TBR’s Digital Commerce Market Landscape tracks how customers are using e-commerce and end-user portal features and functionality across their cloud, services and IT purchasing, as well as customer desires for the future of vendor-delivered e-commerce and self-service features.
TBR’s Infrastructure Strategy Customer Research report tracks how IT leaders are evolving and adapting their investment plans based on market trends and business demands.
TBR’s U.S. Telecom Operator Public Sector Market Landscape examines the opportunity U.S. telecom operators have to capitalize on the public sector market as agencies modernize their network infrastructures and implement emerging technologies.
In discussing clients and their shifting needs and demands, Huawei leaders told TBR that while previous conversations typically started with a client’s immediate plans and end goals, Huawei’s clients now come to it with uncertainty around technologies, business changes and digital transformations. This shifting client mindset has compelled Huawei to invest more aggressively in consulting-oriented skills.
For Huawei, consulting includes helping customers transform their IT organizations and define their own values around digital transformation, with Huawei providing the foundational technology. In TBR’s view, this more technology-centric approach to consulting fits Huawei’s traditional strengths and does not require brand permission around strategy or high-level business consulting. Huawei’s leaders also noted to TBR that they believe digital transformation encompasses both business and technology changes, but the exact mix depends entirely on each client’s specific needs. By continually circling back to the vendor’s emphasis on individual clients, Huawei’s leaders reinforced their overall messaging on value, including consulting as value definition, implementation as value creation and operations as value optimization.
Previously, during TBR’s in-person visits to Shenzhen, China, and virtual meetings over the last two years, Huawei made passing mention of training, rarely singling out consulting and digital skills, except in the context of the vendor’s overall human resource management strategy.
During this year’s summit and in the follow-on discussions with TBR, Huawei’s leaders emphasized the criticality of training around digital transformation, including formal mentoring programs, enhanced client interactions, and what Huawei describes as “the Digital 9” — nine roles identified in nearly every engagement that increasingly need elevation from traditional IT to digital transformation.
Training at Huawei, like many of its technology-centric peers, includes both upskilling employees internally and certifying partners on its technology solutions. In TBR’s view, every leading vendor in the IT services space has adopted a similar ecosystemwide perspective on training. This means Huawei is aligned with prevailing industry trends, which is a critical step for a vendor with more than 30,000 reselling partners worldwide and 6,200 certified service and solutions partners that are capable of implementing solutions, according to Huawei leaders who spoke with TBR.
According to information shared during the event, Huawei’s Digitization and Technical Services revenue increased by 20% over 2021 as the vendor expanded “consulting services and vertical industry services.” In addition, the vendor noted, “Significant demand is coming from government and financial services and insurance markets, typically for supercomputing and modular data center scenarios. [Huawei’s] value proposition is based around our ability to plan, design and build data centers with low energy consumption, IT integration, data replication and disaster recovery, as well as our strong operation and maintenance capabilities.”
In discussing plans for 2022 and beyond, Huawei’s leaders explained to TBR that the vendor anticipates new growth opportunities in Eastern Europe, Southeast Asia, the Middle East and South America. As an example of the latter, Huawei’s leaders described engagements with electricity utilities outside of China. Huawei has developed expertise around digitalizing utilities’ operations, including generation, distribution and consumption, and during the summit the vendor described the Intelligent Electric Power offering as tightly interwoven with consulting partners, including Deloitte, PwC and Accenture. Notably, in June 2020, a Chinese state-owned enterprise, State Grid International Development Limited, bought one of the top four electricity distribution companies in Chile. In TBR’s view, Huawei adeptly leverages its home country’s strategic investments to further the vendor’s success abroad.
During the summit, one particular use case stood out for TBR: Huawei’s Smart Ports solution. The Huawei executive presenting the solution noted that reducing on-site manpower demands through increased automation has proved to be both popular with clients and challenging to implement. Crane operators face long days in harsh and cramped environments, which can lead to long-term health problems. The Huawei solution, already in use in Shanghai, includes deploying remote-controlled cranes, with operators as much as 100 kilometers away from the port and, presumably, sitting in more comfortable surroundings.
Trucks, according to Huawei, present additional problems: Drivers do not get adequate rest and the work can be monotonous and boring, leading some drivers to leave for more exciting and lucrative opportunities. Working with various Chinese ports, Huawei developed an intelligent dispatching system and autonomous trucks, which stay within a port’s confines. As the first live test case, Huawei operates over 70 autonomous trucks in Shenzhen’s port. Lastly, Huawei leaders noted that port planning can also prove critical to reducing operational costs and enhancing overall port safety, leading the vendor to develop a cloud-based AI tool for planning and optimizing traffic within the port. Reduced planning time, according to Huawei, equals reduced operations costs.
TBR has tracked smart ports for years with the appreciation that these facilities can serve as test beds for integrating emerging technologies, such as 5G, IoT, edge compute and AI, while forcing IT and digital solutions to work seamlessly with real-world physical challenges, such as moving containers and ensuring ships do not collide. With China boasting four of the world’s five largest ports — and two of those currently serving as use cases for Huawei’s new solutions — Huawei will likely continue to be a leader in this field. In TBR’s view, supply chain challenges over the last two years have only heightened the need for highly integrated smart port solutions, and vendors that are able to capture the full breadth of ports’ needs will see an explosion of opportunity over the next few years. Huawei should be well positioned to take full advantage of this growth.
The Huawei Global Analyst Summit reinforced many of the vendor’s strengths, including its ability to test and prove solutions in China, the advantages it gains from employing a technology-centric approach backed by hardware and software solutions, and its sheer scale. A new emphasis on consulting — if it is matched with sustained investments in training, selective hiring and concurrent upskilling around digital transformation — could enhance Huawei’s competitive advantages for engagements that extend beyond essential technology needs. Currently, TBR observes consultancies solidifying their relationships with the C-Suite, IT services vendors seeking deeper partnerships and technology vendors building professional services capabilities. Huawei can be part of all three of those trends, and the vendor’s near-term success may depend on how skillfully leadership manages any expansion into consulting.
