In preparation for Atos’ split into two publicly traded entities — Atos and Eviden — the company held Atos Analyst Day in Paris and online in June 2023 focused on Tech Foundations, the business unit that will become the new Atos after the separation is complete 2H23. Atos’ leadership team provided insights on Tech Foundations’ transformation initiatives, go-to-market and growth strategies, financial performance, and business line strategies, specifically around the Hybrid Cloud & Infrastructure, Digital Workplace, and Technology Advisory & Customized Services lines.
Strictly Executing on Its Transformation Plan Will Enable the New Atos to Improve Financial Performance Through 2026
Tech Foundations CEO Nourdine Bihmane opened the event with the statement: “The future is bright for Tech Foundations.” Bihmane announced that the driving forces for Tech Foundations’ (the new Atos’) strategic direction are “refocusing, recovering and rebounding” the business between 2023 and 2026. As part of this transformation, three key objectives have been established for Tech Foundations:
- Redefining the portfolio to address key customer priorities, covering a total addressable market (TAM) that is growing faster and is 44% larger than the TAM covered during 2022.
- Reducing activities in nonstrategic areas, such as BPO and software resales, which accounted for 17% of revenue in 2022 and will decrease to 6% of total revenue in 2026, while expanding core business areas such as infrastructure, hybrid cloud and platforms, digital workplace, and professional services.
- Executing a comprehensive transformation plan to improve profitability through delivery modernization, project margin expansion, and cost improvement around SG&A and third-party spend. By 2026, such activities will generate gross run-rate benefits of approximately €1.2 billion (or $1.3 billion), €270 million (or $290 million) of which was delivered between 1Q22 and 1Q23 and 65% to 70% of which will be delivered by 2024.
The timeline for Atos’ separation into two entities is on track, and the transformation initiatives within Tech Foundations that were started one year ago with the announcement of the split are generating results. Tech Foundations’ revenue from core business areas, which accounted for 83% of revenue in 2022, increased 1.2% year-to-year, an improvement from the 9.2% year-to-year decline in 2021. A return to revenue growth is expected by Tech Foundations in 2026; however, growth will be muted during the next three years and revenue will reach its lowest level, at €5 billion (or $5.4 billion), in 2024, down from €5.4 billion (or $5.8 billion) in 2022.
Tech Foundations’ operating margin increased from -1.3% of revenue in 2021 to 0.7% of revenue in 2022. This prompted the business segment to update its expectations for the new Atos to achieve an operating margin of between 6% and 8% of revenue in 2026, which is higher than its previous midterm ambition of reaching a positive operating margin in 2025 and surpassing 5% in 2026.
Expanding Hybrid Cloud, Technology Consulting and Digital Platforms Capabilities Increases Tech Foundations’ Value Proposition
The new Atos that will emerge from the Tech Foundations business will have more than 52,000 employees globally and will operate across 69 countries. The new Atos will also have a strong foothold in Europe, similar to Atos’ current composition. Tech Foundations is shifting its portfolio, a necessary step for the organization to capture opportunities in a larger and faster-growing addressable market.
While core infrastructure services and private cloud are existing capabilities at Atos, the company is adding solutions around hybrid multicloud infrastructure and forming the Hybrid Cloud & Infrastructure area, which accounted for €2.1 billion (or $2.3 billion), or 40%, of Tech Foundations’ revenue in 2022. Atos positions itself as a managed services provider across the cloud continuum, addressing clients’ traditional infrastructure needs, including mainframes, and integrating with private, public, hybrid and sovereign cloud; edge services; and multicloud environments.
Atos has been delivering data center management services for years and is now expanding relationships with hyperscalers, notably Amazon Web Services (AWS) (Nasdaq: AMZN). In November 2022 Atos expanded its partnership with AWS by signing a multiyear Global Strategic Transformation Agreement that enables Atos customers with large-scale infrastructure outsourcing engagements to speed up the migration of workloads to the cloud and transform digitally.
As part of the Atos Cloud Catalyst solution, Atos chose AWS as its preferred enterprise cloud provider and AWS named Atos as a strategic partner for ITO and data center transformation. Atos is proactively working with managed services customers and offering hybrid cloud services combined with AWS technology advisory services, digital engineering, AI and machine learning (ML) expertise to enable clients’ cloud migration journeys. Partnering strategically but not exclusively with AWS is a smart strategy, as technology agnosticism does not resonate in the market as much as is used to and Atos is making a move to partner publicly and deliberately with AWS.
