Quick Quantum Quips: Demonstrating quantum’s value to customers is top of mind early in 2020

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Welcome to TBR’s monthly newsletter on the quantum computing market: Quick Quantum Quips (Q3). This market changes rapidly, and the hype can often distract from the realities of the actual technological developments. This newsletter will keep the community up to date on recent announcements, while stripping away the hype around developments.

For more details, reach out to Stephanie Long or Geoff Woollacott to set up a time to chat.

February 2020 Developments

In February, developments in the quantum computing market centered on customer proof points. Quantum computing development is happening swiftly, and demonstrating value to customers is an essential way in which quantum vendors can begin the monetization process. However, TBR notes that, often, the commercialized use cases vendors tout remain stuck in the developmental phase.

  1. Cambridge Quantum Computing added IBM as its newest investor in February. IBM and Cambridge Quantum Computing have a long history in partnership, as Cambridge Quantum Computing was one of the first quantum vendors to join IBM’s Q Network back in 2018. Quantum software and quantum machine learning are two of the highlights of Cambridge Quantum Computing’s portfolio, which pair well with IBM’s superconducting hardware capabilities and stand to diversify IBM’s capabilities and therefore accelerate monetization.
  2. D-Wave partnered with Dubai Electricity and Water Authority (DEWA) to promote training and awareness around quantum computing. Leadership and relevant personnel at DEWA attended a three-day training on quantum capabilities offered by D-Wave and also worked with D-Wave to identify some vertical-specific challenges they foresee with quantum computing rollout. TBR believes the adoption of quantum computing will likely be vertical specific, and power resources are a likely second-tier vertical. Initial vertical adoption is most likely to be seen in government and financial services.
  3. Scotiabank, in partnership with Xanadu, is investing in the development of its quantum computing capabilities. Scotiabank leverages a quantum algorithm developed by Xanadu called Monte Carlo in conjunction with its software suite to simulate trading scenarios the bank often encounters, and Scotiabank reports a 1,000-fold increase in calculation speed coupled with increased accuracy of outcomes. Xanadu and Scotiabank are both Canada-based firms.
  4. Xanadu received $3.3 million in funding from the Sustainable Development Technology Canada (SDTC) foundation. The funding will be used to take Xanadu’s photonics-based quantum computing systems from development to general availability in the cloud. Due to this investment, Xanadu expects to demonstrate the commercial usefulness of quantum computing by 2022.
  5. Intel continues its work on a cryogenic quantum computing control chip, which it calls Horse Ridge. Similar to Intel’s goal in the classical computing world, innovation on Horse Ridge is geared toward eliminating some of the complexities of computing with proprietary chips in the quantum computing world, and scalability of qubits is a key focus of these developments as a result. TBR notes that while Intel has made the development of Horse Ridge public knowledge and continues to report on its progress, these quantum control chips remain in the developmental phase. Part of the significance of Horse Ridge is that Intel simplified the control electronics necessary within a quantum system. In doing so, Intel effectively replaced the bulky instruments of a quantum system that are relatively impractical at scale with an integrated system-on-chip, which is expected to speed up the setup time as well as simplify scalability. To do this, Intel effectively has moved the controls closer to the qubits themselves. By moving the controls closer to the qubit, Intel has significantly reduced the number of wires into and out of the cryogenic refrigerator, and this is a key to the milestone Intel is working to reach.

If you would like more detailed information around the quantum computing market, please inquire about TBR’s Quantum Computing Market Landscape, a semiannual deep dive into the quantum computing market. Our latest version published in December.

The emerging and evolving landscape of enterprise edge computing

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TBR launches its inaugural Enterprise Edge Compute Market Landscape this week. The report profiles key vendors playing in the enterprise edge compute market as well as trends in alliance and acquisition activity, emerging market opportunities, and use cases and business cases for edge. As a complement to TBR’s Telecom Edge Compute Market Landscape, this new reportalso details high-level market forecast estimates for the significant enterprise edge compute opportunity.

On Wednesday Senior Analysts Stephanie Long and Nicole Catchpole will host an exclusive preview of TBR’s findings in its Enterprise Edge Computing Market Landscape. In this webinar, the pair will analyze the enterprise edge market, which is providing an emerging and rapidly evolving opportunity for existing data center and cloud players as well as entrants across a broad spectrum of industries. Register today for “The emerging and evolving landscape of enterprise edge computing,” and visit our Webinar Portal to view all of TBR’s previously aired webinars.

