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 fellow Principal Analyst Ezra Gottheil about TBR’s approach to modeling financial performance and other business metrics, including what value comes from modeling and advice on doing modeling correctly.

 

Patrick: We use the term model very loosely around here, and I’ve been challenged on occasion by our readers to explain what we mean when we say we “model vendors.” What do you think a model is, and how do models provide operational insight?

Ezra: The models we are talking about are mathematical frameworks that help us and our customers better understand business processes. Basically, they are estimation tools. The model maintains the relationships among the numbers, and we populate the model with published numbers and estimates that reflect and illuminate the underlying business operations.

 

Everybody models. Figuring out when you must leave to get someplace on time is a model. A budget, even a back-of-the-envelope estimate, is a model. You put in a bunch of estimates, consider the implications, and adjust. That’s modeling. As you make those adjustments, you are thinking about your estimations — what drives the numbers and their implication. That is analysis.

 

The model, through its formulas and checks, preserves the integrity of the numbers, but it is the process of using the model that both requires and generates insight. It keeps you honest, and using the model increases your understanding of the underlying business. The model is an estimation tool, but estimates are not just numbers. They represent how a business operates. Making estimates requires understanding the business, but the process of estimation also expands this understanding. The numbers mean more than mere numbers, and everything you do with them deepens that meaning.

 

It is like the numbers in medicine — temperature, heart rate, blood pressure and the many numbers obtained from samples. These numbers give insight into how the body works. Business numbers reflect how the business works, what the company is trying to accomplish and how, and how well it is doing. This includes greater detail on what the numbers represent, like major expense categories. It also includes context within the company and within the industry, often reflected in the changes in values over time.

Patrick: Our customers use data from our models to help build their own models. Based on your experience, what advice can you give other modelers?

Ezra: Three points: start slow and with a limited scope; start with data you already have or can easily obtain, like the vendor data and insights from us; and start with clear definitions of what you have and what you want to know. We’ve been asked to help clients rationalize, clean up or update their existing models, and their challenges often come from trying to do too much, using too many sources and inconsistent sources for data, and not being clear about the data they have and the outcomes they’re looking for.

 

As I mentioned, modeling can show you how a business works, so if your modeling efforts don’t reflect what you know to be your own truths in your business, how can you trust your model to explain your competitors? One more piece of advice: be comfortable with estimates. You’re not always going to be right; you just need to know what you were thinking when you made your estimates, what changed, and why you didn’t anticipate how the changes would affect your model. So maybe the advice is, really: be humble with your estimates and be willing to adjust.

 

Patrick: How can customers get more out of their models, as well as from our data and insights?

Ezra: Models deliver value by giving the customer a greater understanding of a company’s competitive situation within the market. What works and what doesn’t? Where are the threats and opportunities? How is our company performing in specific areas in comparison to other companies. What should we learn from, and what should we avoid?

 

Models provide a consistent framework to shape that analysis, and TBR’s data reflects relentless updating and refinement of the inputs and the insights. I say “relentless,” because that’s really key to the value. You can’t model once and be done. You need to update constantly and within the framework you’ve established. TBR helps with quarterly data and analysis, so even if you’re only revisiting your own analysis every six months or just annually, you know the up-to-date inputs from TBR fit your model — your framework — in a consistent manner.

 

Got it and a good reminder that snapshot views definitely provide just a moment in time and it’s the consistency that draws out the value over time. One final thought: The vendors we examine, from telecom providers to infrastructure vendors to cloud hyperscalers to management consultancies, all have their own way of looking at their business and the competitive space they play in. By creating taxonomies around the various service lines and modeling the businesses consistently and relentlessly, we’re helping make better apples-to-apples comparisons even though we’re looking at a messy fruit salad.

 

Fill out the form below to automatically receive next month’s edition of Gimme 3 as well as weekly free resources and upcoming webinar invitations

Consultancies continue to evolve portfolio offerings and business structures to better align resources with client needs while also integrating technology within traditional services offerings.

 

Facing pressures from competitors more experienced in leveraging AI, analytics and cloud adoption for clients’ digital transformations, Big Four firms must balance talent composition around technology and consulting to support the shift in business models to better retain clients and deliver on emerging needs brought out from digital adoption. Additionally, talent composition shifts as traditional consulting units split from tax and audit businesses will create disruption for vendors, freeing opportunities with new clients but also changing competitive landscapes.

