Current State of the Federal IT Services Market

The most intensive bull market in federal IT spending continues, and the federal IT services market will remain robust through federal fiscal year 2024 (FFY2024). Much IT modernization work has been done, but there is still more to do as federal agencies continue adopting digital technologies such as AI, analytics and machine learning, all while migrating their legacy workloads to advanced cloud infrastructures. Federal spending on technology and related services neared $120 billion in FFY2023, up over 25% from FFY2021 and on a trajectory to surpass $130 billion by FFY2025.

The below infographic contains the three key takeaways from TBR’s latest research on the U.S. federal IT services market and what these events mean for you.

Top 3 Takeaways for 2024

When Will Leading Federal Systems Integrators Resume a More Active M&A Posture?

Consolidation activity among midmarket federal IT firms remains very robust and will likely generate competitors with the scale and the depth of digital capabilities to challenge the leading federal IT services vendors on future strategic IT modernization programs.

Recent Budget Turmoil Has Not Impacted Federal IT Spending Patterns as Greatly as Expected

Overall growth in the federal IT sector in 3Q23 was the most aggressive TBR has observed since launching its coverage of the market in 2008. The debt ceiling agreement in June 2023 provided a much-needed respite for the federal IT market from the budget turmoil that had impeded growth through FFY2022 and early FFY2023. Latent demand for IT modernization and emerging technologies was set loose by the budget deal in 2Q23, accelerating in 3Q23 and augmenting the usual flurry of award activity in the final quarter of the federal fiscal year.

Federal IT Vendors Standing Up Dedicated Advisory Practices

General Dynamics Information Technology (GDIT) launched a digital transformation (DX) consulting practice in 2Q23, leveraging its network of Centers of Excellence and Emerge Labs, as well as the expertise gained from the more than 4,000 research initiatives that have provided its clients actionable market insights on emerging technologies like AI.

On the heels of GDIT’s announcement, ManTech acquired Definitive Logic Corp. to accelerate the development of its own digital transformation consultancy, adding 330 employees skilled in digital transformation services like data engineering.

What This Means for You

Leading federal integrators will keep a close eye on their midmarket IT services peers, perhaps ahead of renewed M&A activity by the top-of-the-market firms. There is still the threat of a government shutdown during FFY2024, and top-tier integrators have all factored that into their plans for 2024.

Expanding advisory capabilities points not only to the capabilities needs of the vendors that are launching consulting operations but also to the importance of advisory competencies in federal digital transformation.

Conclusion

Technology procurement by federal agencies in 2024 is likely to continue at a brisk pace, as evidenced by expanding outlays for IT initiatives in the Biden administration’s FFY2024 budget across the civilian, defense and intelligence sectors. Several federal systems integrators have also tendered projections for continued robust top-line growth in 2024, even if there is a government shutdown during FFY2024.

As such, TBR is confident there is headroom for growth for not only the legacy federal IT vendors but also their smaller, Tier 2 federal integration peers as well as commercially centric technology companies looking to make inroads into the federal space.

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In a recent deep dive for a consulting client, TBR contacted three of the client’s technology partners to get a sense of what they thought about our client and the client’s immediate peers. We spoke with people who were very familiar with the alliance with our client, and we asked:
 

• Who managed the alliance relationship?
• Who decided when to bring our client in on an engagement and under what criteria?
• What did these technology companies think about our client’s ability to innovate and drive new business?

Prior to these conversations, we examined use cases and thought leadership pieces and analyzed what we knew about the three tech companies’ financial performance. We even spoke with customers who engaged our client and the client’s technology partners. The findings reinforced the fundamental elements of a good alliance: know your partner, respect your roles, and make the customer’s needs the center of everything you do together.
 

That’s not to say that we didn’t hear some new and nuanced responses. Among the critical lessons learned: If your partner’s sales people cannot explain what makes you special, you’re losing opportunities. Partners are not obligated or incented to build that knowledge. If you want them to be able to articulate your value proposition, your alliance relationship needs to include training, training and additional training. You cannot believe anyone in your own organization when they say, “Yeah, those guys know us.” You need to ask your partners yourself, at the client-facing level.
 