On Monday, ManTech (Nasdaq: MANT) agreed to be acquired by private equity specialist The Carlyle Group Inc. (Nasdaq: CG) — the same investment firm that purchased Booz Allen Hamilton (BAH) after BAH split from Booz & Co. in 2008, took BAH public in a 2011 IPO and remained a stockholder until 2016. ManTech has been a publicly traded company since its IPO in 2002. Carlyle agreed to pay $96 per share for ManTech (on Friday, May 13, ManTech’s stock closed at $81.97 per share); taking into account ManTech’s $240 million in net debt, the total transaction value will be $4.2 billion, or roughly 1.6 times ManTech’s trailing 12-month (TTM) revenue of $2.596 billion as of 1Q22.
ManTech co-founder and longtime CEO (40 years) and Chairman (42 years) George Pedersen stepped down as chairman of the board in 2020 and officially retired from the company’s board in February 2022. His retirement from the board sparked rumors that the company was for sale, and industry observers wondered what would become of Pedersen’s controlling block of voting shares. According to ManTech’s 2021 10-K report, Pedersen held 32% of the common stock as well as nearly 83% of the combined voting power vis-à-vis Class B stock ownership. A Reuters report on Feb. 2 suggested that Pedersen’s family wanted to resolve his estate plan following his retirement, including exploring options for his controlling stake. Carlyle’s per-share purchase price represents a 32% premium on the price of ManTech’s stock as of market close on Feb. 2.
When rumors surfaced that ManTech was for sale, it was initially thought that ManTech’s acquirer would be a federal IT peer. Leidos, federal IT’s largest traditional systems integrator, was on the short list of potential buyers. Even after spending over $2.5 billion during 2020 and 2021 on acquisitions, Leidos (NYSE: LDOS) entered 2022 flush with liquidity after back-to-back years of record sales and backlog, sustained profitability, and stronger-than-expected cash from operations in 2021. Leidos certainly had the fiscal war chest to support another strategic purchase, even as it retires debt from its recent acquisition spree.
General Dynamics Technologies (GDT), specifically GDT’s Information Technology (GDIT) segment, was considered a potential buyer, having fiscal resources on par with Leidos, thanks to a corporate parent with a $60-plus billion market capitalization. GDIT has completed its acquisition of CSRA, purchased in 2018 for $9 billion, but the integration process was protracted, reviving speculation that originally surfaced around GDIT’s troubled purchase of Vangent in 2011 that the company struggles to assimilate acquired peers.
Parsons (NYSE: PSN), a longtime construction contractor for the Department of Defense (DOD) and a more recent entrant into the federal IT fray, was also thought to have an interest in ManTech as a way to continue diversifying its portfolio by building out its federal IT capabilities. Buying ManTech would have immediately garnered Parsons the scale to support large federal IT modernization programs, as well as a sizable presence in the Intelligence Community (IC). (ManTech is estimated to generate $1 billion annually from the IC.) However, Parsons would have been forced to rely more heavily on stock to facilitate the transaction, and it was thought the Pedersen family would be less amenable to such an arrangement.
Buying ManTech would have imparted similar benefits upon KBR Inc. (NYSE: KBR) (about $5 billion in federal IT revenue), also believed to be a potential buyer looking to diversify its solutions focus into federal enterprise technology but facing the same potential challenges structuring the transaction in a way that would be favorable to the Pedersen family’s preferences.
Serial federal IT acquirer CACI International (NYSE: CACI) was also rumored to be in the mix to purchase ManTech, which would have expanded CACI’s annual federal IT revenue base ($5.8 billion as of 4Q21 on a TTM basis) past $8 billion in total value, surpassing BAH ($7.9 billion as of 4Q21 on a TTM basis) and SAIC ($7.3 billion as of 4Q21 on a TTM basis), and significantly narrowing the gap with Leidos ($11.8 billion as of 4Q21 on a TTM basis) and GDT (also $11.8 billion as of 4Q21 on a TTM basis, though this includes roughly $4 billion from GDT’s Mission Systems group).
With its recent purchases of Bluestone Analytics (3Q21), an unidentified space-focused company (also in 3Q21), SA Photonics (4Q21) and ID Technologies (1Q22), it appears that the focus of CACI’s M&A strategy is on expanding the company’s high-end, high-margin technology capabilities, particularly in areas that enable wallet-share gains with existing clients in the DOD and IC. CACI’s acquisitions of SA Photonics and ID Technologies also showcase CACI’s preference for leveraging M&A to capture first-mover advantage in solution areas or markets in which the company expects to experience accelerating demand from its core DOD and IC customers.
In addition to its large IC footprint, ManTech is a long-standing IT contractor to the DOD, particularly with its suite of cybersecurity solutions. ManTech’s legacy with the DOD and IC, along with its highly regarded security offerings, would have added value to any of the federal IT peers rumored to be interested acquirers, or other well-funded federal IT competitors (e.g., Accenture Federal Services [AFS], CGI Federal or SAIC). However, ManTech has been a margin laggard in TBR’s Public Sector IT Services Benchmark report in terms of relative operating margin performance. ManTech has been ranked ninth or lower (out of 13 benchmarked companies) in the benchmark report since 2013.
We believe that despite the lucrative nature of its cybersecurity offerings and its operations in the IC, ManTech has largely retained a high emphasis on labor-based services, keeping its margin performance below that of peers. Also impeding relative profitability is ManTech’s focus on being a low-cost but technically acceptable contractor, while peers like CACI, Leidos, BAH and GDT have increasingly recruited superior talent to support a more aggressive pivot up the value chain with their offerings (AI, analytics, cloud, high-end defense platforms, C5ISR [command, control, computers, communications, cyber, intelligence, surveillance and reconnaissance]). In short, ManTech’s federal IT peers might have viewed acquiring ManTech as too margin-dilutive, particularly as a strategic acquisition. TBR also notes that ManTech’s top-line performance has been impeded by the drawdown of military operations in Iraq and Afghanistan over the last decade, while its efforts to expand its footprint in the federal civilian market seemed to stall during late 2021.
Ultimately, it was The Carlyle Group, with over $325 billion in assets under management as of March 31, 2022, that made the purchase. We are not aware of the terms of any competing offers, though we believe ManTech did garner some interest from fellow investment group Veritas Capital — the private equity backer of the three-way merger between Peraton, Perspecta and Northrop Grumman’s IT services unit in early 2021. We expect Carlyle will implement across-the-board cost rationalizations following the acquisition (likely accelerating workforce attrition in an already fiercely competitive federal IT labor market). Carlyle’s deep fiscal pockets will provide ample funding for additional acquisitions to expand ManTech’s suite of offerings in AI, analytics, automation, advanced cybersecurity (e.g., cognitive security), systems engineering and solutions at the tactical edge.
