IBM makes smart IT services play in the U.S. federal sector IT services space

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Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

 

This month Patrick chats with Senior Analyst John Caucis, lead author of TBR’s Federal IT Services Benchmark, and Senior Analyst Elitsa Bakalova, who leads TBR’s coverage of IBM, about IBM’s investments in serving the U.S. federal IT market.

 
TBR’s most recent report on IBM Consulting detailed a recent acquisition, Octo, which is supporting IBM’s efforts to grow in the U.S. federal sector. We reported: “Octo, which has approximately 1,500 employees, provides IT modernization and digital transformation services to defense, health and civilian agencies in the U.S. federal sector. The acquisition will complement IBM Consulting’s existing capabilities in IT modernization and digital transformation. Octo will expand IBM Consulting’s public and federal sector organization to 4,200 employees and contribute federal mission experience and certifications in technologies used by the federal government.”
 
Patrick: With 4,200 employees focused on the public sector, including U.S. federal IT services, how does IBM stack up compared to larger players in the space as well as close peers, like Accenture, CGI and Deloitte?

John: Octo gives IBM Consulting’s federal unit some much needed scale after the recent Kyndryl split. However, in terms of federal IT workforce, IBM Consulting is now only on par with ICF International (~4,700) and ManTech (~5,500 and likely declining as Carlyle restructures). Accenture Federal Services (AFS) has a federal workforce approaching 13,000 as a result of its own recent M&A activity and efforts to staff up to deliver recent big-ticket, strategic wins with the Transportation Security Administration, NASA, Department of Homeland Security, Centers for Disease Control and Prevention, and Department of Veterans Affairs. Most of those awards also represent wallet share gains for AFS, further illustrating AFS’ competitive strength. Next up among the federal IT contractors that operate as divisions of a larger global technology services parent is CGI Federal, which employs between 7,000 and 8,000 federal IT workers and has been gaining traction with its suite of proprietary intellectual property (e.g., its Momentum ERP platform). Deloitte Federal is somewhere between CGI and AFS in terms of the size of its federal staff, but it has significant competitive advantages over IBM Consulting in the federal space in terms of advisory depth and breadth as well as its AI and analytics-heavy portfolio.
 
The legacy federal systems integrators, however, still have significant scale advantages. Leidos and General Dynamics Technologies have workforces approaching 40,000 strong, while other Tier 1 integrators, such as Booz Allen, CACI and SAIC, go to market with federal workforces over 20,000.

 

Webinar: The bull market in federal IT will continue in 2023

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Patrick: So, with IBM Consulting’s smaller scale in a highly competitive market, which federal sector trends do you think will benefit it over the long term?

John: Fortunately, despite IBM Consulting’s scale disadvantages, the ongoing bull market in federal technology provides enough headroom for growth for vendors outside the Tier 1 players, making this the ideal time for IBM Consulting to carve out a niche in federal technology. I believe Octo is a great buy for IBM Consulting to quickly expand its federal footprint and do so in technology areas where spending growth will be sustained for several more budget cycles, through modernization, security, and the convergence of AI/analytics and hybrid cloud. I also believe that IBM Consulting should leverage the fiscal war chest available from its global parent and continue acquiring peers that give it additional scale, positions on key federal IT programs, and capabilities in digital transformation, AI, analytics, cloud and automation. IBM Consulting may not win as many prime contractor positions as its larger peers, but it does have a compelling mix of offerings.
 
Hybrid cloud is likely to be the tip of the spear for IBM Consulting in federal IT, and the opportunity is significant. Many agencies have indicated a strong preference for migrating to a hybrid cloud environment, but many more have yet to begin the process. IBM Consulting has the chops to enable its federal customers to implement a cloud solution that can balance what they want to retain on premises and what they want to move to a public cloud. We believe federal agencies are most amenable to the hybrid cloud approach because of the emphasis on improving citizen services and driving more computing to the edge (both in civilian and military contexts). This will be particularly important as agencies add mobile front ends to systems and improve how they interact with citizens. IBM Consulting is a strong player in the commercial hybrid cloud arena, and it can parlay many of its commercial sector strengths into success in the federal space.

 

Patrick: For additional context, we’ve highlighted IBM Consulting’s public and federal sector practice, but how large is that practice within IBM Consulting? What’s the revenue contribution, and is the practice driving new or significant growth?

Elitsa:Expanding U.S. federal sector expertise diversifies IBM Consulting’s revenue streams and strengthens its coinnovation capabilities. According to TBR estimates, the public sector globally accounted for approximately $2 billion in 2022, or a little over 11% of global revenue for the full year; however, it is one of the smaller sectors for IBM Consulting in terms of revenue share compared to larger sectors such as financial services. IBM Consulting’s federal revenue grew nearly 20% year-to-year in 2022 and accounted for approximately 40% of public sector revenue. IBM Consulting’s emphasis on nurturing client relationships, along with its proximity to clients and understanding of industry nuances and regulations, enables it to capture opportunities in a dynamic market environment.
 
