Integration challenges ahead for Perspecta and SAIC as federal sector IT services vendors position for the rest of 2019

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Publishing this week from TBR’s federal IT research program are our initial assessments of SAIC’s and Perspecta’s 1Q19 earnings performances. Perspecta is wrapping up its first complete fiscal year as an independent business entity. Its inaugural year has been characterized by significant challenges integrating a trio of large-scale legacy federal IT competitors, and we expect this will be reflected in its fiscal performance for 1Q19 and its FY19. The company won major contract extensions and successful re-compete bids to close out its FY19, setting the stage for improved performance in an increasingly growth-friendly federal IT market in its FY20.

SAIC will fully integrate Engility and its nearly $1.9 billion in revenue and 7,500 employees during the year, finishing a process that started in 1Q19. SAIC will leverage Engility to further accelerate its expansion with a more balanced, diversified and de-risked portfolio and an enhanced competitive stance in markets (space and intelligence) adjacent to its core Department of Defense and federal civilian sectors.

Read more of Senior Analyst John Caucis’ assessment of federal IT services vendors through the quarter and the upcoming quarterly benchmark.

Additional assessments publishing this week from our analyst teams

Wednesday

  • Salesforce continues to expand its global reach with new infrastructure investments and local partnerships in key regions. These developments, alongside ongoing improvements to its core portfolio in recent quarters, will enable Salesforce to deliver $3.68 billion in revenue for CY1Q19, according to TBR estimates. — Jack McElwee, Analyst

Thursday

  • TBR’s 1Q19 Cisco report explores how Cisco sustained revenue growth momentum in 1Q19 despite a significant slowdown in its Service Provider customer segment, where communication service providers are focusing much of their investment on the RAN layer and software-defined networking is causing disruption. Outside the service provider segment, however, Cisco’s refreshed product lines and strong brand are resonating across SMBs, large enterprises and public sector organizations. Cisco completed the refresh of its enterprise switching lineup with the introduction of the latest Catalyst product in 1Q19, which will help drive continued growth across non-service provider segments. — Michael Soper, Senior Analyst
  • Cisco Customer Experience’s use of partners to develop its portfolio around analytics, IoT and security as well as supplement delivery enables the company to maintain profitability and generate growth, as highlighted in TBR’s 1Q19 coverage of the company. Its pursuit of partnerships with technology-led vendors, including Microsoft Azure, Amazon Web Services and Google Cloud, will help Cisco Customer Experience generate additional advisory, implementation, and software and solutions support engagements. — Kelly Lesiczka, Analyst

And sign up here for the next TBR webinar, The Makings of the Telecom Edge Compute Market.

Booz Allen Hamilton keeps winning, even when the government shuts down

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TBR’s initial response to Booz Allen Hamilton’s (BAH’s) 1Q19 earnings published on Tuesday, and we expect another strong quarter from BAH to close out its FY19. BAH boasts a soundly differentiated market position and multilayered alignment of its technology and advisory portfolio with the primary objectives of its federal customers. Consulting-led offerings are increasingly interwoven with an innovative technical capacity designed to enable federal clients to meet operational challenges and security threats ever-increasing in sophistication and volume. BAH even emerged from the recent 35-day temporary government shutdown with minimal fiscal damage, further illustrating the resiliency of its solutions model and fueling its confidence about 2020. We further expect the company will issue strong guidance for its upcoming fiscal 2020, with revenue growth in the high single digits and margin performance sustained at current levels.

Read more of Senior Analyst John Caucis’ assessment of federal IT services vendors through the quarter and the upcoming quarterly benchmark.

Additional assessments publishing this week from our analyst teams

Tuesday

  • In our 1Q19 Hewlett Packard Enterprise Cloud Initial Response, we discuss how the company’s margin improvements resulted from a more software-defined portfolio and improved operating efficiency as the HPE Next initiative enters its final year. — Cassandra Mooshian, Senior Analyst
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Wednesday

  • Cost-cutting initiatives including headcount reduction and deeper integration of digital sales and customer service channels enabled Sprint to reduce $1.2 billion in gross operating costs in FY18, but this was largely offset by reinvestments in network and other operational initiatives. Sprint’s financial position will remain challenged long term due to its high debt load and struggle to generate positive net income and free cash flow, highlighting why the T-Mobile merger is in the best interest of the company. — Steve Vachon, Analyst

Thursday

  • Now with its third CEO in two years, Rackspace rebrands Fanatical Support to Fanatical Experience as it commits to providing ‘unbiased expertise’ and a more total support system.      — Cassandra Mooshian, Senior Analyst

