One Lenovo: Creating a Cohesive Global Technology Solutions Company Begins with Unification

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Lenovo Global Industry Analyst Conference (GIAC) 2023 was the first cross-business unit analyst event Lenovo has held since the start of the pandemic. The conference aimed to give analysts a view of the full breadth of Lenovo’s portfolio, the corporate identity weaving through the company’s various line-of-business (LOB) strategies, and the executives running the show from behind the scenes. Clear goals of the event were to drive market awareness of Lenovo’s capabilities, particularly around its Infrastructure Solutions Group (ISG) and Solutions and Services Group (SSG), and to contribute to the company’s multiyear efforts to reshape its brand image and be known as a wholistic technology solutions company.

Creating intersegment coherence with One Lenovo: CEO Yang Yuanqing

Among the challenges Lenovo has encountered as a global business, maintaining operational consistency while minimizing the increase in organizational complexity as the company scales is chief among them. As Lenovo grew beyond selling PCs with the acquisition of IBM’s (NYSE: IBM) x86 server business in 2016, the business units did not necessarily create broad synergies beyond operations optimization such as component sourcing and manufacturing. More specifically, the sales motion became and remains quite fragmented due to the differences in use cases and end-user personas of PC and server purchasers. To address this, Lenovo is undergoing a transformation to become a more cohesive company instead of a siloed one. This transformation effort has been dubbed “One Lenovo” and represents both an internal process and philosophy shift as well as an external interface shift to unify and simplify the company’s go-to-market approach for its customers and partners.

 

Lenovo CEO Yang Yuanqing’s background and affinity for hardware underpinned his sweeping message, which was a simple and respectably grounded one: Lenovo will continue to have the DNA of a hardware company. In spite of the changes in the company, including a long-term diversification of revenue, Lenovo will continue to sell a massive amount of hardware, and the portfolio changes regarding the company’s vision around solutions and services will be additive in nature, not alternative, to provide customers with end-to-end solutions in a diverse set of commercial scenarios.

Lenovo is bringing AI to the data: CTO & SVP Yong Rui

Predictably, another main focus of the event was to showcase Lenovo’s capabilities and strategy in AI across the portfolio. This began with Yong Rui, Lenovo’s CTO and SVP, laying out the context of Lenovo technologies in eight areas: cloud and edge computing, advanced computing, wireless technologies, vehicle computing, device innovation, next-gen interaction, the metaverse and AI. Rui clarified that Lenovo’s play in foundational models would not be in creating such models but rather leveraging them in its future vision of AI ownership and accessibility.

The company believes that three primary buckets of AI models will emerge: public models (foundational models) accessible to all, private models accessible to a group (such as enterprises), and personal models accessible to a single individual. On top of this, Lenovo suggests these models will differ in size, location (and underlying hardware), and personalization. In essence, Lenovo contends that it will be bringing AI to data rather than bringing the data to AI, as the company envisions a future where each device Lenovo sells will have AI embedded in it.

 

However, there is still a large gap in Lenovo’s current capabilities as well as the overall AI landscape that needs to be bridged in order to reach such a vision. For example, the multimodal framework will need interoperability for public, private and personal models to interact, which creates an underlying challenge in governance and data privacy protocols. Additionally, the battle between foundational AI models in the market remains ongoing, meaning no one truly knows which models will survive and continue to be developed, creating a challenge in future-proofing innovations.

AI initiatives

Lenovo’s AI strategy is currently a broad one. It starts with the company’s core competency in hardware to be an AI-capable infrastructure provider with its data center server portfolio, which includes NVIDIA GPUs. On top of that, Lenovo has an edge server portfolio that spans in form factor from the data center servers to clients featuring a variety of silicon options including Intel Atom, NVIDIA Jetson and AMD EPYC processors. To drive adoption of its edge servers, Lenovo has committed to invest $100 million into its AI Innovators program, which has begun introducing use-case-specific offerings with the goal of creating seamless, verticalized, outcome-based solutions deployments. In storage, Lenovo has been targeting the entry-level market while partnering with WEKA to enable workloads for high-performance compute (HPC) and AI through the combination of Lenovo’s software-defined storage platform and WEKA Data Platform software.

 

In Lenovo’s services division, SSG, AI activity is relatively nascent but is developing quickly. The company is building capabilities and solutions that leverage its operational and customer data to train foundational models. These initiatives are designed to improve both customer support and internal operational efficiency. Lenovo also previewed two new consumption-based TruScale offerings for AI — Developing AI at Scale as-a-Service and Applying AI at Scale as-a-Service — that were announced during the Lenovo Tech World event.