IBM Consulting’s growth in the U.S. federal sector was driven by activities such as its deal with the Defense Microelectronics Activity to provide security services that enhance the U.S. Department of Defense’s microelectronics supply chain for critical mission platforms and with the U.S. Department of Education to provide technology strategy and implementation services to consolidate and migrate the system to Amazon Web Services.
 
Patrick: So, the bottom line, as I see it: IBM is making a smart bet that the U.S. federal sector will continue to be a growth driver for the company, even if it is less than 10% of IBM’s total revenue. IBM is backing up that bet with an acquisition, and today’s trends in the U.S. federal sector favor IBM’s approach to IT services, including partnering across the tech ecosystem, as well as its current strengths and capabilities. We’ll keep a close eye on IBM’s progress in 2023!
 

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PwC offers rosy outlook for Middle East economies in 2023

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Optimism abounds

On Jan. 31, PwC’s Dubai, United Arab Emirates (UAE)-based partner and Middle East strategy leader, Stephen Anderson, hosted a webinar as part of the firm’s ongoing “Transforming Our Region” series. The webinar included commentary from a PwC economist, Jing Teow; a Saudi Arabia-based PwC partner, Riyadh al-Najjar; and the CEO of local marketing firm Omnicom Media Group, Elda Choucair. The session touched on macroeconomic trends, PwC’s recent CEO survey and the challenges of running a local company buffeted by global economic headwinds. TBR has attended numerous webinars in this series and believes this most recent edition may have been the most optimistic since the series started in the spring of 2020.

 

Teow, PwC’s director for economics and sustainability, delivered a relatively positive outlook for the region’s economic prospects in 2023, including assertions that the “GCC [Gulf Cooperation Council] will escape the global slowdown” and the region’s non-oil economy will experience a “resurgence.” Teow noted that sustained high average prices for oil and gas contributed to the sunny outlook, as did the rebound in tourism as visitors returned to the region in the wake of the pandemic.

In addition, government spending will continue to support national goals of broader economic diversification. Shifting to risks, Teow noted that while global inflation rates have been moderating, they remain high, particularly in the U.S., where even an easing to 6% would still be well above the Federal Reserve’s 2% target. Centrals banks in the U.S., U.K. and European Union (EU), in TBR’s interpretation of Teow’s view, still hold considerable sway over macroeconomic pressures (and opportunities) in the Middle East.

 

Al-Najjar’s commentary, coming in remotely from the Kingdom of Saudi Arabia (KSA), was notably upbeat, with the PwC partner noting that a surge in new company licenses in KSA was indicative of confidence in private sector growth prospects. Al-Najjar also noted the continued drive by private and public sector entities to diversify the economy and create jobs, particularly for Saudi nationals. (TBR cannot help but note that “localization” has been a government priority in the region since at least 1997.)

For local CEOs, the neighborhood looks great even if the world looks shaky

Anderson then led a discussion about PwC’s recent Global CEO Survey, focusing on the results from CEOs in the MENA region — in short, their outlooks are bearish globally and bullish locally. With that mindset, regional CEOs are, in Anderson’s telling, doubling down on transformation to both head off disruption and become more efficient. While CEOs in other regions might be reticent on M&A and laying off staff, leaders in the Middle East continue to look for investments and fight for the best talent. In Anderson’s words, MENA CEOs are “confident and realistic.”

Notably, according to Anderson, while the metaverse has not yet drawn a dedicated, significant following among regional CEOs, the same leaders have become more attuned to sustainability issues. In TBR’s November 2022 Digital Transformation: Voice of the Customer Research, we included technologies supporting environmental, social and governance (ESG) initiatives as an option for buyers. Not surprisingly, this category ranked high, well above blockchain and the metaverse and just after 5G, which has been around for several years, indicating that buyers are still bullish on creating sustainability-ready business models despite macroeconomic headwinds and that vendors will continue investing in consulting and tech-ready frameworks supporting the opportunity.

Technologies Purchased for Central Digital Transformation Initiative

Rounding out the webinar, Choucair compared running a business in the Middle East to driving a car with two steering wheels and two drivers. While businesses need to respond to local issues and demands, they cannot ignore global trends. In addition, she noted the challenges of dealing with local enterprises still in the early stages of digital transformation (DT) even as other clients were much further advanced. On that point, she praised PwC for its ability to advise across a wide spectrum of clients’ needs and maturities.