Additional assessments publishing this week from our analyst teams

“Further developing NTT DATA’s emerging technology portfolio improves the company’s market position and enables it to seek cross-selling opportunities to broaden engagements and deepen client relationships, as it leverages previous acquisitions and ongoing internal investments to support efforts to expand client wallet share.” — Senior Analyst Kevin Collupy

“DXC Technology is utilizing both organic and inorganic investments to expand its next-generation IT services capabilities, aligning its portfolio with client demand while incrementally strengthening its market perception.” — Collupy

“Cognizant’s focus on evolving from its traditional roots to a digital transformation leader resulted in multiple acquisitions and a flurry of restructuring efforts in 2019, led by the company’s Digital Transformation Office (DTO) that was formed in 2Q19. Recently, the DTO announced a restructured sales and commercial model as part of Cognizant’s 2020 Fit For Growth Plan, including new incentive plans for sales members to prioritize key solutions and services as well as the formation of new customer segments .TBR believes Cognizant’s success during 2020 will be tied directly to the efforts of its DTO, and TBR will be monitoring further initiatives being set forth by the group.” — Analyst Kelly Lesiczka

“T-Mobile ended 2019 on a high note, surpassing postpaid net addition, adjusted EBITDA and free cash flow expectations. This momentum will continue in 2020 as T-Mobile attracts customers via new Un-carrier initiatives, while improved network coverage realized by 600MHz spectrum deployment will help retain customers. The widespread 5G coverage provided by 600MHz spectrum will also help T-Mobile gain a time-to-market advantage during the 5G era’s infancy.” — Analyst Steve Vachon

The federal IT services market remains highly favorable in growth for technology contractors in 2020

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Defense, intelligence and civilian agencies are accelerating modernization efforts in 2020. M&A activity in the market will also remain at a brisk pace.

“Leidos released its 4Q19 and 2019 fiscal results on Feb. 18, posting 4Q19 revenue growth of 11.6% year-to-year to $2.95 billion on the back of strong bookings and backlog growth throughout 2019 as well as several recent large-scale contract wins and successful award rebids that are converting to revenue at a vigorous pace,” said Senior Analyst John Caucis. “Growth with classified customers in the Intelligence Community (IC) also remains strong. Leidos surpassed its guidance for 2019 revenue of between $10.9 billion and $11 billion, with full-year sales of $11.1 billion, an increase of 8.8% over 2018. Leidos’ guidance for 2020 calls for full-year sales between $12.6 billion and $13 billion, implying growth over 2019 of 13.6% to 17.2%, largely driven by recent strategic acquisitions. For example, Leidos spent over $2.5 billion to acquire Dynetics in December and L3Harris Technologies’ Security Detection and Automation division in February, expanding its footprint in defense technologies, airport and critical infrastructure screening products, automated tray return systems, and industrial automation systems.”

According to Research Analyst Brian Baker, “ManTech’s revenue rose 21.6% year-to-year to $604.4 million in 4Q19. Growth was augmented by acquisitions of Kforce Government Solutions, which closed in April, and H2M Group, which closed in August, as both contributed inorganic revenue to ManTech’s top line in 4Q19. Classified customers continue to accelerate spend with ManTech, while spending on behalf of ManTech’s principal Department of Defense and IC clients continues trending upward, in addition to significant wins with federal civilian and health agencies, leading to impressive 15% organic growth in 4Q19 and 9% organic growth for 2019. Robust revenue expansion, strong cash generation and stable margin performance enable ManTech to continue with its aggressive M&A strategy to enhance access to high-growth and high-value markets, similar to tactics of peers CACI, Leidos and SAIC.”

Additional assessments publishing this week from our analyst teams

Forging partnerships with larger-scale technology vendors enables vendors to more quickly enhance portfolios and incorporate emerging technologies while also strengthening scale to pursue opportunities outside their existing markets.

”Quantum computing, the edge, AI and cybersecurity are some of the latest investment areas in which Atos is developing pointed solutions to differentiate between a typical blue-sky consultancy approach and its approach of a technology-enabled organization. Enhancing its cloud capabilities, such as around Google Cloud solutions through the launch of Workplace as a Service Google Edition and the acquisition of Maven Wave, and the launch of the Digital Hybrid Cloud offering jointly with VMware, creates cloud professional services opportunities that will sustain Atos’ cloud revenue growth in the coming quarters.” — Senior Analyst Elitsa Bakalova

“CGI is pursuing a strategic growth objective to double its revenue base over the next several years with accelerated investments in M&A and homegrown IP. However, the company must continue to execute on its expense management strategy as margins face pressure in the near term with the ramped-up acquisition pace and ongoing organizational restructuring.” — Research Analyst John Croll

“Refreshing its business image to position as a digital transformation company and better align with client demand for emerging technologies, such as security, IoT and AI capabilities, will provide growth opportunities for Fujitsu’s services business if the company is able to successfully build out its global presence and talent bench to support new portfolio areas. While the company has expanded its global network, adding new delivery and innovation centers that increase client awareness of the brand and offerings, the company is unable to generate sustainable and consistent growth outside Japan. Bolstering portfolio innovation efforts through solution codevelopment partnerships will help Fujitsu scale its new portfolio and generate new opportunities, but the company needs to maintain differentiation within its portfolio to successfully capitalize on potential opportunities around emerging technologies.” — Analyst Kelly Lesiczka

“Amazon Web Services (AWS) continues growing its sales team in an effort to outcompete IaaS and PaaS rivals such as Microsoft and as coopetitive partners such as SAP take AWS head-on. The recent general availability of AWS Outposts increases AWS’ hybrid value proposition and will help the vendor maintain its leadership in the consolidating IaaS market.” — Analyst Jack McElwee