Friday

  • We expect VMware to report another quarter of strong, above-average growth in comparison to its software peers. Ongoing portfolio investments, partnerships and tuck-in acquisitions position the company for continued customer attraction and retention. — Cassandra Mooshian, Senior Analyst
  • Portfolio and talent developments equip HCL Technologies (HCLT) to sustain revenue growth through 2021. HCLT needs to quickly scale its investments and market presence to solidify growth. Kelly Lesiczka, Analyst
  • https://tbri.com/blog/hclt-aquires-ibm-software/Despite enhanced efficiencies in traditional IT operations, T-Systems could not offset pressures on profitability from reorganization and adoption of IFRS 16. Expanding its portfolio in growth segments will enable T-Systems to benefit from a more flexible business model to adapt to and address client demands. Kelly Lesiczka, Analyst

And if you missed the May 22 webinar, Bringing the best: Talent and technology in management consulting, check out the replay here.

TBR Weekly Preview: May 20-24

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Before the long weekend here in the U.S., our teams will be publishing deeper analysis on some of the vendors that released earnings earlier this quarter. As always, our approach starts with the individual companies, then builds to an understanding of the larger market.

Additionally, don’t miss this Wednesday’s webinar Bringing the best: Talent and technology in management consulting. Register today!

Tuesday

  • The combination of Atos’ integration and technology capabilities with Google Cloud technologies, made possible by the pair’s global partnership, which marked its first year on April 24, is expanding Atos’ cloud client reach and driving revenue opportunities in secure hybrid cloud orchestration, data and AI, machine learning, and digital workplace solutions for enterprises. The acquisition of Syntel expanded Atos’ cloud advise-build-run portfolio and client reach, notably in North America, and provided critical scale for Atos’ Business and Platform Solutions division, which will accelerate Atos’ cloud advisory and implementation activities. Integration of security services and products into cloud solutions, enables Atos to transform clients’ IT and business models and securely support and manage both cloud and legacy IT environments. — Elitsa Bakalova, Senior Analyst
  • The most recent edition of TBR’s Colocation Benchmark highlights how hybrid IT adoption is a driving force behind colocation adoption as colocation providers offer both data center space and connections to leading cloud providers. The availability of hybrid PaaS and IaaS offerings such as Microsoft Azure Stack and, soon, AWS Outposts provides additional opportunities to extend enterprise colocation environments. — Cassandra Mooshian, Senior Analyst
  • TBR’s Cloud Professional Services Market Forecast details how healthy growth will persist across cloud professional services markets despite automation’s downward pressures as hybrid IT sprawl proliferates. Accenture and IBM remained the top two vendors overall in cloud professional services in 2018, while Accenture is expected to take on significant additional market share through 2023 as it benefits from its C-Suite exposure and position as a technology-agnostic third-party expert. — Cassandra Mooshian, Senior Analyst

Friday

  • TBR’s initial look into Hewlett Packard Enterprise’s (HPE) 1Q19 performance deep dives into HPE’s infrastructure strategy amid recent ongoing changes as HPE enters the final year of its Next initiatives. Commoditization continues to take its toll on infrastructure vendors’ bottom lines, increasing competition and encouraging more nuanced strategies to get ahead. — Stephanie Long, Analyst
  • The 1Q19 Fujitsu Cloud report deep dives into Fujitsu’s cloud strategy amid recent changes. As the company no longer competes for new IaaS opportunities outside of Japan, Fujitsu is leaning on partners and their expansive customer bases more significantly and strategically amid the company’s own strategic shift. — Cassandra Mooshian, Senior Analyst

Finally, publishing this week from John Caucis are 1Q19 assessments of federal IT majors CACI and Leidos, including key developments from the quarter and detailed analysis of each company’s fiscal performance. Nearly a year after losing out to General Dynamics in the competition to acquire CSRA, CACI aggressively jumped back into the M&A fray, spending nearly $1 billion on acquisitions during the quarter to deepen its capabilities in C4ISR, cybersecurity, signals intelligence and electronic warfare for the U.S. Department of Defense and intelligence community. In the past, CACI’s MO regarding acquisitions was often paying a premium to scoop up differentiating solutions capabilities, and after paying $225 million to acquire N.Y.-based Mastodon Design and its 50 employees, it appears CACI retains an aggressive, but judicious, M&A posture. CACI delivered 12%-plus year-to-year growth during 1Q19 — more than half inorganic in nature. Federal IT peer Leidos delivered strong organic growth in its first quarter following its “year of transition” in 2018, suggesting its revamped growth strategy, which hinges on effective leverage of the information systems and strategic solutions assets acquired from Lockheed Martin nearly three years ago, is working. With its operational and organizational revamp around its core markets complete, Leidos is beginning to turn its attention to adjacent market opportunities, including in the U.K., where it plans a significant ramp up of recruiting activities in 2019.