 

According to TBR’s November 2022 Digital Transformation: Voice of the Customer Research: “The DT continuum remains fluid as enterprise buyers continue to adjust their operating models to ensure business continuity, leveraging cloud-enabled technologies at both the infrastructure and applications layers. … Given the uptick in incidences in the Legacy stage, we believe vendors have an opportunity to capitalize on lessons they learned from managing DT programs over the past decade. Vendors must account for nuances around evolving their partner ecosystems as they try to bring forward experience, industry knowledge and technical expertise. Executing successfully through managed services — which appears to be where many buyers within the Transformation stage are currently focused — can help vendors strengthen trust as they try to replace incumbents and support buyers that are currently in the Legacy stage of the DT continuum.”

Full speed ahead for the Emiratis and Saudis

Anderson described four themes for the region for 2023: “staying confident,” “doubling down on transformation,” “turbo-charging digital” and “acting on climate.” In TBR’s view, this foursome may be unique to the Middle East, and especially to the UAE and Saudi Arabia. With the price of oil averaging nearly $100 per barrel in 2022, the UAE and KSA governments can continue to prime the pumps of their economies, invest in technologies and create employment opportunities for nationals.

 

Macroeconomic headwinds, particularly from increased interest rates in the U.S. and economic slowdowns in Europe, may dampen growth in the two largest Middle East economies, but locally based companies will continue to benefit from robust government spending and a sustained and increasingly successful effort to diversify away from oil. In short, 2023 should be a very good year in Dubai, UAE, and in Riyadh, Saudi Arabia.

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Landscape Shifts In Management Consulting Require Consulting Firms To Change Their Approach

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Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

 

This month Patrick chats with Senior Analyst Kelly Lesiczka about the management consulting space, including the outlook for consultancies’ resource management strategies and revenue trajectory. Ongoing landscape shifts within the management consulting space have pushed firms to re-evaluate business structures and portfolio offerings.

 

Patrick: TBR’s Management Consulting Benchmark looks at 13 vendors. Did any of them do something in 2022 that surprised you or really stood out from the rest of the pack?

Evan: EY’s potential split stood out, as it would mark a significant change in the consulting landscape. While most firms are reorganizing to blend technology with consulting and to capitalize on opportunities brought to light after client’s technology-driven transformations, EY’s potential split seems to be the most drastic business change to respond to the client needs. Boston Consulting Group (BCG) looks to accomplish the same goal but on a smaller scale with the establishment of BCG X, which combines BCG Digital Ventures, BCG GAMMA and BCG Platinion. The development of BCG X creates a hub for BCG to build out its technology presence and expertise to reach the same opportunities as those vendors with larger-scale technology practices.

Patrick: Growth across the benchmark — that is, all the vendors combined — has fluctuated kind of crazily in the last few years, dropping to just under 2% in 2020, jumping to almost 13% in 2021, and now you’re projecting around 9% for 2022. Nine percent isn’t terrible; it is close to the average pre-pandemic, but what are you expecting in 2023 and 2024 when it comes to revenue growth?

Kelly: Recessions typically work out well for consultancies as clients look for guidance around how to best navigate changing market conditions, indicating the current market conditions will serve consulting vendors well during 2023. Estimated consulting revenue for the benchmarked firms will likely decelerate annually, as firms look internally to reinvent business models and refresh portfolio priorities.

Moving into 2023, revenue will be generated around two key focus areas. The first area will be alliances, which will continue to shape the way firms approach client engagements and technology establishment. Partnerships have become more important and central to firms over the past few years and will serve as core strategy levers to move them through 2023.

Second, firms will look internally to ensure business models and organizations are properly aligned with both portfolio and market changes. Firms that ensure access to expansive and diverse partner networks with different technology and industry knowledge, combined with a flexible and understandable business model, will be best suited to accelerate revenue growth through 2023 and 2024.

 

Patrick: One thing we hear about constantly across the IT services and digital transformation industries is the challenge around recruiting and retaining talent. When you think about the vendors in the benchmark and their talent strategies or initiatives, which ones are addressing this issue best?

Kelly: Talent competition challenges firms to retain employees and create consistency across portfolio and client management. While each firm sets forth different resource management strategies and recruitment tactics, certain firms have been more successful at improving culture and environments.

One example is BCG: The firm retains a more “old school” reputation centering around a different culture from startups and the like, creating additional difficulties for the firm to retain employees. That being said, BCG has pursued new initiatives — such as flexible work environments, including the opening of WeWork spaces, and newer training programs that support the development of skills — to attract and retain new employees.

Another firm to watch for resource management strategies would be PwC. The firm has launched different programs and platforms that more closely monitor employee metrics and benefit usage to improve engagement and thus retention. While the programs are still evolving and being brought to scale, the efforts and initiatives to track engagement and career progression will help employees envision a path forward and their place in the organization overall.

