AI Buzz Sparks IT Infrastructure Shifts, but Privacy and Strategic Challenges Are Impacting Adoption

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Utilizing AI Is the Top IT Organization Priority for the Next 2 Years

The industry enthusiasm surrounding AI has quickly led to shifts in organizations’ strategic priorities and expected investments such as demand for servers. Despite the hype, few organizations have operationalized GenAI to date. Instead, most are focused on overcoming initial barriers to adoption, including understanding the business implications of this new technology frontier.

 

The buzz around AI has permeated the minds of IT leaders at many organizations, with 44% of respondents* indicating that utilizing AI is a top priority for the next two years, outpacing all other priorities surveyed.

GenAI Has Generated Significant Interest Among IT Buyers of All Verticals and Company Sizes, But Few Have Implemented the Technology to Date

Generative AI (GenAI) is a hot topic, but only 22% of respondents* indicated their organization is using GenAI-based technology in day-to-day operations, suggesting that many organizations want to leverage GenAI to drive transformation but are unsure of where to begin. Most respondents are in a conceptual phase, with 57%* currently discussing GenAI use cases or testing GenAI technologies.

 

Not all organizations wish to build their own bespoke GenAI solutions, with 18% of respondents indicating they are waiting for turnkey solutions that can be applied to their business. Only 3% of respondents* are not considering GenAI at all.

 

There were no major differences in current levels of GenAI adoption relative to organization size.

 

Respondents from the industrials and technology verticals are slightly ahead of others in terms of using GenAI in day-to-day operations. Public sector lags considerably, with only 9% of respondents using GenAI today.

 

Healthcare respondents were most likely to be in the testing phase, at 47%.*
 

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Most Respondents Expect to Use GenAI Solutions Tailored to Their Use Case, While a Smaller Subset Will Adopt Software With Embedded GenAI Features

Overall, 65% of respondents* using or considering GenAI will run GenAI on their own infrastructure, and 45%* will use public cloud, signaling that GenAI projects will take on a hybrid strategy. It is worth noting that the respondents answering this survey are decision makers for purchasing IT infrastructure, and therefore may be more biased toward using their organization’s private infrastructure for GenAI versus individuals who are focused on public cloud.

 

For some organizations, using GenAI will be based solely on enhancements to ISV applications and not their own custom build-outs. Of the respondents using or considering GenAI, 13%* expect to only use software and applications with GenAI features and do not plan to build GenAI use cases in public cloud or on their own infrastructure.

 

Enterprises appear to be most wary of using public cloud for GenAI technologies.

Vendors Engaging Customers on GenAI Will Need to Start the Journey by Establishing Trust in Handling Data and Navigating Legal and Ethical Concerns

The greatest barriers to organizations adopting GenAI are those at the heart of the GenAI debate: ensuring data privacy and assessing the legal and ethical risks of using GenAI technology. IT decision makers are expected to ensure their organizations are operating according to standards; however, they are inexperienced with the technologies to be adopted and vendors have limited use cases to showcase at this time to assuage these concerns.

 

More tactical challenges, such as long lead times to purchase AI-enabled servers or structuring data for machine learning, are farther down the list but may become greater barriers over time when organizations move from conceptualization to implementation of GenAI solutions.

 

Enterprises are by far the most concerned with ensuring data privacy, as 56% of enterprise respondents* consider it a top barrier compared to 31% of respondents overall.

 

Obtaining budget is of greater concern to small and midsize businesses than to enterprises.

Financial services respondents were most likely to be concerned with more tactical issues, such as addressing hardware shortages, structuring data and finding vendors to help deploy GenAI solutions.

 

Access all of TBR’s customer research data on GenAI adoption in IT infrastructure with a subscription to TBR Insight Center™. Start your free trial today!

 

*Survey data and analysis in this section are excerpts from TBR’s 2Q24 Infrastructure Strategy Customer Research. The survey was fielded in April and May of 2024 and focuses on the overall investment strategies of IT infrastructure purchasers. Survey respondents are IT decision makers based in the U.S. who are responsible for servers and storage purchase decisions at companies with 250 or more employees. Small business was defined as organizations with 250 to 999 employees, medium business as organizations with 1,000 to 4,999 employees, and enterprise as organizations with 5,000 or more employees.

GenAI, IT Modernization and Strategic M&A Drive Infrastructure as a Service and Platform as a Service Growth

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Enterprise Migrations and Large-Scale M&A Are Influencing the IaaS and PaaS Market

Current State of the Infrastructure as a Service Market

Among benchmarked Infrastructure as a Service (IaaS) vendors, average revenue growth increased 21% year-to-year in 2Q24, marking the fourth consecutive quarter of acceleration. There are two primary factors at play: enterprise IT modernization activity, which is much stronger now than it was this time last year, and generative AI (GenAI).