 

In its Intelligent Devices Group (IDG) Lenovo aims to compete in the AI PC space leveraging its core PC portfolio. Lenovo envisions a world where PC users will leverage AI to achieve hyperpersonalized experiences. The company hopes that the AI PC concept will accelerate refreshes in PCs to end the past year’s market slump.

 

In summary, Lenovo’s AI strategy spans all three business units with the most mature and tangible offerings coming out of ISG while SSG and IDG continue to develop. From an overall organizational standpoint, the company is in the middle of the first wave of AI portfolio expansion, defined by its broad pursuit of applications. Lenovo remains in the stage of discovering where AI is a sensible fit and where it may not be. What will follow is an eventual consolidation and clarification stage, where the company will delineate the disparate efforts from the successful vision-fit initiatives and drive a focused expansion from there. It will be exciting to see how the strategy unfolds.

 

Innovative Ecosystem Expansion: Leveraging Tech Startups for Sustainable Growth in IT Services

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Ecosystem expansion

As vendors across both the IT services and management consulting spaces recognize the need to innovate more quickly than in previous years to stay ahead of technology trends and peers, companies are investing in their partner ecosystems. To evolve the ecosystems, vendors look to include a more diverse set of firms and companies such as technology startups, academic research institutions and other universities. Integrating technology startups within the ecosystem allows vendors to deepen their expertise and capabilities tied to niche technology areas while also building attached services for larger-scale platforms. As vendors sprinkle partners’ expertise and technology capabilities across their portfolio offerings, their ability to deliver value for clients will improve.

Strategic Synergy: Unleashing Innovation through Startup Partnerships – A Case Study with HCLTech and the Intel Foundry Services Accelerator

Working with technology startups enhances vendors’ core capabilities, helping them evolve their portfolio offerings and deliver additional value for clients. For example, in May 2023 HCLTech joined the Intel Foundry Services Accelerator. Through the partnership, HCLTech will support product development around chip manufacturing and will combine its experience with that of integrated device and fabless manufacturers, IP vendors, foundries and semiconductor equipment providers. The partnership aligns well with HCLTech’s engineering and R&D expertise as well as its manufacturing depth, embedding newer design techniques and products to orient more closely with clients’ transformation needs.

 

Forging partnerships with technology startups that facilitate growth of core areas enables vendors to drive more value across their portfolios with the infusion of digital and analytics capabilities. Additionally, the expansions and enhancements help vendors evolve their businesses to stay ahead of peers and remain aligned with clients’ needs.

Sustainability

Maintaining a diverse set of vendors and firms across ecosystems enables IT services vendors to develop portfolio offerings and expertise that address challenges across clients’ business and operating environments. For example, as clients’ sustainability needs continue to emerge, spanning reporting, business processes, operations and change management, working with sustainability firms and startups will help vendors gain expertise, enabling them to transform internally and to better assist clients. For example, Fujitsu partnered with Anthesis to help clients reach carbon neutrality. Through the partnership, Fujitsu will look to create an intelligent climate planning tool that includes strategy development and implementation.

Conclusion

Working closely with partners to drive innovation and integrate newly gained expertise across their portfolio offerings will guide vendors’ alliance and partner strategies during 2H23 and through 2024. Vendors need to expand their ecosystems to include technology startups and research academia to successfully drive collaboration with partners and clients, remain ahead of trends and evolve portfolio offerings.

 

Private 5G Market Expectations Through 2027

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Spend on 5G and LTE private cellular network infrastructure will grow at a TBR-projected CAGR of 12.6% from 2022 to 2027 to reach $8 billion. Governments and large enterprises in key developed markets (especially the U.S. and China) are driving the majority of the private 5G network market.

 

Consulting & systems integration (C&SI) companies are playing a key role in bringing their ecosystems to bear in private cellular network engagements to help business entities realize their digital transformation goals. TBR expects the private 5G market to scale as more compatible endpoint devices are commercialized and key 3GPP standards are ratified. Due to these issues, the market ramp-up will be more gradual than previously anticipated.

 

Join Principal Analyst Chris Antlitz on Thursday, Nov. 16, 2023, at 1 p.m. EST/10 a.m. PST for a 30-minute discussion on TBR’s latest private cellular networks research. Don’t miss this opportunity to ask how market developments will impact your strategy over the next few years!
 

