How To Build Trust In Financial Model(ing)

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Financial modeling: Trusting the data

A financial model is only as valuable as the validation, sourcing and trust that underly the numbers. In other parts of this series, we’ve talked about what a financial model is and how financial modeling can be used, but none of those things matter without trust in the data.

At TBR, this fact plays into every step of working with clients on financial modeling engagements: upfront, during the modeling process, and in the final delivery of the models and our recommendations based on them. Here are some of the techniques we recommend for building trust in your financial models.

Reported financials and SEC filings need to be the foundation

Publicly held companies provide a wealth of resources through their Securities and Exchange Commission (SEC) filings and financial disclosures. While the cadence of these releases follows a standard quarterly and annual schedule, the content and depth of the disclosures vary quite a bit from company to company. In addition to the standard income statement, balance sheet and statement of cash flows, every company provides different types of information on their segments, expenses and resources.

Some report headcount by function and/or geography while others report only a single total headcount figure. Larger companies have segment reporting, which is very important as we parse revenue, expense and headcount for our modeling clients. To make matters more challenging, many companies regularly change their segment definitions, reorganizing their offerings into new segments or integrating more granular or even less granular data into their financial results. Keeping track of how and where companies report financial information can be quite challenging, but it is an essential starting place for financial modeling.

The primary value in cataloging publicly reported financial information is that it gives you the confidence to take the next step into more granular and estimated data. It provides the model recipient with a clear initial reference point to return back to with the more detailed models. No matter what, you are able to show how we take those undisputable data points and facts to confidently estimate peers’ headcount, revenue size, investment trends or level of investment.

The best way to model the business is to know the business

Once all the base-level financial information is captured, the next step in validating a model is to become immersed in the business. Understanding the history, leadership and different dynamics of a company’s segment or product group allows the analyst to audit and check how the financial model should trend over time. Identifying the leaders of particular segments being modeled can be a great way to check trends and potentially pick up specific data points. This can be achieved through earnings calls, investor presentations, video interviews, and also in-person events where the executives are sharing their strategy and recent performance.



Occasionally other specific data points, like revenue or headcount, are shared during these types of presentations, but more often there is qualitative insight about the trajectory, strategy and future plans that are shared, which can confirm or guide financial models.

Secondary sources can guide and bound estimates

Getting beyond the reported information and direct executive commentary, secondary sources give more nuanced indicators for financial models. This is an incredibly broad category of sources that can range from press articles to official and personal social media posts to job posting sites. While these sources rarely offer specific quantitative data, they do provide points of reference to validate our financial models.

Examples can include an executive on LinkedIn sharing a growth rate or headcount figure for the size of the business they formerly led, or a local news story about a vendor opening a new facility, including the number of jobs available and the amount of investments being made. Most TBR models are structured quarterly, so it’s not possible to get the same data points every quarter, but they can provide a point in time that is useful as a reference and validation.

Targeted primary research fills in the gaps in reported and secondary information

The last step to make a financial model useful is to think about the actual problem that is being addressed and what actions should be taken. Interviews with executives who either currently or recently led business units are most often the best source for strategies and tactics that are driving the results shown in the financial model.

While all confidentiality and nondisclosure agreements are upheld, these candid discussions can validate the overall trends being depicted by our financial models. The relative growth of one business compared with others, levels of profitability, the pace of hiring, and other critical elements of our modeling engagements can be discussed with the right individuals. These discussions are helpful throughout the modeling engagement and validation process.

At the initiation of a project, they can help provide hypotheses about how a business is performing and the factors impacting that performance. Later in the engagement, discussions can help validate those assumptions and translate into recommendations for our client based on the financial modeling.

IBM makes smart IT services play in the U.S. federal sector IT services space

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Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

 

This month Patrick chats with Senior Analyst John Caucis, lead author of TBR’s Federal IT Services Benchmark, and Senior Analyst Elitsa Bakalova, who leads TBR’s coverage of IBM, about IBM’s investments in serving the U.S. federal IT market.

 
TBR’s most recent report on IBM Consulting detailed a recent acquisition, Octo, which is supporting IBM’s efforts to grow in the U.S. federal sector. We reported: “Octo, which has approximately 1,500 employees, provides IT modernization and digital transformation services to defense, health and civilian agencies in the U.S. federal sector. The acquisition will complement IBM Consulting’s existing capabilities in IT modernization and digital transformation. Octo will expand IBM Consulting’s public and federal sector organization to 4,200 employees and contribute federal mission experience and certifications in technologies used by the federal government.”
 
Patrick: With 4,200 employees focused on the public sector, including U.S. federal IT services, how does IBM stack up compared to larger players in the space as well as close peers, like Accenture, CGI and Deloitte?