Growing partnerships with key cloud vendors help sustain Capgemini’s success

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As Senior Analyst Elitsa Bakalova notes this week, “Partners are key contributors to Capgemini’s technology-enabled transformations around next-generation technologies, such as digital and cloud. The expanded partnership with Amazon Web Services enhances Capgemini’s AWS business in North America and improves its ability to advance cloud adoption in a strategic region for Capgemini’s global expansion. Additionally, the integration of Altran continues, and as of Jan. 27, Capgemini holds 53.57% of Altran’s share capital and at least 53.41% of Altran’s voting rights. Altran will improve Capgemini’s ability to deliver digital transformation to the industrial sector and position as an intelligent industry vendor that can provide solutions around Engineering 4.0 and Industry 4.0.” Across the IT services spectrum, TBR has seen substantial changes in the way vendors partner with cloud and software companies, an area we will examine in greater detail throughout 2020.

Additional assessments publishing this week from our analyst teams

“Tata Consultancy Services closed 2019 with continued revenue growth, which TBR attributes to ongoing investments in its solution suite and talent pool, alongside aggressive pricing. Strengthening its digital capabilities that enable technology-based transformation, at scale, for the company’s global clientele will drive further growth in 2020.”  — Kevin Collupy, Analyst

 “TBR expects T-Systems’ revenue growth will slightly accelerate in 4Q19 as the company benefits from an improved delivery network and a realigned portfolio that offers clients cloud, IoT and security capabilities that support growth initiatives. T-Systems leverages partnerships that enhance scale and help to embed emerging technologies within its core portfolio offerings and equip the company to drive revenue growth around these capabilities. As T-Systems infuses growth areas throughout its portfolio and realigns business segments to focus on these profitable avenues, including the establishment of an integrated telecommunications business that will house telecommunication services and classified ICT business, the company will be able to leverage more flexible delivery and innovation models to position as more customer-led and customer-centric.” — Kelly Lesiczka, Analyst

 “AsCisco integrates acquired assets to provide advanced security and intent-based networking solutions, we expect Cisco Customer Experience will benefit from pull-through support and maintenance opportunities, allowing it to sustain revenue growth in 4Q19. Additionally, portfolio growth to include hybrid IT and multicloud will also provide migration and management engagements, creating new areas of growth. Similarly, expanding its software and subscription portfolio provides consistent revenue streams, contributing to Cisco Customer Experience revenue growth through support and maintenance engagements. Leveraging its core strength areas, such as security, networking and SD-WAN, will help Cisco to maintain its existing engagements while also effectively combating competitive pressures from vendors pursuing opportunities in similar growth areas. Cisco’s technical expertise improves its ability to differentiate its professional services portfolio from that of its peers.”
— Kelly Lesiczka

“The cloud solutions agreement with the National Association of State Procurement Officials through September 2026 is a milestone for Capgemini’s cloud services business in the U.S. as the simple contractual process will expand the company’s activities in the public sector, which TBR does not believe to be a leading industry in the country for Capgemini, unlike its business in financial services and manufacturing. Capgemini will provide joint offerings with Amazon Web Services, Microsoft, BMC, ServiceNow and Virtustream.” — Elitsa Bakalova

“TBR estimates HCL Technologies (HCLT) will sustain revenue growth of between 15% and 16.5% year-to-year through 2021, and will operate within its guided range of 16.5% to 17% in constant currency for FY20. Acquisitions provide HCLT with expanded market share and enhance portfolio offerings to appeal to dynamic client demand and propel revenue. Developing HCL Software and incorporating partner assets to support integration and management opportunities will create recurring and higher-profit revenue streams. We expect HCLT will leverage its software business to capture higher-value services engagements, but the company must be mindful of cannibalization within its traditional services streams, which comprise the majority of revenue. Additionally, deal size remains smaller than in previous years, with most clients in the $1-plus million category as HCLT benefits from an increase in software license and deployment deals. TBR believes most deals during the quarter were generated with new logos, as HCLT looks to drive recurring revenue streams tied to the HCL Software business unit, which will generate additional growth in the $1-plus million category from cross-selling and upselling other product and software offerings.” — Kelly Lesiczka  

“IBM faced healthcare IT services (HITS) headwinds throughout 2019, plagued by media reports and customer dissatisfaction with emergent solutions leveraging AI, mainly Watson for Oncology. The newly appointed general manager of Watson Health, Paul Roma, will work to improve employee satisfaction in addition to building confidence among IBM investors and partners within the wider healthcare market. A more succinct portfolio and go-to-market strategy supported by recent internal restructuring efforts will be critical to returning IBM to growth in 2020, when TBR estimates the company’s annual HITS revenue growth will reach 2.2%. Further, IBM’s addition of Red Hat and background in emerging technology areas such as blockchain for insurance industries and AI — despite missteps in these areas in 2018 — will enhance the value of the company’s existing HITS suite and offer it differentiation in the market compared to peers.” — Kelly Lesiczka

Plus, this Wednesday, join TBR’s Chris Antlitz for his insights from TBR’s 2020 Telecom Predictions: “TBR’s research suggests 2020 will be a springboard year for the telecom industry’s development of the new architecture, with spend in the key markets of 5G, network virtualization and edge computing poised to ramp up significantly through the middle of the next decade. TBR also anticipates that systems integrators will play a much broader and key role in helping CSPs transform their businesses and networks and that webscales will increasingly encroach on CSP turf as they concurrently pursue new value created from the aforementioned technologies.”