On July 3 Tech Foundations launched its Technology Consulting portfolio of advisory services. The new portfolio expands the business unit’s professional services capabilities and enables C-Suite executives to establish technology road maps and drive business outcomes utilizing solutions in areas such as generative AI (GenAI), data, analytics, automation and IoT.
Technology Consulting is staffed by teams of global and local experts and is part of Tech Foundations’ new Technology Advisory & Customized Services service line. Technology Consulting will support clients’ business and technology organizations by offering customized digital transformations utilizing local presence and partner ecosystems, such as technology partners, hyperscalers and academia.
Atos expects Technology Consulting to be a growing and highly profitable business line. Grouping Atos’ existing IT consulting resources into a formal service line and expanding Technology Consulting through internal mobility and hiring will enable Atos to address dynamic market trends.
However, Atos will have to offer appealing employee benefits and career progressions to attract skilled consulting professionals and prevent them from defecting to IT services peers with established consulting practices and a history of operating in the consulting sector, such as Accenture (NYSE: ACN), IBM Consulting (NYSE: IBM) and Atos’ France-based competitor, Capgemini. Because Atos lacks the consulting track record of these peers, the company will need to leverage its established client relationships to win consulting engagements.
Tech Foundations has also established a new service area called Digital Business Platforms, which comprises vertical industry solutions, such as digital identity, connected solutions, major sporting events and sustainability. Digital Business Platforms is an “incubator” business line that has been combined with Tech Foundations’ Growing Markets region to drive expansion of new industry-related digital offerings.
Tech Foundations is not offering everything for everyone across industries; rather, it targets complete use cases that it can replicate in sectors of strength. For example, Tech Foundations is utilizing its 30-year collaboration with the Olympic Movement and more than 20 years of experience as a Worldwide IT Partner of the Olympic and Paralympic Games to create use cases for clients in the sports industry, such as the Union of European Football Associations (UEFA).
In addition, Tech Foundations is utilizing digital identity use cases from the U.K. and France to securely and seamlessly digitalize citizen services in Morocco and Togo.
Embedding GenAI Into Offerings, Service Delivery and Internal Functions Enhances Tech Foundations’ Value Proposition and Relevance
According to Bihmane, GenAI is already in use and is disruptive. Tech Foundations is utilizing GenAI internally with the goal of optimizing processes — for example, in sales, around proposal writing; in procurement, driving RFP generation and supplier assessments with much more intelligence; and in marketing, accelerating output and time for information. Tech Foundations is enhancing its portfolio with GenAI offerings and augmenting service delivery with GenAI solutions.
For example, in Digital Workplace services, the digital workplace agents and technicians utilize GenAI solutions for faster issue resolution time and increased customer satisfaction, while in Hybrid Cloud & Infrastructure, professionals use GenAI for coding assistance and error management. Establishing an advisory practice around GenAI enables Tech Foundations to address the ethical side of adoption for clients as well as for its own internal operations as the business unit transforms its delivery, such as by swapping junior-level resources for GenAI capabilities.
According to TBR’s June 2023 Digital Transformation: Cloud Ecosystems Market Landscape, “[T]he nascency of GenAI will require vendors to clearly articulate potential use cases to drive adoption. While content generation presents an easy-to-understand use case, deeper, specialized workflow automation will be more difficult to prove ROI on, as it will require greater time and money to tailor such automations to the enterprise.
TBR believes this work, paired with challenges such as data protection, will represent a significant consulting opportunity for the IT services community. Specifically, IT services firms possess not only the trust of buyers but also the knowledge of buyers’ businesses to educate clients and then help tailor GenAI tools to their business needs. Service vendors, though, must account for the implications on their business models as GenAI matures.”
Sales Organization Transformation and Expanded Alliance Relationships Will Improve Tech Foundations’ Commercial Performance in the Next Few Years
Strengthening commercial activities improves Tech Foundations’ ability to recover revenue growth by increasing signings and book-to-bill from approximately 70% currently to up to 110% through 2026. The organization appointed Clay Van Doren as chief growth officer, a new role to oversee all sales activities.
