Atos’ sustainability play relies on ecosystems, science and leading by example

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In mid-May, TBR met with senior leaders from Atos to discuss sustainability and Atos’ role as an ecosystem orchestrator, a services vendor and a role model for decarbonization. Jason Warren, VP head of Atos’ NetZero Transformation portfolio, and Miriam Hanckmann, head of Atos’ Digital Net Zero Portfolio, walked through a detailed presentation, including alliance partnerships, case studies and Atos’ overall strategy around sustainability. The following reflects both that discussion and TBR’s ongoing analysis of Atos.

3 characteristics of Atos’ approach may not be unique, but the combination is

Atos’ Warren and Hanckmann highlighted characteristics of their company’s approach to sustainability, which collectively may separate Atos from peers, even if other IT services vendors can claim one or two similar characteristics.


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First, Atos knows it must work within an ecosystem and cannot provide services or advance sustainability goals alone, an approach that reflects the company’s overall ethos of addressing climate change. Second, even with that understanding, Atos has become practiced at being customer zero, demonstrating the value of the company’s sustainability efforts as blueprints for others. Lastly, and perhaps truly unique among peers, Atos relies on and boasts of a science-based approach that resonates with CIOs and other enterprise decision makers responsible for technology and sustainability. Atos leads with science, not just good ideas.

 

While these characteristics potentially separate Atos, some of the company’s offerings could be replicated by firms better positioned to deliver value around government, risk and compliance, particularly the Big Four. In addition, Atos’ sustainability engagements to date have been heavily weighted toward Europe, which may limit the company’s global appeal and ability to deliver to clients worldwide. Even with these cautions, TBR’s overall assessment remains that Atos has built substantial credibility, experience and expertise around sustainability that should keep it among the leaders in the space, even in the event of a company split.

Building an ecosystem sometimes requires establishing a star for the system to revolve around

Within the consulting and IT services space, many vendors claim to possess end-to-end capabilities, a description only applicable when the vendor defines the ends of the spectrum. In reality, every client engagement includes ecosystem partners as every consulting or IT services business problem cuts across more technologies and business challenges than any single vendor can handle.

 

Sustainability takes that reality and stretches it beyond imagination. Among an enterprise’s strategies, the operations and responsibilities potentially implicated in meeting sustainability goals include — at the bare minimum — fleet and real estate management, procurement, supply chain, on-premises and cloud computing, emissions, and employee business travel. If no single IT services vendor or consultancy can address an enterprise’s full range of sustainability needs, partnering across a well-curated and constantly tended ecosystem becomes essential. On this, Atos may stand apart from peers.

 

During the discussion with Atos’ leaders, Hanckmann described the 330+-person EcoAct consultancy, acquired by Atos in 2020, as being staffed primarily with “climate PhDs.” She added that Atos’ technology capabilities, combined with EcoAct’s consultants, would help the combined companies’ clients use “digital to accelerate advisory … measuring emissions, gathering data, accelerating consultancy solutions.” Hanckmann also noted that the Atos-EcoAct combination creates a “green network for cultural alignment, learning from each other what digital and climate mean and how they interact, so clients get the full spectrum and maturity of conversations.”

 

In TBR’s view, Atos could potentially leverage its independence from traditional governance, risk and compliance work as added value to enterprises looking to ensure financial performance metrics are not unduly influencing sustainability metrics.

 

The last 24 months have been marked by an uptick in large consultancies and IT services vendors acquiring sustainability or decarbonization boutiques, so what makes EcoAct special is the ecosystem Atos folded it into, one that includes Atos’ long-standing relationships with Siemens, which is also one of Atos’ key accounts, and Johnson Controls, as well as EcoAct’s role in the Atos Climate Innovation and Knowledge Center (CLICK).

 

The special client relationships give Atos deep insight into sustainability challenges facing manufacturing companies, including, as described by Warren, “how to integrate products and provide real-time data.” Warren added, “Tech partners like Johnson Controls develop and deploy building management systems,” which Atos then aligns with hyperscalers and industry consortia to create a full package of data, analytics and decision making around decarbonization. Atos orchestrates others’ efforts to bring clearly defined value to shared clients. Within the CLICK, EcoAct consultants works with “academic, institutional, public, and private partners” to “develop methodologies, analytics tools, tap key areas of expertise, and support customers … driving standardization and normalization in reports and publications,” according to Warren.