In the end, ManTech may return to publicly traded status as a larger and more profitable federal IT peer with a broader and more lucrative suite of solutions better aligned with the federal embrace of digital technologies, in a scenario more reminiscent of BAH’s IPO in 2011 after three years of Carlyle’s restructuring. Conversely, Carlyle’s ultimate goal may be to sell ManTech to a larger federal IT peer with the fiscal wherewithal for a strategic purchase that will either further cement its leadership position (e.g., Leidos, GDT, BAH or SAIC) or catapult its scale (e.g., CACI, AFS, CGI Federal or even IBM Consulting) into direct contention with established federal IT leaders.
In mid-March, TBR met with EY leaders to learn about their latest efforts around supply chain and sustainability, extending our previous discussions with the firm covering these areas separately. TBR heard from Glenn A. Steinberg, EY’s Global Supply Chain and Operations leader; Velislava Ivanova, EY’s chief sustainability officer and Climate Change and Sustainability Services leader for the Americas; Rae-Anne Alves, EY’s ESG (Environmental, Social and Governance) and Sustainability Supply Chain leader for the Americas; Martin Neuhold, EY’s Europe West Supply Chain & Operations leader; Lauren Rogge, EY’s senior manager of Climate Change and Sustainability Services; and Akshay Honnatti, EY’s U.S. Sustainability Tax leader.
During the hourlong discussion, three key observations emerged. First, the EY leaders’ emphasis on the global nature of supply chain and sustainability echoed the firm’s ongoing efforts to operate more seamlessly across international — and member firm — borders. Steinberg acknowledged EY’s Europe-based supply chain practice has been a leader globally, with more depth and experience than the Americas and APAC practices, but reiterated the globally integrated nature of EY’s approach to supply chain sustainability. Second, EY presented client stories centered primarily on traditional consulting engagements and outcomes, including strategies, road maps and change management. EY’s decision to play to its core strengths and avoid promoting technology for technology’s sake reinforces the firm’s overall strategy and its approach to clients’ business problems. And third, EY presented five themes, detailed below, which appeared to TBR to be split between regulator-driven and client-driven approaches. Given the nascency of supply chain sustainability as an EY practice and a priority for EY clients, TBR believes this five-themed framework can serve as a useful guide for clients, investors, regulators and any interested parties across both supply chain and sustainability. In short, expanding globally, playing to core consulting strengths and crafting a framework that resonates should be a solid formula for sustained growth.
To set the stage for the discussion, the EY team said their firm’s Supply Chain & Operations Consulting Practice is set to reach 30% year-to-year growth in 2021, and upward of 40% growth in the Americas. Among the drivers for that growth, EY mentioned ongoing shipping disruptions, excessive supply concentration risks and expiring legacy on-premises IT systems. As enterprises invest in tackling multiple related supply chain and operations challenges and increasingly tie every aspect of their business to sustainability goals, EY has seen new roles emerge, including a chief sustainability officer. In all, EY painted a picture of continued uncertainty around financial and regulatory pressures compounded by macro trends outside of most enterprises’ control. In other words, a perfect environment for consulting.
To make sense of the chaos, EY explained its framework for chief supply chain officers, including a version of EY’s customary “Now, Next, Beyond” approach, and then five key trends explaining what actions and investments their clients have undertaken (at EY’s recommendation). To set the framework, EY defined resiliency as the combination of visibility and agility, with clients encouraged to fully understand their supply networks, including their operating models and workforces.
Similarly, EY defined sustainability as the commonly used combination of environmental, social and governance, with the emphasis here more on clients taking an outside-in view of themselves. Rounding out the framework, EY described the “Now” as “cost-optimized, manual, rigid and linear,” the ”Next” as “agile networked ecosystems,” and the “Beyond” as “autonomous.” Within that framework, EY then introduced five key objectives:
In TBR’s view, Nos. 2 and 5 reflect the changing regulatory pressures around sustainability and increasing calls for structured, common reporting requirements (see this TBR assessment of an EY webcast on this exact issue). Nos. 1, 3 and 4 focus on enterprises themselves and the changes needed to meet sustainability goals and ensure enduring results.
To illustrate the importance EY places on the framework, the EY team walked TBR through several use cases, all tied explicitly to one or more of the five objectives. Across the use cases, three points stood out to TBR. First, one of EY’s most compelling use cases has been EY itself. The EY team shared an example of a global retailer seeking EY’s advice on diversity, equity and inclusion (DE&I) improvements based on what the client understood about EY’s own internal DE&I success. Second, EY’s technology integrations appeared to be a seamless component of solving a client’s problem, rather than an attempt to shoehorn technology into an engagement to sell a solution. And third, EY’s ability to bring regulatory expertise, particularly around tax issues, consistently elevated the firm’s value with clients.
EY has not been alone in trumpeting its own internal success, layering technology into consulting engagements and bringing governance, risk and compliance expertise to the table. What may separate EY, in TBR’s view, is the coherence and completeness of EY’s sustainable supply chain and operations framework. Repeatedly, the EY team came back to the trends affecting the firm’s clients and recognizing the opportunities to make fundamental changes, not simply short-term operational cost-takeout measures. One example of this long-term thinking came from Steinberg, when he noted that the “circular economy is one of the main levers to decarbonization.”
In EY’s own estimation, clients looking to “introduce circularity” into their business model will need to grapple with, among other challenges, “consumption of resources faster than regeneration cycles with an over-reliance on resources which don’t replenish themselves fast enough to sustain the ever-growing demand” and “regulatory requirements” which may create “extended producer responsibility, waste reduction regulations and the banning of certain products and materials.” Most enterprises have not planned for resources regeneration cycles and waste reduction regulations, but EY appears to understand most enterprises eventually will, so the smarter clients will start now, with EY’s guidance.
TBR believes sustainability and supply chain challenges require strategy consulting and change management-led approaches, not technology-driven solutions, which plays to EY’s strengths in the near term. As clients’ own sustainability competencies mature, EY should be well positioned to provide technology-enabled solutions to help clients sustain their decarbonization efforts. EY works with its Alliance Partners including Microsoft, SAP, Enablon, and P&G to develop and deploy new ESG solutions in the market focused on ESG reporting, carbon emissions, decarbonization, supply chain and product transparency. They have also formed a partnership with Nottingham Spirk, a product innovation company, around embedding ESG criteria into product design for its clients.