 

Top hyperscalers Amazon Web Services (AWS) and Microsoft are capturing legacy Oracle and SAP workloads as customers continue to migrate to the cloud to not only outsource their IT operations but also drive lasting business value. Though the geopolitical outlook is increasingly uncertain, we expect customers will continue to prioritize more traditional “lift and shift” migrations, and steps vendors are taking to deliver more integrated solutions could help. For instance, by the end of 2024, Oracle’s database services will officially be available on AWS, Microsoft Azure and Google Cloud Platform (GCP), which could be a big growth tailwind for these vendors. For context, converting Oracle’s remaining database support install base to the cloud represents a roughly $18 billion incremental revenue opportunity for these hyperscalers, including Oracle itself.

 

Regarding GenAI, investments in AI compute and new data centers are translating into top-line growth. Most vendors report they have multibillion-dollar AI and GenAI businesses, though this is minuscule compared to the tens of billions of dollars these vendors are investing. Vendor capex guidance for 2025 suggests that the level of investment will only increase, although we do expect this is when GenAI fatigue will hit and many customers may begin to re-evaluate their IT priorities.

Current State of the Platform as a Service Market

The Platform as a Service (PaaS) market is similarly growing behind GenAI adoption, as many customers, who still have a fear-of-missing-out mentality, are spinning up new workloads natively in the cloud with services like Amazon Bedrock, Microsoft Azure OpenAI and Google Vertex AI.

 

The PaaS market will similarly be impacted by GenAI disillusionment, but we believe this trend will also cause customers to focus more on the data layer, prompting them to take a second look at strategies around governance, data quality and integration for long-term AI success.

 

Another key trend driving PaaS market growth is M&A. IT leaders are acquiring to enter new markets and access IP they can ultimately sell as part of an entire end-to-end suite of offerings, as customers continue to crave more simplified, integrated solutions. By far the best example is Cisco’s acquisition of Splunk, which added $960 million to Cisco’s top line in 2Q24 and is quickly making Cisco a rising force in PaaS with its observability portfolio. IBM’s proposed acquisition of HashiCorp, which is expected to close by the end of this year, would be another transformative deal that would put IBM squarely into the Terraform space and deliver synergies with Red Hat that will be attractive to unsatisfied VMware customers.

Cloud Infrastructure and Platform Revenue Leaders

Steps Microsoft Is Taking to Elevate Its Data Portfolio as Part of the Broader AI Strategy Will Fuel Azure Growth and Marginalize AWS’ Segment Lead

Cloud Infrastructure & Platforms Revenue and Growth_TBR 2Q24 

Amazon Web Services: AWS continues to ride a wave of accelerating revenue growth and will cross the $100 billion threshold in annual sales by the end of 2024. Making it as easy as possible for customers to build GenAI applications in the cloud with Amazon Bedrock’s unified API, and adjacent developer tools like App Studio and SageMaker, is integral to AWS’ strategy and ability to drive IaaS growth. At this point, there are probably well over 10,000 customers using Amazon Bedrock for a range of generic use cases like text generation and virtual assistants.

 

Microsoft: Though AI infrastructure constraints caused Azure revenue to dip 2 percentage points to 29% in 2Q24, Azure is growing faster than AWS despite becoming larger and closing in on AWS’ revenue volume. Steps Microsoft is taking to advance its PaaS strategy through solutions like Fabric will continue to fuel Azure growth and help protect Microsoft’s lead in the AI space. For context, the number of Azure AI customers also using Microsoft’s data and analytics tools grew nearly 50% year-to-year in 2Q24, while Microsoft Fabric has now reached 14,000 paid customers.

 

Google Cloud: Recognizing that GenAI leadership stems from the infrastructure foundation, Google Cloud has been heavily building out its infrastructure portfolio by supporting not only NVIDIA’s Blackwell chips, which are expected to be available on GCP in early 2025, but also its own hardware. This includes Axion, Google Cloud’s first Arm-based processor that will support a range of GCP services, including data services key for GenAI like Dataproc and Dataflow. In 2Q24 Google Cloud also announced its sixth-generation TPU (tensor processing unit).

Harnessing AI and Automation in Business Process Outsourcing to Drive Growth Amid Shifting Buyer Priorities

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Offering Business Process Improvement Underpinned by AI Technology Enables Vendors to Increase Their Value Propositions and Drive BPO Revenue Growth

Vendors’ business process outsourcing (BPO) businesses continue to benefit from the ongoing shift in buyer priorities from innovation and growth toward business resiliency and optimization. Buyers are investing in automating business processes to free up costs, providing pathways to growth for vendors with AI-powered and platform-based offerings.

 

With generative AI (GenAI) taking center stage in both Accenture’s and clients’ investments, Accenture has an opportunity to further improve the company’s profitability, provided it can position GenAI as a value enabler, rather than another technology that is in search of a problem. However, we expect Accenture, like many of its IT services peers, to continue racing to capture as much business as possible in the managed services space before GenAI picks up and threatens the core value proposition centered on human-backed service delivery.