 

While Atos’ ecosystem strategy may not be unique among IT services vendors, the company’s emphasis on partnering across a wide spectrum of sustainability stakeholders and actors, rather than touting stand-alone capabilities and offerings, demonstrates a maturity in thinking about decarbonization, reflecting Atos’ relatively long-standing commitment to climate change efforts.


‘Show me what you did, don’t tell me what you know’

The customer-zero approach — selling to clients based on strategies, initiatives and technology-based solutions deployed by the vendor within its own operations — has been widely adopted in recent years, becoming a resonant use case, when applicable. In TBR’s experience, Atos has rarely presented itself as customer zero, but with sustainability the vendor has been showing its own standards to clients and the internal lessons learned on adoption, measurement and change management. Clients, according to Warren, have been interested in not only the solutions but also what Atos did with its e-car fleet, remanufactured laptops and even its branding around carbon reduction.

 

Additionally, Atos built a carbon data platform internally, which the vendor now offers to clients as a tool, branded as MyCO2Compass, within a sustainability engagement or as a single offering within a subscription base. Perhaps the best summation of Atos’ approach to selling its own record as a means of selling its services comes from the vendor’s list of company credentials, which begins with: “Net zero is key to Atos’ raison d’être.”

 

According to TBR’s March 2022 Digital Transformation: Cross-Vendor Analysis:

 

“As most enterprises consider sustainability to be part of broader DT programs rather than stand-alone initiatives, it is not surprising that buyers rank working knowledge of sustainability services-related compliance risk and privacy issues as the most critical attribute for vendor selection as they want to minimize business disruption.

 

“Vendors’ market awareness backed by ongoing industry knowledge and investments in their own sustainability programs also rank among the most critical attributes, as vendors that can demonstrate business outcomes through industry-aligned use cases typically alleviate buyer concerns around new investments.

 

“Becoming customer zero is a well-known approach, particularly around sustainability, as it can accelerate vendors’ opportunities in the space and supports them in two ways: first, as a PR vehicle and second, in building the necessary use case for conducting workshops. Price was among the important, but least critical, attributes for vendor selection, suggesting buyers are mostly in the exploratory stages and competition on the vendors’ side has yet to intensify.”




One last point on customer zero: As noted above, Atos’ sustainability engagements have mostly been in Europe, which could potentially be played as a strength in two ways. First, Atos’ efforts to meet European standards and regulations should resonate well with a predominantly European client base. Second, if Europe turns out to be a test bed for environmental regulation, as countries in other regions begin adopting similar legislation and monitoring and reporting structures, Atos will be able to demonstrate its own successful adaption to clients in those non-European jurisdictions.

Appealing to technologists through science

Finally, Atos leads with science, in a manner perhaps unique in the IT services space. Of course, all IT services vendors lead with and lean on technology, but Atos’ approach comes across as more foundationally rooted in a scientific approach to solving business, technology, operational and — in this case — global problems.

 

The Atos Scientific and Expert communities provide research and promote Atos’ approach to solving technology-related problems. And throughout the sustainability discussion and in countless briefings over the last dozen years, Atos has consistently placed the scienced-based core of its offerings at the forefront. Warren and Hanckmann mentioned science-based net-zero target setting, cooperation with universities around climate research, and 160 patents relating to decarbonization and energy efficiency.

 

Warren noted, “Decarbonization is embedded in everything Atos does, and we’re working with R&D teams to devise reliable and tangible actions to deliver on carbon commitments in deals,” further cementing the scientific emphasis. In TBR’s view, Atos would benefit from leaning even more heavily into a science-based brand. Atos’ capabilities are rooted in science, not just ideas. While every IT services buyer prioritizes differently — and perhaps European buyers, especially around sustainability, are bit more technology-oriented in contrast to U.S. buyers looking for consulting — most CIOs and CTOs, Atos’ core buyer personas, appreciate the emphasis on science and data.