The Key to Strategic Alliances Lies in a Comprehensive Grasp of Partner Capabilities, Priorities and Incentives

Let’s build on this idea of really knowing your role and your alliance partners’ capabilities. In this messy, evolving ecosystem, as you’re being smart and clearly defining roles among alliance partners engaged with strategic clients, you’re going to run into one of the most vexing challenges seemingly every company faces: understanding what someone else does.

Internally, most companies tackle this through knowledge management, an almost always underfunded effort to ensure that employees know what other employees do and that everyone can articulate the company’s mission, capabilities and offerings. The reasons why most knowledge management efforts underwhelm are vast, but the short version comes down to lack of leadership, funding, curating and consequences.

In today’s IT ecosystem, vendors absolutely must ensure their mission, capabilities and offerings are well understood by their ecosystem partners. Similar companies have developed stark differences, and every company is spreading into adjacent swim lanes. If you don’t know what your ecosystem partners do, you’re going to underwhelm them (and be forgotten) or realize too late that they’ve been taking your money off the table. It’s almost impossible to overstate how critical a comprehensive understanding of your ecosystem partners’ capabilities, priorities and even incentives is to fully leveraging alliances.

Educating for Success: Elevating Partnerships Through Comprehensive Knowledge Sharing and Strategic Alignment in the Dynamic Technology Ecosystem

They need to keep you up to speed on all their speeds and feeds. In our research, the vendors that are dedicating resources to educating their ecosystem partners on developing portfolios, new offerings and changes in market perceptions and opportunities outperform peers and the IT market as a whole. Your sales people can’t be the only ones who understand your capabilities because they aren’t always the people who are in front of your clients. When your partners’ sales people are selling you, how well do they sell?

Everyone gets wrapped up in their own world, and we’re often advising our clients to stay in their own lane and do what they do well. As the technology ecosystem evolves, that’s not enough. Now companies need to be absolutely certain an understanding of their business model and value proposition extends to their alliance partners. As they say, the more you know!

IT Infrastructure Vendors Move From Sustainability Basics to Multivendor Sustainability Tracking

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

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

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

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

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

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

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

In our June 2023 Digital Transformation: Cloud Ecosystems Market Landscape, we wrote that “the nascency of GenAI will require vendors to clearly articulate potential use cases to drive adoption. While content generation presents an easy-to-understand use case, deeper, specialized workflow automation will be more difficult to prove ROI on, as it will require greater time and money to tailor such automations to the enterprise.
 
TBR believes this work, paired with challenges such as data protection, will represent a significant consulting opportunity for the IT services community. Specifically, IT services firms possess not only the trust of buyers but also the knowledge of buyers’ businesses to educate clients and then help tailor GenAI tools to their business needs. Service vendors, though, must account for the implications on their business models as GenAI matures.” Not all IT services vendors have been taking the same approach, so let’s look at the strategies and activities of three key players: Accenture, IBM Consulting and Dell Technologies.
 

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

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

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

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

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

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

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

Dell Technologies Builds Out Its Ecosystem and Approach to GenAI

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

All About the Ecosystem

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

In late 2022 TBR published Top 3 Predictions for IT Infrastructure in 2023, which detailed our expectations for user consoles in OEM, managed services and the overall storage market. Click here to download your free copy of this report.

Navigating 2023’s Storage Landscape: Loyalty, Innovation and Shifting Demands

Last fall as we made our predictions for 2023, TBR anticipated that storage vendors would invest in providing the most flexible platforms to stand out in an increasingly competitive market. As we close out the third quarter of the year, this prediction has proved to be true, with vendors rolling out innovations across management, integration, consumption and managed services to defend market share.

There are a number of market factors impacting the competitive landscape. First, data storage has traditionally been a market with strong customer loyalty. Barriers to switch storage providers have been high because of the significant investments companies have made in talent, software and services to align to specific storage systems. However, as evolving market needs such as multicloud integration and increasing use of flash storage proliferate, customers are re-evaluating their storage platforms, thereby creating opportunity for vendors to capture share from peers.