John: Octo gives IBM Consulting’s federal unit some much needed scale after the recent Kyndryl split. However, in terms of federal IT workforce, IBM Consulting is now only on par with ICF International (~4,700) and ManTech (~5,500 and likely declining as Carlyle restructures). Accenture Federal Services (AFS) has a federal workforce approaching 13,000 as a result of its own recent M&A activity and efforts to staff up to deliver recent big-ticket, strategic wins with the Transportation Security Administration, NASA, Department of Homeland Security, Centers for Disease Control and Prevention, and Department of Veterans Affairs. Most of those awards also represent wallet share gains for AFS, further illustrating AFS’ competitive strength. Next up among the federal IT contractors that operate as divisions of a larger global technology services parent is CGI Federal, which employs between 7,000 and 8,000 federal IT workers and has been gaining traction with its suite of proprietary intellectual property (e.g., its Momentum ERP platform). Deloitte Federal is somewhere between CGI and AFS in terms of the size of its federal staff, but it has significant competitive advantages over IBM Consulting in the federal space in terms of advisory depth and breadth as well as its AI and analytics-heavy portfolio.
 
The legacy federal systems integrators, however, still have significant scale advantages. Leidos and General Dynamics Technologies have workforces approaching 40,000 strong, while other Tier 1 integrators, such as Booz Allen, CACI and SAIC, go to market with federal workforces over 20,000.

 

Webinar: The bull market in federal IT will continue in 2023

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Patrick: So, with IBM Consulting’s smaller scale in a highly competitive market, which federal sector trends do you think will benefit it over the long term?

John: Fortunately, despite IBM Consulting’s scale disadvantages, the ongoing bull market in federal technology provides enough headroom for growth for vendors outside the Tier 1 players, making this the ideal time for IBM Consulting to carve out a niche in federal technology. I believe Octo is a great buy for IBM Consulting to quickly expand its federal footprint and do so in technology areas where spending growth will be sustained for several more budget cycles, through modernization, security, and the convergence of AI/analytics and hybrid cloud. I also believe that IBM Consulting should leverage the fiscal war chest available from its global parent and continue acquiring peers that give it additional scale, positions on key federal IT programs, and capabilities in digital transformation, AI, analytics, cloud and automation. IBM Consulting may not win as many prime contractor positions as its larger peers, but it does have a compelling mix of offerings.
 
Hybrid cloud is likely to be the tip of the spear for IBM Consulting in federal IT, and the opportunity is significant. Many agencies have indicated a strong preference for migrating to a hybrid cloud environment, but many more have yet to begin the process. IBM Consulting has the chops to enable its federal customers to implement a cloud solution that can balance what they want to retain on premises and what they want to move to a public cloud. We believe federal agencies are most amenable to the hybrid cloud approach because of the emphasis on improving citizen services and driving more computing to the edge (both in civilian and military contexts). This will be particularly important as agencies add mobile front ends to systems and improve how they interact with citizens. IBM Consulting is a strong player in the commercial hybrid cloud arena, and it can parlay many of its commercial sector strengths into success in the federal space.

 

Patrick: For additional context, we’ve highlighted IBM Consulting’s public and federal sector practice, but how large is that practice within IBM Consulting? What’s the revenue contribution, and is the practice driving new or significant growth?

Elitsa:Expanding U.S. federal sector expertise diversifies IBM Consulting’s revenue streams and strengthens its coinnovation capabilities. According to TBR estimates, the public sector globally accounted for approximately $2 billion in 2022, or a little over 11% of global revenue for the full year; however, it is one of the smaller sectors for IBM Consulting in terms of revenue share compared to larger sectors such as financial services. IBM Consulting’s federal revenue grew nearly 20% year-to-year in 2022 and accounted for approximately 40% of public sector revenue. IBM Consulting’s emphasis on nurturing client relationships, along with its proximity to clients and understanding of industry nuances and regulations, enables it to capture opportunities in a dynamic market environment.
 
IBM Consulting’s growth in the U.S. federal sector was driven by activities such as its deal with the Defense Microelectronics Activity to provide security services that enhance the U.S. Department of Defense’s microelectronics supply chain for critical mission platforms and with the U.S. Department of Education to provide technology strategy and implementation services to consolidate and migrate the system to Amazon Web Services.
 
Patrick: So, the bottom line, as I see it: IBM is making a smart bet that the U.S. federal sector will continue to be a growth driver for the company, even if it is less than 10% of IBM’s total revenue. IBM is backing up that bet with an acquisition, and today’s trends in the U.S. federal sector favor IBM’s approach to IT services, including partnering across the tech ecosystem, as well as its current strengths and capabilities. We’ll keep a close eye on IBM’s progress in 2023!
 

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Unpacking the latest IT services, digital transformation and consulting trends: 2023 outlook and insights from TBR’s research

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Join TBR Thursday, March 9, 2023, for a deep dive into the latest developments and insights in the IT services, digital transformation and consulting landscapes. Principal Analyst and Practice Manager Patrick M. Heffernan and members of our Professional Services team will share their in-depth knowledge on how recent trends have influenced their latest research, and what new research areas they will be tackling in the upcoming year. Don’t miss out on this informative and valuable session!