TBR’s favorable assessment of EY’s potential hinges in large part on EY’s track record for layering both trust and data into the firm’s consulting and technology solutions. The most critical element for sustainability will be measurement, starting with how the enterprises, regulators, employees and investors come to agreement on definitions for “sustainable” and “decarbonization.” If EY can lead that discussion and provide its clients with meaningful answers, the firm will stay ahead of the sustainability curve and continue growing its supply chain and operations practice.
Dell Technologies (NYSE: DELL) will undoubtedly face stiff competition on its journey to multicloud leadership. Building a simplified and unified multicloud environment remains an elusive concept for customers operating on a diverse set of platforms serving unique stakeholders. While by TBR’s own analysis, building a fully unified cloud experience for customers remains a distant goal for many vendors, Dell Technologies is taking steps in this direction by giving customers the tools to manage workloads running on Dell Technologies platforms more seamlessly and enabling customers to utilize Dell Technologies’ stack in tandem with public cloud. Success will hinge on Dell Technologies’ ability to scale partnerships, the speed at which Project Alpine initiatives ae rolled out to the market, and the company’s ability to win customers’ favor in leveraging Dell Technologies’ SaaS platforms for multicloud management.
Jeff Clarke, vice chairman and co-chief operating officer for Dell Technologies, opened Tuesday’s keynote by pointing out that software innovation across the industry is consistently outpacing hardware innovation. This theme resonated throughout the event, which focused on Dell Technologies and partner capabilities that can marry on-premises and public cloud data, automate IT management tasks and enhance security. Dell Technologies is building an ecosystem around its ISG portfolio that can increase the value of its own software and tools, particularly in the storage space.
ISG has performed competitively versus market peers over the past year, growing 4% year-to-year in 2021 to $34 billion in annual revenue. Although much of the product emphasis during Dell Technologies World focused on storage innovations, recent ISG growth has predominantly been driven by the server and networking business, which was up 4% in 2021, while storage has remained flat, partially due to marketwide challenges around securing components. Dell Technologies’ leadership position in the storage market is a key advantage for the company and is important to protect, particularly as competitors such as Pure Storage (NYSE: PSTG) and NetApp (Nasdaq: NTAP) have intensified their focus on hybrid cloud storage solutions via partnerships with major hyperscalers.
The primary service expansion announced for Dell Technologies APEX, Dell Technologies’ portfolio of cloud and IaaS offerings, was Dell Technologies APEX Cyber Recovery Services. This managed service provides day-to-day management of cyber recovery vault operations and assistance with data recovery should a cyberattack occur — valuable capabilities that help customers not only deal with ever-increasing ransomware threats but also fill in gaps for customers whose IT teams lack the capacity and expertise to address security issues.
Dell Technologies also expanded its partnership with Amazon Web Services (AWS)(Nasdaq: AMZN), announcing CyberSense for Dell Technologies PowerProtect Cyber Recovery for AWS, which adds AI and machine learning-based monitoring of files to determine if a cyberattack has occurred as well as applies post-attack forensics to identify the customer’s last good backup copy.
While Product Group VP Caitlin Gordon noted that Dell Technologies is not new to hyperscale partnerships, with 1,500 companies already using Dell Technologies Data Protection on AWS, expanding the breadth of the company’s partnerships to include more services and a larger number of cloud providers is essential to address a more robust number of customer use cases. Gordon stated that the Dell Technologies PowerProtect Cyber Recovery Service, which was launched with AWS in 4Q21, will be available on Microsoft Azure in the second half of 2022.
Dell Technologies’ Project Alpine, introduced in January, encapsulates the company’s efforts to make more of its software available on public clouds. Project Alpine will make Dell Technologies’ block and file storage software available on public clouds to give customers a unified experience managing and moving workloads between their on-premises Dell Technologies infrastructure and public clouds. Gordon provided an update on the progress of Project Alpine, noting that customers will be able to access the same Dell Technologies management tools they are already familiar with via a SaaS interface to move data between environments. Project Alpine is a key step in not only increasing the appeal of Dell Technologies’ storage portfolio but also remaining competitive against storage peers that are taking a similar approach to cloud alliances, such as Pure Storage Cloud Block Store, Azure NetApp Files and Amazon FSx for NetApp ONTAP.
Dell Technologies is the first hardware vendor to announce a partnership with Snowflake (NYSE: SNOW), a data warehouse company popular among public cloud users for analyzing and managing their company data. With this new partnership, Dell Technologies customers will be able to bring their on-premises data sets into the Snowflake cloud alongside public cloud data sets, a capability that is currently not available for other vendors’ on-premises systems. This type of partnership is an example of how Dell Technologies is expanding customer choice and the capabilities of its platforms, a trend that is likely to continue as Dell Technologies grows its partner roster and perhaps begins to ramp up acquisitions following the spinoff of VMware (NYSE: VMW) in late 2021.
Storage updates focus on software innovation
Dell Technologies focused on the software innovation theme as it highlighted improvements to its storage portfolio, which includes PowerMax, PowerStore and PowerFlex. For the enterprise PowerMax storage product line, Dell Technologies emphasized the zero-trust architecture and increased intelligence and automation, which reduces NVMe-over-TCP setup time by 44% and guarantees a 4:1 data reduction ratio. Dell Technologies highlighted a more SaaS-based approach for its midrange PowerStore operating system software, rolling out version 3.0 to customers free of charge with 120 new features.
Perhaps one of the most critical aspects of gaining share in multicloud environments for Dell Technologies will be winning over developers, an audience that has been more of a tangential focus for Dell Technologies in the past as its historical customer base has been rooted in infrastructure managers. In his keynote address, CEO Michael Dell noted the company is focused on making its solutions API-driven, increasing levels of automation and supporting Kubernetes platforms like VMware’s Tanzu and Red Hat’s OpenShift in addition to AWS EKS, which is available on Dell EMC VxRail and PowerStore.