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In This FREE Session on Private 5G Market Expectations You’ll Learn:

  • Which verticals are driving spend on private cellular networks
  • What uses cases are seeing market traction
  • What role C&SIs are playing in the private cellular networks market

 

 

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.
 
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Dell Security Services: Steady, Smart and Positioned to Accelerate on Zero Trust Solution

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In a wide-ranging discussion with TBR, Dell Technologies’ Adam Miller, a marketing leader focused on cybersecurity, explained his company’s strategy in the security services space, including how Dell Technologies expects to stand out over the coming few years. The following analysis reflects both that discussion and TBR’s ongoing coverage of Dell Technologies.

20 years of experience and 1,000-plus customers

Dell Technologies (NYSE: DELL) is well known for its secure devices and infrastructure but is quickly catching up to peers in terms of name recognition around security services (see below for a description of the company’s security services portfolio). While brand can be improved through marketing, acquisitions, and sustained and successful partnerships that deliver security services value to clients as part of a multiparty engagement, Miller believes Dell Technologies will get a substantial boost based on its expanding Services portfolio and impactful Zero Trust security partnership with the U.S. Department of Defense (DOD).

 

As part of the initiative, named Project Fort Zero, Dell Technologies, in concert with 30-plus other technology partners, will deliver an “advanced maturity Zero Trust solution” — validated by the DOD — within the next 12 months. U.S. defense and intelligence agencies have long been viewed as leading edge organizations with respect to cybersecurity, and vendors have often sought to use credentials related to providing security solutions to the U.S. federal government as a testament to their expertise and reliability. Dell Technologies should see a substantial increase in its brand value around security services as the company expands the Project Fort Zero initiative across the wider U.S. federal government and enterprise organizations.

 

In addition to providing clients with some sense of authority and dependability, Dell Technologies should also benefit from leading a loose consortium of security-related technology solution providers. The cybersecurity space is far too vast for any single player to truly be “end to end,” so partnering well across the ecosystem frequently separates leaders from middle performers and laggards. Dell Technologies should be able to leverage Project Fort Zero to solidify its partnering capabilities and demonstrate leadership.

Proven and low-cost strategy: Going to market as part of larger Dell Technologies

Similar to peers’ offerings, Dell Security Services are offered as an add-on to technology and services engagements, almost always with existing clients. Miller did not anticipate any change in that approach, and TBR believes executing well on a proven and low-cost strategy trumps aggressive sales campaigns and marketing blitzes.

 

TBR recognizes that the add-on approach could limit Dell Technologies’ security services’ growth, but the company can lean into its trusted technology provider reputation and strong client relationships to ensure security services, at a minimum, keep pace with the larger company and are positioned to accelerate when market conditions permit.

 

As noted above, should Project Fort Zero significantly boost Dell Technologies’ security brand, the company may be able to use security services as a leading offering in its go-to-market strategies.

Dell Technologies streamlined its security portfolio following several divestments in recent years

Since the close of the massive $65 billion acquisition of EMC in 2016, Dell Technologies has been a seller in the M&A market, slowly refining its portfolio while also paying down debt. This has involved divesting parts of its security portfolio such as SonicWall and RSA. However, Dell Technologies very much remains a player in the cybersecurity arena, with recent divestments enabling it to narrow its focus on its overall security strategy. Several of the company’s security offerings are now tucked under the APEX umbrella, such as APEX Backup, APEX Cyber Recovery and APEX Data Storage.

Additionally, Dell Technologies has developed its security services strategy to focus on three fundamental areas that help customers reduce their attack surface, protect their assets and data, manage security proactively, and help build cybersecurity maturity. These families of offerings and services fit well with the company’s portfolio and overall strategy, aligning with its existing hardware products, and creating opportunities for attached sales to larger IT infrastructure engagements.

Steady, smart and sane, with a boost coming from Project Fort Zero

Miller made clear to TBR that Managed Detection and Response remains a target area for Dell Technologies’ investments, while noting his company understands that many peers in the security services space view Managed Detection and Response as a core offering. That understanding marks exceptional self-awareness on Dell Technologies’ part about where the company fits within the broader cybersecurity ecosystem. Dell Technologies has strengths it can play to and believes the security services market has long-term potential.

 

In TBR’s view, Dell Technologies has not been trying to differentiate where differentiation is impossible and is not betting the farm on security services growth. Instead, the company is taking an approach that is steady, smart and sane. Add to that strategic approach a potentially highly beneficial solution validation from the U.S. Department of Defense, and Dell Technologies has positioned itself well for steady, and possibly accelerated, security services growth.