 

In this FREE webinar you’ll learn:

  • Which IT services, digital transformation and consulting trends shaped TBR’s research in 2022 and how those trends will impact the market in 2023
  • What research areas TBR will focus on in 2023, including cybersecurity, and where we will expand our current research, such as decarbonization
  • Which IT services vendors and consultancies will feature most prominently in TBR’s 2023 research

 

Register now

 

 

Previous TBR 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].

Not your mother’s CDW: Putting services at the heart of digital transformation

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Evolving from a traditional VAR to a full-on IT services vendor

While generally known among consumers as a technology company, CDW (Nasdaq: CDW) has always been known within the IT arena as a value-added reseller (VAR) giant, one of the prime movers within that space. Without losing its market position in reselling, CDW now aims to be more: a full-on global digital transformation and IT services provider, supporting customers as they evolve their IT environments, including helping them modernize and manage their own IT or managing it for them.

 

According to Andy Eccles, CDW’s SVP for Integrated Technology Solutions, technology does not work on its own: “You need CDW. We make technology work.” In TBR’s view, the evolution from VAR to enabling “digital velocity” through professional services certainly will advance the company beyond “your mother’s CDW.”

 

But that evolution depends on getting three things right: 1) educating the CDW sales force on how the company can deliver on five business outcome areas — innovation, cost, agility, risk, experience; 2) shifting how CDW shows up in the market by refreshing and expanding the company’s brand; and 3) finding the right partnerships to allow CDW to focus on its strengths and leverage the broader IT ecosystem to CDW’s full advantage.

 

In December 2022 TBR spoke with Eccles and VP and General Manager of Orchestration Tara Barbieri, and the following reflects both that discussion and TBR’s ongoing research in the IT services, professional services and digital transformation space.

CDW Amplified Services: ‘Enabling IT and business transformation’

To set the stage, Eccles and Barbieri provided some details about CDW’s services capabilities at present, including the full services portfolio: Infrastructure, including Multicloud Services, Workspace, Security, Development, Data and Support Services.

 

Across each of those service lines, according to Eccles and Barbieri, CDW helps clients who know what they need from their IT environments and where they want to make changes and improvements, but who, critically, do not know how to get there quickly, efficiently and cost-effectively. CDW Amplified Services’ strength in addressing those challenges comes from the broader company’s vast IT experience and capabilities, including 100,000-plus products and services from 1,000-plus technology brands.

 

In short, there is nothing in the IT space CDW does not understand or deliver, allowing the company to address any and every IT challenge. Complementing the massive reseller store of products and services, CDW Amplified Services, according to Eccles and Barbieri, contracts for services engagements “around the outcome. What exactly are we trying to do? What is the customer’s goal?”

 

In TBR’s view, outcome-based or value-based contracting has challenged many IT services vendors and consultancies as clients remain leery of overpaying for hard-to-measure services and the vendors themselves must convince their own leadership to take financial risks with outcome-based engagements.

Shifting sales, branding and partnering toward services

Of the three challenges CDW faces in growing a competitive IT services practice with scale and quality, educating its own sales force on CDW Amplified Services’ capabilities may be the easiest to tackle. Salespeople across CDW currently understand at least one technology offering in depth, and the company expects sales teams will quickly adapt to bringing in additional CDW expertise to meet client demands.

 

In TBR’s view, the sales motions for products and services differ, in some ways significantly, requiring different approaches, knowledge bases and even compensation packages. But this is neither a complex problem nor a new one, and CDW’s approach to building its services practice — which is methodical, bolstered by acquisitions, several of which CDW made in the last three years, and centered on technologies CDW already resells — should facilitate expanding the company’s sales capabilities into services.

 

Evolving CDW’s brand — or, as Barbieri said, understanding how CDW “shows up in the market” — will require, in TBR’s view, two substantial changes. First, clients need to become aware of everything CDW does, including the full range of offerings CDW Amplified Services can deliver. Barbieri acknowledged that most CDW customers do not know the company offers multiple services, including consulting. Eccles said CDW will be looking for “aha” moments, in which customers appreciate CDW’s capabilities, but he acknowledged those moments currently happen “one customer at a time” and will be hardest to achieve with existing clients where perceptions of CDW’s capabilities are “entrenched.”

 

These hurdles lead to the second necessary change and tie back to CDW’s challenge around its sales staff: CDW must, in Barbieri’s words, “enable sellers to emphasize everything CDW does.” Changing the brand will require changing the way CDW’s own professionals describe the company, its capabilities and its place in the market. In TBR’s research around IT services vendors and consultancies, innovation and transformation centers have been useful in changing clients’ perception of a vendor’s breadth of capabilities and services, but these centers have also been critical in helping to spread the word internally about new offerings and shifting corporate culture to reflect a different role in the technology and services ecosystem.