 

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Industrial IoT (IIoT) – Challenges in the marketplace

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Gimme 3 — Insight Interview with TBR’s Subject-matter Experts

In TBR’s new blog series, “Gimme 3 — Insight Interview with TBR’s Subject-matter Experts,” Principal Analyst Patrick M. Heffernan discusses our latest and most popular research with our analyst team.

This month Patrick chats with Senior Analyst Evan Woollacott about Industrial IoT (IIoT), including how IT services vendors and consultancies must make smart choices around IP and ecosystems.

 

How vendors are grappling with ecosystems and IP challenges in the IIoT marketplace

Patrick: This line from TBR’s Digital Transformation Insights: IIoT Market Landscape really jumped out at me: “Perhaps victims of their own success, many IT services providers’ initial IIoT efforts sought to draw the OT [operational technology] and IoT ecosystem to their IP, when they should have used the ecosystem to draw their IP to the opportunity and customer environment.” Which IT services vendor stands out for having made that shift already? Which vendors use the ecosystem and their IP the right way?

Evan: Not to answer the question like a consultant, but, in short: too early to tell. Cloud platform leaders like Microsoft and Amazon Web Services (AWS) have certainly sought to build out their IIoT-enabling technologies at all levels of the IT stack, ranging from the OS layer with offerings like Azure Sphere or AWS FreeRTOS, to edge platforms like AWS Greengrass or Azure IoT Edge technologies for IIoT.

Atop this foundation, AWS and Microsoft have also each sought to allow clients to derive value from this newfound device-level data with their respective Cloud for Manufacturing portfolios, which should allow both companies to begin cultivating ISV ecosystems to optimize manufacturers’ discrete business processes.

That being said, Microsoft’s 2021 launch of Cloud for Manufacturing remains in public preview today, having missed its general availability target date of 3Q22. So, yes, IT services vendors and cloud hyperscalers have the technologies required to support clients’ IIoT aspirations, but the portfolios intended to deliver business outcomes, the Cloud for Manufacturing portfolios, remain in early-stage R&D.

This could be a result of the long list of tech standardization issues present in IIoT that may be delaying partner buy-in with not only familiar, IT-realm partners but also the vast OT end of the spectrum.

Patrick: In describing some common IIoT use cases, you say, “While these examples are not overly complex aspirations, the ecosystem design requirements to enable them inhibit an organization’s ability to scale the use case beyond just a single warehouse and/or the entire warehousing industry.” You also wrote that “no one client will use the same consortium of vendors across their IT and OT environments, a dynamic that — before even considering the rigorous regulatory and compliance laws of an industry like healthcare or pharmaceuticals — reinforces the need for technology standardization across the IIoT technology value chain.” Ecosystem design and evolving technology standards sound like huge consulting opportunities. Any consultancies that stand out as leading in IIoT?

Evan: At the top of the list, PwC’s Connected Solutions division probably has the potential to be an enabler of the IIoT market, relying heavily on its IT services and consulting expertise on manufacturing entities’ business processes, to build solutions atop Microsoft’s Azure.

As PwC identifies high-value solutions, the firm will gain the awareness of not only buyers but also Microsoft to encourage more solution codevelopment and insight into Microsoft’s own R&D road maps to ensure strong future alignment between the two firms. Though PwC’s DNA is professional services, this more ISV-led partner approach could provide lessons to PwC on how to develop solutions by leveraging Microsoft’s technology expertise. So, certainly PwC Connected Solutions is one to keep an eye on.

 

Patrick: You noted that “smart professional services vendors that recognize OT buyers are used to dealing with third-party suppliers will increase their focus on building relationships with the likes of Nokia, Bosch, Caterpillar and GE to ensure they have the ear of the OT buyer.” With all the other changes happening in services and technology alliance ecosystems, are you asking too much from the services vendors, by suggesting they broaden their ecosystem plays even further and manage even more alliances?

Evan: It is a lot to ask of IT services firms, no doubt, but this is what the clients will be asking as well. A client will be grappling with the need to manage their technology providers across both IT and OT realms as they pursue IIoT aspirations. I think it is important to recognize that the IIoT opportunity remains in its infancy today, with new use cases being found each day as clients harness additional data and discover ways of integrating it within their existing business processes to optimize their operations.

As more devices are connected, the needs around partner management will grow exponentially. To answer your question a different way, though, perhaps this all speaks to a need in the market, an opportunity for an IT services and consulting vendor to build its value proposition exclusively around IIoT. As we have said in various reports authored through TBR’s Digital Transformation practice, no one vendor can enable DT outcomes for clients.

IIoT is just a microcosm of DT, exclusive to asset and device-intensive customers with a seemingly never-ending list of use cases. Just as technology firms should never try to become service providers and vice versa, in the context of IIoT, maybe the Accentures of the world shouldn’t try to spread themselves too thin and cover this opportunity as well, but instead find the dedicated partner that has invested for years in its OT services resource bench to solve the IIoT market development issue together, not alone.

