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Top 3 Predictions for Digital Transformation in 2024

1. GenAI hype meets reality
2. Ecosystems fuel disruption and lead to the rise of the superpowers
3. Cyber, data and regulations — the three-legged stool enabling new digital transfomration growth

 

 

Challenges and Opportunities in the Era of GenAI and Enterprise Digital Transformation

While cloud remains the backbone of buyers’ digital transformation (DT) programs, generative AI (GenAI) has thrown vendors and their technology partners into a frenzy, especially as enterprise buyers have started paying closer attention to their IT spend in response to macroeconomic headwinds.
This new dynamic creates a plethora of challenges and opportunities for technology and services vendors that guide and manage enterprise DT programs. From vendor consolidation to technology stack simplification, buyers continue to look for ways to optimize their digital assets, making it hard for vendors to introduce new technology without the appropriate use cases. Delivering value in a challenging market requires vendors to act more as strategic partners and collaborate rather than simply transact with enterprises.
 
GenAI is here to stay. There are certainly more unknowns than knowns today, despite everyone across the ecosystem convincing others they have found the silver bullet that will enable the creation of the next-gen enterprise business model. As with most new technologies, establishing the right frameworks as well as commercial and pricing models is a necessary first step before adoption can scale. Developing and deploying pricing mechanisms that incorporate pro bono and/or risk-sharing services and using templated offerings to standardize delivery can help vendors maintain their incumbent positions, especially as GenAI will level the skills playing field.
 

Expectations around differentiation are also changing, increasing the need for vendors to add specialization and often spurring them to expand their partner ecosystem. The advent of a new technology stack (e.g., next-gen GPU-run data centers that enable GenAI to reveal its full potential) will compel vendors to re-evaluate and expand their relationships with chip manufacturers — something many software and services vendors have not done for a while.
 
Additionally, the implications for cyber, data, regulations, ethics, and model governance will continue to dominate headlines and vendor-buyer conversations. And while vendors are in the business of making money, we believe the winning formula is to strike the right balance between constantly selling and consistently developing relationships with buyers and partners.
 
To read the entire 2024 Digital Transformation Predictions special report, request your free copy today!

New: Discover insights into GenAI for 2025 across IT services, cloud, IT infrastructure, federal IT services and more. Download your free copy of TBR’s 2025 GenAI Predictions special report today!

Top 3 Predictions for Professional Services in 2024

1. The 2023 focus on reskilling and training will pay off in accelerated revenues in 2024
2. Generative AI will create a pivot to outcomes-based pricing
3. Regulations will become a major pain point for all

 

Embracing Change, GenAI Hype and the Imperative of Outcome-Based Strategies for IT Services and Consultancies

As they say, nothing in life is certain except for death and taxes. And change. And data overload. And hype about technology and disruption. Predictions provide a perfect platform for big leaps and wild guesses, but at TBR, we are seeing more of the same for 2024, including taxes, data overload, and technology (read: generative AI [GenAI]) hype.
 
IT services and consulting stubbornly remain a people-centric business, despite advances in automation, analytics and AI, and vendors most adept at attracting and retaining good people continue to outperform peers. Keeping good people when the hype around GenAI suggests that many task-oriented jobs will disappear requires vendors offer training in new skills and develop new career paths.
 
Concurrent with these pressures on talent, GenAI will pressure contracts — with greater transparency comes greater opportunity to pay for exactly what you got. IT services vendors and consultancies that embrace outcome-based pricing models will increasingly find their clients, particularly those enamored with GenAI (although, who isn’t?) open to creative pricing and reluctant to continue business as usual once GenAI has pushed the client’s procurement office out the door.
 

 
Additionally, governments continue to lean into regulation to mitigate societal risks and to tame or unleash (depending on your political views) commercial activities. After the last three years of dealing with the pandemic, war, and the emergence of robot overlords (read: again, GenAI), we can reasonably expect governments will increasingly seek the security blanket of tighter regulations.
 
Add a splintering of global approaches to trade, finance and geopolitics, and companies face not just more regulations but also overlapping and potentially conflicting compliance obligations, varying wildly by jurisdiction. Death and taxes, indeed.
 