HPE buys Cray: Is this the definition of insanity?

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We know Moore’s law drives consolidation in the industry. What we do not know, however, is if any two hardware-centric vendors can come together and build a business accretive to the top line. Michael Blumenthal tried this strategy by combining Burroughs and Sperry to create Unisys, and that certainly did not work. More recently Dell acquired EMC, and while jury remains out on that consolidation play, early indications have been positive.

HPE hardware acquisition history

Hewlett Packard Enterprise (HPE) has deployed this strategy multiple times over the years. Today HPE announced it will acquire Cray for $1.3 billion, which equates to $35 a share, or a $5.19 premium over yesterday’s closing price of $29.81. Similar hardware-centric deals HPE has conducted over the years include:

  • Acquiring Apollo after its first-mover advantage in engineering workstations was eclipsed by Sun Microsystems
  • Acquiring Compaq after it had acquired Tandem and Digital Equipment Corporation (DEC), which had likewise struggled as much in business model integration as with technology integration
  • Acquiring SGI, which was hemorrhaging cash but was a strategic HPE OEM partner that HPE could not afford to let fail or be acquired by a rival
  • And now Cray, the last of the venerable high-end niche vendors to double down on higher-margin high-performance computing (HPC)

HPC becomes mainstream as accelerators keep pace with big data compute demands

HPC certainly has growing appeal. That appeal stems from several economic drivers

  • As always, Moore’s law theory gets borne out in reality as cost and form factors decrease to the point where distributed computing (a fundamental tenet of Ken Olsen’s original business plan for DEC in the early 1960s) can be done at the board level if not the chip level. Graphics processing units (GPUs), tensor processing units (TPUs) and field-programmable gate arrays (FPGAs) can keep pace with increasing demands coming from big data analytics.
  • Supply chain excellence and software tuning of these commodity components can allow for custom-designed systems, purpose-built to the compute demands of the HPC customers.
  • IBM certainly keeps innovating in HPC, especially with its RISC-based Power chips suited for analytics.
  • Lenovo has taken a huge bite out of HPE’s share of the HPC space through its design engineering and supply chain flexibility, manufacturing commodity Intel boards at scale through Lenovo’s global manufacturing space. Per Lenovo it went from having none of the top 500 HPC installations in the world in 2014 to having 140 of them in 17 countries in 2018. Much of this success came at HPE’s expense.

Will the acquisition go against type and be viewed as a sane move?

A definition of insanity is to engage in the same activity over and over again while expecting a different outcome. HPE’s history has been to acquire struggling firms in niche hardware areas in hopes of growing share. With fewer and fewer silicon-centric vendors left standing, the odds of success can certainly increase in time.

The Cray acquisition may well aid HPE in stalling Lenovo’s recent successes in the HPC space, but Lenovo’s operating best practices are well suited to commoditizing markets. Supply chain excellence honed to attack the hyperscale market brings decided cost advantage to the HPC space. Talent recruited from Intel and other firms likewise gives Lenovo the software tuning competencies necessary to extract fit-for-purpose performance from commodity chipsets.

Quantum also looms large on the horizon as the next chapter for the high-end compute requirements to help solve the world’s intractable problems. Seven nanometer wafers may not be the end of the line for silicon innovation, but it is certainly getting close. This acquisition seems poised to satisfy the immediate here and now, while once again being eclipsed by niche innovation elsewhere, with that elsewhere coming in the quantum domain in three to five years.

Recent articles have come out suggesting HPE is cutting back on quantum research, intending instead to extract more life out of the traditional computing space with processors for deep learning and analytics. HPE has certainly acquired a company that has been admired for decades as being the “tip of the spear” in silicon innovation. HPC innovations certainly can work for today, but that tip of the spear will be blunted by the inexorable laws of physics, making further silicon innovation increasingly more challenging. Future offerings in what has been Cray’s core market will come from quantum innovators. Once quantum reaches economic advantage over high-end classical computing, the industry will see yet another round of business exits for those vendors lacking transformation fearlessness. Like many of HPE’s other hardware-centric acquisitions, this move appears to have reasonable short-term impact and limited long-term upside.