Graph - 2Q24 BPO Revenue and Growth

Driving Transformation in Healthcare, HR and IT Services with Business Process Outsourcing

Expanding its industry portfolio offerings, such as within healthcare, will enable Cognizant to deliver on finance, HR and back-office functional needs, helping to offset recent declines within its outsourcing services. In June Cengage, an education technology company, renewed its engagement with Cognizant to continue receiving services for seven years. As part of the deal extension, Cognizant will also now support Cengage Unlimited, which provides a subscription platform for users to receive education courses. Cognizant will also provide cloud and security services in support of its finance and HR operations.

 

HCLTech deepens its knowledge base with close partnerships with Google Cloud, AWS and IBM that enable the company to build domain and functional expertise on HR, CRM and finance functions, underpinned by AI. Integrating its partners’ AI platforms and associated talent enabled HCLTech to deliver on clients’ IT and business services needs and generated revenue growth during 2Q24. HCLTech’s partnership with IBM around IBM watsonx brings in AI expertise to address clients’ HR and IT concerns. HCLTech won a deal in 2Q24 with an energy infrastructure company in the U.S. to provide IT and business services to improve the client’s user experience, enabling it to more quickly pursue market opportunities.

Emerging Consultancy Trends: Talent Management and Innovation in the Spotlight

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Technology continues to threaten the nature of consulting engagements, requiring consultancies to showcase value and deliver on outcomes. Greater investment in talent frameworks, structure and skill will equip staff to lead client discussions and effectively leverage technology to assist workflows. Partnerships remain a core piece of the technology integration, bringing in new expertise and go-to-market opportunities that enable consultancies to meet a wider variety of client needs. Client retention remains a priority across consultancies but will require the firms to effectively deliver value through services.

Consultancies Will Experience a Shift in Traditional Consulting Services as Technology Is Further Embedded in the Market

Consultancies will manage talent more closely to reach higher quality standards

Consultancies refreshed their network of centers, including new operations with partners as well as those designed for internal use. As the consultancies look to bring both talent and clients in-office to work more collaboratively, improve communication and enhance the culture, the new centers serve as a path to facilitate interactions and engagement.

 

In a joint investment, Microsoft and KPMG opened an Operational Risk Skills Development Center in Quebec, followed by a national rollout of the training center supporting Canadian clients’ efforts to take advantage of generative AI (GenAI) responsibly. KPMG also recently announced the opening of a European Union (EU) AI Hub in Ireland. The AI hub is located inside one of the firm’s Innovation Hubs and is set to house 200 employees with skills in risk, regulatory services and cybersecurity. The AI hub will leverage KPMG’s Trusted AI framework and use technology from Microsoft and Cranium (an AI security startup that was spun out from KPMG Studio in 2023).

 

IBM Consulting has poured investment dollars into training and building a network of hybrid cloud and AI talent globally, including IBM’s launch of an AI Center of Excellence in Abu Dhabi, United Arab Emirates, in January 2023 in partnership with the Mohamed bin Zayed University of Artificial Intelligence.
 

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With a return to in-person discussions and conversations, PwC strengthened its center network to emphasize technology solutions. For example, PwC established a Cyber Managed Services Center in Cork, Ireland; added a GenAI business center to its Luxembourg experience center; and opened an AI excellence center in Saudia Arabia.

 

Accenture announced the openings of GenAI studios in Chicago, Houston, New York, San Francisco, Toronto and Washington, D.C. Accenture Federal Services opened a Cybersecurity Center of Excellence (CoE) in partnership with Google in Washington, D.C., highlighting Accenture’s balanced approach to pragmatism and innovation executed through a well-oiled command-and-control culture.

 

Capgemini announced it had signed a strategic agreement with Amazon Web Services (AWS) to accelerate the adoption of GenAI solutions across organizations. The agreement focuses on helping clients gain knowledge around and realize the value of GenAI in business processes. Together, the two companies will move clients from pilots to production by leveraging Capgemini’s network of AWS CoEs. The partners will fast-track the deployment of industry-specific solutions, assets and accelerators, and create functional use cases through Amazon Bedrock.

New leadership will facilitate the evolution of traditional consulting services

With the appointment in July of a new PwC global chairman, Mohamed Kande, who was formerly the company’s Global Advisory and U.S. Consulting Solutions leader, TBR expects sustained and possibly increased investment in advisory and consulting capabilities across the global network, even as the consulting market overall continues to stagnate. Combined with the announcement of new leadership teams in a number of major territories, including the U.S. and the U.K., a new PwC strategy — to update the firm’s 3-year-old The New Equation strategy — will likely re-emphasize the PwC brand and lean into the firm’s technology expertise.

 

Janet Truncale became EY global chair and CEO on July 1, and TBR expects her top priority will be strengthening the company’s talent base, in part by continuing the EY Badges program and leading with its “better working world” strategy.