 

Well, Evan, tell us what you really think about how IT services vendors and consultancies should play in the IIoT space! A good point, honestly, and one that we make often in talking about the business of technology: Do what you do well and stick to it. Vendors that wander get lost. And readers, keep an eye out for an upcoming video with TBR Principal Analyst Bozhidar Hristov further discussing the topics Evan touched on in this blog.

 

What’s next for Lockheed Martin after being left out of ABMS consortium?

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  • Lockheed Martin is expanding its capabilities to support JADC2 by adding its Active Radio Frequency satellite to the NTN and building out the 5G.MIL partner network to enable interconnectivity across the U.S. military branches.
  • Other defense contractors are also working to support JADC2, such as Northrop Grumman leveraging 5G technology and L3Harris acquiring Viasat’s Tactical Data Links business.
  • Despite concerns, the DOD is expanding its budget for JADC2, which is slated to grow from $1.5 to $2 billion in FY22 to $2.2 billion in FY23 to improve its intelligence and communication capabilities to counteract hostile threats.

In September the U.S. Air Force selected L3Harris Technologies, Leidos, Northrop Grumman, Raytheon Technologies and SAIC for its Advanced Battle Management System (ABMS) Digital Infrastructure Consortium.

Notably, Lockheed Martin (NYSE: LMT) was left out of this cohort, despite ramping up its efforts to underpin the Department of Defense’s (DOD) Joint All-Domain Command and Control (JADC2) vision.

ABMS Digital Infrastructure Consortium

ABMS is similar to the U.S. Army’s Project Convergence and the U.S. Navy’s Project Overmatch. It is compatible with the JADC2 program, under which U.S. military branches are investing in upgrading current Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) programs to support the Department of Defense’s (DOD) vision of instantaneous multidomain interconnectivity.

 

The inaugural members of the Digital Infrastructure Consortium were selected due to their experience with JADC2-enabling technologies. They are tasked with jointly developing the digital design criteria for the new cloud-based command and control system. This system will be part of JADC2’s cloud-like environment, enabling the rapid receipt and transmission of sensor data to interconnected networks.

 

Once deployed, the open architecture framework developed by the ABMS Digital Infrastructure Consortium would improve the data-sharing capabilities of the U.S. Air Force, U.S. Space Force and relevant allies. The framework will use AI and machine learning support to share common operating pictures with decision makers across the military branches, enabling them to better coordinate and make more informed choices.


Top 3 Predictions for Federal IT Services in 2023

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5G.MIL

In March 2021 Lockheed Martin announced a new partnership with Omnispace to establish worldwide 5G connectivity for commercial and federal customers through a nonterrestrial network (NTN). Then in November 2021, Lockheed Martin announced a new partnership with Verizon (NYSE: VZ). The two allies revealed they were testing if Lockheed Martin’s open mission system frameworks could seamlessly function with Verizon’s 5G Ultra-Wideband Service. The defense contractor and communications technology company also collaborated to design 5G.MIL unified infrastructure capable of supporting JADC2.

 

Since then, Lockheed Martin has continued to invest in 5G.MIL and build out its partner network with commercial businesses in the cloud, semiconductor and telecom verticals to enable interoperability between networks that utilize IP and those that do not. For example, Lockheed Martin announced a slew of new alliances with businesses including Keysight Technologies (NYSE: KEYS), Intel (Nasdaq: INTC) and Microsoft (Nasdaq: MSFT) to broaden 5G.MIL’s capabilities.

 

Recently, Lockheed Martin has been making progress with these partners. For example, Verizon and Lockheed Martin demonstrated in late September that they could improve situational awareness via 5G.MIL. The two showcased how 5G-leveraging drones could communicate with Verizon On Site Private Network nodes to transmit video and intelligence, surveillance and reconnaissance (ISR) radio frequency (RF) data during military operations.

Space-augmented JADO

Lockheed Martin also announced it has invested further in Terran Orbital and made progress on its Space-Augmented Joint All-Domain Operations (JADO) Environment (SAJE) project.

 

In 1Q23 Lockheed Martin will launch two of its Pony Express 2 smallsats to showcase its HiveStar, SmartSat, mesh networking and tactical communication capabilities. Lockheed Martin will also launch its Tactical ISR Sat (TacSat) with an infrared sensor sometime between 2Q23 and 3Q23. The TacSat features ISR functions and supports communications and on-orbit processing. These three satellites will comprise a JADO test bed and expand Lockheed Martin’s capabilities to support instantaneous interconnectivity across domains.

 

The SAJE project’s test bed has been offered as an option for the U.S. Air Force and other military branches interested in seeing how a Lockheed Martin NTN could enable JADO for them. It will also bring 5G.MIL to space while likely giving the defense contractor a role with ABMS as well as other JADC2-enabling projects as Lockheed Martin will be able to showcase how an NTN can leverage 5G to support military units by better connecting them and improving their situational awareness.