Kick-starting innovation takes smart thinking, not just action

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An innovation leader at a fast-growing Europe-centric consultancy shared with me tactics his firm uses to make its innovation engagements creative and pragmatic, with principles centered on adding real business value while capturing as much opportunity as possible for meaningful change.

First, pick one area to innovate, based largely on where you can expect value to come from. This echoes the age-old advice to search for what’s missing where it likely is, not where the lighting is best. And it echoes a recent theme we’re hearing from consulting and IT services vendors that clients need help making choices, not just understanding what choices they have.

Second, assemble the micro-learnings — the initial ideas and concepts — just to get people thinking, which I think reflects a trend of consultancies intentionally leaning away from “design thinking” as a term of art, while keeping the principles in place. Get creative, with purpose, but don’t get locked into an over-hyped and little-understood approach.

The third ingredient is multiple points of views, far wider than the perspectives of clients and their clients. If you’re considering supply chain, seek views from the HR managers at your client’s supplier. If you’re in the pharma space, talk to nurses actually distributing the meds. We’ve heard multiple stories of consultancies taking extra steps toward understanding a client’s ecosystem, but typically, this takes place when a minimum viable product is being tested, rather than early in the thinking-and-design phase.

Finally, when it comes to building something to test, focus on testing, whether you’re innovating around the right problem with the right idea, rather than the specific product or solution. Again, we’ve seen plenty of innovation engagements that move to testing and become too focused on the technology and making it work, not evaluating, continually, whether the innovation is being applied to the real problem.

Thinking on this discussion and reflecting on the last year of discussing innovation — as an offering, as an element of what consultancies and IT services vendors bring to their clients — we’re considering how to more fully capture innovation within the larger context of digital transformation. Look for specific assessments of innovation in the upcoming Digital Transformation Insights reports and the supporting vendor-specific quarterly reports, including Accenture, IBM Services and Management Consulting Benchmark Profiles for PwC, EY and McKinsey & Co.

TBR Weekly Preview: May 13-17

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As we move further into May, we will shift from initial earnings reports to larger, detailed reports on the vendors we cover, plus the benchmarks and market forecasts for the broader areas, such as cloud and telecom. And definitely do not miss Wednesday’s webinar on digital transformation.

Monday

  • The IBM Cloud report highlights how cloud remains an increasingly key component to IBM’s hybrid business model and long-term strategy. IBM reported single-digit cloud year-to-year growth, at 7%, a remarkably smaller rate than its larger cloud peers, which underscores the continued messaging and go-to-market shortcomings it needs to overcome. Cloud is often relied on as IBM tries to bounce back, but the cloud business also needs some attention. IBM will continue to sell off noncore software assets to hone its hybrid IT focus and messaging — the success of which is largely contingent on the planned acquisition of Red Hat in late 2019 by IBM. — Cassandra Mooshian, Senior Analyst

Wednesday

  • Strengthening its focus on premium customers enabled AT&T to improve the EBITDA margins of its Mobility and Entertainment Group divisions in 1Q19, despite competitive pressures hindering subscriber growth. Though AT&T will continue to trail T-Mobile in postpaid phone net additions throughout 2019, AT&T will boost Mobility margins through its premium unlimited data plans and by being disciplined in its device promotions. Conversely, AT&T continues to lose video subscribers to over-the-top platforms, but the operator’s higher DIRECTV price points will help strengthen Entertainment Group margins. — Steve Vachon, Analyst