Furthermore, storage hardware vendors are facing difficulty in driving growth, not only because of customer loyalty and intense competition but also because of slowed enterprise demand in 2023. Dell Technologies (Dell), Hewlett Packard Enterprise (HPE), NetApp and Pure Storage all reported double-digit storage hardware revenue declines in the first quarter of 2023. The drop-off in demand adds pressure to win competitive takeover deals to help slow revenue declines and protect profitability.

Finally, disruptive vendors are adding pressure to incumbents with targeted strategies to push into enterprise storage accounts. Although Pure Storage reported revenue declines, the company remains a disruptive force in the storage market. Pure Storage initially made headway by targeting non-mission-critical Tier 2 workloads. Having proved itself among its existing customer base, Pure Storage has expanded to target larger customers and higher-performance workloads with new form factors and aggressive pricing.

In 2Q23 Pure Storage announced that its all-flash portfolio can now address the entirety of customers’ storage use cases. Lenovo, another disruptive vendor, has significantly grown its storage business in recent quarters, while others have reported declines.

Although Lenovo has a notably smaller storage business — TBR estimated Lenovo’s storage revenue at $400 million in 1Q23 compared to market leader Dell’s $3.6 billion in the same quarter — Lenovo’s ability to drive growth is not going unnoticed by peers. Lenovo is establishing itself in the entry-level storage price points and intends to work its way up into more premium segments as it builds recognition in the space.
 

Hybrid Cloud Strategies Are at the Forefront of Storage Innovation

One of the key ways storage vendors are responding to the hypercompetitive market conditions is by improving the interoperability of storage systems and enabling hybrid or multicloud capabilities. This trend is largely customer driven, as buyers seek to escape siloed architectures in favor of greater interoperability, which vendors have embraced to varying levels by expanding partner ecosystems and product strategies.

Vendors can no longer rely on keeping customers locked into their own tech stacks; instead, they must embrace neutrality and build connections for customers to move their data across various locations, whether it be on premises, colocated or on public cloud.

For example, NetApp continues to add features to BlueXP, the multicloud storage management platform it launched in late 2022 that aims to help customers manage their on-premises and cloud data. NetApp also deepened its partnership with Google Cloud, which now provides a fully managed Cloud Volumes Service based on the NetApp ONTAP operating system.

Dell has taken a similar approach as NetApp by putting its storage OS on Microsoft Azure and Amazon Web Services (AWS) public clouds in an effort to keep customers entrenched in its storage technologies while also enabling hybrid cloud experiences.

Lastly, HPE has also fully embraced hybrid cloud strategies through its GreenLake portfolio, with expanded AWS services and new private cloud offerings for enterprises and smaller businesses.

Incumbents are Responding to Increased Competition with Channel Investments

Storage vendors are matching technology innovation with investment in go-to-market strategies, particularly in the channel space. Storage vendors must not only woo their end customers with product innovation but also win favor among channel partners to gain entry into new accounts. Channel partners are critical to reaching a broader customer base whether vendors are expanding geographically or into new customer segments, and as a result vendors are competing to stand out with the most attractive programs.

Recently, Dell announced a new channel plan focused on incentivizing sellers to make storage deals via channel partners, and also relaxed its partner requirements to quadruple the number of eligible partners. NetApp has also refreshed its partner program with a focus on enabling partners to offer services and solutions, which will likely align with partners’ desires to add value on top of transactional sales and expand recurring revenue streams.

Competition Will Continue to Ramp Up as We Move into 2024

Although vendors are optimistic some pressure will be alleviated by enterprises loosening their purse strings in the coming months, competition for winning share will remain and market leaders will jump on the next round of emerging tech trends to evolve storage portfolios. While the themes of building a multicloud-friendly storage environment dominated  2023, the next question will be how vendors can address the influx of demand for AI solutions.