What’s next for Lockheed Martin after being left out of ABMS consortium?

In September the U.S. Air Force selected L3Harris Technologies, Leidos, Northrop Grumman, Raytheon Technologies and SAIC for its Advanced Battle Management System (ABMS) Digital Infrastructure Consortium.
 
Notably, Lockheed Martin (NYSE: LMT) was left out of this cohort, despite ramping up its efforts to underpin the Department of Defense’s (DOD) Joint All-Domain Command and Control (JADC2) vision.

ABMS Digital Infrastructure Consortium

ABMS is similar to the U.S. Army’s Project Convergence and the U.S. Navy’s Project Overmatch. It is compatible with the JADC2 program, under which U.S. military branches are investing in upgrading current Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) programs to support the Department of Defense’s (DOD) vision of instantaneous multidomain interconnectivity.

 

The inaugural members of the Digital Infrastructure Consortium were selected due to their experience with JADC2-enabling technologies. They are tasked with jointly developing the digital design criteria for the new cloud-based command and control system. This system will be part of JADC2’s cloud-like environment, enabling the rapid receipt and transmission of sensor data to interconnected networks.

 

Once deployed, the open architecture framework developed by the ABMS Digital Infrastructure Consortium would improve the data-sharing capabilities of the U.S. Air Force, U.S. Space Force and relevant allies. The framework will use AI and machine learning support to share common operating pictures with decision makers across the military branches, enabling them to better coordinate and make more informed choices.


Top 3 Predictions for Federal IT Services in 2023


 

5G.MIL

In March 2021 Lockheed Martin announced a new partnership with Omnispace to establish worldwide 5G connectivity for commercial and federal customers through a nonterrestrial network (NTN). Then in November 2021, Lockheed Martin announced a new partnership with Verizon (NYSE: VZ). The two allies revealed they were testing if Lockheed Martin’s open mission system frameworks could seamlessly function with Verizon’s 5G Ultra-Wideband Service. The defense contractor and communications technology company also collaborated to design 5G.MIL unified infrastructure capable of supporting JADC2.

 

Since then, Lockheed Martin has continued to invest in 5G.MIL and build out its partner network with commercial businesses in the cloud, semiconductor and telecom verticals to enable interoperability between networks that utilize IP and those that do not. For example, Lockheed Martin announced a slew of new alliances with businesses including Keysight Technologies (NYSE: KEYS), Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) to broaden 5G.MIL’s capabilities.

 

Recently, Lockheed Martin has been making progress with these partners. For example, Verizon and Lockheed Martin demonstrated in late September that they could improve situational awareness via 5G.MIL. The two showcased how 5G-leveraging drones could communicate with Verizon On Site Private Network nodes to transmit video and intelligence, surveillance and reconnaissance (ISR) radio frequency (RF) data during military operations.

Space-augmented JADO

Lockheed Martin also announced it has invested further in Terran Orbital and made progress on its Space-Augmented Joint All-Domain Operations (JADO) Environment (SAJE) project.

 

In 1Q23 Lockheed Martin will launch two of its Pony Express 2 smallsats to showcase its HiveStar, SmartSat, mesh networking and tactical communication capabilities. Lockheed Martin will also launch its Tactical ISR Sat (TacSat) with an infrared sensor sometime between 2Q23 and 3Q23. The TacSat features ISR functions and supports communications and on-orbit processing. These three satellites will comprise a JADO test bed and expand Lockheed Martin’s capabilities to support instantaneous interconnectivity across domains.

 

The SAJE project’s test bed has been offered as an option for the U.S. Air Force and other military branches interested in seeing how a Lockheed Martin NTN could enable JADO for them. It will also bring 5G.MIL to space while likely giving the defense contractor a role with ABMS as well as other JADC2-enabling projects as Lockheed Martin will be able to showcase how an NTN can leverage 5G to support military units by better connecting them and improving their situational awareness.

What’s next

Lockheed Martin

The defense contractor will continue to position itself to capitalize on JADC2’s expanding budget and expand the SAJE test bed’s capabilities in 2024 by adding its Active Radio Frequency satellite to the NTN. Lockheed Martin will also further build out the 5G.MIL partner network to enable JADC2 and partner with primes like AT&T and Microsoft as well as smaller innovators to enable interconnectivity across the U.S. military’s branches.

Other defense contractors

Industry peers will also jockey to underpin the DOD’s vision. Northrop Grumman is also leveraging 5G technology to support JADC2 and allied with AT&T in April to unify AT&T’s 5G private networks with Northrop Grumman’s systems to create a scalable open architecture while assessing digital battle networks. L3Harris announced in October that it would purchase Viasat’s Tactical Data Links (TDL) business for $2 billion, expanding its reach by gaining access to Link 16 Multifunctional Information Distribution System (MIDS) platforms and terminals that are already in use across the globe.

