Demand, decarbonization, wild change: IT services and management consulting for the rest of 2022

3 trends setting the stage for the end of 2022

IT services will continue to grow in a good or bad economy

As we start the final four months of 2022, trying to read the macroeconomic tea leaves for signs of a recession, a recovery, or something in between may be a fool’s errand as most reliable markers currently provide mixed signals. In place of confidence and certainty around broad economic conditions, we are focused on the challenges and opportunities emerging for IT services vendors and management consultancies.

• With technology vendors slowing their hiring cadences or even shedding headcount, IT services vendors may find more talent available, which could ease attrition pressures and allow some vendors to lessen dependencies on subcontractors. If M&A activity remains muted, TBR expects IT services vendors and consultancies will increasingly hire technology-experienced talent to support revenue growth.
• TBR expects IT services revenue to continue growing, even in the event of a global recession. IT systems have become corporate utilities, a necessary cost that must be maintained and even consistently improved to contain costs and support growth. Through surveys and in-depth interviews with IT buyers, TBR sees a recurring sentiment that IT budgets will stay steady or grow through the end of 2022 and well into 2023.

India-centric IT services vendors, such as Tata Consultancy Services (TCS) and Infosys, may be the best positioned to weather substantial economic pressures, in part because of their lower-cost talent base and decades of investments in automation. Building facilities and recruiting in India’s second-tier cities could also provide the India-centric vendors with a cushion in the event of a downturn. In addition, TBR expects IT services vendors will increasingly invest in Latin and South America to hedge against overexposure to India’s risks.

A lull in decarbonization support may provide an opening for less active vendors

In TBR’s first Decarbonization Market Landscape, we noted that, “although some firms have been active over the last few decades around developing and acting on decarbonization strategies, many were induced — be it from competition, stakeholders or regulatory evolution — to improve, update, revisit or outright announce new net-zero targets, which in recent years have become somewhat of a comprehensive measure of a firm’s overall decarbonization efforts. Critics of the net-zero slogan argue that it is yet another disguise for inaction as firms can simply continue business as usual while betting on nascent carbon sequestration techniques or other unproven technologies.”

IT services vendors and consultancies that have been slow to invest in and publicly announce aggressive decarbonization initiatives and capabilities may find their approach provides advantages as they can focus their go-to-market messages on low-cost solutions that marry decarbonization with sensitivities to an uncertain macroeconomic picture. Rather than bespoke — and potentially expensive — engagements, buyers may shy away from large investments if net zero fades as a corporate priority.

For those vendors TBR has identified as decarbonization leaders, based on both their own commitments and their services and solutions for clients, maintaining trust and demonstrating transparency around decarbonization efforts will remain the critical success factor. Continuing from the report quoted above, “Overcoming this fate is up to leadership to ensure transparency and organizational commitment by reporting emissions reduction progress, verifying and auditing with independent parties, and embedding the GHG [greenhouse gas] accounting process within financial reporting.”

TBR believes Europe will remain the proving ground, demonstrating to management consultancies, IT services vendors, clients and regulators what can and cannot happen in decarbonization. Vendors most active in Europe will remain at the forefront, even if energy pressures and a continuing war in Ukraine dampen overall enthusiasm for decarbonization.

A new world order, brought on by Kyndryl, Atos, maybe EY, and definitely VARs

Kyndryl’s split from IBM created a new force in the IT services space, a $19 billion vendor with “an established customer base, skilled talent, IP, and expertise around modernizing and managing customers’ mission-critical systems,” as TBR noted in our first report on the company. With Atos expecting to split into two separate companies and rumors that EY may carve out its consulting practice, the entire IT services and management consulting landscape seems ready for a new world order.

• According to TBR’s 2Q22 Atos report, “Atos is accelerating its transformation path, with plans over the next 12 to 18 months to split into two separate entities — Tech Foundations (TFCo or new Atos) and SpinCo (or Evidian) — to unlock value for clients, employees and shareholders. … Evidian, which will see an accelerated investment of €0.4 billion over the next five years, will work in digital transformation, big data and cybersecurity. New Atos, which will be restructured through a €1 billion plan between 2022 and 2026, will work in managed infrastructure services, digital workplace and professional services. The reasoning behind the planned split is that the two segments have different performance, business models, dynamics and strategies; therefore, a one-size-fits-all approach with the two segments staying within one company does not deliver superior performance.” Atos’ decoupling appears to be following Kyndryl’s path, and the two new companies will likely have a solid partnership similar to Kyndryl and IBM’s to deliver holistic solutions that cover the advise-build-run life cycle.
• In contrast, EY slicing off its advisory practice to create a stand-alone management consultancy unencumbered by tax, audit, and risk obligations and restrictions would break ground and compel the remaining Big Four firms to adjust their strategies and investments to meet the new competitive threat. Allied more tightly with Infosys, Microsoft and even Kyndryl, the new EY consultancy could challenge the full spectrum of digital transformation vendors, from McKinsey & Co. through Accenture to Wipro.

Off the radar for many but potentially more disruptive over the long term, TBR has noted that every vendor in the IT space, including cloud and hardware-centric providers and value-added resellers, aspires to orchestrate services and tap into the ever-growing market for managed services. The VARs have established client bases and the ability to see, in real time, shifting IT budgets and demands, which may provide them — if they can shift business models away from a transaction-always mindset — the best opportunity to evolve rapidly in this space.