 

While an ”experience center” or dedicated center of excellence around CDW’s services may not be a planned investment (currently), CDW’s ability to evolve its brand and get clients to think about the company as innovative and a leader in IT services depends, in part, in TBR’s view, on internal education and advocacy for what CDW Amplified Services will mean to the company’s next decade.

 

Unsurprisingly, the first two challenges feed into the third: finding the right partnerships across a complex and crowded IT services ecosystem. In their discussion with TBR, Eccles and Barbieri acknowledged while CDW can address clients’ issues around innovation, cost, agility, risk and experience, different personas within their client base drive those issues, bringing a variety of business needs, technology capabilities and, of course, budget considerations.

 

In thinking about partnering to address clients’ technology issues, CDW considers which client personas partners currently work with and where CDW can contribute its own strengths. In TBR’s view, most players in the IT services space evaluate potential alliance partners based on mapping each partner’s capabilities, strengths, clients and investments, looking to minimize overlap and maximize complementary offerings.

 

CDW’s approach starts with addressing specific client business outcome needs and how technology can deliver value, then moving to partners’ capabilities, reflecting, perhaps, CDW’s legacy of providing technology and understanding the full breadth of a client’s technology environment. As with brand and sales, CDW’s ability to drive change and benefit from smarter partnering across the technology ecosystem will depend, to a significant degree, on internal efforts to ensure everyone at CDW understands how the company is evolving from a traditional VAR into a full-on global professional and IT services partner.

 

TBR has written extensively about IT services vendors and consultancies testing out new solutions and platforms internally before rolling them out to their clients or the broader market — the “customer zero” approach. To tackle these three challenges, CDW may need to maintain a similar mindset, working through the corporate culture, brand permission, evaluation and compensation changes needed to make that pivot beyond a traditional VAR.

Understanding and delivering the technology central to digital transformation

Reflecting on the discussion with Eccles and Barbieri and reviewing CDW’s recent performance and corporate history, TBR believes CDW has honed a few characteristics likely critical to completing its evolution into an IT services provider, supported by a legacy VAR business.

 

First, CDW clearly understands the “digital” part of “digital transformation” actually is all about enabling transformation through technology. Eccles noted that “customers often see digital transformation as a technology project, not a change or business project,” which accurately reflects, in TBR’s view, the perspective of the majority of CDW’s customers, who are not in the C-Suite or looking to disrupt their business, create new business models or transform.

 

CDW’s customers want to achieve certain business outcomes with technology that works and know they need CDW to advise, orchestrate, deliver, manage and optimize it. Building on that approach, since CDW has been providing technology and IT staff for so long to so many clients, the company understands what works, what emerging trends matter to which customers, which customers manage their technology well and which ones need help, and — through all of that — where the opportunities are. CDW often begins engagements with a discussion of its customers’ larger business challenges.

 

The company also understands the current technology environment and what could improve it, making the company an ideal partner for the customer and for other providers involved in these engagements, including management consultancies that benefit from CDW consulting on and providing services around the technology stack. Wanting to be “not your mother’s CDW” while leveraging legacy VAR strengths that customers have come to rely on, the company knows what it does well and is willing to partner in areas that have not been traditional strengths. This self-awareness may be CDW’s key strength.

 

TBR has spoken with a number of vendors in various stages of evolution, from VARs to consultancies to security vendors to hardware companies, and many have not approached their challenges with as firm of an understanding of their current place in the market as has been demonstrated by CDW.

 

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PwC offers rosy outlook for Middle East economies in 2023

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Optimism abounds

On Jan. 31, PwC’s Dubai, United Arab Emirates (UAE)-based partner and Middle East strategy leader, Stephen Anderson, hosted a webinar as part of the firm’s ongoing “Transforming Our Region” series. The webinar included commentary from a PwC economist, Jing Teow; a Saudi Arabia-based PwC partner, Riyadh al-Najjar; and the CEO of local marketing firm Omnicom Media Group, Elda Choucair. The session touched on macroeconomic trends, PwC’s recent CEO survey and the challenges of running a local company buffeted by global economic headwinds. TBR has attended numerous webinars in this series and believes this most recent edition may have been the most optimistic since the series started in the spring of 2020.

 

Teow, PwC’s director for economics and sustainability, delivered a relatively positive outlook for the region’s economic prospects in 2023, including assertions that the “GCC [Gulf Cooperation Council] will escape the global slowdown” and the region’s non-oil economy will experience a “resurgence.” Teow noted that sustained high average prices for oil and gas contributed to the sunny outlook, as did the rebound in tourism as visitors returned to the region in the wake of the pandemic.