 

In February McKinsey & Co. partners re-elected Bob Sternfels as the firm’s global managing partner after three voting rounds. Sternfels has provided some stability to McKinsey in the last few years and will likely continue prioritizing quality over quantity, slowing its hiring efforts and fine-tuning the firm’s existing expertise to meet new demands in a GenAI age.

 

Across all three firms, in TBR’s view, new leadership (or consistent leadership, in McKinsey’s case) has been welcomed at the senior level and seen as necessary in light of post-pandemic changes to the consulting and professional services market.

 

In APAC, management consultancies have seen some leadership changes as well. EY Australia recently announced four new appointments: the leads for consulting in Australia; supply chain for Oceania; Asia Pacific financial services; and private equity consulting. Notably, only two of the people appointed to those four positions have been with EY for more than a few years.

 

In May EY Australia announced Katherine Boiciuc as the firm’s new chief technology officer. Earlier in the year, Boston Consulting Group (BCG) in Australia and New Zealand announced a number of senior-level promotions, including Stephen Hosie (healthcare, private equity and public sector), Whitney Merchant (gas, including liquefied natural gas), Lachlan McDonald (mining, oil & gas, manufacturing, and construction), and James Argent (managing director and partner). BCG also appointed Kelly Newton to serve as comanaging partner in New Zealand. Rounding out the region, KPMG appointed David Rowlands as global head of AI, in addition to the promotion of Tim Robinson to lead the firm’s technology consulting practice in Australia.

Partnerships require additional differentiation to drive value for clients

Differentiation will be key for consultancies to prove value tied to partner technologies including AI, GenAI, digital and cloud. Leaning on centers and talent to communicate the value and possibility of their services will provide consultancies with a slight advantage, but the firms will also need to partner around core AI and GenAI capabilities in addition to offering implementation and management services.

 

Post-pandemic management consultancies, particularly the Big Four, have expanded the scope and composition of their partner ecosystem, focusing primarily on key technology vendors including Google Cloud, AWS, SAP and Microsoft, as well as niche providers. Consultancies have trained their own staff around partners’ capabilities, as well as accelerated the opening of dedicated centers to facilitate adoption and transformation rooted within different solutions.

 

  • KPMG US runs a global Oracle operating model backed by a Global Oracle Center of Excellence, and the firm recently launched a Global Oracle EMEA Hub to capitalize on growth in that market. KPMG Delivery Network hubs, located across LATAM, EMEA and APAC, are supported by over 8,500 Oracle consultants, including more than 700 Oracle Cloud Infrastructure-certified consultants. KPMG also opened a CoE with Google Cloud to combine Google Cloud’s AI technologies with KPMG’s industry and functional knowledge.
  • PwC also partnered with Google Cloud, but through a different avenue, focusing on tax compliance and analytics. The partnership also dovetails with PwC’s efforts to complement its existing strengths around tax, workforce transformation, customer experience and HR processes. In addition, PwC teamed with Microsoft to open an AI CoE in Saudi Arabia with the goal of developing AI skills and supporting recruitment. The center will host a recruiting program every two months, bringing in new talent to support portfolio expansion.

 

With partnerships among the consultancies and vendors pursuing similar goals and initiatives, differentiation from the consultancies will be key to their success in scaling new technology and remaining go-to partners for their clients. The CoEs and certified talent provide an avenue for consultancies to immerse clients within the culture and company values in addition to exposure to the services and solutions.

Federal IT Spending Will Remain Robust in FFY25 Amid AI Prioritization

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Federal IT in 2025: Sustained growth amid modest budget increases and strategic modernization

Since coming into office, the Biden administration has fueled an unprecedented federal IT bull market. While the White House’s proposed federal civilian technology budget of $75.1 billion for federal fiscal year 2025 (FFY25) is the smallest increase in several years (up less than 1% compared to $74.5 billion in FFY24), it is still an increase of more than 14% from $65.8 billion in FFY23, and up 25% from $60.1 billion in FFY21, the last year of the prior administration.

 

FFY25 has started with a continuing resolution (CR), as have most of the last several fiscal year. The impact of the latest CR on the largest federal systems integrators may be limited to shorter-cycle programs in their order books, but some disruptions to larger, longer-term engagements are not out of the question.

 

Despite uncertainties as a new administration comes into power, overall federal IT spending priorities will remain intact. Digital modernization across civilian, defense and intelligence IT infrastructures must continue. Services provided by civilian agencies must be digitized to enhance citizen engagement and operational efficiency. And IT investment by defense and intelligence agencies must continue expanding in response to global geopolitical instability and the ever-rising challenges from U.S. nation-state rivals.

 

In the civil space, IT decision makers are coming under greater scrutiny to demonstrate how effectively they have invested IT budget windfalls from the last several fiscal cycles. This is partially reflected in overall IT spending growth that will slow in FFY25, at least based on the Biden administration’s initial FFY25 budget request.