What’s next

Lockheed Martin

The defense contractor will continue to position itself to capitalize on JADC2’s expanding budget and expand the SAJE test bed’s capabilities in 2024 by adding its Active Radio Frequency satellite to the NTN. Lockheed Martin will also further build out the 5G.MIL partner network to enable JADC2 and partner with primes like AT&T and Microsoft as well as smaller innovators to enable interconnectivity across the U.S. military’s branches.

Other defense contractors

Industry peers will also jockey to underpin the DOD’s vision. Northrop Grumman is also leveraging 5G technology to support JADC2 and allied with AT&T in April to unify AT&T’s 5G private networks with Northrop Grumman’s systems to create a scalable open architecture while assessing digital battle networks. L3Harris announced in October that it would purchase Viasat’s Tactical Data Links (TDL) business for $2 billion, expanding its reach by gaining access to Link 16 Multifunctional Information Distribution System (MIDS) platforms and terminals that are already in use across the globe.

Joint All-Domain Command and Control

While there are some concerns about JADC2, the DOD will continue to expand its budget for the initiative. JADC2 funding is slated to grow from between $1.5 billion and $2 billion in FY22 to a minimum of $2.2 billion in FY23 as the DOD looks to improve its intelligence and communication capabilities to counteract hostile threats.

Top 3 Predictions for Digital Transformation (DT) in 2023

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Update: Download your free copy of TBR’s Top Digital Transformation Predictions for 2024 special report, IT Ecosystem Trust Paves the Way for GenAI-enabled Growth in 2024

AI, automation and the metaverse: Why digital transformation won’t be the same in 2023

3 Digital Transformation Trends We Expect to See in 2023

  1. Your funky chair now floats in the metaverse
  2. Automation will lower costs and AI will transform businesses
  3. They hyperscalers will kill technology agnosticism

Digital = Ecosystems, with AI, automation and Metaverse among the prominent and new(ish) members

Digital transformation (DT) never ends, even if the pilot project scales. Enterprises always need another transformation, and IT services vendors and consultancies helpfully meet that demand with new technology. The metaverse — whatever it actually turns out to be — is the latest shiny new object that drives hype and early-stage investments. Digital transformation cannot escape technology, but as enterprises mature from innovation into iterative improvements, all of DT becomes less about feeds and speeds in a business-context-free vacuum and more about connecting technology with business processes. In a bit of good fortune for everyone involved in DT, AI is the perfect tool to enable that connection.

Everyone involved in DT has experienced the increased importance of ecosystems, with some growing sense that it is only a matter of time before enterprises, IT services vendors, consultancies and technology partners all share data and harmonize processes across one giant multi-enterprise business network. That reality, to quote someone who would not want to be quoted for saying this (Google it), is “a success that hasn’t occurred yet.” While unrealistic for now, clusters of ecosystems might be emerging as IT services vendors and consultancies rapidly pivot away from going to market with technology vendor-agnostic approaches.

One more implication to consider as we move into 2023: just as a new ecosystem cluster may emerge, new silos may develop within enterprises. Rather than divisions between lines of business an d IT, finance, and other traditional business groups, silos may form around specific technologies, providing an opening for IT services vendors and consultancies with specialized skills and the capability to advocate around solutions instead of business KPIs. In TBR’s view, IT services vendors and consultancies that help build these silos, or mini ecosystem clusters, will need to keep them open, with the right protocols and API from the technology side and the standards, incentive models and messaging on the business side.

2023 will be a rocky year, with a potential global economic slowdown decreasing spending on innovation while compelling investments in cost-cutting. The best prepared and smartest IT services vendors and consultancies will see through to the far side of any recession to rebounding spending on AI-fueled transformation supported by keep-the-email-system-working realities of core IT services.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Professional Services (IT Services Vendors) in 2023

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Update: Download your free copy of TBR’s Top Professional Services Predictions for 2024 special report, IT Services and Consulting in 2024: Traversing GenAI Pressures, Talent Challenges, and Regulatory Waves

Transparency, consistency and quality:
3 watchwords for 2023

Top 3 predictions for IT Professional Services in 2023

  1. Enough with the data lakes and process automation — give me ROI
  2. IT services providers’ toil and trouble wILL not alter clients’ buying behaviors, but will disturb alliances
  3. the talent war grinds on, even as employee experience loses its luster

After all the emerging tech hype, just bring the best IT services people and consultants, every time, at a fair price

After years of IT services vendors and their technology partners telling clients (and analysts) that “data is the new oil” and that “every company is a technology company,” we are finally reaching a tipping point at which vendors cannot sell the promise of data but need to sell the results. Clients expect returns on their investments in digital transformation, analytics and cloud, pushing IT services vendors to deliver more transparently, with more consistency and at a higher quality.