In addition, government spending will continue to support national goals of broader economic diversification. Shifting to risks, Teow noted that while global inflation rates have been moderating, they remain high, particularly in the U.S., where even an easing to 6% would still be well above the Federal Reserve’s 2% target. Centrals banks in the U.S., U.K. and European Union (EU), in TBR’s interpretation of Teow’s view, still hold considerable sway over macroeconomic pressures (and opportunities) in the Middle East.

 

Al-Najjar’s commentary, coming in remotely from the Kingdom of Saudi Arabia (KSA), was notably upbeat, with the PwC partner noting that a surge in new company licenses in KSA was indicative of confidence in private sector growth prospects. Al-Najjar also noted the continued drive by private and public sector entities to diversify the economy and create jobs, particularly for Saudi nationals. (TBR cannot help but note that “localization” has been a government priority in the region since at least 1997.)

For local CEOs, the neighborhood looks great even if the world looks shaky

Anderson then led a discussion about PwC’s recent Global CEO Survey, focusing on the results from CEOs in the MENA region — in short, their outlooks are bearish globally and bullish locally. With that mindset, regional CEOs are, in Anderson’s telling, doubling down on transformation to both head off disruption and become more efficient. While CEOs in other regions might be reticent on M&A and laying off staff, leaders in the Middle East continue to look for investments and fight for the best talent. In Anderson’s words, MENA CEOs are “confident and realistic.”

Notably, according to Anderson, while the metaverse has not yet drawn a dedicated, significant following among regional CEOs, the same leaders have become more attuned to sustainability issues. In TBR’s November 2022 Digital Transformation: Voice of the Customer Research, we included technologies supporting environmental, social and governance (ESG) initiatives as an option for buyers. Not surprisingly, this category ranked high, well above blockchain and the metaverse and just after 5G, which has been around for several years, indicating that buyers are still bullish on creating sustainability-ready business models despite macroeconomic headwinds and that vendors will continue investing in consulting and tech-ready frameworks supporting the opportunity.

Technologies Purchased for Central Digital Transformation Initiative

Rounding out the webinar, Choucair compared running a business in the Middle East to driving a car with two steering wheels and two drivers. While businesses need to respond to local issues and demands, they cannot ignore global trends. In addition, she noted the challenges of dealing with local enterprises still in the early stages of digital transformation (DT) even as other clients were much further advanced. On that point, she praised PwC for its ability to advise across a wide spectrum of clients’ needs and maturities.

 

According to TBR’s November 2022 Digital Transformation: Voice of the Customer Research: “The DT continuum remains fluid as enterprise buyers continue to adjust their operating models to ensure business continuity, leveraging cloud-enabled technologies at both the infrastructure and applications layers. … Given the uptick in incidences in the Legacy stage, we believe vendors have an opportunity to capitalize on lessons they learned from managing DT programs over the past decade. Vendors must account for nuances around evolving their partner ecosystems as they try to bring forward experience, industry knowledge and technical expertise. Executing successfully through managed services — which appears to be where many buyers within the Transformation stage are currently focused — can help vendors strengthen trust as they try to replace incumbents and support buyers that are currently in the Legacy stage of the DT continuum.”

Full speed ahead for the Emiratis and Saudis

Anderson described four themes for the region for 2023: “staying confident,” “doubling down on transformation,” “turbo-charging digital” and “acting on climate.” In TBR’s view, this foursome may be unique to the Middle East, and especially to the UAE and Saudi Arabia. With the price of oil averaging nearly $100 per barrel in 2022, the UAE and KSA governments can continue to prime the pumps of their economies, invest in technologies and create employment opportunities for nationals.

 

Macroeconomic headwinds, particularly from increased interest rates in the U.S. and economic slowdowns in Europe, may dampen growth in the two largest Middle East economies, but locally based companies will continue to benefit from robust government spending and a sustained and increasingly successful effort to diversify away from oil. In short, 2023 should be a very good year in Dubai, UAE, and in Riyadh, Saudi Arabia.

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Landscape Shifts In Management Consulting Require Consulting Firms To Change Their Approach

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Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

 

This month Patrick chats with Senior Analyst Kelly Lesiczka about the management consulting space, including the outlook for consultancies’ resource management strategies and revenue trajectory. Ongoing landscape shifts within the management consulting space have pushed firms to re-evaluate business structures and portfolio offerings.

 

Patrick: TBR’s Management Consulting Benchmark looks at 13 vendors. Did any of them do something in 2022 that surprised you or really stood out from the rest of the pack?

Evan: EY’s potential split stood out, as it would mark a significant change in the consulting landscape. While most firms are reorganizing to blend technology with consulting and to capitalize on opportunities brought to light after client’s technology-driven transformations, EY’s potential split seems to be the most drastic business change to respond to the client needs. Boston Consulting Group (BCG) looks to accomplish the same goal but on a smaller scale with the establishment of BCG X, which combines BCG Digital Ventures, BCG GAMMA and BCG Platinion. The development of BCG X creates a hub for BCG to build out its technology presence and expertise to reach the same opportunities as those vendors with larger-scale technology practices.