 

According to the same TBR digital transformation research as cited above, “Regional differences in vendor selection criteria underscore the importance of employing a localized go-to-market approach. For example, the top vendor attribute in North America was price, while in Europe respondents ranked vendors’ sustainability services scope as No. 1. In APAC, working knowledge of sustainability services-related compliance risk and privacy issues was the top factor. We see European buyers as the most mature in both road mapping and executing around their sustainability initiatives as regional legislation requires compliance in certain areas, thus creating broader opportunities for vendors with comprehensive portfolio offerings that can also rely on and manage partner ecosystems.”

Can Atos’ approach maintain sustainability?

In TBR’s view, Atos’ current leadership around sustainability stems in part from the combination in full of these three characteristics: willingness to play across a wide ecosystem, dedication to implementing internally first and then rolling out solutions to clients, and leading with a science-based approach.

 

Atos’ continuing leadership role in the sustainability space may also depend on these characteristics, as a potential global recession, continued high inflation, and an overall weariness of climate change challenges diminish buyers’ willingness to spend on decarbonization efforts. By being able to tap into a wide range of solutions through partners and the continued ability to demonstrate decarbonization and financial success, all underpinned by relentless science, Atos may be part of the overall effort to keep up the necessary pressure to maintain corporate interest around sustainability. A tall order, but no doubt a welcome challenge for a company that has made net zero integral to its overall mission.

 

Atos’ sustainability capabilities extend beyond what we have described above, and in the coming months, TBR will examine Atos’ and other IT services vendors’ and consultancies’ decarbonization efforts and offerings in greater detail, in both the individual vendor reports and the upcoming Decarbonization Market Landscape.

Post-quantum cryptography: Commercial and go-to-market strategies of leading players

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Join Analyst Jacob Fong and Senior Strategy Consultant & Principal Analyst Geoff Woollacott Thursday, Aug. 11, 2022, for a deep dive into recent activities in the quantum computing industry. They will review key players in the market, including IBM and Quantinuum, and look at the latest advancements in post-quantum cryptography in commercial and strategic alliances.

 

In this FREE webinar you’ll learn:

  • Position of the major quantum computing hardware vendors in the quantum system development race
  • Drivers of geographic differentiation in quantum computing prominence
  • Overarching trends developing within the quantum computing community
Register now

 

Can’t attend Aug. 11? Register now and we’ll send you the entire slide deck and the event recording the day after the live airing to view at your convenience.

 

 

TBR webinars are held typically on Thursdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. Previous webinars can be viewed anytime on TBR’s Webinar Portal. For additional information or to arrange a briefing with our analysts, please contact TBR at [email protected].

TBR launches annual Telecom Vendor Maintenance Pricing Benchmark

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TBR’s Telecom Vendor Maintenance Pricing Benchmark looks at the maintenance portfolio packaging; go-to-market, pricing and discounting strategies; and price points of telecom OEMs.

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TBR launches semiannual Cloud Ecosystems Market Landscape

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TBR’s Cloud Ecosystem Market Landscape will provide clients with access to data and analysis on 10 IT services vendors’ AWS, Google Cloud Platform and Azure practices.

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TBR releases exclusive webinar content from 2Q22

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2Q22 competitive intelligence webinars included talks on expectations for IT infrastructure investments, cloud ERP opportunity, COVID-19’s lasting impact on the IT services market, the latest in blockchain and sustainability initiatives, and more.

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

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EY views managed services as a ‘no regrets business’

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

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

 

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

 

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

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

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

 

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

EY organizes its managed services into five broad categories

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

 

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

 

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

 

The core modular groupings of EY managed services are:

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

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

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

 

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

 

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

 

Examples offered by EY of this point included:

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

 

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

 

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

Market implications

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

 

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

 

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

 

The implications to EY competitors are broad.