Promises around the benefits of leveraging analytics and cloud no longer meet clients’ demands for clear, tangible outcomes delivered through transparent engagements. IT services vendors must demonstrate upfront the business cases for emerging technologies and then deliver results. Vendors that invested in core services competencies, such as operational excellence and managed services, and in technology skills will continue to grow revenues, even if the global economy slows.

IT services vendors and consultancies undergoing organization changes — from branding to P&L to complete splits — must assure their clients they can meet their delivery commitments. Clients’ needs and demands will continue apace, without regard to internal machinations by leaders at IT services vendors and consultancies. Competitors’ upheavals may provide some new openings for opportunistic and nimble players, but the overall picture remains simple: Clients’ IT spending will not disappear, and they will continue to look for vendors and firms that can consistently deliver.

Quality depends almost completely on people. Even as IT services vendors implement automation tools and management consultancies dabble in SaaS offerings, talent management remains the critical component to running an IT services or consulting business. And as individual vendors and firms win battles in the war for talent, the overall shifts will come from balancing increasing demands for highly skilled talent with business models that reward scale at the right locations.

Transparency, consistency and quality are hardly earthquake-like trends across the IT services and consulting space, but they will be the markers of successful vendors and firms through 2023.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 3 Predictions for Telecom Going Into 2023 and Beyond

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Update: Download your free copy of TBR’s Top Telecom Predictions for 2024 special report, Telecom Industry Retrenches in Response to Macroeconomic Pressures

Telecom industry will face an unprecedented level of uncertainty and risk in 2023

Top 3 predictions for Telecom industry (CSPs) in 2023

  1. Global telecom industry enters rationalization phase
  2. CSP investment in 5G infrastructure enters post-peak phase
  3. Cablecos build out their own cellular networks in the U.S.

CSPs face a confluence of headwinds in 2023

2023 will likely be one of the most uncertain and challenging periods in the telecom industry’s history. A confluence of negative shocks will concurrently impact the industry next year, with telcos and cablecos bearing the brunt of the impact and vendors suffering knock-on effects.

The challenges communication service providers (CSPs) face are large in magnitude, broad in scope and occurring simultaneously. They include the following:

  • Rising interest rates: After more than a decade of unprecedented low interest rates — thanks to key central banks’ quantitative easing (QE) strategies, which were originally enacted to combat the global financial crisis of 2008-2009 — CSPs now face rapidly rising interest rates as central banks aggressively pivot to quantitative tightening (QT) to combat inflation. This reversion of interest rates portends challenges for the telecom industry due to record leverage in the sector.
  • Inflation: General price increases across the global economy pose a risk to CSPs’ input costs, especially around labor and energy. Average revenue per user (ARPU) is struggling to keep pace and new revenue sources remain elusive, squeezing CSPs’ margins.
  • Lack of 5G ROI: Despite spending several hundred billion dollars in aggregate thus far on spectrum and infrastructure for 5G, there remains no clear path to ROI for CSPs, further deteriorating CSPs’ business fundamentals.
  • Technological complexity: New technologies and architectures (e.g., open vRAN and network slicing) are proving to be more complex and expensive to deploy than originally anticipated, posing a business risk and hindering CSPs from evolving into digital service providers.
  • Energy costs: Supply shortages and rising energy costs pose a risk to the ability to run telecom equipment and are likely to impact CSPs’ margins as energy is one of the largest components of CSPs’ opex.
  • Supply chain disruption: Sourcing parts remains a challenge, delaying the timing of infrastructure deployment and fueling inflation. Talent remains in short supply and is expensive, especially for new skills that are required for digital transformation. In addition, the worsening geopolitical environment and continued COVID-19 lockdowns in China threaten to create new and persistent supply chain bottlenecks.
  • New competitors: Especially hyperscalers, which are capturing new value created from key enablement technologies, including 5G, multi-access edge computing (MEC) and AI and machine learning (ML), as well as upending the traditional connectivity business model
  • Labor strikes: Strikes are likely to occur as unionized labor rallies for wages that keep pace with inflation. Strikes pose a risk to CSP operations and margins; TBR notes this issue mostly impacts CSPs in the U.S. and Europe, where unions in the telecom industry are most prevalent.
  • Economic recession: The global slowdown that began in 2H22 (mostly driven by QT) is highly likely to morph into a global recession in 2023, portending adverse demand-side impacts for CSPs and their vendors. Bad debts are likely to increase, and consumers and businesses are likely to optimize the telecom services they purchase.


The impact of these challenges will be partially mitigated by government stimulus (much of which was greenlighted during the COVID-19 pandemic), which continues to directly and indirectly power the global economy (e.g., subsidize capex, support low-income households, backstop consumer and corporate credit markets), though the impact of the economic support is waning.