Patrick: Growth across the benchmark — that is, all the vendors combined — has fluctuated kind of crazily in the last few years, dropping to just under 2% in 2020, jumping to almost 13% in 2021, and now you’re projecting around 9% for 2022. Nine percent isn’t terrible; it is close to the average pre-pandemic, but what are you expecting in 2023 and 2024 when it comes to revenue growth?

Kelly: Recessions typically work out well for consultancies as clients look for guidance around how to best navigate changing market conditions, indicating the current market conditions will serve consulting vendors well during 2023. Estimated consulting revenue for the benchmarked firms will likely decelerate annually, as firms look internally to reinvent business models and refresh portfolio priorities.

Moving into 2023, revenue will be generated around two key focus areas. The first area will be alliances, which will continue to shape the way firms approach client engagements and technology establishment. Partnerships have become more important and central to firms over the past few years and will serve as core strategy levers to move them through 2023.

Second, firms will look internally to ensure business models and organizations are properly aligned with both portfolio and market changes. Firms that ensure access to expansive and diverse partner networks with different technology and industry knowledge, combined with a flexible and understandable business model, will be best suited to accelerate revenue growth through 2023 and 2024.

 

Patrick: One thing we hear about constantly across the IT services and digital transformation industries is the challenge around recruiting and retaining talent. When you think about the vendors in the benchmark and their talent strategies or initiatives, which ones are addressing this issue best?

Kelly: Talent competition challenges firms to retain employees and create consistency across portfolio and client management. While each firm sets forth different resource management strategies and recruitment tactics, certain firms have been more successful at improving culture and environments.

One example is BCG: The firm retains a more “old school” reputation centering around a different culture from startups and the like, creating additional difficulties for the firm to retain employees. That being said, BCG has pursued new initiatives — such as flexible work environments, including the opening of WeWork spaces, and newer training programs that support the development of skills — to attract and retain new employees.

Another firm to watch for resource management strategies would be PwC. The firm has launched different programs and platforms that more closely monitor employee metrics and benefit usage to improve engagement and thus retention. While the programs are still evolving and being brought to scale, the efforts and initiatives to track engagement and career progression will help employees envision a path forward and their place in the organization overall.

 

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EY delivers data-driven transformation through business frameworks and ecosystem partners

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Trusted data drives confidence in the process, and EY helps to contextualize it all at scale

With cloud becoming part of the IT utility bill the opportunities for monetizing enterprise data are increasing as the technology provides the bridge between everyday operations and future process optimization with the end goal of improving the customer experience. For all this to happen stakeholders must trust the data they use, which is often a challenge as data quality remains poor. During EY Global Data and AI Summit in November 2022, client stories were centered on the opportunity for organizational data to serve stakeholders — from employees to end customers — but the complexities from a technology and change management perspective continue to slow the pace of adoption.

Overcoming these hurdles requires all parties to work together, but agreeing and then executing on jointly developed frameworks are easier said than done, particularly as technology complexities and various data sources have turned the promise of a data lake to capture insights into a data swamp. This has triggered the need to develop tools and business process flows that extract the noisy data and capitalize on the insights first- and third-party data offer. EY’s background in business process optimization and investments in tech-ready solutions turn the firm into an invaluable partner especially as EY sees data and AI as a strategic growth initiative.

According to TBR’s November 2022 Digital Transformation: Voice of the Customer Research, “While we do not anticipate AI and/or automation tools to take over the top spot for technologies that support buyers’ DT [digital transformation] programs, these technologies will be further put to the test in 2023 as enterprise buyers seek to drive efficiencies by using automation and generating targeted insights through AI algorithms to withstand macroeconomic headwinds.” Smart IT services vendors and consultancies will come forward and offer this exact value proposition, forcing EY to ensure it can deliver measurable ROI. Technology alliance partners see the opportunity to develop an open tech stack, such as Databricks, which presented at the conference about its tiered warehousing solution Lakehouse.

This would allow consultancies like EY to scale adoption and integration, thus alleviating buyers’ concerns about vendor lock-in. EY brings capacity and capability to enable the use of enterprise data through the value chain, leading with process and content knowledge, which helps it strengthen trust with stakeholders seeking a vendor to contextualize their business data. TBR recognizes that standardizing data is an ongoing endeavor and the need to develop interoperable data standards is not a new concept. EY’s openness to lead the discussion and the efforts around the issue provide a starting point, a necessary first step for all parties to benefit from the value of data.