Iowa caucuses: Digital transformation run amok

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Iowa’s first-in-the-nation, high-value, high-visibility caucus misfired last night, potentially costing the state its special status in coming years, which could trigger a massive economic impact due to the loss of revenue associated with early campaign activities (e.g., hotel stays, dining, gas, ads). The strategic value of rapid visibility bouncing into New Hampshire, first capitalized on by Jimmy Carter in 1976, is a reminder of how long Iowa has held this status and what a disastrous operational failure could mean. 

This poorly executed digital transformation (DT) will most likely cost Iowa its high-value job in the nation’s presidential primary process. Nevada purchased the same software as Iowa for its upcoming caucus and will now face pressure to quickly learn from Iowa’s mistakes and lay out a proper DT plan. DT can only proceed at the rate and pace of the slowest learners. Volunteers of all ages and technological savvy are, by definition, going to include some slow technology learners.

We’re seeking to elect people to navigate the new economic realities technology brings to bear on our way of life. There is great good that comes from technology adoption, but there are also negative impacts. Leaders, often from older demographics, don’t know what they don’t know when it comes to technology. Conversely, younger staffers versed in technology and tasked with the rollout may not understand the need for training of those from older generations. If they cannot execute simple tasks from a phone, how are they to craft legislation to mitigate against the moral hazards technology can inflict on our way of life?

So what went wrong? The Iowa democratic party didn’t know what they didn’t know

The Iowa Democratic Party apparatus sought to modernize the method by which they aggregate votes. Rather than phone the results into a central aggregation point, they decided, “There’s an app for that.” Additionally, the process of tallying votes was, likewise, shifted to accommodate the large number of primary candidates through the use of the second-choice ranking systems to release supporters of candidates who did not reach the 15% support threshold within each of the 1,700 caucus sites. So, a new process on the ground and a new process for communicating the results back to a central aggregation point ignited the dumpster fire that was the 2020 Iowa Caucus.   

Bad idea compounded by poor planning

TBR has a signature article around the concept of “Wallet versus Will” in which we articulate how the axis has flipped on public sector technology adoption. Government used to lead when cost was the driving inhibitor to technology adoption, as “protection of the commons” could justify heavy capital outlays for leading-edge technology. Today, the consumerization of IT has citizen IT as the public sector parallel to provide for convenience.

But the public sector and the ancillary offshoots of the major parties’ apparatus are not as attuned to how to go about DT, and this is why the process on full display to the nation’s political junkies last night looked more like a cigar blowing up in Moe Howard’s face.

Here are the basics of the implementation plan rolled out by the Iowa Democratic Party to its caucus site captains:

  1. The caucus captains were told to download the app on to their phone.
  2. The download had a caution that the app could alter the phone, asking the volunteer captains if they wanted to proceed. Some opted not to proceed given, well, they are volunteers and did not want to run the risk of harming their personal property in the process of giving their time.
  3. Some captains who opted for the app could not figure out the app because there was no formal training provided on its use.
  4. The backup system — or the old way of phoning results back to a centralized location — was not adequately staffed, resulting in volunteer captains sitting on hold for as long as several hours to provide the results. Part of the challenge in that process was also that the rules on the ground had changed, so the captains were also phoning to ensure they had made the correct calculations for the new training.

To recap: No formal user training for a body of 1,700 volunteers of varying ages and technology comfort. No tutorials that could have been done on the volunteer’s own time ahead of the caucus. No live testing of the process to ensure there was adequate capacity, and inadequate fail-over infrastructure in the event of go-live difficulties.

This disaster could have been avoided with some investments in change management and technology consulting. Iowa party leaders didn’t know what they didn’t know, and now Iowans will likely pay a steep price for this technology hubris.

Big changes for Big Blue

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Lots of news coming from IBM these past few weeks, and we have plenty of analysis on it from Geoff Woollacott, Stephanie Long, Elitsa Bakalova, Catie Merrill and Nicole Catchpole. IBM unveiled a new Power System and announced Ginni Rometty will be stepping down, making way for cloud champion Arvind Krishna to emerge as the new CEO, effective April 6. TBR’s 4Q19 IBM report will comment on these changes as well as touch on the overall health and performance of IBM corporate and its Systems Hardware business.