 

While the outlook for management consulting has not drastically changed since December 2021, firms have reoriented their market positioning by establishing business units dedicated to software and technology. The split of EY’s consulting and audit businesses will have a significant impact on the management consulting market, changing the way competitors view EY as well as the way the firm engages with its clients. The change will likely help create opportunities for consultancies with a deeper set of capabilities that address business processing needs as well as touch resource management, portfolio structure and strategy development, all underpinned by technology.

 

Prediction No. 1: Expanded capabilities require expanded skills, leading consultancies to increasingly invest in education

Senior Analyst Kelly Lesiczka: Changing client needs have led consultancies to transform their portfolios to better align with software and technology services and solutions. As a result, talent composition around technology and engineering staff versus traditional consulting and advisory staff has moved away from historical organizations to support R&D and innovation efforts.

 

For example, consultancies have maintained or accelerated their acquisition pace, with EY planning to acquire up to 25 firms during the year and McKinsey acquiring four firms thus far. Consultancies will continue to leverage acquisitions as well as partnerships to grow technology-oriented talent, which will help accelerate clients’ post-pandemic transformations and increase their use of digital and software platforms. The acquisitions deliver a mix of technology talent, such as engineers, data scientists and architects, to better work with clients to pinpoint data needs and drive insights.

 

Training also remains a core piece of vendor strategies to expand talent capabilities, helping to deepen industry and technology skills. Leaning on existing programs with a focus on training hours enables vendors to better grow in-house technology skills.

 

For example, Accenture is running two parallel tracks with its resource management programs. The first track is to recruit and/or train staff with skills that can provide immediate support in areas such as cloud, evidenced by the launch of a talent hub in Albany, N.Y., focused on training recruits on Salesforce technologies. The second track is to build a pipeline of recruits through earn-and-learn models (i.e., without traditional degree requirements).

 

Focusing on talent development specialized around technology solutions has remained a core piece of vendors’ resource management strategies. As services remains a people business, the need to invest in talent will dictate whether vendors fall behind, maintain pace with or accelerate ahead of peers, particularly as demand to address a wider range of services from business operations to technology maintenance continues to expand.

Prediction No. 2: Restructuring throes and woes will continue to constrain some management consultancies’ ability to execute consistently

Kelly: Vendors have looked at ways to optimize operations, including resource management of talent and staff and business practice restructuring. The realignments allow vendors to deepen expertise more easily within different business areas and equip specialized talent to deliver on varying needs. The trend has held true thus far through 2022 as vendors add on and spin out certain business areas.

 

For example, in May news spread that EY was considering splitting its audit and consulting businesses as the firm hoped to not only address potential conflicts of interest between the two business units but also open up opportunities to partner with vendors it could not previously, such as Amazon Web Services, Google and Salesforce.

 

In September EY confirmed it would move forward with the split, with plans for EY’s consulting business to go public and provide tax, business advisory and technology adoption services while the remaining legacy EY continues to deliver audit services.

 

Consultancies recognize the need to transform their business operations to better capitalize on upcoming opportunities and be best positioned to compete for engagements that leverage a hybrid of traditional services and newer technology solutions.

 

While the Big Four firms will not likely consider massive business spinouts moving through the remainder of 2022 and into 2023, vendors will continue to reorganize business operations work more seamlessly internally, particularly as the consultancies establish flexible in-person and remote working plans for staff.

 

 

Prediction No. 3: Sustainability booms for consultancies poised to measure, benchmark and report clients’ progress

Kelly: Sustainability grows as a primary investment area for clients, leading consultancies to grow their resources as well as establish internal programs to respond to energy consumption and greener technology usage. In 2022 consultancies have looked to partners and acquisitions to deepen knowledge around sustainability tracking as well as different ways to implement more efficient technologies. As regulations change around sustainability tracking, including measuring and reporting to publicize metrics, consultancies are quickly growing their resources to audit energy use.

 

Deloitte acquired Carbon Care Asia’s advisory business to strengthen its consulting capabilities around sustainability and carbon services in the region. The purchase of the sustainability consultancy will bolster Deloitte’s portfolio offerings across environmental, social and governance (ESG) reporting, climate scenario analysis, net-zero carbon solutions and sustainability research for clients across Hong Kong and Asia Pacific.