It is all about the ecosystem and EY is taking steps to address the opportunity

Vendors often recognize a trend or a need to address opportunities and/or threats through a particular adjustment of their go-to-market strategy and/or portfolio offerings, but they rarely make bold moves that could disrupt operations. This time it is different. At the summit EY demonstrated its willingness and readiness to partner better and differently. During one of the panel discussions, EY brought six of its data and AI partner companies ranging in size and portfolio offerings to present on stage: Databricks, IBM, Microsoft, RelationalAI, Snowflake and UiPath.

The companies presented in alphabetical order so EY could avoid being accused of favoritism, a smart move further confirming EY’s willingness to partner better and bring parties together not just in a press release but also to clients. EY’s approach to partners is different from many of its peers’ as the firm does not go to market with a particular vendor unless EY uses that vendor internally. Adopting a customer zero approach to its alliance partners elevates EY’s trustworthiness, a key element in the firm’s efforts to act as an ecosystem enabler.

According to TBR’s November 2022 Digital Transformation: Voice of the Customer Research: “With trust comes responsibilities, and vendors that align their portfolios, partners and people with client expectations, rather than trying to constantly upsell and cross-sell new technology, are better positioned to maintain that trust. Managing partner ecosystems is becoming increasingly important as they help vendors develop capabilities that add depth around industry knowledge and/or technology expertise — something buyers appreciate. Overcoming competitive pressures by pivoting toward coopetive frameworks takes time, alignment with leadership’s vison, and the establishment of new commercial and incentive models. Accounting for technology complexity, along with operational silos and data exchange, is also key to these efforts.”

With EY writing many of the rules in the alliance partner management playbook, the firm has set the bar high, not just as a showcase at a conference but also as a go-to-market approach as the firm continues to execute on a vision rooted in adopting collaborative business models enabled by standardizing data.

EY and its technology partners deliver data-driven transformations for clients

EY invited numerous client representatives from EMEA, North America and APAC to share their stories about working with EY and its partner companies. For example, EY, in partnership with UiPath, worked with a Fortune 500 automotive retailer in North America to enable its automation journey, build a foundation for an analytics model, and establish an internal Center of Process Excellence to address the client’s top strategic priorities. EY helped the client develop a proof of value and a business case for the automation of specific processes, build an operating model enabled by data analytics and robotic process automation, and implement UiPath’s low-code and no-code drag-and-drop solutions. EY leveraged its technology expertise to educate the client around technology solutions and supported process improvement initiatives.

The key takeaway from this client case is that EY stood out for its ability to build trust in relationships and to drive process improvement and transformation, especially when automation involves changes in people’s job structures. EY helped the client understand the next-generation technology and how to establish a lean corporate structure and have a streamlined IT organization, and gave client teams the ability to do things themselves with low-code and no-code solutions while providing structure and guidance along the journey.

 

EY also showcased its decision intelligence engagement with HSBC and in partnership with Quantexa, a provider of decision intelligence software. As the banking industry undergoes digital transformation, having a data analytics capability is essential. During the discussion, EY and the client shared that when starting a digital transformation initiative, it is very important to understand the scale of the organization and noted that it is hard to have a digital model without data and data connectivity. Obtaining the right level of information during the decision-making process, all based on models and data, is the first step in the transformation process.

Prior to initiating the transformation, EY conveyed voice of the customer and voice of the employee studies to be able to drive a cultural change and adoption of digital processes at the bank. During the three-year engagement, which began in 2021, EY supported the client during the adoption of the model, which was driven by metrics such as revenue growth, and implemented a data platform that underpins clients’ operational processes. EY’s understanding of the clients’ business and key performance metrics, and delivery of thought leadership on the financial services industry, enabled the client to expand activities with its customers and pursue opportunities in new areas, such as establishing a digital marketplace.

Future transformations require data-enabled foundations today, and EY offers reliable frameworks for clients and partner companies

EY’s future-back approach to innovation aligns better to technology adoption than it does to execution against the increasingly anachronistic enterprise-first mentality. Applying its future-back framework to data and AI opportunities positions EY as an ecosystem orchestrator that can help guide, develop and manage enterprise motions regardless of where transformation programs originate: bottom up or top down. In the bottom-up scenario, building organizational muscle, such as establishing a Center of Excellence through building use cases and an AI North Star to scaling often stalls because of internal politics, which, on the other hand, create change management opportunities for EY. The top-down motion, typically C-Suite led, takes a bolder approach, which a firm like EY can support through its robust background in financial analysis, governance and risk management. While neither scenario is unique to data and AI, the market is ripe for transformation, but only if a firm like EY manages to extend its support beyond the front-end advisory recommendations.

 

In TBR’s special report EY Managed Services protect clients from the bleeding edge of regulatory change we wrote: “EY said little about infrastructure technology, and yet the value propositions discussed throughout the day repeatedly referenced EY Fabric. A cloud-based data lake infused with AI and machine learning, the critical distinction of EY Fabric is that it is one global operating model. A single global operating model requires a standard set of business rules and inordinate amounts of data wrangling before any analytics can be applied against the data for business insights.