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

 

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

 

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

PwC, the SEC, and sustainability

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

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

 

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

What clients need and what the SEC wants

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

 

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

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

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

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

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

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

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

Regulatory pressures and consulting capabilities sustain sustainability

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

 

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

 

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

 

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

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

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Lenovo is executing on ambitious growth objectives

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

 

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

 

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

 

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

 

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

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

Become a trusted partner

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

 

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

 

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

Capture vertical-specific edge compute demand

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

 

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

 

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

Accelerate growth in CSP business

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

 

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

Differentiate in ESMB with services and cloud capabilities

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

 

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

 

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

 

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

Build nuanced portfolios that address geo-specific needs

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

 

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

 

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

Leverage in-house design and manufacturing for competitive advantages

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

 

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

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

 

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

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

Conclusion

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

Demand pull and cost push: Two sides of the inflation coin

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A nonfactor for decades, inflation is now parsed into demand pull and cost push

Pricing analysts across the tech industry will have to take a new look at the mix of inflationary pressures, sort those pressures by cost push and demand pull, and adjust their own business muscle memory for both short- and long-term instability stemming from rising energy costs, destabilized supply chains and increased component demand.

 

To excel at textbook economic analysis, you are told to look at one variable, “all other being equal,” or ceteris paribus. But the real world never works that way. The real world becomes particularly alarming for economists when their textbook explanations are not borne out by what is happening.

 

Such a situation occurred in the late 1970s. Inflation (and unemployment) increased from 7.5% to 10.4% from Jimmy Carter’s presidency to Ronald Reagan’s presidency, and then chair of the U.S. Federal Reserve Paul Volcker began raising interest rates to choke off inflation. The term “stagflation” was coined to explain the inexplicable. As we seek to understand inflation today, we have a better parsing of the multiple factors that can drive inflation.

Demand pull inflation: The classic definition

Demand pull inflation is classic 20th century thinking. It loosely corresponds to “too many dollars chasing too few goods.” Traditional Keynesian economic thinking asserts that this situation means the economy is overheating. It asserts the solution is for central banks to raise interest rates to slow demand and bring it in line with current supply. Low unemployment is expected to be a compatible condition to this kind of economic overheating, and with the slowdown, labor market pressure will likewise abate.

Cost push inflation: A fancier definition for resource scarcity (and potentially disruption)

Cost push drove the high inflationary cycle of the 1970s. Oil price shocks, driven by OPEC production decisions, triggered choke points across the entire economy. Companies had little recourse but to pass along price increases, or to “push” the costs onto the consumers at a time when unemployment was high.

The current blend of demand pull and cost push

Today demand pull influences are seen more on the consumer side, with record-high savings during the pandemic shutdown, plus consumer purchases and housing prices spiking due to various government relief payments. Similarly, unemployment remains low, and certain skilled positions, especially acute in the tech sector, remain hard to fill.

 

Textbook moves to raise interest rates to slow the economy are being deployed to cool this economic overheating. Whether it results in a soft or hard landing of the economy on more stable ground remains open to, at times, contentious debate, given cost push inflation is also rampant.

 

Cost push is readily apparent in any purchases of basic staples. Energy and food are about as basic as it gets, and there are no simple solutions to those issues. Energy is a heavily regulated industry, with public support for moving away from fossil fuels mounting, especially among younger individuals. Food prices are being hit by both the energy cost increases and the supply chain disruptions resulting from the conflict in Ukraine. Neither fuel nor food disruptions are likely to abate soon, and the food issues around wheat and the attendant products manufactured from wheat are likely to worsen before they improve.

 

If that news is not dire enough, energy supply chain constraints do not appear to be a short-term blip on the way to resuming normal productive capacity. A Grid News article lays out in great detail the supply chain constraints — rising demand, conversion of refinery capacity to renewable diesel, and shuttering of older domestic refinery capacity during the pandemic —impacting the refinery segment.

 

Further, expansion of U.S. refinery capacity is unlikely given regulatory and environmental risk, as well as a fundamental shift in financial outlook. The article expects gas prices to rise over the summer, which is a normal occurrence, but the article is not optimistic about an increase in refining capacity in the U.S. due to cost, environmental regulation, and long-term industry outlook as public sentiment grows for green alternatives.

What does this mean for the technology industry?