Dell Technologies CIO and chief digital officer Jen Felch went on to discuss how the company has applied these principles to its own IT department. Dell Technologies focused on its own developer experience by creating self-service infrastructure through automation of virtual machine provisioning, networking and container deployment, in addition to providing developers with increased cost transparency to help them make more informed decisions. This was orchestrated through the Dell Technologies Developer Cloud, a user interface utilized by Dell Technologies’ developer and infrastructure teams. Per Dell Technologies’ own internal audit, enabling a self-service infrastructure helped the company’s developers increase their time spent on software development (versus administrative tasks) from 20% to 75%, a success point that Dell Technologies believes it can help its customer base achieve. Dell and Felch did not comment on what the company is doing to cultivate a Dell developer community, which will be another critical element to driving participation in the Dell ecosystem.
Dell Technologies’ PC business has been fueling the company’s revenue growth, with the Client Solutions Group (CSG) growing 27% year-to-year in 2021 to $61 billion in revenue, while also supporting strong margins. Highlighted PC innovations focused on the top end of Dell Technologies’ portfolio, for both business laptops and the Alienware gaming line, with a theme of collaboration, connectivity and security. Dell Technologies showcased a prototype of its Latitude 9330 laptop featuring buttons built into the trackpad to manage virtual conferencing functions such as turning the camera and microphone on and off, chatting, and sharing content. The PC also leverages AI-based features such as fixing videoconferencing performance issues by connecting to multiple networks simultaneously to increase bandwidth. From a privacy and security standpoint, the PC can detect whether onlookers are viewing the user’s screen and obscures the content from view.
Aside from innovations centered on user experience, Dell Technologies showcased the company’s focus on sustainability in PC design via Concept Luna, a three-pronged approach to reducing the carbon footprint of PCs by decreasing the size of components such as motherboards, intentionally choosing eco-friendly materials, and designing PCs to be more serviceable, which facilitates repairs and refurbishment.
Dell Technologies World 2022 illustrated Dell Technologies’ intentions to enable a multicloud ecosystem for its customers. The company is taking a broader approach, rather than relying solely on its APEX “as a Service” portfolio to drive growth, by embracing partnership opportunities with public cloud vendors and turning its attention toward meeting the needs of developers who are consuming vast amounts of infrastructure services. Partnerships are also a focal point for building a broader ecosystem. While Dell Technologies’ relationship with VMware remains close, the company’s first major event since the VMware spinoff gave Dell Technologies greater opportunity to highlight a broader range of partnerships, including its new alliance with Snowflake and in support of customers using OpenShift. The multicloud messaging throughout the event demonstrated that Dell Technologies understands its customers’ most essential market needs, and now the company must focus on executing to meet those demands, particularly through Project Alpine and by expanding its strategies to better cater to developers.
Kyndryl (NYSE: KD), a $19 billion spinoff from IBM (NYSE: IBM), operates as an independent company in the managed infrastructure services segment and designs, builds, manages and modernizes mission-critical technology systems. Kyndryl has existing infrastructure services strengths that were built over the years when the company was part of the IBM Global Technology Services (GTS) business unit. Established relationships with 75% of the Fortune 100 companies and more than half of the Fortune 500 companies will enable a smooth start for Kyndryl customers.
The company brings with it skilled talent, intellectual property (IP) and a unified services delivery platform that will support business expansion in areas such as cloud, security, cyber resilience, data, AI, automation and network edge technology across industries. Kyndryl has established efficient organizational, go-to-market and operating models that are less complex compared to IBM’s models for the former GTS business unit.
Additionally, Kyndryl has the freedom to choose which vendors to work with, so the company is progressively expanding its alliances and partner ecosystem with emerging technology providers, hyperscalers and ISVs to improve its ability to deliver solutions based on customers’ choices and needs and collaboratively deliver business outcomes through holistic solutions.
On Nov. 3 IBM completed the separation of its managed infrastructure services business to form Kyndryl, which has operations in 63 countries, approximately 89,000 service professionals with an average field experience of more than 10 years, and more than 4,000 blue-chip customers.
Kyndryl has the freedom to establish its own market-specific strategic direction and the flexibility to design its operations to drive profitable growth. The guiding principles for its organization are flatter, faster and focused — flatter in terms of Kyndryl’s new operating model; faster related to speed in delivery through simplification; and focused on providing innovation and value through agility. Kyndryl is also using its existing expertise in infrastructure services, which are supported by a global delivery network and operations in more than 100 countries, and capabilities in designing, building, managing and modernizing mission-critical information systems to bolster its growth. Existing expertise, coupled with global scale; IP, including more than 4,000 patents; methods; models; and breadth and depth of talent enable Kyndryl to advance customers’ digital transformations.
Having an operating model that is organized around customers and their geographic locations improves Kyndryl’s ability to align its expertise with local market trends and deliver business outcomes. Country leaders and managing partners collaborate with customers in their home geographies, and knowing the language and having a cultural affinity enable Kyndryl to establish strong customer relationships.
Kyndryl has six global practices — Cloud; Applications, Data & AI; Security & Resiliency; Core Enterprise & zCloud; Network & Edge; and Digital Workplace — and an Advisory and Implementation Services practice that underpins these six businesses to enable adoption and integration of advanced technologies that drive business progress. As Paul Savill, global practice leader, Network & Edge explained during a briefing on the practice, Kyndryl is developing competencies and innovation at the global practice level, and teams in regions look to the six practices to create solutions that customers request.
The company delivers integrated solutions across the six global practices and provides customers with holistic solutions and a unified customer experience. Kyndryl enables customers to modernize technology and operations with faster time to value, improving business outcomes and experiences. Kyndryl’s new structure resembles the growth model Accenture launched in March 2020, rolling up the P&L on a geographic basis due to the need for client proximity and culture affinity and also because most technology partners’ sales models are aligned by territory.
In March Kyndryl’s Third Party Advisor group organized virtual briefings on the six global practices. Key highlights from the briefings include:
Prior to the spinoff, the GTS business unit revolved around traditional IBM infrastructure services; however, Kyndryl has an opportunity to expand in areas related to digital transformation, data, applications and security services. IBM is Kyndryl’s largest technology partner, given the historical relationship between the two companies. Kyndryl is also broadening its partner ecosystem by building relationships with hyperscalers, systems integrators, hardware and software providers, and next-generation technology providers as well as investing in broader service capabilities to diversify its portfolio, support growth and remain focused on solving customer challenges.