For years technology vendor events have brought forth clients to share their operating horror stories of trying to get right the standard data model. That EY, a global partnership, was able to settle on one global data model internally, and then drive it out to market is a testament to the EY operating culture, and a boon to its managed services practice. EY Fabric automates data wrangling for EY clients. It then extracts data from client systems, normalizes the data in EY’s data lake and runs proprietary algorithms against the data. Finally, EY Fabric reports fact-based insights and change management recommendations to the client. From those advisory engagements flows the managed services agreements, where EY ‘lands’ by addressing the topmost set of operational pain points, and then ‘expands’ through that proof of value into adjacent service modules.”

While EY Fabric provides the necessary link to managed services, the platform also connects well with partner technologies. For example, SAP represents the application layer, which contains much of the EY client that must be extracted and run against EY algorithms for business insights. Microsoft underpins the cloud-first EY Fabric and coinnovates with EY on the hooks into customer data. ServiceNow (NYSE: NOW) provides the base workflow shell for many of the EY managed services workflows. These relationships further amplify EY’s end-to-end enterprise transformation value proposition. We believe EY is self-aware of its strengths as the firm continues to collaborate with partners, including technology and services companies, to ensure it maintains service quality and protects its brand.

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EY’s humility paves the way for long-term success in a tough marketplace

We understand that becoming ecosystem orchestrators in the data and AI space or in the technology market takes time and, most importantly, talent; it is important to build a bench with orchestrators that consist of project heads with the necessary domain expertise to curate client processes for ingestion into EY Fabric as well as orchestrator AI chatbots to be run against the increasing volume of regulatory changes flowing from the public sector as governments seek to keep up with the pace of business change technology unleashes.

EY is not immune to talent retention headwinds, but the firm continues to invest in various initiatives to expand its recruitment reach. For example, EY’s Open Data Science Challenge gives the firm access to university students across the globe who sign up to participate. EY gains a database of potential recruits who bring AI knowledge and business interest, which the firm could later explore, especially those who move further in the competition. During the conference, EY announced  the winner of this year’s challenge, which was focused on developing an AI algorithm addressing biodiversity and predicting the movement of frogs in nature. EY sees these recruitment opportunities as another node of its already humble approach to build an ecosystem where each participant plays a role rather than constantly competing with each other.

In TBR’s December 2022 Cloud Ecosystem Market Landscape we wrote: “To be leading ecosystem participants, vendors across the ICT value chain will be required to prioritize the needs of both their partners and enterprise buyers over their internal growth aspirations. It sounds like an idea born in marketing, but DT outcomes will demand multiparty business networks, which bring together the value propositions of players across the technology value chain. By leading with their core competencies, players can establish the needed trust of partners and customers alike, increasing their competitiveness against other players that have spread themselves too thin with aspirations of being end-to-end DT providers.”

 

Executing against the commercial construct of multiparty ecosystem technology and delivery model starts with aligning leadership vision to sales motions and incentive models that are centered on superior customer service rather than fulfilling quarterly sales quotas. With EY pursuing plans to split its consulting and audit business and the NewCo seeking to become a publicly traded company through an IPO, preserving the firm’s humility and entrepreneurial culture will likely present an even greater challenge than developing tools and algorithms that can clean enterprise data swamps and turn them into valuable customer insights that provide the necessary links to support end-to-end enterprise transformation.

 

Since TBR attended the summit, EY has announced the global chair and CEO for the two proposed organizations post-split (AssureCo and NewCo). Julie Boland will serve as the global chair and CEO of AssureCo, and Carmine Di Sibio will serve as the global chair and CEO of NewCo. AssureCo will focus primarily on audit, tax and specialized advisory services. NewCo’s capabilities will be geared toward offering consulting-led IT services and solutions. TBR will closely monitor the progress of the split and will reflect our takeaways in special reports as well as future iterations of the Management Consulting Benchmark Profile: EY. TBR will share additional analysis and financials of EY’s data and AI business as part of the January 2023 Digital Transformation: Analytics Professional Services Benchmark.

 

In November TBR had an opportunity to attend, in person, EY’s first Global Data and AI Summit held in Malaga, Spain. EY did not randomly choose the location, and it gave the firm an opportunity to highlight its entrepreneurial culture, something that came through vividly throughout the conference as TBR interacted with some of the more than 100 attendees including EY clients, partner companies and other analysts. In recent years Malaga has become the IT nomad’s paradise as its warm climate and lower cost of living have attracted many IT professionals, turning the town into a leading IT industry destination in Europe. EY also recently opened a Global Delivery Center in the city. Entrepreneurship often means innovation and understanding that success is rooted in collaboration, which is highlighted by EY’s recent activities as the firm aims to capitalize on end-to-end enterprise transformation opportunities.