 

Additionally, Boston Consulting Group (BCG) looks to grow its resources to support the strategic development of sustainable solutions. The firm opened a Climate and Sustainability Hub in Asia to focus on facilitating partnerships, driving green ventures, and developing new capabilities and solutions.

 

To support this effort, BCG also grew its network partnerships, such as with CDP to focus on net-zero goals through the use of the CO2 AI Product Ecosystem platform, and will further integrate sustainable practices within the supply chain for clients.

 

 

 

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.

Cloud applications vendors benefited from the disruptions that the pandemic wrought upon enterprises since the initial outbreak, as organizations embraced remote workforces enabled by cloud technologies to maintain business continuity. This trend resulted in a rapid modernization of enterprise IT estates, which guided TBR’s 2022 predictions for the cloud applications market.

 

Now, well into 2H22, cloud applications vendors are pursing growth amid mounting economic uncertainty ranging from inflation challenges to geopolitical concerns — headwinds that are set to linger well into 2023.

 

Prediction No. 1: SaaS opportunity size attracts all kinds of new participants

Senior Analyst Evan Woollacott: When looking at 2022, TBR estimated the SaaS market opportunity would reach $225 billion and continue to grow at a rate of more than 10% year-to-year as a confluence of trends ranging from client need for application customization and SaaS vendors’ pursuit of industry outcomes creates new growth opportunities.

 

Small startup ISVs are the most logical players to be attracted to the opportunity, and the number of these new companies coming to market has continued to grow, even during the pandemic. Through 1H22, multiple legacy software incumbents recognized the shortcomings of traditional partner programs and sought to simplify the programs to encourage cloud ecosystem development.

 

For instance, during an interview in March, SAP’s SVP of Software Partner Solutions Tom Roberts outlined the company’s plans to adjust fees for partners to join SAP’s Online Marketplace and integrate with SAP systems. SAP plans to waive the traditional 15% fee for the majority of partners that join the Online Marketplace, reducing barriers to entry for niche ISVs that may be wary of the upfront costs. Further, SAP will reportedly reduce the fee partners pay to connect with these systems from 20% of revenue to 15%.

 

Enabling partner coinnovation, though, will require SaaS vendors to not only offer partner-friendly program constructs but also possess the necessary PaaS capabilities to allow partners to seamlessly integrate their IP within vendor portfolios to accelerate joint time to market. The availability of these assets, together with program benefits like joint S&M funds, will be crucial points of differentiation for SaaS vendors aiming to encourage ISV community engagement in a highly contested marketplace.

Prediction No. 2: Cloud delivery for mission-critical applications inches closer to mainstream

Evan: The overall applications market witnessed a landmark event in 2022, as TBR’s 1Q22 Cloud and Software Applications Benchmark found that Salesforce eclipsed SAP as the largest applications vendor in terms of total revenue, despite Salesforce lacking on-premises application revenue. This event speaks to the level of client adoption maturity for front-office workloads, like S&M and CRM, compared to that of back-office functions like ERP.

 

Salesforce’s evolution to a SaaS incumbent has been impressive, and the company has increasingly sought to sustain its performance by establishing relevancy outside front-office workloads with solutions like Revenue Cloud, a revenue lifecycle management offering. These portfolio expansion efforts are well timed, as TBR’s 1H22 Cloud Applications Customer Research indicates client willingness to migrate mission-critical applications to cloud is rising, setting the stage for workloads outside the front office to catalyze the next wave of growth for the cloud applications market.

 

Specifically, TBR’s 1Q22 Cloud and Software Applications Benchmark also found that Business Applications (BA) workloads, which includes applications like ERP, finance and payroll, had the highest mix of benchmarked on-premises revenue at 37% of the 1Q22 BA revenue total, compared to just 11% for benchmarked Sales & Marketing revenue. This represents a vast install base of legacy BA clients to migrate to SaaS offerings, be it SAP’s Business Suite 4 HANA (S/4HANA) or Oracle’s Fusion ERP.

 

While ERP incumbents like SAP have reported promising backlog growth for SaaS ERP portfolios, converting this opportunity to revenue will require greater involvement of the IT services and consulting ecosystem to mitigate migration complexity associated with workloads like ERP. Application vendors must provide, with partner support, efficient, seamless migrations for mission-critical workloads, particularly given mounting economic uncertainty, which has already resulted in greater IT budget scrutiny across all workloads, evidenced by statements made by Salesforce executives during the company’s 2Q22 earnings call.