Joint All-Domain Command and Control

While there are some concerns about JADC2, the DOD will continue to expand its budget for the initiative. JADC2 funding is slated to grow from between $1.5 billion and $2 billion in FY22 to a minimum of $2.2 billion in FY23 as the DOD looks to improve its intelligence and communication capabilities to counteract hostile threats.

Top 3 Predictions for Digital Transformation in 2023

AI, automation and the metaverse: Why digital transformation won’t be the same in 2023

Top 3 predictions for Digital Transformation in 2023

  1. Your funky chair now floats in the metaverse
  2. Automation will lower costs and AI will transform businesses
  3. They hyperscalers will kill technology agnosticism


Top 3 Predictions for Digital Transformation in 2023


 

Digital = Ecosystems, with AI, automation and Metaverse among the prominent and new(ish) members

Digital transformation (DT) never ends, even if the pilot project scales. Enterprises always need another transformation, and IT services vendors and consultancies helpfully meet that demand with new technology. The metaverse — whatever it actually turns out to be — is the latest shiny new object that drives hype and early-stage investments. Digital transformation cannot escape technology, but as enterprises mature from innovation into iterative improvements, all of DT becomes less about feeds and speeds in a business-context-free vacuum and more about connecting technology with business processes. In a bit of good fortune for everyone involved in DT, AI is the perfect tool to enable that connection.
 
Everyone involved in DT has experienced the increased importance of ecosystems, with some growing sense that it is only a matter of time before enterprises, IT services vendors, consultancies and technology partners all share data and harmonize processes across one giant multi-enterprise business network. That reality, to quote someone who would not want to be quoted for saying this (Google it), is “a success that hasn’t occurred yet.” While unrealistic for now, clusters of ecosystems might be emerging as IT services vendors and consultancies rapidly pivot away from going to market with technology vendor-agnostic approaches.
 
One more implication to consider as we move into 2023: just as a new ecosystem cluster may emerge, new silos may develop within enterprises. Rather than divisions between lines of business an d IT, finance, and other traditional business groups, silos may form around specific technologies, providing an opening for IT services vendors and consultancies with specialized skills and the capability to advocate around solutions instead of business KPIs. In TBR’s view, IT services vendors and consultancies that help build these silos, or mini ecosystem clusters, will need to keep them open, with the right protocols and API from the technology side and the standards, incentive models and messaging on the business side.
 
2023 will be a rocky year, with a potential global economic slowdown decreasing spending on innovation while compelling investments in cost-cutting. The best prepared and smartest IT services vendors and consultancies will see through to the far side of any recession to rebounding spending on AI-fueled transformation supported by keep-the-email-system-working realities of core IT services.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Professional Services in 2023

Transparency, consistency and quality:
3 watchwords for 2023

Top 3 predictions for Professional Services in 2023

  1. Enough with the data lakes and process automation — give me ROI
  2. IT services providers’ toil and trouble wILL not alter clients’ buying behaviors, but will disturb alliances
  3. the talent war grinds on, even as employee experience loses its luster


Top 3 Predictions for Professional Services in 2023


 

After all the emerging tech hype, just bring the best IT services people and consultants, every time, at a fair price

After years of IT services vendors and their technology partners telling clients (and analysts) that “data is the new oil” and that “every company is a technology company,” we are finally reaching a tipping point at which vendors cannot sell the promise of data but need to sell the results. Clients expect returns on their investments in digital transformation, analytics and cloud, pushing IT services vendors to deliver more transparently, with more consistency and at a higher quality.
 
Promises around the benefits of leveraging analytics and cloud no longer meet clients’ demands for clear, tangible outcomes delivered through transparent engagements. IT services vendors must demonstrate upfront the business cases for emerging technologies and then deliver results. Vendors that invested in core services competencies, such as operational excellence and managed services, and in technology skills will continue to grow revenues, even if the global economy slows.
 
IT services vendors and consultancies undergoing organization changes — from branding to P&L to complete splits — must assure their clients they can meet their delivery commitments. Clients’ needs and demands will continue apace, without regard to internal machinations by leaders at IT services vendors and consultancies. Competitors’ upheavals may provide some new openings for opportunistic and nimble players, but the overall picture remains simple: Clients’ IT spending will not disappear, and they will continue to look for vendors and firms that can consistently deliver.
 
Quality depends almost completely on people. Even as IT services vendors implement automation tools and management consultancies dabble in SaaS offerings, talent management remains the critical component to running an IT services or consulting business. And as individual vendors and firms win battles in the war for talent, the overall shifts will come from balancing increasing demands for highly skilled talent with business models that reward scale at the right locations.
 
Transparency, consistency and quality are hardly earthquake-like trends across the IT services and consulting space, but they will be the markers of successful vendors and firms through 2023.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Telecom in 2023

Telecom industry will face an unprecedented level of uncertainty and risk in 2023

Top 3 predictions for Telecom in 2023

  1. Global telecom industry enters rationalization phase
  2. CSP investment in 5G infrastructure enters post-peak phase
  3. Cablecos build out their own cellular networks in the U.S.