 

For example, the U.S. Department of Health and Human Services’ budget is expected to decline by $100 million (or 1%) in FFY25 compared to FFY24. IT budgets at some agencies, such as the Department of Education will be flat in FFY25 but will expand at a handful of agencies like the Department of Homeland Security in FFY25.

 

The Defense Appropriations Act for FFY25 provides $852.2 billion in total funding, a 3.3% increase compared to FFY24. The Biden administration ceased providing greater detail on Department of Defense (DOD) IT outlays early in its term, but TBR assumes defense IT spending will increase in concert with the growth in overall defense outlays and will continue centering on using data to enhance warfighting and intelligence operations, modernizing the Pentagon’s underlying IT infrastructure, and achieving interoperability across service branches and with the defense agencies of U.S. allies.

 

Defense agencies will also ramp up investment on solutions that push data capture and analysis ever further out to the tactical edge. National security will continue to be a bipartisan matter as the global threat environment remains elevated. The total addressable market for federal systems integrators (FSIs) with a presence in the defense and intelligence sectors could be worth at least $200 billion, and potentially $300 billion or more, with a large and growing portion of the market opportunity tied to AI.

 

Technologies like quantum computing and space-based IT architectures have also been deemed critical by the U.S. defense and intelligence communities, and investment is accelerating in these areas. Additionally, AI currently retains a high strategic priority among emerging digital technologies.

 

AI investments across all federal sectors have accelerated as agencies recognize AI’s potential to optimize agency operations and enhance mission-critical agency functions. AI solutions enable DOD and intelligence community (IC) agencies to process high volumes of data, and subsequently generate actionable insights to warfighters and combat commands, as well as to intelligence operators in the field.

 

Federal agencies must also master AI from both a technological and a responsible use standpoint, prior to the inevitable adoption of generative AI (GenAI). The most basic, fundamental distinction between AI and GenAI is that AI is good at analyzing existing content while GenAI generates new content. Much foundational modernization work is still needed across the federal IT environment to accommodate digital technologies like cloud, AI and GenAI, ensuring continued (albeit slower) federal IT growth in FFY25 and beyond.

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GenAI will continue to revolutionize mission-critical functions and day-to-day operators at federal civilian, defense and intelligence agencies

The business case for GenAI streamlining human-resource-intensive, mission-essential operational tasks is indisputable. Even early GenAI use cases have demonstrated the potential of GenAI for federal agencies. Early AI pilots focused on automating repetitive duties to maximize efficiencies in federal agency workflows, but the scope is expanding to focus on the potential for AI to transform more mission-critical activities.

 

In addition to streamlining operations vis-à-vis AI, DOD and IC agencies are also implementing AI technologies to make sense of the enormous volume of data being generated by networks of satellite and C5ISR (Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance and Reconnaissance) systems and provide actionable intelligence to warfighters, military commands and other national security personnel deployed globally.

 

As a result, TBR expects that AI prototyping initiatives will accelerate in FFY25 and that more pilot projects than ever will convert to formal AI implementation initiatives in FFY25.

FSI-operated, AI-focused CoEs and innovation centers will proliferate across federal IT in FFY25

Federal agencies want to see AI in action, but FSIs must clearly demonstrate the potential ROI of AI to risk-averse agency IT decision makers. The FSIs most proactively managing their alliance ecosystems will take their relationships with commercially focused technology peers to the next level.

 

Like its parent company in commercial markets, Accenture Federal Services (AFS) has actively stood up new showcasing centers in federal IT. AFS’ collaboration with Google Public Sector has been particularly prolific as of late. In 4Q24, AFS and Google Public Sector’s Rapid Innovation Team (RIT) launched the Federal AI Solution Factory to accelerate the development and deployment of AI-powered solutions for federal agencies.

 

The new facility comes on the heels of AFS and Google Public Sector launching a new center of excellence (CoE) in 2Q24 to showcase how GenAI technologies can improve citizen services across federal agencies, following AFS and Google Public Sector teaming to stand up a new Cybersecurity CoE in 4Q23.

AI-related budget outlays in civil agencies will surge in 2025

AI is enhancing the citizen experience by automating human-resource-intensive tasks and enabling civilian agencies to respond proactively, not reactively, to security or operational challenges.

 

Civilian agencies are demanding AI technologies that maximize organizational efficiencies, knowledge management and security and that facilitate digital transformation of monolithic IT systems.

 

According to TBR’s 3Q24 CACI report, “The federal government allocated $3.3 billion for artificial intelligence (AI) in the FFY25 budget request, although TBR believes there is a large volume of undisclosed AI-related spending in the FFY25 budget earmarked for the classified arena in the DOD and IC, and federal law enforcement agencies. Beyond the $3.3 billion allocated for AI in the FFY25 budget, Congress is currently considering a proposal to spend over $30 billion on ‘AI innovation projects’ across civilian agencies, the first such effort fund large-scale AI adoption in the civil space. The bipartisan nature of the proposal certainly reflects how AI is increasingly being prioritized across the federal IT market.”