Within the tech sector multiple inflationary influences apply pressure. Rising energy costs will often be remediated with temporary surcharges. Amazon indicated in the company’s last earnings call that it was considering such measures. This surcharge can work for finished goods; however, component shortages triggering demand pull inflationary pressures similarly have a blend of cost considerations.

 

Some cost spikes will work themselves out as supply chains react to pandemic-induced disruptions. Other cost spikes will persist until productive capacity increases, given how many more finished goods outside of the technology space itself consume embedded components in smart devices.

 

For infrastructure manufacturers, this means year-to-year price declines in the “faster, better, cheaper” trendline, predicated on Moore’s law for decades, should at least temporarily flatten out. TBR analysis of the silicon shortages suggests these challenges will be ameliorated in the next two to three fiscal quarters.

 

The other pressure and risk consideration will be the impact on long-term pricing agreements for managed services and “as a Service” subscriptions. A backlog of recurring revenue priced with lower inflation forecasts will likely apply margin pressure to developing “as a Service” revenue streams of pure play companies and independent operating units within multiline businesses. Pricing adjustments may be baked into new agreements and renewals moving forward, but the runoff of booked contractual commitments could impact profit margins. Noncurrent bookings will be a telling indicator.

 

Services firms basing project fees on billable hours should be reasonably well insulated given hourly rates can change in real time to adjust for rising labor and fringe expenses.

 

As stated, pricing analysts will have to take a new look at the mix of inflationary pressures, sort those pressures by cost push and demand pull, and adjust their own business muscle memory for both short- and long-term instability rising energy costs, destabilized supply chains, and increased component demand brings to bear on their respective market segments and the monitoring of their commercial offers.

PwC’s Industry Cloud strategy delivers on 3 major cloud trends

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PwC’s ambitious Industry Cloud strategy aims directly at heart of current trends

After spending an afternoon at PwC’s Boston Seaport offices in late March, TBR came away with a clearer picture of how the firm is centralizing its capabilities into solutions to be utilized in client engagements. It is a strategy that has been developed cautiously and thoughtfully over time, mirroring the firm’s overall evolution of the last few years, which has been both methodical and ambitious. The new Industry Cloud strategy is firmly in line with the company’s DNA but is also aligned with the most current trends in the cloud market, namely services, collaboration with partners, and industry alliances and preconfigured ecosystems.

The importance of services in cloud adoption and utilization has only increased over the last two years. The migration of mission-critical workloads and skills shortages have stoked demand for third-party firms to help implement and manage cloud solutions. PwC is tightly integrating services with all the cloud assets being deployed for the firm’s customers, which is an evolution of the long-standing Integrated Solutions program, incorporating the best of PwC’s consulting business across all platforms.

PwC’s Alliance strategy is integral to the Industry Cloud strategy, and through these collaborations, PwC is selecting well accepted and widely adopted cloud technologies to include in the firm’s recommended cloud solution frameworks, then filling the gaps between those individual technologies. The key is not trying to recreate the wheel with technology that already exists but using alliances to bring the leading solutions together across multiple vendors. It ties into broader PwC strategies to use automation, scale and commonalities to reduce deployments times by as much as half in some cases.

A key tenet of PwC’s strategy is also to build common cloud services that bring industry and sector-specific practices and prebuilt configurations to accelerate adoption timelines and reduce custom work. For a variety of reasons, customers are looking for diversity in their IT and cloud vendor landscapes, and PwC’s open solution frameworks cater to that desire. Lastly, industry specificity is an emergent trend in cloud. PwC is addressing the industry specialization void in the market by bringing together industry-leading technologies, tying them together with an integration fabric, and filling any gaps with its own services and innovation based on PwC’s deep experience and investments. These solutions can then enable customer business transformation spanning the front, middle and back office.

Industry customization ties the solutions together, as it as it reduces the need for custom services and is done in tight collaboration with cloud vendors’ technology. In this special report we detail these trends and PwC’s cloud strategy. However, in short, we see PwC’s strategy as being well developed and aligned not only to its core DNA but also to some of the most current trends and developments occurring in the market.