Top 3 Predictions for Telecom in 2023


 

CSPs face a confluence of headwinds in 2023

2023 will likely be one of the most uncertain and challenging periods in the telecom industry’s history. A confluence of negative shocks will concurrently impact the industry next year, with telcos and cablecos bearing the brunt of the impact and vendors suffering knock-on effects.

The challenges communication service providers (CSPs) face are large in magnitude, broad in scope and occurring simultaneously. They include the following:

  • Rising interest rates: After more than a decade of unprecedented low interest rates — thanks to key central banks’ quantitative easing (QE) strategies, which were originally enacted to combat the global financial crisis of 2008-2009 — CSPs now face rapidly rising interest rates as central banks aggressively pivot to quantitative tightening (QT) to combat inflation. This reversion of interest rates portends challenges for the telecom industry due to record leverage in the sector.
  • Inflation: General price increases across the global economy pose a risk to CSPs’ input costs, especially around labor and energy. Average revenue per user (ARPU) is struggling to keep pace and new revenue sources remain elusive, squeezing CSPs’ margins.
  • Lack of 5G ROI: Despite spending several hundred billion dollars in aggregate thus far on spectrum and infrastructure for 5G, there remains no clear path to ROI for CSPs, further deteriorating CSPs’ business fundamentals.
  • Technological complexity: New technologies and architectures (e.g., open vRAN and network slicing) are proving to be more complex and expensive to deploy than originally anticipated, posing a business risk and hindering CSPs from evolving into digital service providers.
  • Energy costs: Supply shortages and rising energy costs pose a risk to the ability to run telecom equipment and are likely to impact CSPs’ margins as energy is one of the largest components of CSPs’ opex.
  • Supply chain disruption: Sourcing parts remains a challenge, delaying the timing of infrastructure deployment and fueling inflation. Talent remains in short supply and is expensive, especially for new skills that are required for digital transformation. In addition, the worsening geopolitical environment and continued COVID-19 lockdowns in China threaten to create new and persistent supply chain bottlenecks.
  • New competitors: Especially hyperscalers, which are capturing new value created from key enablement technologies, including 5G, multi-access edge computing (MEC) and AI and machine learning (ML), as well as upending the traditional connectivity business model
  • Labor strikes: Strikes are likely to occur as unionized labor rallies for wages that keep pace with inflation. Strikes pose a risk to CSP operations and margins; TBR notes this issue mostly impacts CSPs in the U.S. and Europe, where unions in the telecom industry are most prevalent.
  • Economic recession: The global slowdown that began in 2H22 (mostly driven by QT) is highly likely to morph into a global recession in 2023, portending adverse demand-side impacts for CSPs and their vendors. Bad debts are likely to increase, and consumers and businesses are likely to optimize the telecom services they purchase.

The impact of these challenges will be partially mitigated by government stimulus (much of which was greenlighted during the COVID-19 pandemic), which continues to directly and indirectly power the global economy (e.g., subsidize capex, support low-income households, backstop consumer and corporate credit markets), though the impact of the economic support is waning.

TBR’s convictions that the telecom industry will look very different by the end of this decade continue to strengthen, with current events laying the groundwork for structural changes in the composition of the telecom industry and the business model for connectivity. Economic gyrations and other challenges have a history of driving significant changes in the market, at a broader scope and much faster pace than what occurs during stable market conditions. The current situation will prove no different.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 5 Predictions for Cloud & Software in 2023

Cloud vendors will use predictable strategies for unprecedented times in 2023

Top 5 predictions for Cloud and Software in 2023

  1. Cost comes back into vogue
  2. The big and small get bigger
  3. Cloud growth is generated by partnerships
  4. Looking to meet a new set of business-led use cases, hyperscalers invest in cloud-native PaaS, but not without infringing on partners
  5. SaaS vendors will more aggressively pursue solution up- and cross- sell to expand client ARPU and weather economic pressures


Top 3 Predictions for Cloud and Software in 2023


 

Vendors will focus on cost and partnerships to weather 2023 uncertainty

2023 will mark the first time the mature cloud market has been tested. Cloud served as an alternative IT cost-savings measure in the wake of the 2008 financial crisis, but it is no longer a small, insignificant portion of the average customer’s IT budget.
 
While cloud spending and the overall market opportunity will continue to expand in the coming year, we expect that growth to be altered by the macroeconomic environment. In response, we believe cloud vendors will go back to basics, focusing on cost and employing the assistance of their maturing ecosystems to weather the environment.
 
As a reflection of the uncertainty felt by customers, and the pullback and spending that will result, many cloud decisions will be based on cost savings yet again. The benefits of agility, innovation and business expansion will remain at the core of cloud purchasing decisions, but a thorough evaluation of the cost of cloud versus that of alternative solutions will play more of a role in 2023 than in the preceding years.
 