Thursday

  • TBR’s first public sector IT services report of the quarter, Raytheon Intelligence, Information & Services (IIS), will discuss how Raytheon’s IIS business group continues to deliver market-leading fiscal performance, despite the run-off of a major defense sector support contract. IIS delivered double-digit top-line growth in 1Q19, driven principally by continued robust expansion of its core cybersecurity and space programs. Growth in these key sectors, particularly in the classified arena, was critical in enabling IIS to deflect the impact of declining work volumes on the Warfighter Field Operations Customer Support program, though the wind down of this program will become increasingly taxing during 2019. Meanwhile, a newly centralized base of operations in the United Arab Emirates will generate mindshare and market share gains for Raytheon in the Middle East while the company positions itself at the forefront of the 5G revolution in federal IT as the premier contractor to escort defense agencies into the 5G era. Finally, Raytheon is targeting the lucrative European security market as an opportunity to leverage its cyber leadership and expand international sales. — John Caucis, Senior Analyst
  • Cisco strengthens its portfolio by attaching services to new product offerings to capture data center, IT infrastructure and workplace transformation engagements. However, declines within its deferred revenue signal the company could face challenges in maintaining services revenue expansion. — Kelly Lesiczka, Analyst
  • Capgemini continues to sustain its profitable growth through an operating model based on three pillars: a unified go-to-market strategy that presents one face to the client and sells the entire Capgemini portfolio, industry focus, and an agile and competitive portfolio. Changes Capgemini made during 2018 to its portfolio, organizational structure and sales model enable the company to address rising demand from clients’ business side and strengthen relationships with clients to expand wallet share. Offering industry expertise, such as through the new Unified Commerce Solution for Grocery, enables Capgemini to attract clients’ C-Suites by addressing their business-specific needs. Capgemini has a competitive portfolio and global services capabilities around fast-growing and emerging solutions and revitalized core outsourcing offerings that will continue to drive revenue growth for the company. — Elitsa Bakalova, Senior Analyst
  • Industry specialization is becoming a central focus of Atos’ strategy as the company articulates and delivers digital value and customer excellence leveraging its technology expertise and partnerships in areas such as security, cloud, IoT and quantum computing. One of Atos’ strengths is its ability to strictly execute on the plans it sets for its financial performance over three-year horizons and present consistent messaging to the industry analyst community. TBR expects Atos to execute on its plan to provide clients with innovative solutions that enable technology-powered strategies and business models. Deconsolidating Worldline as a stand-alone business as of Jan. 1 is a logical move that will have an immediate positive impact and enable Atos to focus on its core digital services activities. — Elitsa Bakalova, Senior Analyst
  • Despite the maturing smartphone market and competition from new mobile virtual network operators such as Xfinity Mobile and Spectrum Mobile, significant opportunity remains for T-Mobile to sustain subscriber growth, exemplified by the company gaining higher postpaid phone net additions in 1Q19 compared to 1Q18. Decreased postpaid phone churn, which has been lower than that of AT&T the past two consecutive quarters, is a main driver of T-Mobile’s higher net additions, as customers are becoming more satisfied with T-Mobile’s service options, network coverage and customer service. — Steve Vachon, Analyst
  • The strength of its broadband business will enable Comcast to sustain Cable Communications revenue growth through 2020 despite continued video subscriber losses as consumers shift to over-the-top offerings. Comcast will also sustain revenue growth long term through the company’s burgeoning businesses, including Xfinity Mobile, Xfinity Home and its machineQ IoT venture. — Steve Vachon, Analyst

Friday

  • Fujitsu Services benefits from portfolio investments but needs to reorient its focus on client retention to sustain growth. We expect Fujitsu will look to its services portfolio offerings and onshore centers, showcasing its technology expertise to create differentiation and extract additional wallet share as well as generate opportunities outside its traditional client base. — Kelly Lesiczka, Analyst

Off the road and on your screen: A webinar featuring our latest look at digital transformation

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Seven of the last nine weeks spent traveling has included an incalculable number of meetings and countless great stories, ranging from ground-breaking IoT solutions and stand-out blockchain presentations to a surprising utilities-selection app. All the events confirmed, for me, that we’re on the right track with how TBR has structured its research and analysis around the IT services and broader technology space, including our new Digital Transformation Insights Portfolio. In listening to consultancies and IT services vendors talk about how they run their companies and how they deliver to their clients, I heard that models with the right combination of strategy, performance and bonuses provide the foundation of our analysis, echoed perfectly in our quarterly reports and benchmarks. 

On May 15 I’ll present parts of our digital transformation portfolio in a webinar titled, “30 Minutes, 3 Months, 3 Years: Evolution of Digital Transformation.” In addition to walking through how we developed the portfolio and what we’re researching and writing about each month, I’ll pull in examples from the last nine weeks and preview some of the analysis we will be publishing in the coming months, including the much repeated theme/complaint/reality that humans consistently become the weak link in any digital transformation. Nearly every client story I’ve heard recently included lessons learned around change management, leadership commitment and team selection, regardless of whether the featured technology was IoT, blockchain, RPA or run-of-the-mill ERP. I’ll walk through some observations on this theme as well as other commonalities from clients’ stories and vendors’ evolving digital transformation strategies.

Join me for the webinar and send comments and questions directly, as our research traditionally has been shaped answers to the key intelligence questions we develop based on clients’ questions. 

TBR Weekly Preview: May 6-10

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We are still cranking through our initial analysis of vendors’ earnings for the first quarter, with more detailed analysis available two weeks after the announcements.  