 

Civilian agencies will increasingly leverage AI in FFY25 to improve citizen-facing services, achieve regulatory compliance more efficiently, optimize operational workflows, and enhance workforce recruiting and retraining.

Meet MAMAA: The Top 5 Hyperscalers Shaping the Future of Digital Ecosystems

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What Are the Top 5 Hyperscalers?

Alphabet, Amazon, Apple, Meta Platforms and Microsoft are the five largest, most comprehensive hyperscalers in the world by a wide margin. This group of Tier 1 hyperscalers are collectively referred to as MAMAA.

 

TBR research shows only the Tier 1 hyperscalers can transcend most, if not all, of the major lifestyle categories to provide a seamless end-to-end ecosystem experience, touching all aspects of people’s lives, primarily due to their scale and access to resources.
 

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The World’s Largest Hyperscalers Are Positioned to Win an Outsized Share of the New Opportunities Created in the Digital Era

Tier 1 hyperscalers have momentum as they pursue their end-to-end digital ecosystem goals. Key reasons why hyperscalers will succeed in their digital ecosystem endeavors include:

  • Scale
  • Network effect
  • Proficiency at building and scaling platforms
  • Adept at translating data into outcomes
  • Near limitless financial resources
  • Access to the best talent
  • Have the best legal teams
  • Control essential intellectual property and patents (e.g., devices, chipsets, AI/machine learning algorithms, Lidar)
  • Tax advantaged — pay relatively little in taxes

Tier 1 Hyperscalers Intend to Own and Control Critical Aspects of the Value Chain in the Digital Era

The End Goal: Full-scope Digital Ecosystems

TBR believes the top 5 hyperscalers will own and control foundational and critical aspects of the digital economy and capture an outsized portion of the value created during the digital era.

  • Societies will become dependent on their clouds.
  • The majority of internet traffic will run over their networks.
  • Transportation will be directed by their self-driving technologies.
  • A significant portion of financial transactions will be processed via their payment platforms.
  • And much, much more

 

If current trends play out, and assuming interference from regulators remains manageable, TBR believes MAMAA will ultimately become fully integrated, end-to-end digital ecosystem owners, providing essential solutions for businesses and consumers worldwide.

 

At a high level, hyperscalers are all pursuing the same strategy, which is to maximize the value of data. All of the Tier 1 hyperscalers are entering similar markets, introducing similar products and services, investing in similar technology areas, and pursuing similar business models. The underlying goal is to provide an immersive, seamless, end-to-end digital experience to end users (consumers and businesses), which will maximize hyperscalers’ value capture in the digital era. Value in its most basic form resides in the data that hyperscalers have access to, but leveraging that data to produce outcomes is how the hyperscalers make their money.

As Hyperscalers Redefine Digital Ecosystems, Industry Consolidation and Adaptation Become Essential for Long-Term Relevancy

As hyperscalers build out their ecosystems, some incumbent entities will become marginalized and fail, and the remaining incumbent players across industries will have to consolidate, adapt and/or partner with hyperscalers in some way or risk fading from relevancy. The markets for IT, advertising, retail, media, entertainment, financial services and other industries are already facing this disruption. TBR believes transportation, healthcare, education, telecom and other industries will also experience hyperscaler disruption during this decade.

 

The lifeblood of the digital era is data, and the heart is the systems, platforms, marketplaces and other digital infrastructure that make use of that data. Hyperscalers have thus far created the most compelling digital infrastructure that is capable of amassing, synthesizing, automating and utilizing vast amounts of data, which is the key underlying reason why they have been so successful in creating economic value over the past two decades.

Growing Infrastructure as a Service Commitments and Competitive Dynamics

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Hyperscalers Forge Larger, Longer-term Deals Amid Intensifying Competition

Customers Are Engaging in Long-term Contracts

Market leaders Amazon Web Services (AWS) and Microsoft have highlighted that customers are signing larger cloud contracts with longer terms. At least in the case of AWS, customers are increasingly applying their cloud credits toward one- or three-year subscription offerings like Savings Plans and Reserved Instances.

 

Microsoft offers similar plans, and in FY3Q24 reported an 80% year-to-year increase in the company’s number of $100-plus million Azure deals. We expect this trend to persist and potentially bring a greater degree of stability to hyperscalers’ top lines.

Google Cloud Should Keep an Eye on OCI’s Expansions

Oracle Cloud Infrastructure (OCI) is growing noticeably faster than competing services as Oracle rapidly fills data center capacity. Oracle has an unofficial goal of closing the revenue gap with Google Cloud Platform (GCP). Though this is a lofty goal, Oracle’s $60-plus billion backlog balance and strategic use of third-party colocation providers, alongside a series of cloud regions that interconnect with Azure, should be noted.