Vendors in the cloud space may face slightly longer sales cycles, additional financial scrutiny and increased negotiation to secure deals. We also expect to see more competition and growth from vendors below the top tier of cloud providers. As more significant workloads have moved to cloud, the need for complementary solutions like data management and security has increased.
 
Lastly, cloud partnerships will underpin the growth that will occur — albeit it at a slower rate than has been seen over the past five years. The growth of indirect cloud revenue, through systems integration engagements, cloud-based ISVs, managed service providers and resellers, will play a pivotal role in the continued expansion of the market. We expect these trends to shape the cloud market in the face of an unprecedented challenge in 2023.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for IT Infrastructure in 2023

Strategic investments will combat impending headwinds

Top 3 predictions for IT Infrastructure in 2023

  1. The storage market will remain extremely competitive as vendors invest to provide the most flexible platforms
  2. User consoles are the OEM frontier for establishing an edge-to-cloud ecosystem
  3. Managed services are eyed as a profit preserver


Top 3 Predictions for IT Infrastructure in 2023


 

Building a diverse ecosystem is key to maintaining relevance and protecting against share losses

In a continuation of a multiyear trend, the go-to-market efforts of the IT infrastructure have focused little on the infrastructure itself and increasingly on becoming an integral piece of organizations’ edge-to-cloud strategy. Infrastructure vendors are honing their ability to deliver outcome-based solutions in hopes of being seen as solution providers rather than transactional sellers. While the vision appears to be relatively straightforward, the successful execution ultimately relies on significant investment in engineering operating systems and management platforms to function across edge, data center and cloud environments, plus investments in engineering joint solutions with cloud vendors and ISVs that can satisfy a broad range of customer needs.
 
Executing on the ecosystem strategy is critical to infrastructure vendors for three key reasons.

  1. The burden on IT organizations to manage infrastructure has only increased since the pandemic, necessitating new solutions to automate and offload operational tasks.
  2. Volumes of data generated continue to grow, with significant activity happening outside of centralized data centers in edge locations, warranting new strategies for deploying and managing infrastructure and integrating it with other solutions.
  3. Preserving revenue growth and profitability will require a revenue diversification strategy that emphasizes solutions and services that add value beyond the hardware itself, which will be particularly important as customers pull back on infrastructure spending in 2023 over economic concerns.

Competition among infrastructure vendors will be stiff as ever going into 2023 as the market navigates revenue challenges driven by cautious enterprise spending, leaving vendors hungry to increase their relevance and value to customers outside the traditional data center.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Devices in 2023

After rapid pandemic-related growth, the PC market will shrink in 2023

Top 3 predictions for Devices in 2023

  1. PC revenue will decrease
  2. Price competition will reduce margins
  3. The next advances in PCs will be cellular connectivity and AI-backed features


Top 3 Predictions for Devices in 2023


 

Following the pandemic-related surge in PC sales and AUR, vendor revenue and margins will be lower in 2023

2023 will see a return to normal PC market conditions, but with a changed role for PCs. The pandemic changed the way people work, including how they work with PCs. TBR believes the work changes will have lasting effects. While some people and some companies are returning to pre-pandemic workstyles, the pandemic permanently accelerated the existing trends toward hybrid workplaces and a greater reliance on PCs for work and collaboration.
 
Most importantly for PC vendors, buyers and users have greater respect for PCs. Not only have PCs been essential for collaboration and maintaining productivity under changed working conditions, they also have been greatly enhanced. While many of these improvements preceded the pandemic, the greater reliance on PCs has made such advances important. The solid-state drive (SSD), now ubiquitous, makes PCs faster and more reliable, as well as contributing to reducing weight and power consumption. PCs are thinner, lighter and brighter and have a much longer battery life.
 
Buyers are more willing to spend on these more productive PCs, as well as on attached services and accessories. This has contributed to large increases in average unit revenue (AUR) and to higher margins, but buyers also are keeping their PCs longer because of greater reliability and greater satisfaction with performance.
 
The increase in PC life cycle, combined with PC supply catching up with demand for the first time in four years, will challenge PC vendors’ revenue and margins in 2023.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Federal IT Services in 2023

The bull market in federal IT will continue in 2023

Top 3 predictions for Federal IT Services in 2023

  1. Federal agencies accelerate demand for commercially developed digital technologies, particularly cloud computing
  2. Cybersecurity investment accelerates to defend an ever-expanding threat landscape and combat rising cyber disruption in federal IT
  3. Acquisitions continue at a slow pace in the federal IT M&A market during 2023


Top 3 Predictions for Federal IT Services in 2023


 

Federal IT spend is poised to surge to new highs on the back of digital modernization and cybersecurity investment

The Biden administration’s federal fiscal year 2023 (FFY2023, ending Sept. 30) budget looks to be a windfall for federal IT contractors, with a double-digit year-to-year increase in civilian IT spending, significant expansion in cybersecurity outlays across defense and nondefense sectors, and generous funding boosts for public health IT infrastructure and veteran care. Other technology priority areas include 5G and broadband connectivity, AI, enhancement of space capabilities and IT systems modernization.
 