Additional assessments publishing this week from our analyst teams

“TBR estimates Wipro IT Services’ (ITS) revenue growth will accelerate in 2020, as the company leverages a broad network of centers opened throughout 2019, including centers dedicated to industry solutions and emerging technologies as well as centers that enhance core capabilities. An emphasis on centers will lead to cross-selling and upselling opportunities and improved client retention within Wipro’s addressable market. Additionally, increasing training and reskilling efforts will allow Wipro ITS to more effectively communicate its portfolio and manage client relationships to drive opportunities around its digital offerings. Wipro ITS’ ability to accelerate revenue growth will be contingent on securing deals around emerging digital assets — particularly through its now-robust cloud platform partner ecosystem — to expand its wallet share and mitigate its lack of digital scale compared to peers.” — Kelly Lesiczka, Analyst

“Recent acquisitions, such as that of Luxoft and Syscom, reinforce DXC’s focus on integrating acquired industry expertise into its distinct industry segments to create higher-value engagements and build longer-term relationships with clients. DXC will aim to capture technology demand in industries such as automotive, which aligns with industry strengths gained through strategic acquisitions such as Luxoft.” — Kevin Collupy, Analyst 

“Moving through 2020, Cognizant’s ability to create scale for its newly acquired digital solutions and services will be critical to driving growth, though its emphasis on digital will have an adverse impact on its traditional outsourcing business. We expect Cognizant will operate within its revenue guidance in 4Q19 as it emphasizes its digital portfolio to drive adoption of emerging technologies as well as looks to key verticals to generate use cases and drive growth opportunities.” — Kelly Lesiczka

“T-Mobile will end 2019 on a high note as the company’s annual postpaid net additions and adjusted EBITDA will surpass initial guidance expectations. T-Mobile’s momentum will continue in 2020 regardless of the outcome of the proposed Sprint merger, as the company’s widespread 5G coverage and expanding portfolio and service options will attract new customers.” — Steve Vachon, Analyst

In 4Q19 Google Cloud saw rapid revenue growth that paralleled and validated its continued and planned investments in infrastructure, R&D, talent, partnerships and expansion of its global footprint. TBR predicts this accelerated pace of growth, fueled by Google Cloud Platform and Anthos, will help the company close the gap with market share leaders Amazon Web Services and Microsoft. In addition, 4Q19 marks the first time that Alphabet disclosed Google Cloud revenue, a move that isolates and highlights the significant growth rate of this sector of the overall business. — Nicole Catchpole, Senior Analyst

On Wednesday Principal Analyst Ezra Gottheil and Analyst Eric Costa will host a live webinar and Q&A on TBR’s predictions for IoT in 2020 and beyond, including the more purposeful role of AI in IoT and how the conversational interface will demonstrate its relevance. Register today for “IoT settles in for the long haul,” and check out our Webinar Portal to view all of TBR’s previously aired webinars.

Big Blue turns purple

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Rometty steps down, making way for cloud champion Krishna as IBM’s new CEO

At close of business on Jan. 30, IBM unveiled Virginia Rometty was stepping down as CEO. Arvind Krishna, current SVP of Cloud and Cognitive Software at IBM, will take over effective April 6. It was also announced that James Whitehurst, IBM senior vice president and CEO of Red Hat, will become the new IBM president, also effective April 6.

Traditionally, CEOs come from finance or sales and marketing. Finance leaders are tapped when the bottom line is the priority; sales and marketing leaders are selected when the top line is the priority. However, the current market climate presents a different kind of IT landscape. The rapidly shifting requirements and demands from enterprises necessitate a different kind of leader.

Krishna’s presence should assure customers, particularly those with primary concerns around IBM’s product road map and the ways in which IBM will build out the safe, secure and innovative ecosystems components for the new multi-enterprise business networks and company federations. Installing a career technologist at the helm addresses the marketing challenge of countering competitors that rose to prominence in Chapter 1 of cloud computing. Large enterprises seeking to future-proof their investments in Chapter 2 of the cloud, as digital transformation continues to transcend the enterprise, will look to IBM for a well-articulated technology vision.  

While Krishna will message to the market, Whitehurst will work on needed cultural change as IBM president

Much of IBM’s recent struggles have revolved around execution, as the organization’s culture and operating practices were misaligned to the prevailing ways of working and innovative best practices that came from native cloud competitors. IBM historically has deployed ROI business case justifications in silos that worked well for transaction selling. This ROI process has to give way to a companywide viewpoint of overall revenue contribution — or lifetime customer value — regardless of which discrete technology assets receive the recognition in the internal accounting process. The two models are not compatible. In purchasing Red Hat, IBM acquired a company with vastly different operating practices that created a sustainable and consistent revenue model based around a free product. Fourth quarter results showing Red Hat’s sequential growth and the traction IBM gained with its Cloud Pak rollouts are leading indicators of the directional shifts these two executives will steward.

In promoting Whitehurst to the role of president, IBM signals to customers, investors and employees that it will be changing its internal operating models to be more like those of Red Hat. Symbolically, this indicates the acquisition was more a merger of equals and should allay the concerns of the broad Red Hat ecosystem of developers and customers IBM has to retain and expand to realize the value IBM expects to gain from the purchase as it takes aim at becoming a share leader in Chapter 2 of the cloud.