While Kyndryl has IT consulting and implementation experts who were brought over from GTS and are responsible for architectures and the technology side of transformations, the company is investing in expanding its advisory and implementation services to support its goal to increase revenue share in the service area from approximately 10% of revenue before the spinoff to 15% of revenue in the midterm. While Kyndryl has strong IT consulting expertise, areas such as business consulting and application modernization and transformation are less developed because such capabilities remained within IBM after the spinoff and are now part of the new IBM Consulting. Developing new joint solutions with partners is one lever for evolving the business mix and expanding advisory and implementation services.
TBR expects Kyndryl to increase interactions with strategy firms, such as McKinsey & Co. and Boston Consulting Group and Big Four firms, such as EY and PwC, to address the business side of transformations and be able to characterize what technology-enabled solutions Kyndryl needs to increase value for customers. TBR also expects Kyndryl to increase interactions with the new IBM Consulting to address business, applications and the process side of transformations.
Kyndryl’s hyperscaler alliances include:
Examples of Kyndryl’s partnerships with other vendors:
On March 1 Kyndryl reported financials for the first time since its inception. During 4Q21 Kyndryl’s revenue declined 7.5% year-to-year as reported in U.S. dollars and 4% year-to-year in constant currency to $4.6 billion. For 2021, revenue on a pro forma basis declined 3.6% year-to-year in U.S. dollars and 5% year-to-year in constant currency to $18.7 billion. Adjusted EBITDA margin decreased to 14.6% of revenue in 4Q21 on a pro forma basis, down from 18.2% in 4Q20, and to 14.7% of revenue in 2021 on a pro forma basis, down from 15.3% in 2020. Operating margin declined to -15.3% in 4Q21, down from -14.1% in 4Q20, and to -9.8% in 2021, down from -8.7% in 2020. Signings declined 22.8% year-to-year to $4.4 billion in 4Q21 and 24.2% year-to-year to $13.5 billion in 2021, negatively affected by uncertainty around the spinoff of Kyndryl from IBM.
The revenue growth pressures reflect the negative effects from Kyndryl’s operation as a captive business to IBM prior to the spinoff, including its inability to adjust its portfolio to dynamic market trends and its limited opportunities within the partner ecosystem. Prior to the spinoff, revenue in GTS’ Infrastructure & Cloud Services segment, which moved to Kyndryl, declined for 11 consecutive quarters beginning in 3Q18 before returning to revenue growth of 0.5% year-to-year in 2Q21. While IBM was ramping up activities around modernizing infrastructures through hybrid cloud and managing mission-critical workloads, lower business volumes and commoditization were driving growth pressures in classic infrastructure services areas, a trend that continued somewhat for Kyndryl in 4Q21.
Kyndryl’s adjusted EBITDA margin and operating margin were negatively affected by transaction costs of $129 million in 4Q21 related to the spinoff, such as advisory banking and legal fees and employee retention expenses. The company also took a goodwill impairment charge of $469 million in 4Q21, associated with its business in EMEA and the U.S., which negatively affected operating margin in 4Q21 and for the full year. Kyndryl expects to have a considerable amount of separation work, which will lead to higher expenditures during 2022, such as costs related to migration of systems, rebranding and execution on an employee retention plan that IBM initiated prior to the spinoff.
Kyndryl is taking actions to transform its business and strengthen its revenue and margin profile in the next three years. Augmenting advisory and implementation services capabilities will positively affect revenue growth as such projects have a shorter duration, convert faster to revenue compared to long-term and large-scale outsourcing engagements, and are also margin accretive. On the profitability side, the company will be lowering its asset intensity ratio and following an expense management initiative. However, Kyndryl expects financial results for fiscal year 2023 (ending in March 2024) to resemble results for the full-year pro forma 2021, with declining revenues year-to-year in constant currency, adjusted EBITDA margins in the midteens and breakeven-adjusted pretax income.
Kyndryl has the opportunity to improve signings performance as a result of its expanding partner ecosystem and expects to generate double-digit signings growth during fiscal year 2023. While such activities will enable Kyndryl to return to revenue growth in 2025, during the next two years the company will be exposed to competitive pressures and dynamic market trends. Generally, companies that provide infrastructure services, including Kyndryl, are not able to shift direction quickly. Kyndryl usually starts its year with approximately 85% of projected revenue already under contract due to its multiyear engagements. Long sales cycles and long ramp-up times in managed services elongate signings conversion into revenue and profitability, most likely leaving Kyndryl with financial performance below peer averages in the next two years.
Kyndryl’s three initiatives in the areas of alliances, advanced delivery and accounts will enable the company to drive revenue and signings growth and improve profitability in the near term. Increased activities with new alliance partners enable the company to operate across a wide range of technologies, increase wallet share with customers, attract new customers and drive revenue growth. Kyndryl is targeting approximately $1 billion in signings by fiscal 2023 from partnerships with hyperscalers such as AWS, Google Cloud and Microsoft, which will lead to incremental revenue streams, a new profit source for the company.
Kyndryl expects to generate approximately $200 million in annualized margin-accretive revenue by fiscal year 2023 from engagements with hyperscalers and continue to increase hyperscaler certifications, which collectively stood at 16,000 at the end of 2021. Advanced delivery is tied to establishing skills to address demand, such as upskilling people, developing certifications and positioning close to customers. Expanding automation in service delivery will enable the company to redeploy people to work on higher-value and higher-margin activities, such as freeing up experienced technologists and delivery experts to work on new opportunities with hyperscalers; enhance the quality of its service delivery; and reduce costs, such as eliminating approximately $200 million in annualized costs by fiscal year 2023.
On the accounts side, Kyndryl aims to address challenges in low-margin business areas, which will drive approximately $800 million in pretax income opportunity. The company will emphasize turning around margin-dilutive engagements, such as by expanding relationships around new revenue streams with new alliances and increasing activities around the six global practice offerings and the advisory and implementation services business. Kyndryl plans to deliver a $75 million benefit through March 2023 and begin fiscal 2024 with $200 million in annualized run-rate benefits. Strictly executing on strategic priorities will be key to the company’s success in the next two years.