 

TBR’s coverage of Dell Technologies includes individual vendor coverage by the IT Infrastructure, Devices and Professional Services teams, along with various benchmark and market forecast coverage across TBR.

 

IT Infrastructure Vendors Leverage Analytics and AI to Enhance Sustainability Services

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IT Infrastructure Vendors Move From Sustainability Basics to Multivendor Sustainability Tracking

IT infrastructure vendors are moving beyond table stakes sustainability services around asset recycling to more sophisticated offerings that help IT organizations achieve specific goals, such as allocating workloads to optimize emissions or electricity consumption.

 

These offerings will provide significant value to organizations that seek better control over their company’s carbon footprint; however, TBR believes the ability to track sustainability across multivendor tech stacks versus a single brand will ultimately provide greater value to users.

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HPE and Pure Storage Pioneer Sustainability Integration in IT Infrastructure Consumption Services

IT infrastructure-focused sustainability services are evolving to include consultative services on optimizing energy consumption and emissions and, perhaps more importantly, leveraging the management platforms built for “as a Service” solutions to enable new modules focused on analyzing and optimizing infrastructure usage. Hewlett Packard Enterprise (HPE) and Pure Storage were the first among their infrastructure peers to announce sustainability integrations into their management platforms.

 

Pure Storage is using the Energy Savings Visualizer and sustainability assessment tools in its Pure1 platform to offer an energy efficiency SLA for its Storage as a Service (STaaS) offering, Evergreen//One. This SLA provides service credits and remediation services if the watts per tebibyte exceed the guaranteed level.

 

HPE has released a preview of the HPE GreenLake sustainability dashboard, which monitors energy consumption, carbon emissions and electricity costs to generate analysis on infrastructure optimization. HPE also reported that it will leverage its OpsRamp acquisition to expand the sustainability dashboard to include the management of multivendor infrastructure, which TBR believes will be a significant value-add and make the sustainability tools more actionable by enabling them to track the energy consumption of non-HPE hardware.

 

Although Lenovo TruScale’s infrastructure metering was built on measuring power consumption, the company has yet to announce specific sustainability capabilities based on these features. Lenovo’s initial sustainability capabilities have been broader than those of TruScale in scope, such as purchasable carbon credits derived from Sustainable Aviation Fuel (SAF) utilization in the transport of its products. Similarly, Dell Technologies’ APEX console has yet to announce capabilities for optimizing infrastructure usage relative to emissions.

GenAI, the Maturing Digital Transformation Market and Ecosystems: Buyer and Vendor Implications

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With buyers trying to extract the most ROI from their existing digital estates, new opportunities enabled by generative AI (GenAI) compel them to seek advice and support from IT services vendors on what is possible. Vendors, on the other hand, must navigate the current market complexities wrapped in macroeconomic headwinds and evolve their own business models with minimum disruption as they try to capitalize on GenAI-enabled digital transformation services.

 

Join TBR Thursday, Nov. 9, 2023, for a 30-minute deep dive and Q&A focusing on the latest developments in the digital transformation landscape. Principal Analyst and Practice Manager Patrick M. Heffernan and Principal Analyst Boz Hristov will discuss how recent trends have influenced upcoming research in TBR’s Digital Transformation: Voice of the Customer Research, Cloud Ecosystem Report and Adobe and Salesforce Ecosystem Report. Additionally, the pair will give an exclusive preview of research areas and topics TBR intends to focus on in 2024. Don’t miss out on this informative and valuable session!
 

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In this FREE session on GenAI in the digital transformation market you’ll learn:

  • State of the digital transformation market from buyers’ perspectives, including early insights into TBR’s November 2023 buyer survey results
  • How the partner ecosystem is evolving
  • How leading IT services firms are investing in and positioning GenAI

 

 

 

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].
 
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TBR Makes Recent Insights Live Sessions, Including a Key Discussion on Commercialization of GenAI in the Cloud, Publicly Available

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Technology Business Research, Inc. (TBR) is pleased to announce the on-demand availability of all of our 3Q23 webinars. Topics last quarter included the generative AI strategies of both hyperscalers and SaaS providers, key trends impacting business performance of U.S. enterprise operators, AI disruption amid hardware refresh cycles, and changes in IT infrastructure buyers’ strategies as they adapt to the post-pandemic era.