Rometty started to write IBM’s cloud narrative, yet with Red Hat now in the mix, the story is far from finished

In many ways, IBM’s true cloud story began once Rometty stepped in to run Big Blue in 2012. Just over a year after assuming the role, IBM acquired SoftLayer in an attempt to become the leader in cloud computing and catch the leader in public cloud infrastructure, Amazon Web Services (AWS). However, amid heavy competition, SoftLayer quickly fell behind, causing IBM to shed the brand and incorporate the acquired control plane into what became IBM Bluemix — a rebranding effort with inconclusive results as it would ultimately become IBM Cloud. Over the past eight years, Rometty has been ambitious in laying out her goals to capture “the big 3” — AWS, Microsoft and Google — yet the market remained skeptical as IBM consistently failed to deliver on its top line and the ability to catch industry leaders was viewed as a pipe dream. In many ways, this prompted the acquisition of Red Hat — a $34 billion bet IBM officially made in July 2019 to take the 80% of customers still operating on premises to the cloud. Microsoft, with its competitive platform know-how through Azure, successfully captured cloud in its infancy by shifting customers’ front-end applications. However, IBM, with the help of Red Hat’s platform, is looking to take customers’ mission-critical back-office workloads to the cloud, in what it deems Chapter 2 of the cloud. This is a competency that has yet to be proven but may hold true under new leadership. 

Systems Hardware has been on a cloud-centric pivot for a while, and Krishna is likely to reinforce and cement this transition

TBR believes that from a hardware strategy perspective, the CEO shake-up will have little impact. The z14 and z15 refreshes have focused on positioning the venerable mainframe as a critical gateway into the hybrid multicloud world by building in critical firmware and software features to deliver the mainframe capability with public-cloud-like operating characteristics, enterprise-grade security and data management capabilities. TBR does not see this changing anytime soon.

A new CEO brings promise of stabilization to IBM Services, which has performed inconsistently over the past few years

While IBM’s CEO transition is not strictly tied just to IBM Services, it is a positive move for the services business. Over the past six years, IBM Services’ revenue has been uneven, and has largely been in decline during the past five quarters. Filling the role of CEO with an employee who has been with the company since 1990 and has been instrumental to the development of IBM’s cloud business and the acquisition of Red Hat will likely bring a fresh perspective to IBM and IBM Services, which has been struggling to overcome growth pressures in traditional labor-based services, such as in Global Technology Services and Global Process Services. Meanwhile, IBM Services is experiencing growth in cloud-related activities as the company leverages its technology incumbency to advise, migrate, build and manage clients’ hybrid cloud environments. IBM Services will benefit from IBM’s new public cloud offering for financial services clients, the new IBM Cloud Paks portfolio, and synergies from the Red Hat acquisition as well as the related launch of consulting and technology services offerings for Red Hat and multicloud management. However, such offerings have yet to gain scale to offset lingering growth challenges in traditional services segments.

Krishna’s experience and expertise, including around operations, will help IBM Services continue with its technology-led transformation value proposition and also help overcome execution challenges, which were present during 2019 and negatively affected services revenue growth and profitability. The Cloud and Cognitive Software business, which Krishna is currently leading, has been a growing business; sharing knowledge and supporting the ongoing market trend of convergence between services and software will help IBM Services transform into a growing business.  

 What to watch going forward

This is as critical a juncture for IBM as when it installed Lou Gerstner from the outside in 1993. In this transition, IBM is splitting the responsibilities between an IBM insider as chairman and an IBM outsider instrumental in building one of the best technology operating models for the new technology era. From this vantage point, TBR will be evaluating and monitoring the following:

  • Reorganization: IBM has to change how it works internally to align with subscription monetization models. Executive measurements have to shift to align to the best practices Red Hat has deployed building a business around free products. IBM historically has jettisoned business lines that lacked discrete profit metrics as stand-alone products. We will be looking to see which members of the respective teams move into leadership roles under the new stewardship.
  • Developer reactions: It is said the developer is king. TBR would expect the developer community to be heartened by these appointments, and we will be tracking this sentiment in our ongoing cloud research streams.
  • Employee reactions: Will this result in high-profile exits or will this provide middle managers with the air cover necessary to act more like “wild ducks” in IBM internal parlance?
  • Customer reactions: This will flow from the ongoing Wall Street analyst briefings on quarterly results. Rometty was conspicuously absent from many of these calls, and we expect that one or both of these new leaders will be available for the all-important Q&A sessions of these briefings.
  • Competitor reactions: Market share positions in Chapter 2 of the cloud are up for grabs, with many entities, notably Microsoft, AWS and Google aiming to become the de facto hybrid cloud standards. Traditional peers of IBM fared far worse than IBM in Chapter 1 and will struggle to remain relevant as anything more than a derived decision for increasingly commoditized infrastructure. IBM likewise has the installed base advantage for protecting enterprise IP assets. At issue, of course, is whether it can maintain that customer trust by articulating a product road map that resonates, coupled with an organization that can deliver on that vision. Krishna and Whitehurst have clear remits and track records to suggest they can deliver.

Quick Quantum Quips: Talent acquisition becomes a larger challenge as vendors achieve additional proof points

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Welcome to TBR’s monthly newsletter on the quantum computing market: Quick Quantum Quips (Q3). This market changes rapidly, and the hype can often distract from the realities of the actual technological developments. This newsletter will keep the community up to date on recent announcements, while stripping away the hype around developments.

For more details, reach out to Stephanie Long or Geoff Woollacott to set up a time to chat.