IT spending growth will be most robust in the civilian segment, where the White House has requested nearly $66 billion for technology investment, up 12% over FFY2022 levels. Digital transformation and cybersecurity enhancement initiatives will receive prioritization, the latter driven largely by the 2021 Executive Order (14028) mandating that federal agencies fortify cyber defenses. Zero-trust security will feature heavily in civil agency IT cyber strategies to secure supply chains, improve incident response and reporting, and minimize workforce-related security risks.
 
During the first year of the Biden administration, federal IT contractors with significant footprints in the Department of Defense (DOD) were concerned that the emphasis on the president’s domestic agenda would result in significant slowdowns, or even cuts, in defense spending. This scenario did not play out, as proposed DOD outlays in the president’s FFY2023 defense budget rose by tens of billions of dollars over FFY2022 levels, including a 2.3% increase for IT and cyberspace activities funding that will push total DOD IT spending to nearly $58 billion in FFY2023, up from the $56.6 billion enacted in FFY2022.
 
Like their counterparts in the civilian sector, DOD agencies are looking to adopt zero-trust approaches to shore up the security of enterprise IT and communications networks, and other critical military infrastructure. Enhancing IT-related space capabilities (e.g., missile warning and navigation systems, and advanced satellite communications) will also receive funding increases, and the DOD will also increasingly utilize AI, analytics, big data and next-generation mapping technologies to study the national security implications of climate change.
 
Against the backdrop of record levels of technology investment spanning civilian and defense agencies alike, federal IT contractors are confident the federal IT market will remain growth friendly through 2023.

 
TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Capgemini betting on business outcomes to drive growth

Capgemini provides transformational services that drive business outcomes

In an early session at the Global Analyst and Advisor Summit, Capgemini CEO Aiman Ezzat declared Capgemini had become a business and technology partner to clients, helping them with their digital transformation and delivering business outcomes.

 

To make clear the change from years past, Ezzat said unequivocally that Capgemini is “not an IT services company,” a sentiment echoed throughout the day’s sessions and in many of TBR’s side discussions with Capgemini leaders and professionals.

 

In TBR’s view, Capgemini must shift more than just its approach toward clients if the company wants to bring a truly robust breadth of offerings, from strategy to core IT services to cocreation of shared IP. Capgemini must shift its culture, an effort TBR believes is well underway. Across a number of competencies, strategies and go-to-market motions, TBR saw examples of Capgemini bringing a new focus on value, such as the comment by Capgemini’s Group Chief Strategy and Development Officer Fernando Alvarez that Capgemini would be selling “value and delivering business outcomes,” not just basic IT services.

 

Given the global economic uncertainties, newly developing competitive pressures and accelerating commoditization of IT services, cultural and business model shifts might challenge Capgemini’s performance as businesses might cut back on discretionary spending on transformational projects; however, TBR expects the company to leverage Capgemini Engineering as the bridge between transformation and a new wave of outsourcing opportunities.

 

Top 3 Predictions for Professional Services in 2023

 

Positioning as a strategic partner for clients enables value creation

Capgemini places value creation at the center of its strategy and creates value utilizing its technology background and software engineering skills. The company is looking for ways to help run clients’ businesses more efficiently and also establish new business models, such as by utilizing its development skills to build software architectures for e-vehicles. Pushing client centricity and selecting 10 focus industries to drive specialization improves Capgemini’s ability to create value and increase client reach.

 

While in the past Capgemini was not as vocal on being proactive on the topic of innovation, its leadership team is placing innovation at the core of its strategy. The company is running an initiative to increase perception with clients around innovation and is involving two-thirds of its strategic accounts in coinnovation activities in the Applied Innovation Exchange (AIE) network and labs to address areas of transformation such as around quantum computing, metaverse-related solutions and sustainability.

Capgemini attracts clients and talent by leading with value

Capgemini is positioning as a strategic partner for its clients to address their needs. Alvarez stated during his presentation that listening to clients is the rule for Capgemini and the company must communicate in a focused way by industry to better serve its clients. Delivering value to clients is driven by measurable business outcomes, industry expertise and data-driven industry solutions.
 
Creating new business models, harnessing the value of partners and data ecosystems, and supporting talent that has a passion for innovation are also value creation factors. According to Alvarez, Capgemini does not just address clients’ needs around cloud; it covers what runs on top of cloud. For example, data is a critical asset for clients, and Capgemini pushes to drive excellence around implementing data solutions and focusing on insights and business outcomes, and the data capability is coupled with cloud for scalability. Capgemini’s ability to build ecosystems to create value with partners by industry verticals and bring subject-matter expertise in engagements drives value creation and improves the company’s ability to price differently and position as a talent magnet.
 