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Industry cloud is moving from a nice-to-have to a must-have

Enterprise maturity around horizontal cloud capabilities has resulted in a growing appetite for solution customization built around highly nuanced, industry-centric needs. This rising need will be addressed by both cloud vendors and services firms like PwC. Vendors have traditionally leveraged partnerships to add vertical functionality and go-to-market support to their solution sets, but that strategy has become even more aggressive recently, with multiple acquisitions being announced.

Oracle’s (NYSE: ORCL) intended acquisition of Cerner, Microsoft’s (Nasdaq: MFST) purchase of Nuance, and Salesforce’s (NYSE: CRM) strong alliance with Veeva (NYSE: VEEV) are all examples of how vendors are investing to offer more industry functionality to customers. Cloud vendors are also supporting industry-based go-to-market ambitions by augmenting their approach with an increased reliance on ecosystem partners across the IT continuum.

While tech partnerships have accelerated industry-based solution design and development, evidenced by Microsoft’s partnerships with both Rockwell (NYSE: ROK) and Honeywell (Nasdaq: HON), engagement with IT services entities will be just as critical to facilitating adoption among customers with industry-fluent advisory, road-mapping and implementation support services.

Specifically, in venues like industrial manufacturing, client DNA is rooted in hardware legacy organizational models and waterfall innovation and many clients lack not only the knowledge to support software-driven business models but also an understanding around the outcomes emerging technology — be it cloud, IoT or AI — can bring to their operations. This knowledge gap plays to the strengths of the professional services side of the IT spectrum, where innovation centers pair educational resources with business cases to provide prospective clients with an understanding as to what their own digital transformation (DT) could look like.

Not only has vendor activity with industry cloud picked up, so too have financial results as end customers increase adoption of these solutions. As shown above, customers see industry cloud capabilities as value-add elements of their cloud technologies, notably with the ability to free up resources being the least cited benefit. The ability of industry cloud offerings to first meet regulatory requirements and then also match the unique business and IT workflows within certain industries are the most compelling benefits, according to TBR’s 2H21 Cloud Applications Customer Research.

TBR’s perspective on PwC’s alignment with industry cloud trends: ‘Micro alliance activation’

      • PwC is not “boiling the ocean” with its approach to Industry Cloud, instead focusing on heavily regulated industries as the firm looks for ways to not only meet regulatory requirements but also leverage investments to competitively differentiate itself with enhanced time to market and ongoing operational excellence, While many vendors on the technology side have taken an even more focused approach to industries, we believe PwC’s strategy is appropriate for the firm, given its partner-driven engagement focus and existing presence within the industries.
      • PwC’s approach aligns to the third most selected benefit of industry cloud: “We are in the early phase of cloud adoption and are pursuing industry cloud services as a preliminary step in the process.” Many companies are still in an early stage of their cloud adoption. Regulations are more stringent in these industries, creating real and perceived barriers to adoption. In many ways, industry cloud is the ramp these customers need to get started using cloud in more significant ways as part of their IT strategy.

Cloud partnerships are moving from important to critical

The shift to partner-led growth is not a new trend but is being further legitimized in 2022. Growth from indirect, partner-led revenue streams have been outpacing direct go-to-market efforts for several years, but indirect revenue is reaching a new level of scale and significance in the market.

TBR estimates indirect cloud revenue is approaching 25% of the total cloud market opportunity, which is a significant milestone. For reference, in traditional IT and software, indirect revenue represents somewhere between 30% and 40% of revenue streams. We expect the indirect portion of the cloud segment to surpass that level within five years, approaching half of the market opportunity within the next decade. For all cloud vendors, the combination of short-term growth and long-term scale makes partnerships an increasingly critical element of their business strategy.

Partner ecosystems have been a core part of the IT business model for decades, but the developments around cloud will be different for various reasons, primarily because the labor-based, logistical tasks of traditional IT are largely unnecessary in the cloud model.

For cloud vendors and their partners to succeed in growing the cloud market, they both need to be focused on enabling business value for the end customer. Traditional custom development becomes cloud solution integration. Outsourcing and hosting are less valuable, while managed services are far more variable for cloud solutions. To capture this growing and sizeable opportunity in 2022, we expect companies will adapt their partner business models and vendor program structures to align with vibrant cloud ecosystems.