 

Google Cloud has opted to build and operate its own data centers, and while the company is expanding its footprint, competitors are doing so at a rapid pace, leading Google Cloud to enter markets where AWS, Microsoft and, in many cases, Oracle already have an established footprint.

Oracle Remains a Rising Force in IaaS, Growing Noticeably Faster Than Peers

Demand for OCI exceeds supply, but Oracle is quickly building new data centers, specifically smaller facilities that deliver high uptime and reliability, and is also leveraging third-party colocation providers. As Oracle fills capacity within its OCI data centers, Infrastructure as a Service (IaaS) revenue will continue to grow, and executives appear confident Oracle can maintain a 50%-plus growth rate on cloud infrastructure revenue for the near future.
 
Infrastructure as a Service Revenue Growth for 4Q24

Cloud Infrastructure Vendor Spotlights

Amazon Web Services

Essentially the first company to bring GPUs to the cloud, AWS has an established relationship with NVIDIA that AWS will hone to make sure customers continue to build applications on AWS infrastructure. For instance, AWS is supporting NVIDIA’s latest GB200 chips, allowing customers to scale up to thousands of GPUs in a single cluster, and is exploring the codevelopment of industry-specific solutions. Despite this alliance, AWS continues to invest in its own custom AI chips.

Microsoft

IaaS revenue growth is reaccelerating, coming off a challenging 2023, but Microsoft is also reporting a revenue uplift for AI services. In 4Q23 Microsoft reported that AI services contributed 6 points of growth in the Azure and other Cloud Services business. Serious about leading the AI market, Microsoft made the long-anticipated move to release its own custom line of chips, dubbed Maia, to better support AI workloads, including Copilot, and keep pace with peers, which have long invested in custom silicon.

Alibaba Cloud

Alibaba Cloud’s IaaS revenue growth continues to struggle due to ongoing economic headwinds in the China market, resulting in another quarter of negative growth in 4Q23. To hedge against this trend, Alibaba Cloud announced it will cut prices on more than 100 of its core products by up to 55%. The organization hopes to attract more enterprises and developers involved with AI development projects to promote overall AI adoption.

Leidos Sees Strong Bookings and Sustained Growth Across National Security, Health and International Sectors

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Leidos’ Domestic DOD, Intel and National Security Operations Are Seeing Modest to Moderate Growth

Leidos’ reorganization is delivering positive results, particularly down the company’s income statement, where profitability reached record levels in 1H24. Midsingle-digit top-line growth is being buoyed by strong bookings activity with the Department of Defense (DOD) and civilian agencies.

 

Leidos’ top-line expansion is also being driven by the continued surge in program volumes in Leidos Health, which itself is sustaining year-to-year sales growth and operating margins near 20%. Outside of federal IT, Leidos’ Australia subsidiary is parlaying the company’s innovations in military-grade cybersecurity and software into new growth avenues in the fast-expanding Australian defense sector.
 

Explore the Ramifications of the Waning Bull Market on Federal IT Services Contractors in the Below TBR Insights Live On-demand Replay — Watch Now!

3Q24 Vertical Analysis

National Security & Digital (NSD)

NSD is booking new work with the DOD to modernize existing software platforms and implement new software that will accommodate future advanced weapons systems and digital technologies like AI-enhanced battlespace solutions. Leidos’ DevSecOps capabilities heavily underpin NSD’s efforts to enable the DOD to achieve its “Army of 2030” concept. NSD is also actively touting the potential benefits of GenAI for national security and DOD missions by addressing the upfront ethical and security risks of GenAI for defense and national security agencies.

Defense Systems (DS)

Sequential margin improvement for DS owes to efforts to optimize contract delivery. DS houses Dynetics, where activity is accelerating to develop satellite, force protection and hypersonics solutions for the DOD. Margins in DS will improve further in 2H24 as programs in these three areas transition from the R&D phases to production and delivery to clients.

Health & Civil (H&C)

Underpinning H&C’s robust performance of five straight quarters of double-digit growth as of 3Q24 are higher program volumes in H&C’s managed health services (medical examinations, diagnostic tests and automated reporting – delivered principally through Leidos’ QTC Health Services subsidiary) and disability exam programs with the VBA (Veterans Benefits Administration).

 

H&C was also awarded a five-year $326 million contract in 3Q24 with the National Institutes of Health (NIH) for Agile software development to modernize NIH’s grant management system, further extending H&C’s relationship with the NIH. (H&C provides scientific and operational support to the NIH’s 27 institutes and centers.)

Commercial & International (C&I)

Top-line growth for C&I, which includes Leidos’ commercial energy, international and Security Enterprise Solutions (SES) operations, is holding at low-single-digit rates. Segment expansion owes to higher program volumes in Australia, accelerating activity in Leidos’ energy unit and the continued rebound of Leidos’ now-restructured SES group.