Capgemini’s management team is no longer seeing the company as an IT services provider with outsourcing heritage sitting in Europe, but as a global digital and technology transformation provider that focuses on value creation, a strategic direction that will enable the company to continue to drive profitable revenue growth in the coming years.

Capgemini is shifting from selling capabilities to selling transformation

Establishing a proactive offerings development strategy and packaging offerings with clear value proposition and business outcomes improve Capgemini’s ability to expand wallet share with existing clients and approach new clients before they reach out with a request for proposal.

 

Capgemini’s corporate strategic framework, which has two pillars (data/AI and cloud) and three playing fields (customer first, intelligent industry and enterprise management), allows the company to support clients’ technology-based transformations. Investing in developing industry and domain expertise enables Capgemini to become a transformation partner for clients and drive revenue growth of over 20% year-to-year at constant currency in its three playing fields and 25% year-to-year in its two pillars.

 

According to Franck Greverie, head of Portfolio and Global Business Lines at Capgemini, connecting the dots by delivering end-to-end transformation that starts at the customer-first playing field and moves through intelligent industry and enterprise management is a key emphasis for Capgemini. Clients expect activities across the value chain, and engagements typically start with strategy services and work with clients on use cases and on transformation tasks to reach the endpoint. The strategy piece is key, so Capgemini is not only selling solutions but also providing transformation components and is partnering with clients to help them reinvent themselves. According to Greverie, two-thirds of Capgemini’s offerings were related to technology-enabled transformation four years ago while two-thirds are related to business-led transformation today, a shift that also contributes to Capgemini’s value creation.

Applying innovation at scale supports value creation

According to Pascal Brier, chief innovation officer, innovation enables clients to drive change, grasp opportunities, build value and separate from competitors. Placing innovation at the center of its strategy enables Capgemini to help clients change their status quo. Capgemini has a three-step approach to innovation that helps create value and deliver innovation at scale.

 

First, the company highlights what comes next and puts technologies to the test. Second, the company develops a tailored approach for each client, and third, it deploys innovation at scale. In the first step, the company conducts self-funded internal research and utilizes partnerships with academia to look at emerging trends and prepare capabilities. For example, Capgemini works with MIT around defining a framework for trust in AI and autonomous systems. The partnership with the MIT Initiative on the Digital Economy and joint research on B2B platforms was highlighted at the event.
 
Capgemini also participates in industry consortiums with government subsidies and conveys joint research with clients. Capgemini also cited the EcoSat R&D program, an initiative led by Capgemini Engineering to develop a solar balloon to conduct observations of the Earth and expand 5G capabilities. Capgemini’s labs, such as around quantum, 5G and edge, the metaverse and Web3, and autonomous systems, support the company’s research programs and thought leadership, improve its internal readiness and enable early business engagement.

 

In the second step, Capgemini’s global network of 22 AIEs across the globe enables tailored coinnovation with clients that is catered to specific industries and applies technologies to use cases. The key for innovation is that it is deployed at scale, and this is the way value is generated. Capgemini’s frog studios, ecosystem of technology partners and startups, Centers of Excellence and established network of global delivery centers enable scaling of innovation.

 

Capgemini Invent, the digital innovation, design and transformation business of Capgemini, highlighted two brands that drive technology-based innovation — Cambridge Consultants and Synapse.
 
Cambridge Consultants, which Capgemini acquired as part of Altran in 2020, is a specialist in identifying and developing breakthrough products and services that drive differentiation to clients. Headquartered in Cambridge, U.K., it has generated over 5,000 patents for its clients and comprises over 800 engineers, scientists, designers and consultants across offices and over 140 labs in the U.K., U.S., Japan and Singapore. Synapse, which is based in the U.S. and was a Cambridge Consultants company, is a product engineering company whose mission is to positively impact people and the planet through sustainable product development and improved user experience. Such expertise strengthens Capgemini’s transformation and innovation capabilities, enabling it to attract clients by reinventing their business models and generating business outcomes.

Industry expertise augments business outcomes delivery

Integrating the industry angle into its strategy and offerings, applying industry expertise with global accounts, and touting industry specialization through marketing messaging and branding supports Capgemini’s industry mission. Capgemini has selected 10 priority industries in which the company is building depth and investing in talent with the goal of helping clients offset pressures from external factors that negatively affect their business performance.

 

Capgemini shared six factors for disruption across industries, including geopolitical conflicts, energy crises, supply chain disruptions, economic factors, labor constraints and planet boundaries. For example, Capgemini stated that the consumer products and retail industry is challenged by labor crises and increasing labor costs, which are negatively affecting distribution centers that move daily household essentials. There is also approximately 35% employee attrition, on average, in stores and approximately 30% in manufacturing. To capture opportunities in consumer products and retail and help clients drive revenue growth, manage costs and operate sustainably, Capgemini is showcasing its capabilities around omnichannel commerce, advanced user experience, and solutions that combine physical and digital shopping.