 

Prediction No. 3: Customization becomes the standard for cloud applications

Evan: A confluence of trends guided TBR’s prediction that customization for cloud applications would become table stakes in 2022. This belief has only been strengthened over the past nine months as a litany of predicted indicators materialized, ranging from platform investments to support citizen developers to the accelerated expansion of industry-led portfolios.

 

At the platform level, vendors like Microsoft and Salesforce have sought to bolster the scope of their PaaS suites. While data integration and management capabilities remain vital to vendors’ multiproduct sales efforts, these same assets also support the inclusion of partners’ technologies alongside their core IP. Likewise, vendor investment has accelerated around self-service developer capabilities and robotic process automation (RPA) assets to provide maturing customers with tool kits to get more out of their deployed SaaS workloads, customizing them according to their specific business processes.

 

Lastly, supporting clients’ growing appetite for industry customization remains a top investment priority for application vendors, particularly in the healthcare space, where the impact of the pandemic resulted in a rapid shift in how healthcare entities provide services, perhaps best characterized by a surge in the use of telehealth to reduce medical workers’ risk of exposure.

 

Highlighting vendor efforts, Oracle completed its $28.3 billion acquisition of Cerner in June 2022, immediately outlining plans to enhance Cerner’s core health management system, Millennium, through many new features and improvements, including a voice-enabled user interface and an IoT network for diagnostic devices. Oracle is already starting to verticalize Fusion, announcing Oracle Fusion HCM and ERP for Healthcare, which will incorporate industry-specific rules based on inputs pulled from Cerner and then tied back into HR and financial records within Fusion.

 

 

 

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.

After TBR published a special report on SoftwareONE’s place in the software, cloud and IT services ecosystem, we spoke with Pierre-Francis Grillet, SoftwareONE’s global director of SAP Business Development, to learn more about how his firm’s SAP practice competes in an exceptionally crowded market.

 

Three key points stood out to TBR:

• SoftwareONE’s focus on its core strengths including expertise in SAP, cloud and licensing, which are all crucial in the move to cloud and Everything as a Service, fits well with current trends in the IT services, cloud and software landscape.
• Emphasizing pragmatic, incremental transformation over broad digital transformations helps SoftwareONE more easily define its value to clients.
• Grillet and his team understand which cloud platform works best in a client’s environment, and they’re willing to make recommendations, differentiating SoftwareONE from vendors seeking to be multicloud agnostic.

 

Given SAP’s massive on-premises ERP install-base — which totaled 25,000 customers as recently as 1Q22 — the market opportunity surrounding migrations from offerings like SAP ERP Central Component (ECC) to SAP Business Suite 4 HANA (S/4HANA) is vast. As such, my colleague Evan Woollacott notes that S/4HANA is critical to SAP’s ability to achieve its midterm ambition of more than €22 billion in non-IFRS cloud revenue out of more than €36 billion in non-IFRS total revenue by 2025.

 

This goal would bring SAP’s mix of cloud revenue as a percentage of total revenue to over 60% in 2025, compared to a mix of approximately 41% based off SAP’s 2Q22 earnings. Given SAP’s 2Q22 S/4HANA Cloud revenue was just $503 million across 14,500 live clients, the company has a long way to go to achieve its goal. From a services partner perspective, such as SoftwareONE, SAP’s need to accelerate migrations to S/4HANA represents a substantial revenue opportunity, particularly given the inherent complexity associated with these transformations.

 

While it’s true that SoftwareONE will constantly be competing against larger players with scale and smaller players with lower prices, if it persists with a smart, well-refined and well-executed strategy that stays true to the company’s core strengths, it should continue to grow ahead of peers.

 

 

GSI fatigue opens opportunity lanes for SoftwareONE

According to Grillet, clients have grown tired of global systems integrators (GSIs) with massive teams based in low-cost countries doing things cheaply because they can. Instead, clients looking for SAP implementations welcome the chance to work with smaller vendors bringing expertise-led approaches and IP-rich capabilities.