January 2020 Developments

In January, changes in the quantum market revolved around IBM and its partnerships and coopetition with first movers in addition to pushing the first-mover advantage in live quantum computing systems. First, IBM offered a proof point of commercial viability in a partnership with Daimler and later saw top talent leave for IBM customer JPMorgan Chase. Another startup, QCI, entered the market, and the French government, recognizing the strategic importance of the technology, began outlining its investment strategy for quantum investments. 

  1. IBM unveiled a real-world application in the quantum computing space leveraging its quantum computing capabilities. In partnership with Daimler AG, IBM leveraged its quantum computing technologies to create and analyze lithium-containing molecule models as IBM strives to make higher-capacity and faster-charging batteries to bolster the electric car market. The ability to model — not simulate — a molecule will dramatically speed up the drug and material discovery process.
  2. IBM unveiled a new 28-qubit quantum system at CES 2020. The new system is said to have accomplished IBM’s goal of doubling quantum volume, achieving a score of 32 — up from 16 from last year. To emphasize the potential of quantum computing to speed up development, IBM leveraged its 53-qubit system to improve on the 28-qubit connectivity. The improved hexagonal lattice connectivity structure used in the development of the 28-qubit system was a contributing factor in the system’s ability to meet the quantum volume goal of 32.
  3. JPMorgan Chase, a current customer of IBM for quantum computing, poached one of IBM’s executives from the group. Marco Pistoia, who worked at IBM for 24 years, most recently led IBM’s quantum computing algorithm team. This departure underscores the challenges talent acquisition and retention will pose in the quantum computing space. Vendors are already working to fight against talent shortages. IBM, in particular, is investing heavily in academia to promote degrees in quantum-relevant fields, but the shortages will persist and talent acquisition and retention will be of rising concern as the technology matures. For further details on this announcement, please check out TBR’s blog post on the topic.
  4. Quantum Computing Inc., a startup in the space, unveiled a quantum application development platform called Mukai. This is largely in the experimental phase despite the formal announcement, but Mukai is designed to leverage software to improve speed of development of quantum-ready applications.
  5. France unveiled a framework for its quantum strategy. While many of the details remain undisclosed, likely due to the classified nature of government investments in emerging technologies, France is making formal efforts to invest in and leverage quantum technologies to improve its research capabilities, overall technological development and economic security. The public investment by governments in quantum technology highlights the value quantum technologies can bring and reinforces the eventual power of quantum, even though true commercial use of the technology remains a few years away. It also highlights a degree of fear among countries of creating vulnerabilities if they choose to ignore quantum’s potential. We have seen ongoing investments in quantum from China and the U.S. as well as a variety of European countries making consistent investments in the technology, including the Netherlands and Russia.

If you would like more detailed information around the quantum computing market, please inquire about TBR’s Quantum Computing Market Landscape, a semiannual deep dive into the quantum computing market. Our latest version published in December.

Analytics within digital transformation engagements depend on high-quality people and data

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This week, TBR publishes the first Digital Transformation Insights report for 2020, building on the 2019 series, which included analysis around blockchain, digital marketing, IoT and quantum. The first report centers on IT services vendors’ strategies and performances within their analytics practices. Senior Analyst Boz Hristov notes that, “The maturing A&I services market continues to hold strong digital transformation opportunities for vendors, as long as they can address buyers’ business model complexities through collaborative and coopetitive delivery frameworks. Additionally, vendors that can address skills gaps and ensure data quality and security standards are met are positioned to win.” Next month’s DTI report will look at edge computing within digital transformation. In March TBR will examine the SAP practices of a few leading services vendors.

Additional assessments publishing this week from our analyst teams

“Sprint’s rising churn rates, weakening financial performance and high debt load highlight the necessity of the proposed T-Mobile merger. Subpar network quality remains at the root of Sprint’s issues as postpaid phone subscriber losses continue to escalate, despite the operator’s aggressive pricing and elevated network capex spending since 2018. A more significant capex budget is required for Sprint to successfully compete long-term in the U.S. market; however, Sprint’s inability to generate significant free cash flow hinders the company from doing so.” — Steve Vachon, Analyst

“As Infosys ramps up cyber offerings to better address the complexities associated with the next wave of emerging technologies, an aggressive pricing strategy paired with revamped account management enables the company to expand its client roster as it turns into a solutions broker.” — Hristov

“Verizon remains able to capitalize on its reputation as a premium wireless service provider to attract customers willing to pay a higher price for the operator’s network coverage and premium unlimited data plans. However, Verizon’s wireless network is becoming a less significant differentiator as AT&T and T-Mobile are now on par with Verizon in LTE coverage and as the rival companies are improving signal quality and data speeds by deploying services on additional spectrum.” — Vachon

“Though AT&T is facing short-term challenges, the company’s ambition to transition from a traditional telco to a global digital service provider is a long-term endeavor requiring a broad array of assets that may not all pay dividends in the short term. AT&T also has abundant opportunity to reduce expenses without divesting core business units via initiatives such as WarnerMedia synergies, nonvital headcount and real estate reduction, and deeper integration of network virtualization.” — Vachon