 

Capgemini’s emphasis is to drive innovation in the sector and enable clients to improve customer experience and take costs out through a transformational effort, not a transactional effort, such as around changing store designs, addressing specific store employee needs and balancing activities with clients’ brand purpose. Consumer products and retail accounted for 13% of total revenue in 3Q22 and grew 14.5% year-to-year in constant currency in 3Q22 and grew 20.4% year-to-year in constant currency for the first nine months of 2022.

Capgemini creates new business models in the automotive industry

During the event, Capgemini augmented the sessions with multiple client representatives discussing their work with Capgemini on stage or connecting live through a virtual communication platform to show Capgemini in action and provide insight on successes and challenges during engagements. For example, Capgemini invited its client Lynk & Co, a global mobility company and part of Geely Auto Group, to talk about the journey around implementing an innovative and sustainable car-sharing service in Europe.

 

According to the presentation, cars stand still during their lifetime approximately 96% of the time, on average, while just 4% is spent on the road, or 6 hours and 43 minutes in a week and 14.6 days in total for the year. Lynk & Co is improving car usage by launching a car-sharing model in Europe, in which a person’s Lynk & Co car can be rented out while it is not used by its owner.

 

The Lynk & Co mobile app enables car owners to make their cars available to the community, including establishing rental pricing and requirements about parking the car when the rental time is over. The cars are built to be shared, with advanced telematics and connectivity to make the rental process secure. Community members receive star ratings from car owners based on their behavior to avoid vehicle misuse, while car renters get rated for the condition of the vehicle they own. The customer journey for purchasing a Lynk & Co vehicle is fully digital, with an online sales channel and no dealer involvement.

 

Capgemini was instrumental in the initial development of the business model and launch of the solutions and digital platform program with Lynk & Co in Europe. Capgemini was involved in the development and implementation of a custom-built platform, CRM solutions and mobile apps, and implementation of financial management software from SAP. The Lynk & Co client case highlights Capgemini’s capabilities around business and digital design consulting, along with its technology and systems integration expertise, which drives superior customer experience and new business models.

 

Intentionality and industry clouds: How EY’s Microsoft practice harnessed a dynamic market

It starts with context

EY’s robust and expanding Microsoft (Nasdaq: MSFT) practice exemplifies how steadily, quietly and persistently EY has transformed from a legacy audit, tax and consulting firm into a technology-enhanced digital transformation powerhouse. While media and competitor attention focuses on EY’s pending split into a legacy audit firm and an unfettered consulting and IT services vendor, the existing firm continues acquiring assets and talent, growing revenues, and delivering to clients and technology partners.

 

In October TBR met with leaders from EY’s Microsoft practice, including Jim Little, EY Global Microsoft Alliance leader. We discussed trends across the cloud and IT services ecosystem, EY’s Microsoft-related capabilities and growth, and EY’s expectations for 2023 and beyond. The following reflects that conversation and TBR’s ongoing research on EY, Microsoft, and both vendors’ ecosystems and competitive landscapes.

Building capabilities and influence by playing to strengths

EY continues to build, run and sell consulting services, including a Microsoft practice that Little and his team said currently ranks as the fourth-largest Microsoft Dynamics 365 partner globally. Among the facts and figures EY presented, a few stood out to TBR:

 

  • EY earned over 6,000 Microsoft certifications in FY22 and is an Advanced Specialized partner with Microsoft Solution Partner designation across all six domains.
  • Ninety percent of EY client service solutions are used on the Azure cloud.
  • EY has delivered over 16,000 Microsoft projects across over 4,000 clients globally.

 

Greg Jenko, EY Global Microsoft Services Group leader, noted that EY is a “business transformation firm” with well-established industry expertise and a long history of understanding back-office processes and change management, allowing EY to “deliver transformation on the back of Microsoft.”

 

While not competing with India-centric IT services vendors on cost-driven cloud migrations, EY has been building capabilities on top of the Microsoft stack, focused on six advanced specializations (in addition to broad Microsoft capabilities). EY’s U.S. member firm has a dedicated Microsoft team, while member firms in other regions with less scale operate as virtual business groups. According to EY, the firm’s global connected dedicated Microsoft Team is the first among the Big Four at its current focus and magnitude.

 

In addition to the firm’s size, scope and capabilities, Little also stressed EY’s flexibility, noting that his firm could examine business model and technology implications of a client’s strategy, leading to EY-assisted bespoke data-driven transformations. Kathy Hevland, EY Global Microsoft Relationship director, explained that the firm has “strong brand permission” in heavily regulated industries, such as financial services, based on EY’s heritage in audit and assurance.

 

Additionally, EY has found success working with clients in industries with critical supply chain challenges. Little summed up EY’s value in the Microsoft space by noting that “bringing EY specialists to bear allows clients to move faster,” which echoes TBR’s research around clients’ highest priorities for digital transformations and cloud migrations.