For IT services vendors and consultancies, 2024 looks a little boring. Reskill and train your people so you’ve got the right folks ready to deploy at scale to address your clients’ toughest problems. Let someone else handle the easy problems until they get replaced by GenAI. Start baking outcomes-based pricing into every engagement, underpinned by AI and analytics that demonstrate unquestionably what value you are bringing your clients. And lean hard into governance, risk and compliance (GRC), unless you do not have those skills already, in which case, find a partner.
 
To read the entire 2024 Professional Services Predictions special report, request your free copy today!

During HCLTech’s Financial Services Advisor and Analyst Day in New York City this past August, the vendor described an engagement with a European bank in which HCLTech provided a comprehensive Know Your Customer (KYC) solution. TBR requested further details and met with HCLTech leaders responsible for the solution and the vendor’s European Financial Services practice in September in London.

 
HCLTech has a long history of working with banks and has developed an appreciation for the associated challenges, technology environments, and regulatory and compliance demands, in addition to the full stack of ecosystem partners. Additionally, HCLTech understands financial institutions’ KYC risks and has applied the company’s own investment and IP to address clients’ concerns around data and processes.

 

Over the last couple of years, HCLTech created a comprehensive approach to KYC for a European bank, solving a number of the bank’s operational challenges, including collating siloed processes and gathering related and dependent data and analytics into a single stream, allowing the CIO to see and understand the technology challenges and bringing greater confidence in controls and reporting to the chief compliance and risk officer.

 

Having engaged this and other financial services clients, HCLTech leaders described the company as the “glue” between IT and risk and compliance. Critically, HCLTech’s leaders said their professionals on the highlighted engagement spoke extensively with the people handling the day-to-day work of analyzing KYC cases.
 

According to Santosh Kumar, Vice President and Head of Financial Services Solutions, EMEA and APAC, no other IT services vendor has received permission from — or even pressed for permission from — bank CIOs to interview and work with them around designing a technology solution that meets the needs of the banks’ KYC analysts, professionals that Santosh stated are frequently considered necessary cost centers within a bank’s operations.

 

Diving further into the use case, Abhishek Mishra, Senior Solutions Director, Financial Crime and KYC, HCLTech, first detailed the pain points and trends HCLTech sees across the financial services space, including false positive rates, compliance costs, cloud migration and enhanced data analytics.

 

Against these conditions, according to Mishra, HCLTech positions itself as “the beacon of trust and innovation in the ever-evolving landscape of financial crime prevention” and a vendor capable of empowering “organizations worldwide to safeguard their integrity and financial stability.” Against that aspiration, HCLTech highlighted the company’s resilience and experience, enhanced by technologies, particularly smart automation.

 

Further discussing HCLTech’s decision to engage directly with the KYC analysts, Mishra described how he sees a range of KYC issues that are not always apparent at the CIO or chief compliance officer level, including fragmented IT systems and frequent manual interventions into processes that should be standardized and automated.

 

Using the platform codeveloped with the European bank client, HCLTech helped the bank reduce its operations team by 60% and lowered the incidence rate of false positives by 30%. As Mishra noted, the industry standard incidence rate for false positives is around 90%, making any improvement a substantial savings in operations costs. Overall, the breadth and proven depth of HCLTech’s capabilities across the KYC and broader financial services space struck TBR as potentially significant differentiators as IT services vendors face increased pressures on their margins, talent management strategies and business models.

The “glue” between IT and risk and compliance

It is a bold claim, and plenty of consultancies, many IT services and even some technology vendors would self-describe as the essential connection between functional groups within an enterprise. HCLTech’s claim, in this particular case about KYC, holds greater weight based on the thorough — and fully operational — nature of its KYC platform.

 

In a wide-ranging discussion with TBR on this use case, HCLTech’s Mishra and Santosh did not shy away from answering several challenging questions, including why banking clients would trust HCLTech with as material a requirement as KYC as well as how HCLTech interacts with the regulators.

 

HCLTech executives showed a refreshingly honest assessment of the company’s place in the ecosystem, acknowledging that the Big Four firms continue to play an essential role in providing assurance to both clients and regulators that HCLTech’s KYC approach — and other banking process technologies — meet all criteria for reliability and compliance. Mishra and Santosh also readily acknowledged that the company’s role within the ecosystem depended on niche technology vendors, rejecting the idea that HCLTech was “end-to-end” while embracing the need to be a capable and easy-to-work-with ecosystem partner.