Compared to IT services peers, Kyndryl, which reported $18.7 billion in revenue in 2021, ranked No. 6 in revenue size among the 31 vendors covered in TBR’s 4Q21 IT Services Vendor Benchmark report. Kyndryl is slightly larger in revenue size than Cognizant, which generated $18.5 billion in revenue in 2021, but is smaller than Fujitsu, which garnered $21.3 billion in revenue, and Capgemini, which reported $21.5 billion in revenue. With a TBR-estimated $15.1 billion in revenue in managed infrastructure services in 2021, which includes IT outsourcing and managed cloud services, Kyndryl is the revenue leader in the segment among the 31 vendors in TBR’s IT Services Vendor Benchmark. The closest competitors in the segment are DXC Technology with $8.2 billion in revenue in 2021, NTT DATA with $6.4 billion and Atos with $6.1 billion.
Note: The above graph is from TBR’s 4Q21 IT Services Vendor Benchmark, which will publish on April 18. TBR’s IT Services Vendor Benchmark is a quarterly research program that covers 31 leading vendors in the IT services segment and analyzes their go-to-market strategies and investments, alliances and acquisitions, resource management and financial performance.
Kyndryl will be part of TBR’s Professional Services and Cloud Services research areas and will be included in TBR’s IT Services Vendor Benchmark and Cloud Professional Services Benchmark. TBR will include Kyndryl data and analysis in TBR Insight Center™, an interactive platform that provides robust and dynamic visualizations of TBR’s benchmark and customer study data, saving customers time and speeding business decision making. After two quarters of earnings, TBR will evolve the Kyndryl profile into a more comprehensive report, with details to be determined based on our analysis of the vendor.
In the company’s first event since the Infosys Leadership Forum in Americas in 2021, Infosys once again hosted clients, analysts and partners for in-person and virtual sessions during its one-day Infosys Cobalt World Tour, which was held at Madison Square Garden. With Infosys Cobalt increasingly becoming the backbone of the company’s performance and go-to-market efforts, the themes of the event were well aligned with Infosys’ goal of becoming a digital transformation partner known for its strong execution capabilities.
TBR left the Infosys Cobalt World Tour event with three takeaways that will guide our continuing analysis of Infosys’ cloud capabilities and performance:
With revenues from Digital reaching 59.2% of Infosys’ (Nasdaq: INFY) total sales in 1Q22, up from 51.5% a year ago, the company is demonstrating its ability to capitalize on its investments in portfolio, talent and alliance partners, all necessary ingredients for expanding client wallet share. Infosys defines its Digital services as being “comprised of service and solution offerings of the company that enable our clients to transform their businesses. These include offerings that enhance customer experience, leverage AI-based analytics and big data, engineer digital products and IoT, modernize legacy technology systems, migrate to cloud applications and implement advanced cyber security systems.”
Infosys wrapped up FY22 on a high note as the company registered its largest growth in over a decade, increasing revenues 20.3% on an annual basis to $16.3 billion. Infosys added $2.75 billion in net-new revenue in FY22, which was higher than the combined $2.62 billion in revenue from the three previous years. Infosys’ success was largely enabled by Infosys Cobalt as the company has been able to up- and cross-sell Cobalt to clients seeking to modernize and optimize IT architectures and business processes through adoption of cloud-ready services and solutions while lowering total cost of ownership. Infosys launched Infosys Cobalt, a suite of platforms, solutions and services, in August 2020.
Today Infosys Cobalt taps into the company’s catalog of over 35,000 assets, 300 cloud solutions blueprints, and a developer community of startups as well as public and private providers. While Infosys Cobalt has its own global leadership structure and P&L, Infosys’ decision to not set it up as a stand-alone unit but rather as a go-to-market framework that pulls assets from within Infosys and its broader ecosystem enables Infosys Cobalt to better support the company’s cloud performance. (TBR’s estimates of Infosys’ cloud revenue and growth can be found in TBR’s Cloud Professional Services Market Forecast).
During the event, Infosys let clients tell the company’s story rather than having leadership lead the presentations, an approach that in TBR’s view was different than how peers usually run similar forums. The experiences and use cases they all shared further solidified Infosys’ cloud expertise including not only traditional lift-and-shift migration support but also its ability to engage in security-wrapped outcome-based business discussions rooted in Infosys’ technology execution prowess. Infosys’ clear vision around its cloud value proposition takes into account important aspects of enterprises’ business and digital transformation programs, including culture, talent and deepening clients’ trust.
In addition to facing challenges around culture and talent — issues that all vendors are grappling with industrywide — Infosys must also focus on deepening clients’ trust, particularly as it seeks to adopt “as a Service” pricing models at scale. Managing client relationships beyond the initial point of sale is key, and we believe Infosys will accelerate its efforts to adopt a beyond-the-contract type of mentality to ensure renewal rate goals are met, especially as cloud contracts pivot from traditional large, five-plus-year outsourcing setups to shorter-term subscription-based contracts where clients have an opportunity to switch between providers, further compelling Infosys to stay on top of relationships.
Though Infosys continues to hire in bulk, sales and support staff declined 50 basis points as a percentage of the total workforce to 5.1% to 16,156 in FY22, up from 14,582 in FY21, reflecting the company’s focus on its delivery staff as Infosys’ sales strategy succeeds in the market. Additionally, automation enables Infosys to standardize processes in service delivery, which we believe will be critical as Infosys scales “as a Service” sales. “Operation remains very core to us, [helping with] cost optimization every year. We’ve taken out between 3,000 to 4,000 people, automating and putting in bots, and this is fourth quarter.” — Nilanjan Roy, CFO, Infosys, 1Q22 earnings call
With business services pivoting from noncore to core, Infosys must also account for the twofold implication of scaling “as a Service” sales at scale. Monetizing both the development and management of cloud applications through a consumption-based commercial model carries risks and rewards for Infosys, a paradigm many systems integrators face. For example, Infosys needs to bear the cost of staffing its bench with engineers to develop the applications far in advance, often without knowing how long it will take to monetize the SaaS offering. Infosys has tried to pursue SaaS sales at scale in the past, but we believe the company now has a clearer vision, expectation and path forward on how to approach the opportunity. The incremental approach Infosys takes to scale its cloud-related sales is centered around Infosys Cobalt’s ability to deliver value-wrapped proprietary and partner assets in a services-oriented architecture, which solidifies Infosys’ value proposition within the ecosystem. Such a strategy allows Infosys to stay within its swim lane while also helping it demonstrate the company is willing to share risk without jeopardizing performance by attempting to sell stand-alone software solutions.