3Q23 TBR Insights Live Sessions

GenAI in the Cloud: Commercialization Hype vs. Reality

Learn the generative AI (GenAI) strategies and approaches of both hyperscalers and SaaS providers and how cloud providers are using custom silicon to accelerate GenAI
 

Key Trends Impacting the U.S. Telecom B2B Market

Learn key trends impacting business performance of U.S. enterprise operators and the competitive landscape; how U.S. operators are performing relative to each other across segments, including wireless and wireline service and large enterprise, SMB and the public sector; and how U.S. operators are positioning to capitalize on key growth opportunities in fixed wireless access, multi-access edge computing and private cellular networks
 

AI Disruption and Hardware Refresh Cycles: What It Means for OEMs

Learn how past and present macroeconomic conditions are impacting devices industry subsegments, which portfolio strategies devices vendors are employing to take advantage of AI and to mitigate the effects of the industry downturn, and how devices vendors are positioning around AI
 

IT Infrastructure Strategy and Purchasing Trends in the Post-pandemic Era

Learn how IT infrastructure buyers are adapting to the post-pandemic era, the top priorities influencing IT infrastructure investments today, and strategies for IT infrastructure deployment over the next two years
 

TBR Insights Live sessions are held typically on Thursdays at 1 p.m. ET and include a 15-minute Q&A session following the main presentation. A recording of the session is sent to all registrants the day after the live airing.

 

To find out what we are discussing in 4Q23, visit the TBR Insights Live page of our website.

Infosys and TCS: Forecasting to 2027 and Anticipating Upcoming Earnings

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Tata Consultancy Services and Infosys are scheduled to release their latest quarterly earnings results this week. To access our analysis on each company, as well as analysis on market competitors, as soon as it becomes available, start your free trial today.

Expectation for 2022-2027: Around 6% CAGR

Last quarter, TBR forecast revenues for these two India-centric IT services vendors out to 2027 and anticipated both would stay in the midsingle-digit range. Illustrating the size gap between the pair, Infosys’ best-case scenario would put the company at just over $31 billion in 2027, while TCS’ worst-case scenario would be around that same size of $31 billion. Over the same time period, TBR forecasts Accenture will grow at a slightly slower rate than TCS, bringing Accenture to nearly $83 billion by 2027.

 

For further context around our analysis of TCS’ and Infosys’ earnings, let’s look at our expectations and the best-case scenarios:

 

  • TBR expects TCS will grow at a 5.89% CAGR from 2022 through 2027 to reach $36.5 billion in annual revenue, with a projected range between the lower and upper confidence intervals (CIs), all things being equal, of $31.5 billion to $40.8 billion.

 

  • Best-case scenario: TCS’ fast-follower strategy works for TCS to stay relevant in the market and capitalize on in-demand areas, but reaching the upper limit of our confidence interval would be a stretch for the company as it would require a departure from its linear headcount-to-revenue-growth relationship, deeper penetration around high-value offerings such as consulting, and/or sizable acquisitions. All of these would necessitate taking on more risk than the company has traditionally.

 

  • TBR expects Infosys will likely grow at a 6.96% CAGR from 2022 through 2027 to reach $25.1 billion in annual revenue, with the range between the lower and upper CIs, all things being equal, projected to be between $22.6 billion and $31 billion. This is an update to the previously modeled CAGR of 7.23% through 2027 as we account for material changes to the environment Infosys must operate in. Additionally, the buyer decision cycle is increasing in length, and Infosys’ focus on managed services will pressure the company’s revenue realization cycle. Avoiding distractions caused by market noise around new managed services providers that could pressure Infosys’ performance will be key to the company meeting its revenue goal.

 

  • Best-case scenario: Reaching $31 billion in revenue by 2027 appears to be a tall order for Infosys, as this would require the company to more than double its revenue from 2021, when annual sales were $15.6 billion. Infosys has two potential paths to reach such scale. First, the company could pursue a large-scale bolt-on acquisition but only after optimizing its existing portfolio and divesting legacy assets that are likely to get commoditized due to generative AI (GenAI). Offloading Infosys’ BPM unit could be an option. Second, Infosys could win several megadeals similar in size to the Daimler contract, which was worth north of $3 billion. In 2Q23 Infosys signed a $1.5 billion deal with BP as well as a $2 billion deal with an existing client where Infosys will provide AI-enabled and automation-based modernization and maintenance services, paving the way for the company to reach $31 billion in annual sales despite facing macro headwinds.

 

TBR’s analysis of both companies last quarter highlighted talent management strategies, an area we will watch closely during the earnings releases this week and over the course of the quarter.