TBR’s convictions that the telecom industry will look very different by the end of this decade continue to strengthen, with current events laying the groundwork for structural changes in the composition of the telecom industry and the business model for connectivity. Economic gyrations and other challenges have a history of driving significant changes in the market, at a broader scope and much faster pace than what occurs during stable market conditions. The current situation will prove no different.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

Top 5 Predictions for Cloud & Software Vendors in 2023

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Update: Download your free copy of TBR’s Top Cloud Predictions for 2024 special report, GenAI: A Growth Catalyst for Cloud Evolution in 2024 and Beyond

Cloud vendors will use predictable strategies for unprecedented times in 2023

Top 5 predictions for Cloud and Software vendors in 2023

  1. Cost comes back into vogue
  2. The big and small get bigger
  3. Cloud growth is generated by partnerships
  4. Looking to meet a new set of business-led use cases, hyperscalers invest in cloud-native PaaS, but not without infringing on partners
  5. SaaS vendors will more aggressively pursue solution up- and cross- sell to expand client ARPU and weather economic pressures

Vendors will focus on cost and partnerships to weather 2023 uncertainty

2023 will mark the first time the mature cloud market has been tested. Cloud served as an alternative IT cost-savings measure in the wake of the 2008 financial crisis, but it is no longer a small, insignificant portion of the average customer’s IT budget.

While cloud spending and the overall market opportunity will continue to expand in the coming year, we expect that growth to be altered by the macroeconomic environment. In response, we believe cloud vendors will go back to basics, focusing on cost and employing the assistance of their maturing ecosystems to weather the environment.

As a reflection of the uncertainty felt by customers, and the pullback and spending that will result, many cloud decisions will be based on cost savings yet again. The benefits of agility, innovation and business expansion will remain at the core of cloud purchasing decisions, but a thorough evaluation of the cost of cloud versus that of alternative solutions will play more of a role in 2023 than in the preceding years.

Vendors in the cloud space may face slightly longer sales cycles, additional financial scrutiny and increased negotiation to secure deals. We also expect to see more competition and growth from vendors below the top tier of cloud providers. As more significant workloads have moved to cloud, the need for complementary solutions like data management and security has increased.

Lastly, cloud partnerships will underpin the growth that will occur — albeit it at a slower rate than has been seen over the past five years. The growth of indirect cloud revenue, through systems integration engagements, cloud-based ISVs, managed service providers and resellers, will play a pivotal role in the continued expansion of the market. We expect these trends to shape the cloud market in the face of an unprecedented challenge in 2023.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.

IT Infrastructure Predictions and Trends for 2023 and Beyond

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Update: Hear TBR’s 2024 predictions for the IT infrastructure industry in this January 2024 video with TBR Principal Analyst Angela Lambert

Strategic investments will combat impending headwinds

Top 3 predictions (and emerging trends) for IT Infrastructure in 2023

  1. The storage market will remain extremely competitive as vendors invest to provide the most flexible platforms
  2. User consoles are the OEM frontier for establishing an edge-to-cloud ecosystem
  3. Managed services are eyed as a profit preserver

Building a diverse ecosystem is key to maintaining relevance and protecting against share losses

In a continuation of a multiyear trend, the go-to-market efforts of the IT infrastructure have focused little on the infrastructure itself and increasingly on becoming an integral piece of organizations’ edge-to-cloud strategy. Infrastructure vendors are honing their ability to deliver outcome-based solutions in hopes of being seen as solution providers rather than transactional sellers. While the vision appears to be relatively straightforward, the successful execution ultimately relies on significant investment in engineering operating systems and management platforms to function across edge, data center and cloud environments, plus investments in engineering joint solutions with cloud vendors and ISVs that can satisfy a broad range of customer needs.

Executing on the ecosystem strategy is critical to infrastructure vendors for three key reasons.

  1. The burden on IT organizations to manage infrastructure has only increased since the pandemic, necessitating new solutions to automate and offload operational tasks.
  2. Volumes of data generated continue to grow, with significant activity happening outside of centralized data centers in edge locations, warranting new strategies for deploying and managing infrastructure and integrating it with other solutions.
  3. Preserving revenue growth and profitability will require a revenue diversification strategy that emphasizes solutions and services that add value beyond the hardware itself, which will be particularly important as customers pull back on infrastructure spending in 2023 over economic concerns.


Competition among infrastructure vendors will be stiff as ever going into 2023 as the market navigates revenue challenges driven by cautious enterprise spending, leaving vendors hungry to increase their relevance and value to customers outside the traditional data center.

TBR’s 2023 Predictions is a special series examining market trends and business changes in key markets. Covered segments include cloud & software, devices, digital transformation, IT infrastructure, professional services, federal IT services and telecom.