 

While the giant GSIs adequately serve the largest enterprise-scale clients, SoftwareONE has found a sweet spot with the high end of the SMB market and low end of enterprise-scale customers, particularly those overlooked by the global GSIs. With a go-to-market focus and capabilities tool kit aligned around lifting and shifting SAP applications to the cloud and technical upgrades to S/4HANA, SoftwareONE stays industry agnostic while leveraging well-honed software asset management skills and an acquisition strategy that brings in boutique and highly specialized firms.

 

In short, if customers don’t want the hassle of working with a giant IT services vendor but do want SAP experts with experience, SoftwareONE looks like a pretty good choice.

Don’t overthink baby steps

From high-level strategy consultancies to thin-margin VARs, vendors constantly hype their abilities to help enterprises unlock the value of digital transformation. Grillet and SoftwareONE have a refreshingly modest and believable counterproposal: pragmatic, incremental IT and business transformation, with the sober recognition that a change as significant as migrating to S/4HANA and to the cloud needs to be executed in a series of manageable — and financially feasible — steps.

 

In Grillet’s opinion, “S/4 touches everything,” so overcoming hurdles like resilience, security, and interoperability and connectedness should be approached with caution, expertise and realistic expectations. Pragmatic, incremental transformation may not sound as exciting as design thinking-led agile disruptive innovation, but software that doesn’t work is useless, no matter how transformative it could be.

 

“Whenever we are selecting the service provider partner, it has to be the long-term journey, not just to go by project-based or portfolio-based services. But if you want to do innovation gently and new value with more outcome results, we really want to see and we have to make [the service provider] a longtime partner.”

— Executive Director, Banking

 

“I think it’s really based on whether they [vendors] take on responsibility. When I’m looking for something, I look for people I trust to work with, and I don’t like it to be sold.It doesn’t matter whether they’re technology vendors or whether they are consultant vendors. So usually, the technology vendors have a better grasp of what our real problem is when we were looking for a solution. I think consultants in the real sense of consultants are usually hired when the board wants to make sure there’s something that they sort of have a grip on it or more control.”

— Chief Digital Officer, Insurance

Multicloud agnosticism means not knowing what works best

When advising clients on which cloud environment to choose for migrating applications or even a full-on instance of S/4HANA, Grillet said SoftwareONE does not shy away from making specific recommendations, eschewing the industry habit of staying multicloud agnostic. Grillet believes his team has the expertise and experience to evaluate a client’s technology needs and long-term strategy, then recommend the cloud environment that fits best, without regard to SoftwareONE’s alliance relationships with or revenue targets aligned to the three hyperscalers.

 

SoftwareONE cannot claim uniqueness in its aversion to multicloud agnosticism, but the company is definitely among the trendsetters in the broader consulting, IT services, software and cloud space moving toward a greater willingness to partner deeply to better serve specific clients rather than broadly try to please all clients.

Small and smart

SoftwareONE’s SAP practice includes 440 professionals working in 34 countries, performing cloud migrations, S/4HANA conversions and S/4HANA implementations. While not at the scale of the SAP giants, such as Accenture, Atos and EY, that TBR covers quarterly, TBR sees SoftwareONE as smartly leveraging its strengths, including 14-plus years of delivering pragmatic, incremental migrations that help clients with successful transformations.

 

Further, SoftwareONE stays within its lane, expanding its footprint at existing clients and slowly expanding its scope of services without pretending to be industry or functional specialists, a strategy TBR believes will generate steady revenue growth, loyal clients and consistent permission to compete.

 

As noted in TBR’s latest Cloud Ecosystem Market Landscape, vendors across the entire digital transformation spectrum “often like to position themselves as end-to-end providers. Many do indeed offer a comprehensive stack of offerings, but the ‘ends’ largely vary and revolve around each vendor’s core value proposition. While enabling and/or developing components of the IT stack provides a strong use case, vendors’ true value lies in their ability to manage partner ecosystems.” Staying in one’s swim lane and partnering smartly lie at the core of SoftwareONE’s strategy, boding well for sustained growth.

 

“I would probably be sacrificing some technical expertise on the problem solving in order to get internal alignment or buy-in from others who have relationships with that firm. At the same time, those firms [consultancies] are outrageously expensive. So, you have to balance fewer but more important pieces of work versus, you know, the ability to afford help on more projects.”

— SVP, Retail