Monday

  • Growth of Wipro IT Services’ (ITS) emerging business lines, such as Digital Ops and Platforms, shows recent investments are paying dividends; however, steep declines in its legacy outsourcing business are offsetting gains. Though Wipro ITS is moving in the right direction, it will require a more aggressive acquisition agenda to compete with peers. — Kelly Lesiczka, Analyst, Professional Services Team 

Tuesday

  • In TBR’s 1Q19 IBM Initial Response, we discussed the waning IBM Z product cycle and its effect across IBM’s businesses. In TBR’s full report on IBM, we will unpack some of the company’s strategies that were announced at IBM THINK 2019 as well as explore the impact of IBM’s quantum computing breakthroughs on its strategy and business performance.
    — Stephanie Long, Analyst, Data Center Team
  • Despite experiencing pockets of growth, such as in consulting and cloud, IBM Services’ revenue continued to decline in 1Q19. IBM Services’ struggles to balance market demand with stakeholders’ expectations and the company’s relentless emphasis on improving profitability via productivity, such as implementing new ways of working and infusing automation and AI into processes, overshadowed any revenue growth. IBM has the incumbent advantage, which has been built on the company’s portfolio breadth, global scale and years of execution, making it one of the most trusted technology brands for large enterprises. However, IBM Services will continue to experience fierce competition from peers, such as Accenture, which is using its industry and functional expertise to expand client mindshare, particularly as it invests in talent development and intellectual property and shifts its value proposition to becoming a technology-enabled solutions broker. — Elitsa Bakalova, Senior Analyst, Professional Services Team

Wednesday

  • TBR’s 1Q19 Sprint Initial Response will examine why the proposed T-Mobile merger is in Sprint’s best interests, as Sprint’s long-term survival as a stand-alone company is threatened by the company’s weak financial position, subpar network quality and struggle to attract customers apart from utilizing aggressive pricing tactics. — Steve Vachon, Analyst, Telecom Team
  • Ericsson is successfully executing its strategies on multiple fronts, as demonstrated by the company’s organic sales growth and improvements in gross and operating margins in 1Q19. Its U.S.-centric 5G strategy has enabled the company to secure large-scale contracts with the country’s Tier 1 operators, as well as with U.S. Cellular, for 5G-ready RAN and LTE densification, and Ericsson will be able to sustain revenue growth throughout 2019 as these contracts ramp. Increasingly optimized headcount and the restructuring or exiting of unprofitable Managed Services and Digital Services contracts are benefiting margins.

Thursday

  • Execution of T-Systems’ transformation plan, combined with increased client adoption in emerging areas, will help the company capture sustainable growth. During 1Q19 T-Systems expanded its presence in Europe to increase its work with its existing clients, leveraging its portfolio investments. — Kelly Lesiczka, Analyst, Professional Services Team 
  • Mode 2 and Mode 3 services and solutions transition HCL Technologies’ (HCLT) portfolio into newer areas and help extract additional wallet share from clients. Additionally, HCLT pursued investments in 1Q19 to develop niche portfolio offerings, such as within the digital marking services space, to help differentiate from its India-centric peers. — Kelly Lesiczka, Analyst, Professional Services Team 

Friday

  • Integrating Capgemini’s established management consulting expertise with digital design and creative studios, as well as with the broader capabilities across its portfolio, will enable the company to provide holistic, consulting-led offerings and approach clients with a business transformation value proposition. — Elitsa Bakalova, Senior Analyst, Professional Services Team

Three years after launching Google One, Google Cloud nears enterprise readiness with Anthos

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Google Cloud’s enterprise journey started with Diane Greene and the ‘One Google’ strategy

When Google entered the public cloud market it leveraged the company’s positive reputation among developers as well as technological expertise around machine learning and data analytics from its Search business. However, as a cloud vendor, the company had yet to establish a reputation or a business model that appealed to enterprises. Customer engagements were largely disjointed as G Suite and Google Cloud Platform were sold by different sales teams, making it cumbersome for enterprises to adopt multiple offerings within Google Cloud’s portfolio. To attract and win enterprise customers, Google Cloud hired Diane Greene as CEO in 2015 and created its “One Google” enterprise strategy in which Google Cloud planned to unify its SaaS and PaaS offerings in sales and engineering. Greene’s experience as the co-founder of VMware made her particularly qualified to lead the new strategy, but she was unable to establish the business messaging that large enterprises seek. However, Google Cloud’s value proposition to enterprises has improved over the past three years under Greene’s leadership with a degree of portfolio integration and technology advancement in areas such as machine learning, analytics and Kubernetes.