TBR’s perspective on PwC’s partner strategy

      • PwC is being proactive in how it leverages alliances, recognizing that winners in industry cloud rely on alliances and that the industry data model is only as good as the ISV solutions that run on top. Within PwC, these relationships are supported by joint business relationships and alliance groups with front-office, middle-office and back-office players, as well as the cloud service providers (CSPs) that go to market with PwC as part of the Journeys model. PwC is being selective about the vendors and technologies it recommends, focusing on leading providers like Amazon Web Services (AWS) (Nasdaq: AMZN) and Microsoft to both offer the most widely used solutions and simplify its alliances.
      • By combining the IaaS and SaaS capabilities of alliances with its own products and accelerators, PwC enables integration points in a platform-like approach. While not a PaaS offering in itself, PwC’s Common Cloud Services Platform, which targets custom Journeys for a specific industry in an end-to-end fashion, should create a high degree of stickiness.
      • PwC is emulating some best practices of its alliances, including the leading cloud service providers (CSPs) and ERP vendors. Further, some of ServiceNow’s success stems from selective innovation and deciding early on where it wishes to develop versus leveraging partners. PwC takes a similar approach, focusing custom development investments on whitespace markets while layering the capabilities of its partners on top of new solutions.
      • One of the most notable obstacles facing PwC is a degree of competitive overlap between PwC and cloud vendors it has collaborated with that are similarly working with industry consortiums to stitch together end-to-end systems. Where PwC stands to benefit in this regard is through its roots as a services firm; unlike some of the product-first competitors overlapping with the Industry Cloud strategy, PwC is going to market first with tech-enabled services that can then get clients exposed to products.

Traditional designations are morphing as value moves to IP development and managed services

In the traditional IT partner model, the business models of partners — such as reseller, systems integrator and ISV — were used to segment partner programs. Cloud has disrupted the traditional model, with born-in-the-cloud partners competing in various activities to optimize their revenue streams and traditional partners expanding their business models to sustain their financials.

As a result, resellers can develop their own solutions and IP, while systems integrators sell and resell their own software solutions and ISVs offer their own managed services. It is common for partners to have multiple business models, making the traditional designations too restrictive.

The other area of strong demand from customers, driving enhanced focus from cloud vendors, is in managed services. Increased cloud adoption has led to higher cloud complexity for many customers, leading to more challenging tasks to provide ongoing administration, integration and operations of the environment. This increasing complexity coincides with a historic shortage of personnel with cloud expertise, driving demand for managed service offerings from third-party providers to fill the gap. As a result, we expect managed services to be the fastest-growing segment of the cloud professional services market, reaching $75 billion by 2026.

Cloud vendors like AWS, Google (Nasdaq: GOOGL) and Microsoft have a vested interest in nurturing their managed service ecosystems to facilitate new investments from their cloud customers. Considering these trends and the likely erosion of legacy services lines by software and managed services, it is critical for consulting-led firms to diversify with serviceable assets that go beyond the underlying modules. While some of its Big Four competitors are similarly recognizing this trend, PwC appears to have caught on to the fact that software and services require vastly different sales models and dedicated teams for successful execution.

With Industry Cloud, PwC serves as consultant, ISV and managed service provider

Using the term Journeys is an apt description of how PwC intends to engage with customers around these solutions. It is not just a cloud technology implementation; there is upfront design and consulting, implementation of both off-the-shelf cloud technology and custom PwC IP to align solutions to industry, and finally provision of managed services to simplify ongoing operations. That is a lot of activity, but it reflects what customers need and want from these types of implementations. It is taking PwC beyond traditional services and value propositions with clients, but it aligns with where customers and the market are heading.

While the framework for Industry Cloud is compelling, it will no doubt be a challenge to execute on the vision. Expanding beyond traditional consulting business roles and activities and maintaining cohesiveness can be challenging, but as we have seen in recent years, PwC has been quite adept at reinventing itself, so we expect the firm to overcome these challenges. Alliance management, cloud service development, packaging and pricing are all competencies being developed within PwC to execute on more Industry Cloud opportunities.