 

  • Maintaining a skilled, scaled and agile talent base remains critical for TCS’ value proposition and success in the market. Year to date, the company has trained 103,000 employees in high-demand competencies. TCS continues to focus on gaining new certifications in high-growth areas, particularly cloud platforms, and has demonstrated its ability to invest in areas it sees as key to long-term growth, more recently unveiling commitments to skilling employees in GenAI.

 

  • Developing digitally versed talent and using an integrated sales approach enable Infosys to target opportunities across core and new business areas. The company is investing in talent initiatives largely enabled by Infosys Springboard and its collaboration with various universities and businesses seeking to reskill their staff. This approach helps Infosys build a name for itself, which can then help the company recruit freshers and industry laterals. Infosys partnered with Adobe and aims to create over 10,000 new Adobe-certified experts globally by 2025. Infosys will also use Infosys Springboard to offer free courses for data scientists supporting the company’s broader GenAI push.

 

No Matter Your Strengths or Strategy, You Must Partner to Deliver on GenAI Opportunities

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In our June 2023 Digital Transformation: Cloud Ecosystems Market Landscape, we wrote that “the 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.” Not all IT services vendors have been taking the same approach, so let’s look at the strategies and activities of three key players: Accenture, IBM Consulting and Dell Technologies.
 

Forging Different Ecosystem Paths on GenAI: Accenture, IBM Consulting and Dell Technologies

Drawing on the Success of Accenture Cloud First, Accenture Has an Obligation to Stay Abreast of GenAI-enabled Opportunities to Sustain Trust

As the race for generative AI (GenAI) supremacy heats up, Accenture has accelerated its investments to ensure it can secure a position among buyers going from exploring the technology to adopting it through the experimentation, implementation and management phases. Just as when the company earmarked $3 billion for Accenture Cloud First in the fall of 2020, Accenture recently announced an investment of $3 billion to enhance and expand its GenAI capabilities.
 
Notable investments as part of the announcement include adding industry solutions and prebuilt models to Accenture’s Data and AI practice; launching AI Navigator for Enterprise, a platform that will arm Accenture’s consultants with access to a library of use cases, thus accelerating time to market; and doubling in-house AI talent to 80,000. Additionally, Accenture deepened its relationships with Amazon Web Services (AWS), Microsoft and Google Cloud to further its collaboration on codeveloping GenAI-centric solutions and services across industry verticals and functional technology areas including supply chain, customer experience and healthcare.

 

Of course, Accenture is not alone in making such announcements as vendors across the professional and IT services spectrum are racing to stake a claim in the space, making it challenging to stand out during the hype cycle. Just as with any other technology, developing business use cases will be key to elevating the value of the technology, with improving productivity serving as the low-hanging fruit. Accenture’s short-term advantage is that the company can rely on the trust it currently has among IT buyers, who for decades have depended on Accenture to fulfill their IT and business process needs.
 
Striking the right balance between developing GenAI sales campaigns and demonstrating value during times when enterprise buyers are becoming increasingly price-sensitive around their cloud spend will be key. During the company’s FY3Q23 earnings call, Accenture’s CEO stated that the company has won deals worth $100 million in GenAI-related revenue from 100 clients in the past four months. Accenture’s install base of over 6,000 clients provides a strong conduit for net-new revenue, especially on the front-end consulting side. The bigger opportunity will come from using GenAI models in large transformation programs.
 
In the short term to midterm, though, the opportunity will revolve around Accenture helping clients establish data strategy and governance policies to ensure they can take full advantage of the technology.

Developing GenAI Capabilities and Utilizing a Client-first Approach Improve IBM Consulting’s Business Transformation Expertise

In June IBM announced plans to expand its partnership with Adobe to provide content supply chain solutions based on Adobe’s GenAI solutions, Adobe Sensei GenAI services and Adobe Firefly. IBM Consulting is launching a new portfolio of Adobe consulting services intended to help clients address complexities in the GenAI landscape and improve customer interactions. The partners will utilize IBM Consulting’s services and Adobe’s AI-enabled Content Supply Chain solution to build integrated content supply chain ecosystems. The development is a follow-up to an announcement in March when IBM Consulting, through its interactive experience unit IBM iX, created new content supply chain services that integrate Adobe’s creative and experience technologies with the goal of driving visibility across creative and marketing projects and improving content across campaigns.

 

GenAI, which IBM sees as a solution that augments but does not replace human intelligence, provides IBM Consulting with opportunities such as helping clients transform business models, improve productivity, create new experiences and connect service delivery; however, these efforts must be aligned internally to drive change. IBM Consulting can support clients by taking a client-first approach in consulting and driving collaborative transformations, including utilizing the IBM Garage for GenAI methods that involve use case ideation as well as open, domain-specific and multimodel approaches to architecture selection and training. In addition to utilizing the IBM watsonx solution, IBM partners with Adobe, AWS, Microsoft, Salesforce and SAP to transform businesses across industries through GenAI solutions.