Incremental improvements are the backbone of Google Cloud’s enterprise-grade platform, Anthos

Over the past year Google Cloud’s momentum has continued to accelerate: Thomas Kurian was appointed CEO, the company partnered with large vendors such as Atos and introduced Google Cloud Services platform, which included hybrid capabilities with Google Cloud’s GKE and its new managed on-premise private cloud, GKE On-Prem. While many of these developments were noteworthy on their own, Google Cloud’s Anthos Platform, announced at Google Next in April, brings together the vendor’s technological advancements and partnerships, as well as new capabilities and infrastructure agnosticism that truly appeals to enterprises.

At its core, Anthos is a rebrand of Google Cloud Services Platform, a multicloud management toolset first announced in July 2018. In addition to GKE On-Prem’s general availability through Anthos, Google Cloud also launched Anthos Migrate, which enables customers to manage workloads running on Amazon Web Services (AWS) and Microsoft Azure. Anthos Migrate automates the migration of virtual machines from on-premises or cloud environments into containers in GKE, which helps simplify migration to Anthos.

The ability to migrate from — or run workloads on — AWS and Microsoft IaaS in addition to Google Cloud Platform (GCP) is vital to Google Cloud’s enterprise strategy, as 30% of enterprises plan to increase the number of IaaS providers in their hybrid environments over the next two years, according to TBR’s 2H18 Cloud Infrastructure & Platforms Customer Research. Further, enabling these organizations to containerize legacy applications on premises in Anthos helps alleviate virtual machine maintenance and OS patching pain points for enterprise IT departments. Migrating to Anthos also enables customers to leverage offerings such as Google Cloud AI in GCP while keeping certain workloads on premises, which is particularly beneficial for organizations facing corporate, government or industry regulations.

Google Cloud’s partner ecosystem will support, sell and augment Anthos to drive customer adoption

Because Anthos is a completely software suite, customers can deploy it on their existing hardware rather than replacing on-premises assets with new infrastructure. For customers that have existing hardware or plan to buy additional infrastructure, Google Cloud hardware partners such as Cisco, and hyperconverged infrastructure partners including Dell EMC, Hewlett Packard Enterprise, Intel and Lenovo are making their offerings compatible with Anthos, enabling customers to configure or purchase the underlying hardware based on their storage, memory and performance requirements.

System integrators including Accenture, Atos, Cognizant, Deloitte, HCL Technologies, NTT DATA, Tata Consultancy Services and Wipro are also developing services and solutions to provide managed services for Anthos, helping Google Cloud customers integrate Anthos into their hybrid environments. TBR expects these partners will drive adoption of Anthos, as they bring Anthos to market and sell the suite to their customer bases, helping expand Google Cloud’s addressable market.

IBM’s Kubernetes-based IBM Cloud Private offers a similar value proposition, but Google Cloud’s expertise in Kubernetes may help fend off competition from IBM, as well as Microsoft and AWS

Google Cloud’s most formidable competitor regarding Anthos is IBM and its Kubernetes-based PaaS offering IBM Cloud Private, which is gaining traction in the market as evidenced by the vendor’s 200 customer signings in 4Q18. Additionally, IBM’s tenure as a trusted enterprise provider makes the vendor a favorable choice for many organizations. However, IBM is also seen by many enterprises as a legacy on-premises provider, whereas Google Cloud is a born-in-the-cloud business with a strictly cloud-oriented business model. In the public cloud market, Google Cloud is growing at a faster rate than IBM, showcasing Google Cloud’s superior perception in the market. In addition to its improving perception among large enterprises, Google Cloud can leverage its reputation among developers to outcompete IBM in the small- to medium-enterprise space.

AWS’ Amazon Elastic Container Service for Kubernetes and Microsoft’s Azure Kubernetes Service are Kubernetes-based PaaS offerings similar to GKE, but the on-premises capabilities for each offering lag behind those of Anthos. Azure AKS will become available on Azure Stack, but the plans to create Azure AKS on Azure Stack were just announced in February. Amazon EKS can connect to Kubernetes apps running on premises, but the capabilities are more limited than those of Anthos as AWS has not yet developed an Amazon EKS on AWS Outposts. TBR expects Google Cloud will be able to fend off competition from IBM, AWS and Microsoft, as Google Cloud — as the inventor of the technology and with a network of more than 20 ISV partners with Kubernetes apps in the GCP Marketplace — has a prowess that may help swing customers in its favor.