While Infosys’ Products and Platform offerings are available on both a license and subscription basis, the company still largely uses many of these assets to drive services engagements. As it relates to Infosys cloud sales, the Infosys Cobalt store provides an access point for clients to explore catalog offerings, with the underlying goal of driving services engagements for Infosys. The additional value of Infosys Cobalt offerings also comes from the company’s ability to wrap an industry layer on top of the technical functionality of these assets, such as the launch of the Infosys Cobalt Financial Services Cloud offering. The solution will support Infosys’ efforts to accelerate performance within its largest industry vertical and address client pain points around areas such as anti-money laundering, transaction reconciliation, open banking, consumer lending and mortgages. Such an offering enables Infosys to build trust with business unit leaders and expand the company’s addressable market especially as clients seek to monetize their user data generated through B2B and B2C interactions with cloud enabling the speed of access.
As much as Infosys values the role of partners, the company recognizes the importance of its greatest assets — its people. However, Infosys has not been spared in the war for talent. The company continues to evolve its resource management value proposition from hiring for skills to hiring for potential, investing in talent development programs that target nontraditional recruits with the goal of establishing emotional connections with the brand, which could help strengthen loyalty and improve retention. For example, a collaboration between the Infosys Foundation USA and the CBS television series “Mission Unstoppable” will highlight three teachers from the foundation’s Pathfinders Institute program — Infosys’ professional development program for K-12 teachers in computer science. The company also expanded the Infosys Springboard learning program to the U.S., which currently has 1.2 million users largely in India, to support early learning as well as career reskilling programs in the U.S. as the region remains a priority for Infosys.
Further, the first group of apprentices graduated from Infosys’ New Apprenticeship (NEW) program, having undergone 12 months of structured and on-the-job training in IT services and incident management. NEW cohorts also earn certifications, such as ServiceNow Certified Systems Administrator, and can earn college credits at Southern New Hampshire University. While much of the cloud-related work today is largely geared toward cloud application development, migration and managed services, Infosys’ leadership sees a bigger gap in the support domain moving forward due to increasing use of low-code development tools, especially as the company seeks to scale deployment of Infosys Cobalt’s 35,000 assets including 300 industry solutions. Training staff on low-code/no-code solutions will help it build trust with business buyers while supporting Infosys Cobalt’s goal to evolve its value proposition toward delivering business outcomes.
As Infosys’ portfolio and go-to-market efforts enable the company to climb up the value chain within enterprises, the company remains realistic about its core strengths. The role of alliance partners is key across both technology and advisory services. Just as Infosys seeks to capitalize on partners’ capital expenditures outlays — particularly hyperscalers — and position itself as an ecosystem orchestrator, the company also appreciates the value consulting partners bring to the table. The recent formalization of the global partnership with EY, which is focused on deployment and management of industry-aligned digital assets, further solidifies Infosys’ ability to recognize its strengths rather than pursue risky bets and try to branch out into uncharted territories.
The event showed across multiple levels that Infosys sticking to what it does best is highly advantageous when applied in a partner innovation setting, including around sustainability. Recognizing that no one vendor can do it all, Infosys’ EVP and head of manufacturing spoke at length during one session with a client executive from a global HVAC company about the two companies’ relationship around HVAC and building system sustainability, including how Infosys is leveraging the HVAC company’s capabilities as both a client and an innovation partner. With nearly 40% of the world’s carbon emissions coming from buildings, decarbonizing physical estates will be one of the most challenging tasks for enterprises, particularly as the majority of existing HVAC systems are not intelligent or connected in any way. The two companies are trying to tackle this issue and make the well-known phrase “what gets measured gets managed” a reality for the HVAC industry.
Through the conversation TBR came to understand that Infosys Cobalt provides the bridge for its partner’s HVAC expertise with the possibilities of IoT and big data. Work between the two companies has helped Infosys reduce its emissions (Infosys became carbon neutral as of 2020) and enabled the global HVAC company to track building efficiency and troubleshoot issues before even arriving on customers’ sites by leveraging the cloud and IoT-powered HVAC systems. While Infosys’ services line of business does not create emissions from manufacturing, its manufacturing clients can be confident that Infosys is bringing the right partners to the table, is a carbon-neutral supplier (therefore supporting its clients’ scope 3 downstream emissions targets), and can apply its technical prowess to help measure where clients are starting out, enabled by cloud.
From cyber to AI to industry specialization, Infosys Cobalt will continue to provide the bridge between Infosys’ core and new portfolio offerings while supporting the company’s efforts to extract additional wallet share from its client roster and pursue new logo opportunities. Just as Infosys’ leadership, clients and partners throughout the event recognized that scaling adoption of new ideas and solutions is less about technology and more about the culture of an organization, the same sentiment applies to Infosys’ internal transformation. Infosys’ organizational culture has gone through growing pains associated with its portfolio as well as client demands over the past four decades. It has not always been easy or straightforward and has sometimes resulted in shaky performance.
Today, Infosys’ culture is strong largely due to leadership’s ability to recognize the company’s place within the ecosystem. Despite rising attrition levels, which is an industrywide trend, Infosys’ approach to talent training and inclusion provides the strong foundation necessary to pursue organizational goals. Infosys Cobalt is no exception. Instead of setting it up as a stand-alone unit, an approach many of Infosys’ peers have taken with similar offerings, Infosys Cobalt spreads across the entire organization, leveraging the skills, expertise and industry knowledge of the company’s sales and delivery personnel. Ensuring Infosys Cobalt provides consistent and standardized client support is key, but could create internal competition when trying to pull the most skilled resources in multiple client engagements at the same time. However, this also presents an opportunity for Infosys to test its ability to become an ecosystem orchestrator. Adopting a customer zero mindset often provides the most valuable use case before deploying at scale to market.
TBR will continue to track and analyze Infosys’ performance and investments as part of its quarterly Infosys report, IT Services Vendor Benchmark, Global Delivery Benchmark and Digital Transformation research. Contact us today to gain full access to these upcoming publications.
Join Principal Analyst Angela Lambert and Research Analyst Jacob Fong for a review of current and projected financial trends among server and storage markets. The team will cover segment financial performance from TBR’s latest IT Infrastructure Benchmark as well as expectations for market growth based on results in our latest IT Infrastructure Market Forecast.
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