 

Shaping trends around industry clouds and ecosystem alliances

Looking ahead, the EY team’s comments about strategy and opportunities matched two dominant trends in digital transformation: industry clouds (aka smarter alliances) and multi-enterprise business networks (aka extended ecosystem plays). Little said EY has been partnering with Microsoft in “engineering solutions to ensure industry clouds are fit for purpose” at both the sector and subsector levels.

 

Further refining EY’s strategy, Little added that the firm has focused subsector industry cloud innovations on geographies where EY and Microsoft have already been jointly partnering to deliver to clients. EY has played to its own strengths, by both industry and geography, to maximize the benefits of its Microsoft capabilities (in contrast to peers and larger IT services vendors, which have remained more opportunistic and transactional). According to Little’s description, EY is also influencing Microsoft’s strategic road map for industry clouds. In TBR’s view, the hyperscalers’ increased push into industry clouds will both expose the ecosystem players lacking industry expertise and open opportunities for vendors (and especially consultancies) with established industry-centric capabilities.

 

In that evolving cloud and digital transformation ecosystem, EY’s strategic decision to stay committed to bespoke, higher-value, innovative cloud professional services, while leaving the commoditized “simple stuff” to the global systems integrators, further plays to the firm’s strengths and helps maintain the firm’s brand permission around business transformation enabled by technology. Further, Hevland noted that “80% of EY’s ecosystem partners” are also Microsoft’s partners, reflecting Microsoft’s “incredibly ecosystem-friendly” posture.

 

With a strategic technology partner committed to alliance relationships and well aligned to EY’s ecosystem, EY should be well positioned to continue rapidly growing its Microsoft practice, even as it leans on IT services partners for capabilities or headcount in areas where EY lacks scale. Little suggested that Infosys, in particular, could bring Microsoft-specific consulting opportunities to EY, and Hevland noted that EY considers ecosystems critical to the firm’s strategy, including evolving new alliances with nontraditional players such as smaller, independent software vendors. In TBR’s view, EY’s all-of-the-ecosystem strategy aligns with digital transformation clients’ understanding that no vendor is truly end to end and every vendor needs to play well in the consulting, cloud and IT services sandbox.

Reassuring talent stays focused to increase retention and aid recruiting

No discussion about digital transformation can ignore talent management, which TBR and the EY team explored at length. In a stark rebuke of consultancies’ decades-long insistence that they are technology-agnostic and rely solely on their clients’ technology preferences, EY stated that while they can still be technology agnostic, they believe Microsoft is clearly winning in the market and so EY has strategically chosen to align with Microsoft and consistently reinforces that dedication. Little said EY professionals know they “will be excellent at Microsoft” and will not be “bouncing around” between hyperscalers’ technologies, giving those professionals reassurances around maximizing their skills.

 

In recent years, EY has acquired Microsoft-only people, niche vendors, building capabilities breadth and extending into new geographies while continuing to recruit with a sustained pitch around Microsoft-focused training and development. Sarah Bingham, EY Global Microsoft Services Group Operations leader, explained that to facilitate recruitment and training at scale, the firm developed a “recruitment-in-a-box” tool kit for EY member firms in countries with smaller, less-developed Microsoft practices. Bingham stressed that intentionality, scale and integration of Microsoft into broader EY training underpinned the global firm’s overall talent strategy. Potentially separating EY from peers, according to Bingham and Little, was the firm’s decision to focus on six advanced specializations, reinforcing EY’s role in bringing higher value to cloud migrations and optimizations.



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Intentionality as a mindset for transforming challenges into opportunities

Throughout the discussion with Little and his team and upon reflecting on EY’s potentially highly disruptive change within the digital transformation landscape, the word “intentionality” stood out as succinctly encapsulating what EY has been doing with its Microsoft practice for the last few years and the challenge the firm has created for peers and competitors.

 

By concentrating on Microsoft Azure as a preferred cloud partner — whether by default or design — EY has wrangled three challenges and turned them into opportunities for growth. First, EY’s clients and ecosystem partners know EY’s strengths center on Microsoft technologies, diminishing any market confusion about EY’s core strategy and capabilities. Second, marrying EY’s established industry expertise with Microsoft’s emerging industry clouds provides differentiation in a crowded competitive landscape. Third, EY’s sustained focus on Microsoft gives its professionals additional reasons to stay with the firm, reducing attrition and potentially attracting highly skilled talent.

 

Whether or not the split happens, EY will need to sustain this intentionality and capitalize on these opportunities for growth. According to TBR’s 2Q22 Cloud Ecosystem Market Landscape, Deloitte — despite its audit relationship with Microsoft that precludes a formal go-to-market alliance — has at least 8,500 Microsoft certifications, surpassing EY’s 6,000. TBR does not expect EY to surpass Accenture’s (NYSE: ACN) 43,000 Azure certifications in the near term (or ever), but EY should be able to match and exceed Deloitte within a couple of years, provided that activities related to the potential split do not adversely affect the firm’s Microsoft practice and that EY can maintain the advantages embedded in its strategy.