TBR Weekly Preview: April 29-May 3

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Two weeks in a row cranking out tons of analysis around technology companies, their strategies and performances, and how we see the market changing constantly. As always, connect directly with the analysts if you have questions.

Monday

  • In TBR’s 1Q19 Fujitsu Cloud Initial Response, we discuss Fujitsu’s strategy and next moves after its decision last October to stop international sales of K5. An increasingly strategic partnership with Microsoft coupled with continued enhancements to its data center and managed services businesses and capabilities will be ever more critical to the vendor’s long-term success outside Japan. — Cassandra Mooshian, Senior Analyst, Cloud and Software Team

Tuesday

  • In TBR’s 1Q19 Alphabet (Google) Initial Response, we track Alphabet’s ability to supplement core advertising revenue with sales of its Hardware products, Cloud services and YouTube subscriptions, as well as its investments in original and licensed video content that have begun to pressure margins. Alphabet’s Other Bets also comes into focus as the company leverages investments in the businesses within this segment, such as Waymo autonomous driving, Verily life sciences and Wing drone delivery, to create revenue streams that are sustainable over the long term. — Michael Soper, Senior Analyst, Telecom Team
  • Leidos begins 2019 with a renewed focus on growth and continued robust activity within its public sector healthcare business. TBR’s 1Q19 Leidos Initial Response will highlight two new collaborations to illustrate the increasing strategic importance of healthcare in Leidos’ revamped growth strategy, as well as updates on the company’s ongoing consolidation of its physical assets in the U.S. and expansion of its footprint in the U.K. — John Caucis, Senior Analyst, Professional Services Team
  • Digital marketing services (DMS) remains a growth opportunity — expected to reach $132 billion by 2023 — as CX-related content deployment advances to maturity. In TBR’s 2Q19 Digital Transformation Insights Report: DMS, TBR benchmarks 19 vendors that are well positioned to increase their share of the addressable DMS market, which on average expanded in revenue 22% year-to-year in 4Q18, through 2023.— Boz Hristov,Senior Analyst, Professional Services Team

Wednesday

  • In TBR’s 1Q19 Apple Initial Response, we will report on Apple’s efforts to shift toward a more services-oriented model as it combats slower product revenue due to lengthening smartphone ownership cycles and global saturation. While Apple’s extensive ecosystem puts it into a strong position to enter the vast content services ecosystem, the company will have to navigate busy service and content markets and overcome experienced and embedded competitors, such as Netflix, Amazon and Spotify. — Daniel Callahan, Analyst, Devices and IoT Team 

Thursday

  • With nearly $1 billion in new acquisitions in 1Q19, M&A is once again taking center stage in CACI’s overall growth strategy, enabling the company to align well with shifting defense and intelligence priorities emphasizing agile solution development, accelerated acquisitions cycles, and advanced communications and security products for warfighting and intelligence missions.  TBR will have in-depth analysis of CACI’s most recent acquisitions to expand its portfolio of cyber, electronic warfare and communications intelligence capabilities in our 1Q19 CACI Initial Response. — John Caucis, Senior Analyst, Professional Services Team

Friday

  • Cognizant’s strategic framework is in place, enabling the company to capture and accelerate digital opportunities. The recent acquisition of Meritsoft, which will add SaaS capabilities to its Digital Operations arsenal, reaffirms Cognizant’s commitment to digital and will help the company expand its digital platforms within its addressable market. — Kelly Lesiczka, Analyst, Professional Services Team 
  • Steady expansion of the number of clients in Tata Consultancy Services’ (TCS) largest segments illustrates the continued traction of TCS’ Business 4.0 framework, designed to drive digital enablement. TBR’s 1Q19 TCS report will discuss hiring trends and margin projections during the remainder of 2019. — Kevin Collupy, Analyst, Professional Services Team
  • As Infosys evolves its value proposition and go-to-market strategy, investments in AI, cloud and design thinking remain at the forefront of company executives’ agenda. A recent uptick in performance, evidenced by the healthy pipeline of large deals the company signed in FY19 for a total contract value of $6.28 billion, gives Infosys the confidence to invest and tout capabilities in new areas to secure long-term growth through product-enabled services. Doubling down on its position on the services supply side through investments in innovative portfolio offerings could help Infosys solidify its standing as a trusted outsourcer as it converts bookings to cash.
  • — Boz Hristov, Senior Analyst, Professional Services Team

This week TBR will also publish several special reports on recent analyst events, including PwC’s Risk Summit and EY’s annual analyst event.