Dell Technologies Builds Out Its Ecosystem and Approach to GenAI

During Dell Technologies’ 2Q23 earnings presentation, Jeffrey Clarke, COO and vice chairman, stated that Dell Technologies “can help customers size, characterize and build the GenAI solutions that meet their performance, cost and security requirements.” The company recently announced Project Helix, a partnership with NVIDIA to create a repeatable solution for GenAI deployments. The solution utilizes PowerEdge servers optimized for generative AI training and inferencing, NVIDIA Tensor Core GPUs, NVIDIA networking, and options to pair with Dell storage appliances.
 
Dell Technologies views these trends as intersecting and strategically important as they can expand the company’s total addressable market. It is taking an ecosystem approach to building out its overall portfolio as well as its “as a Service” APEX portfolio, which complements the company’s multicloud partnerships with vendors such as VMware, Red Hat, Microsoft, AWS and Databricks. Dell Technologies is expanding its presence in these emerging technology areas by developing validated solution blueprints that bundle a full stack of technology that enterprises can deploy for their particular use cases.
 
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All About the Ecosystem

Even as Accenture, IBM, and Dell approach GenAI opportunities with different strategies, they share a reliance on ecosystem partners, reflecting the trend TBR has seen snowball over the last three years. No company is “end to end,” particularly in a nascent technology like GenAI. TBR tracks more than 30 other IT services vendors and consultancies and has published assessments of their GenAI strategies and activities in both quarterly vendor-specific reports and the quarterly IT Services Vendor Benchmark.

Cisco Plunks Down $28B for Splunk to Accelerate Its Business Model Transition

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Adding Splunk will accelerate Cisco’s business model transition

While cloud solutions were originally meant to simplify IT, in many ways they have gradually become just as complex as traditional IT environments. From a performance and security point of view, the shift from delivering within customers’ own data centers to utilizing a multitude of external cloud providers has amplified the challenges of managing and securing these environments. This shift has given rise to a group of vendors that includes Splunk, which provides observability and security solutions that can address the variety of delivery methods used by most customers. The September announcement that Cisco (Nasdaq: CSCO) will acquire Splunk for $28 billion validates this new reality for customers and reflects the need for deep-pocketed traditional IT vendors to shift their own business models to incorporate more subscription revenue streams.

Cisco targets the PaaS space to become one of the largest software vendors in the world

Agreeing to acquire Splunk reflects Cisco’s recognition of the changing growth trends in the cloud space. During the acquisition announcement, Cisco CEO Chuck Robbins noted this purchase would make Cisco one of the largest software companies globally. That phrase seems a little dated, however, as all the largest software vendors are trying to shift their revenue streams to cloud-delivered subscription revenue, and even those revenue streams have slowed significantly in recent quarters.
 
The largest providers in the well-established IaaS space such as Amazon Web Services (AWS) (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) have seen growth moderate, as have leading SaaS providers such as Salesforce (NYSE: CRM) and SAP (NYSE: SAP). The slowing growth for leading providers is due in part to market saturation, as most customers have already shifted to cloud-based solutions, but also reflects a consolidation in the vendor landscape. However, the PaaS market, in which Splunk participates, remains a broad and less mature space that continues to see expanding opportunity. TBR expects PaaS will be the fastest-growing segment of the overall cloud market over the next five years, increasing from $115 billion in 2022 to more than $300 billion in 2027, an average annual growth rate of 21.7%.

 

Within the security and observability segment of the PaaS space, Splunk stood out as one of the largest providers, which led to Cisco’s interest in the vendor. In its fiscal year ended March 31, 2023, Splunk increased cloud revenue by 54%, and projections for fiscal 2024 have the company generating just under $4 billion in revenue for the year. Profitability has also been on the rise, with Splunk reporting a mid-20% non-GAAP operating margin for fiscal 2023. Most recently, Splunk has continued its momentum, with cloud revenue growth of 29% year-to-year in fiscal 1Q24 (calendar 2Q23) and declines in operating expenses during the quarter, accelerating margin improvement.