Tech Foundations also restructured its sales organization to strengthen regional sales, streamline operations and consolidate resources. According to Van Doren, “One size does not fit all in all geographies” in which Tech Foundations operates, so the organization is pursuing a tailored growth strategy in each geography. Adjusting its business line mix based on local demand and client mix in each geography improves Tech Foundations’ ability to strengthen relationships, cross-sell and upsell services, and drive business outcomes through client proximity as well as technology and domain expertise.
While geographic sales organizations are responsible for deals valued at less than €30 million (or $32 million) in total contract value, Tech Foundations is investing in business development, advisers and large deal teams. The organization created deal pods in each region for large deals to drive cross-sell and upsell opportunities and added 40 people to expand and refresh the large deals team. Aligning incentives on win rates and goals for revenue, profit and cash will help Tech Foundations improve deal quality in terms of revenue and profit contribution and accelerate its shift away from deals with unfavorable financial profiles.
Expanding relationships with hyperscaler and alliance partners improves Tech Foundations’ pipeline origination. While Tech Foundations has fallen behind the competition in driving additional profitable business with alliance partners, scaling joint sales initiatives will support the organization’s goal to have 15% of its revenue generated through joint work with partners.
During the past 12 months, Tech Foundations achieved €750 million (or $805 million) of alliance-derived pipeline. Eviden will be a core partner for the new Atos after the split is complete, complementing Atos’ portfolio with digital solutions, cloud services tied to the applications layer, big data and cybersecurity offerings.
The New Atos Will Gradually Improve Competitive Position
Tech Foundations’ strategic transformation is moving the organization in the right direction and will advance its ability to compete with peers and drive sustainable revenue growth and profitability improvement in the coming years. However, the organization has yet to reach the financial levels of key competitors in the IT services segment.
For example, operating margins for providers such as Accenture, Capgemini and NTT DATA were between 7% and 15% of revenue during 2022, while operating margins for India-centric providers, such as HCLTech, Tata Consultancy Services and Infosys (NYSE: INFY) ranged between 18% and 24% during the same period. Revenue growth for the former three ranged between 3% and 16% year-to-year in U.S. dollars during 2022, while for the latter three growth ranged between 10% and 15% year-to-year.
IBM spinoff Kyndryl, which has been performing as a stand-alone managed infrastructure services provider since November 2021, will be a close competitor to the new Atos in terms of portfolio coverage. While Kyndryl is larger in size, with $17 billion in revenue in 2022 and approximately 90,000 employees, the company is going through an organizational, go-to-market and portfolio transformation, which resembles that of Tech Foundations.
For example, expanding relationships with what Kyndryl calls its “blueprint accounts and focus accounts” and utilizing new capabilities gained through alliance partners enable the company to improve customer profitability, offer better margins, increase productivity and deliver higher-value services.
Long sales cycles and ramp-up times in managed services elongate the conversion of signings into revenue and profitability, which in TBR’s view will most likely result in below-average financial performance for Kyndryl through 2024; however, the company has a strategic plan to improve performance and grow revenue by 2025.
Looking beyond 2026, platformization of its portfolio will be a core driver for the new Atos. The company plans to shift from a digital orchestrator to a provider of digital Platform as a Service solutions and enhance activities around subscription-based services. Atos also plans to own vertical and horizontal IP to drive software revenue generation and utilize next-generation offerings to scale GenAI activities.
Accenture is a vendor that has been investing in platform-enabled services over the past few years. According to TBR’s 1Q23 Accenture report, “Accenture’s investments in platform-enabled services, including solutions such as SynOps, myWizard, myConcerto, myNav and others, enable the company to accelerate time to market and offset the additional staffing costs associated with project management and support.”
While the new Atos will experience financial challenges and competitive pressures during the next two years, the company is making smart moves in its strategy, such as replicating and scaling proven solutions, concentrating on certain industries, becoming a preferred partner for AWS, restructuring sales, and recognizing geographic differences in its go-to-market approach. Strictly executing on its plan and tracking progress along the way will enable the new Atos to successfully transform into a growing and profitable company.