budget and the General Services Administration announced that $100 million will be earmarked within the Technology Modernization Fund (the fund to support to federal IT modernization projects) to improve citizen experience using digital technologies.

 

The Biden administration’s executive order mandating the expansion of cybersecurity in 2021 drove the aforementioned growth in cyber-related allocations in the FFY2022 budget and will continue to spur accelerating investment to secure federal IT systems in FFY2023. The White House and federal agencies have issued similar directives regarding expanding the adoption of AI technologies across the federal government. The DOD’s Joint Artificial Intelligence Center saw its budget expand from $89 million in FFY2019 to over $278 million for FFY2021.

 

Federal spending on big data solutions and services was $6 billion in FFY2021 and could surge to nearly $8 billion by FFY2023.

 

 

 

 

Predictions is an annual TBR series examining market trends and business changes in key markets. 2022 covered segments included cloud, telecom, devices, data center, and services & digital.

Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

This month Patrick chats with Senior Analyst Elitsa Bakalova about the IT services market, including how vendors take on talent challenges and internal organizational change.

 

Patrick: Talent in the IT services space seems to be a top-of-mind problem, and in the IT Services Vendor Benchmark you report that attrition expanded again in the first half of this year. Even with vendors hiring more and increasing pay, will talent remain a headache for the remainder of 2022 and into next year?

Elitsa: People are the key resource for IT service delivery, so talent has been and will remain the No. 1 priority for IT services providers during the coming years. Finding the right skills to deliver digital transformation services increases vendors’ chances to fulfill demand and accelerate revenue growth. But attracting and keeping skilled talent are particularly difficult when there is a shortage of skills and those skills come at a higher price that not all vendors can pay. Employee attrition has been on the rise since the beginning of 2021, with two forces driving it: increasing demand for digital transformation and employees’ pursuit of their own happiness.

Enterprises that planned to start digital transformation activities or were in the early stages of transformation in 2020 slowed down their initiatives due to the uncertainty caused by COVID-19. Those enterprises, along with new ones, are now accelerating their digital transformation initiatives and looking for support from IT services providers. Vendors need talent to address the pent-up demand, and some are hiring in bulk, adding thousands of people across the pyramid, often heavily weighted on freshers. Naturally there is rising competition between IT services providers to attract as many resources as possible from universities and poach talent from peers to reach their hiring goals for the year. The jobs supply is high, and I think it will remain that way in the near term.

Turning to employees’ need to be happy and satisfied with life, career and family, when pandemic pressures began to ease in early 2021 some employees started looking for a career change that would likely lead to an increase in pay and job satisfaction. At the same time, vendors began offering new jobs that employees already trained and certified on new skills saw as a great opportunity for career progression with another IT services provider.

Patrick: In one of the benchmark’s quarterly focus sections, you highlighted internal reorganizations: IBM Services splitting into IBM Consulting and Kyndryl, Atos working on splitting into two separate entities, and NTT DATA splitting off the domestic Japanese business. Which vendor will be next?

Elitsa: It is hard to say which vendor will be next, but we can speculate based on our analysis of vendors’ performance and position among peers with similar business models that have undertaken internal reorganizations. Revenue growth and profitability improvement drive IT services vendors and when the two are not in concert, vendors begin to look for ways to adjust portfolios and change internally to reverse the negative effects. Both IBM and Atos were experiencing revenue growth and profitability challenges due to commoditization and low profitability of traditional IT services activities while other parts of their businesses such as digital, cloud, cybersecurity, consulting and application modernization services were growing profitably. Those two vendors sought to improve performance by restructuring declining and less-profitable business units, giving them the flexibility to align strategies and investments with specific markets in which they operate.

 

In our IT Services Vendor Benchmark we see some vendors in the same position. DXC Technology, T-Systems and Unisys have been repeatedly going through internal reorganizations so they can be less reliant on traditional IT services and improve operational efficiency through cost optimization, changes in global service delivery models, and increased use of automation. Despite these efforts, we have yet to see material changes from the reorganizations because those three vendors continue to see declining revenues and razor-thin profitability. Maybe at some point instead of divesting noncore assets, as DXC Technology has been doing, these vendors will split themselves into separate entities — one around traditional IT services and one around services tied to next-generation solutions — similar to IBM Services and Atos.

 

Patrick: Looking at go-to-market trends, you mentioned six of the 31 benchmarked vendors made notable acquisitions in the first half of 2022. Do you think acquisition activity will pick up in the next few quarters?

Elitsa: Near-term, we don’t see a major change in acquisition activity. While a global economic slowdown may cause pockets of tight spending on acquisitions for some less financially stable IT services providers overall, the overall acquisition pace will remain unchanged. Uncertainty typically makes for a good spending environment for consultancies, and the financial services industry continues to face technology disruption, which service vendors aim to capitalize on by investing in industry and technology expertise to drive planning and strategy discussions. Acquisitions are a way to quickly build expertise, and I think vendors will be willing to pay a premium to gain skills.

 

As we see from this month’s blog, it’s been a challenging time for IT services vendors. We’ll be keeping an eye on the market over the next few months to see if macroeconomic factors force any changes in these trends or the IT services vendors’ strategies. Additionally, each quarter we’ll examine the strategies, performance and relative positioning of 31 of the largest IT services vendors as part of our Professional Services research stream. The research also covers go-to-market trends and breakdowns by service line and geography, and an exhaustive set of financial metrics.