 

For more data and analysis on Leidos’ 3Q24 performance, as well as TBR’s entire federal IT research stream, start your TBR Insight Center™ free trial today.

 

Dell Grows Its AI Factory Portfolio with the Integration of New NVIDIA AI Solutions

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Much like its OEM peers, Dell Technologies (Dell) has increasingly made partnering a cornerstone of its strategy, particularly as it relates to the company’s AI business. Dell leverages its AI partner ecosystem to drive the codevelopment of AI solutions like those included in the company’s Dell AI Factory with NVIDIA portfolio.

 

Dell also integrates critical AI infrastructure and PC components, like data center GPUs and AI PC silicon, from a variety of vendors, including NVIDIA, and leverages platform and cloud service providers to increase the reach of its AI solutions. These are just two of the many ways Dell drives AI go-to-market synergies between itself and its partners.

 

Looking ahead, Dell will continue to invest in the development of unstructured data storage offerings to take advantage of the ongoing proliferation of AI workloads. The company will also continue to work with NVIDIA to have certain storage solutions certified and grow its storage footprint around AI servers and systems.

The Latest Dell and NVIDIA AI Solutions

Dell shipped $3.1 billion worth of AI servers in 2Q24, representing an 82.4% sequential increase, while AI server backlog remained healthy at $3.8 billion. Additionally, it is worth noting that while AI server backlog remained flat sequentially, Dell says its five-quarter AI server pipeline has grown to several multiples of its backlog, foreshadowing strong demand through 2025 as systems based on NVIDIA Blackwell begin shipping in volume to customers.

 

After unveiling Dell AI Factory with NVIDIA at Dell Technologies World in May, Dell announced in August the availability of NVIDIA NIM Agent Blueprints on Dell AI Factory with NVIDIA. NVIDIA NIM Agent Blueprints represent the company’s latest addition to its NVIDIA AI Enterprise platform, with the pretrained reference AI workflows being designed to help customers build and employ custom, use-case-specific generative AI (GenAI) applications.

 

In July Dell released its Dell Validated Design for GenAI Digital Assistants. The new solution was codeveloped by Dell and NVIDIA and allows for faster deployment of digital assistants, reducing customers’ development time and speeding up their time to value.

 

In July Dell announced it had begun shipping PowerEdge XE9680 servers based on AMD Instinct MI300X GPUs. Originally, the PowerEdge XE9680 supported only NVIDIA GPUs, but in December Dell announced it would integrate AMD Instinct accelerators into the company’s flagship AI rack server offering.

 

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Telecom Infrastructure Services Operating Margin Climbs as Shift to Maintenance Services Offsets U.S. Market Decline

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Shift to Maintenance Services Bolsters Telecom Infrastructure Services Margins Amid 5G Deployment Declines and U.S. Market Contraction

Despite India growing within the telecom infrastructure service revenue mix and the U.S. declining, TBR-benchmarked vendors’ average telecom infrastructure services operating margin increased 20 basis points year-to-year to 14.2% in 2023. TBR attributes the increase in large part to a shift in the telecom infrastructure services revenue mix from deployment services, which typically carry the lowest margins, to maintenance services, which tend to carry the highest margins among telecom infrastructure services segments.

 

The shift in business mix comes as communication service providers (CSPs) wind down their 5G coverage rollouts in the key countries of China, the U.S. and India and focus on densification. In late 2023 and 1H24, declining deployment activity in India is also helping to improve profitability as margins in the country can be relatively low. The 5G gear that vendors have built out in these and other countries in the past few years is leading to follow-on support revenue, which will enable maintenance services to be a relatively strong-performing segment among TBR-benchmarked vendors despite global decommissioning of legacy infrastructure.

Graph: Telecom Infrastructure Services Revenue and Margins for 2023

Telecom Infrastructure Services Operating Margin Insights

Leading Vendors Remain Those with Large Bases of Hardware or Software Support Subscriptions and Those that Rely Heavily on India-based Labor

Operating margin leaders derive a smaller percentage of telecom infrastructure services revenue from deployment services, which are often provided at or below break-even margins and/or delivered by third parties. Leaders provide a high degree of support, including repeatable and remote services as well as consulting & systems integration services.

 

Automation, analytics, AI and machine learning will prove critical to helping vendors improve margins. Examples include portions of Nokia’s AVA (Analytics, Virtualization and Automation) portfolio and Ericsson’s Operations Engine. However, with a significant portion of revenue coming from deployment services, RAN-centric vendors will be unable to expand overall telecom infrastructure services margins significantly.

 

India-based IT firms such as Tata Consultancy Services and Infosys obtain high telecom infrastructure services margins due to favorable labor rate differentials between India and developed markets as well as the high degree of application development and maintenance services they provide to CSPs in developed markets. With over 40% of its workforce based in India, Accenture also benefits from this market dynamic.

 

Other IT services firms, such as Atos, have a smaller offshore workforce (about 32% based in India) and obtain lower margins as a result.

 

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