 

Splunk was the largest independent vendor in its market segment, but the acquisition will bring Cisco into greater competition with some of its more diverse peers and competitors, including Microsoft and IBM (NYSE: IBM). Despite the increase in competitive dynamics, this move is not novel, as many of the largest legacy IT providers have risked competitive overlap to accelerate the modernization of their businesses to include more cloud assets. The purchase is not the first for Cisco in the PaaS space, as it most notably purchased AppDynamics for $3.7 billion in 2017 and has acquired a dozen software- or cloud-centric firms in the past two years.

 

Splunk’s ongoing cloud transition is not unlike Cisco’s

From a top-line perspective, Splunk should add nearly $4 billion in revenue for Cisco post-acquisition and cloud annual recurring revenue of nearly the same amount. While total revenue, cloud revenue and even profitability have been bright spots for Splunk recently, they come after a more than three-year transition for the vendor. Founded in 2003, Splunk was too early to be born in the cloud, beginning with a traditional software licensing model that persisted well into recent years.

 

Just as other legacy vendors such as Cisco evolved toward subscription and “as a Service” business models, so did Splunk, and it did so while experiencing many of the same financial and leadership challenges that other vendors encounter. In fiscal year 2020 revenue was still growing but software remained a majority of Splunk’s revenue. In fiscal year 2021 cloud revenue grew 77% year-to-year but could not offset the downturn in licensing revenue, and total revenue declined by 5%. It was not until fiscal year 2022 that the company’s growth turned a corner. With new CEO Gary Steele installed in April 2022, total revenue grew by double digits in both fiscal 2022 and 2023, with cloud revenue growing as a percentage of the mix and leading the expansion. After two years of steady progress in Splunk’s cloud transition, it should continue post-acquisition.

Cisco is making progress in its own shift to a subscription model

While ICT hardware will remain a cornerstone of digital transformation, growth opportunities are shifting to the software layer across Cisco’s customer segments. This trend is also driven by customers preferring to consume solutions on a subscription basis. Cisco’s ambition is to align with customers’ digital road maps and capture both software and hardware revenue in a subscription model.

 

In line with this goal, Cisco continues to capture more of its revenue via subscriptions. The company has an ongoing restructuring program not solely to cut costs but also to reallocate resources to continue shifting to a subscription-based business model. Cisco’s Partner Program encourages participants to drive sales of subscription-based offerings. The company is helping partners support this business model transition with innovations in customer financing (Cisco Lifecycle Pay) and offering Cisco Powered Service specializations, which enable partners to be certified as proficient in delivering Cisco “as a Service” solutions, increasing customer confidence in partners.

 

Subscription revenue as a percentage of software revenue was 85% in 2Q23, a 200-basis-point increase from 2Q22, and software subscription revenue volume grew 20% year-to-year. Subscription revenue spanning hardware, software and services accounted for 43.4% of total revenue in 2Q23, a decline of 60 basis points from 2Q22, though total subscription revenue volume increased 13% year-to-year. Cisco is aiming for subscription revenue to reach 50% of total revenue in 2025. Despite progress and significant M&A events, subscription revenue is lower than TBR anticipated, given the number of resources dedicated to growing this revenue stream.

 

Integrating Splunk will help change this, given that it is by far Cisco’s largest acquisition to date. Splunk can supercharge Cisco’s security and observability businesses, enhancing existing products and enabling cross-selling opportunities. The Splunk portfolio will also capitalize on Cisco’s industry-leading channel partner ecosystem, which should enable Splunk to accelerate revenue growth.

 

In the medium to long term, Cisco will explore the use of Splunk’s generative AI capabilities in its observability and security portfolios, as well as in its networking portfolio more broadly. Generative AI will have applications in network management that will simplify the process of deploying and operating enterprise networks for CIO organizations, driving opex reduction.

Splunk will extend and advance but not dramatically alter Cisco’s transformation

The proposed acquisition of Splunk is not only the largest purchase in Cisco’s history but also one of the largest ever in the technology industry. Despite the size, we do not see this purchase as forging a new direction for Cisco, which has been steadily looking to expand into adjacent markets and grow software and subscription revenue streams.
 
Acquisitions have been a staple of Cisco’s strategy over the last decade, and many have focused on business model transformation efforts. Most notably, Cisco purchased AppDynamics in 2017 and added multiple smaller purchases since then to extend and complement the AppDynamics portion of its portfolio. Observability and security capabilities not only represent a growing stream of revenue for Cisco but also are not too far afield from Cisco’s core networking solutions. Although Splunk will continue its own transformation even after the pending purchase is completed, it will bring a sizable financial contribution and should integrate cleanly with the portfolio direction underlying Cisco’s own ongoing transformation.