“TBR anticipates Fujitsu Services will report revenue growth acceleration in 4Q19, as Fujitsu enhances its software, digital, hybrid IT and cloud offerings, which help offset declines in traditional areas. Reorganization and investments within its sales organization, such as the consolidation of its European sales force and the implementation of Account Planning and Opportunity Planning software to improve management in North America, will also contribute to revenue expansion in 2019. The business model adjustments allow the company to better execute and deliver on initiatives to drive adoption of hybrid IT and software offerings, providing recurring revenue opportunities.” — Kelly Lesiczka, Analyst

Senior Analyst John Caucis notes that the U.S. federal earnings season kicks off this week with three defense majors and one services-led defense contractor releasing the results from the final calendar quarter of 2019. First up is General Dynamics Information Technology (GDIT), releasing earnings on Jan. 29. Sales are expected to continue sliding for GDIT, owing to recent asset disposals, portfolio reshaping and operations realignment. TBR projects GDIT’s top-line revenue will decline between 11% and 12% year-to-year to roughly $2.1 billion. A strong rebound for GDIT will hinge on the full leverage of CSRA’s capabilities to win big-ticket, next-generation federal IT engagements in 2020. 

Two additional defense majors, Northrop Grumman and Raytheon, will release their earnings on Jan. 30. Northrop Grumman’s Technology Services (TS) unit completed what was likely its final quarter and last fiscal year as a dedicated, stand-alone business line offering technology, sustainment and modernization solutions in 4Q19. TS, which includes the bulk of Northrop’s technology-related services, was integrated into Northrop’s emerging Defense Systems (DS) business group, effective Jan. 1, 2020. TBR projects TS’ 4Q19 sales will continue the rebound begun in 3Q19, with year-to-year growth between 2% and 3%, bringing TS’ 4Q19 revenue to roughly $1.1 billion. Raytheon Intelligence, Information and Services (IIS), the services division of Raytheon Technologies, is expected to continue expanding its sales at a robust pace, putting the wraps on a red-letter year accentuated by consistent revenue and bookings growth, record backlog levels, improved margin performance, and of course, the pending merger with United Technologies (UT). TBR projects IIS will post revenue of about $1.9 billion in 4Q19, up between 10% and 11% year-to-year.

Finally, Booz Allen Hamilton (BAH) will release earnings on Jan. 31. We project BAH will expand its top line between 8% and 9% in 4Q19 to over $1.8 billion, building on the momentum established during the first half of its FY2020. BAH’s strong performance stems from traction with its technically focused solutions, increasingly infused with advanced technologies that enable the mission aims of its federal agency clientele. Operationalizing AI has clearly become a strategic growth platform for BAH; AI featured prominently in the company’s alliance activity, new contract awards and introduction of new offerings in 4Q19.

Fear of the death of ‘digital’

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When we published our professional and IT services predictions for 2020, we anticipated feedback would center on the seemingly most controversial forecast: the end of “digital” as an industry catch-all term, nearly always followed by “transformation.” Initial comments from clients suggested we touched a bit of a nerve. We do not believe a possible economic downturn (also a 2020 prediction) would mean a return to analog IT. We ended 2019 with the expectation that one or more major IT services vendors or consultancies would drop “digital” from their go-to-market strategy and positioning, and we were surprised to be so right within the first two weeks of the new year (see: Accenture).

And earlier this week, we hosted a webinar on our predictions, and many of the questions centered on what the “demise of digital” really means, illuminating two likely fears in the market. The first fear is that an easy way to signal newness, creativity and up-to-speed technology ― just saying “digital” ― has fully lost its meaning, forcing marketers and IT services leaders to move from the vague and suggestive to something more concrete. While some leading consultancies and the more technology-centric IT services vendors may see this as a differentiating opportunity, other companies may struggle to find the right terms to project their competitiveness in a “digital”-free market. The second, and perhaps deeper, fear is that the change has been happening for long enough now that companies risk looking uncomfortably outdated, marketing themselves as “digital leaders,” when their clients have already begun looking for something truly new.

During the predictions webinar, my colleague Kelly Lesiczka noted how Fujitsu had initially launched Digital Transformation Centers, but then redirected its facility investment toward specific centers focused on emerging technologies, such as blockchain, security and AI, to more aggressively pursue opportunities in these areas. For example, Fujitsu strengthened its AI headcount in Canada and opened a Cyber Resilience Center in Canberra, Australia, in 2H19. If anything, “digital” stopped being useful as a term when every enterprise in every sector in every industry started calling themselves a “digital company.” And in 2020, the word is finally going to fade away completely.

What is the next catchy word or phrase, you may ask? We will leave this up to the marketers and their teams. What we do know is what enterprise buyers care about: As digital transformation programs mature, exploring new connection points made possible by data and emerging technologies helps businesses embark on more initiatives beyond discrete process areas. Vendors should take note of that and avoid relying solely on existing relationships, as buyers do not seem to view a past relationship as critical in vendor selection and are rather open to new ideas offered through integrated and coopetitive scale. Yes, in the end, we always come back to what all this means for the consultancies and IT services vendors.