 

In addition to recognizing challenges within the ecosystem, HCLTech acknowledged that not every client would or could adopt the company’s KYC solution, given the complexities of banks’ legacy technology environments, ingrained cultural dispositions toward caution around all operational aspects governed by compliance obligations, and the myriad technology and IT services vendors that are scrambling for a chance to sell the next special tech-infused solution to a bank (hearing thunderous echoes here of generative AI).

 

Rather than pressing forward on a one-size-fits-all solution, HCLTech has created sandboxes for banks to experiment with a test solution, including the KYC platform, in safe — but realistic — environments. HCLTech’s well-established credibility among financial services clients unquestionably provides the company with entry to advise on new approaches to solving persistent problems.

Financial crimes will not disappear, but HCLTech could ease banks’ costs

In TBR’s view, offering new ways to solve persistent problems is precisely how HCLTech has tackled KYC. Banks budget a surprisingly substantial amount of their operational costs toward KYC, including funds dedicated specifically to paying fines if (read: when) they are found to be out of compliance.

 

In its European bank use case, HCLTech helped the client reduce its number of FTEs dedicated to KYC by 60% and also delivered an auditable, comprehensive and technology-enabled platform that the bank owns, operates and depends on. KYC challenges will never disappear: Money launderers — perhaps Venice’s second-oldest creation — will always be more creative than governments, banks and technology companies. But if HCLTech can substantially reduce banks’ KYC costs without compromising compliance, it is going to unlock considerable value for banks to invest in additional services, technologies and transformations.

 

TBR believes the keys to HCLTech’s success in KYC include:

• Continuing to focus on being the “glue” between risk and compliance and IT: HCLTech has established credibility with the latter and has grown its credibility with the former, but both will remain essential to KYC transformation. Sticking to its comfort zone with technologists will limit HCLTech’s ability to scale a KYC solution.

• Staying within its swim lane: Although it is contradictory to the point above, HCLTech should focus on delivering comprehensive and highly functional solutions, in sync with the company’s engineering DNA. HCLTech executives’ willingness during the conversation to cede consulting territory to the Big Four firms (notably EY) struck TBR as exceptionally self-aware in assessing HCLTech’s role in the broader banking ecosystem.

• Remaining patient: TBR has been briefed on countless transformational solutions that are ready to address burdensome costs with bullet-proof technology. And TBR has heard specific transformational use cases cited … but often three, four or five years later, raising the question: “If that solution was so great, why didn’t it scale?”

HCLTech may have something great here. With patience, discipline around partnering, and a focus on collaboration with the right clients in the right setting at the right time, HCLTech’s KYC solution could become a materially significant step forward in banks’ operational costs and also a good thing for society when it comes to combating fraud and financial crimes.

 

Lenovo Global Industry Analyst Conference (GIAC) 2023 was the first cross-business unit analyst event Lenovo has held since the start of the pandemic. The conference aimed to give analysts a view of the full breadth of Lenovo’s portfolio, the corporate identity weaving through the company’s various line-of-business (LOB) strategies, and the executives running the show from behind the scenes. Clear goals of the event were to drive market awareness of Lenovo’s capabilities, particularly around its Infrastructure Solutions Group (ISG) and Solutions and Services Group (SSG), and to contribute to the company’s multiyear efforts to reshape its brand image and be known as a wholistic technology solutions company.

Creating intersegment coherence with One Lenovo: CEO Yang Yuanqing

Among the challenges Lenovo has encountered as a global business, maintaining operational consistency while minimizing the increase in organizational complexity as the company scales is chief among them. As Lenovo grew beyond selling PCs with the acquisition of IBM’s (NYSE: IBM) x86 server business in 2016, the business units did not necessarily create broad synergies beyond operations optimization such as component sourcing and manufacturing. More specifically, the sales motion became and remains quite fragmented due to the differences in use cases and end-user personas of PC and server purchasers. To address this, Lenovo is undergoing a transformation to become a more cohesive company instead of a siloed one. This transformation effort has been dubbed “One Lenovo” and represents both an internal process and philosophy shift as well as an external interface shift to unify and simplify the company’s go-to-market approach for its customers and partners.

 

Lenovo CEO Yang Yuanqing’s background and affinity for hardware underpinned his sweeping message, which was a simple and respectably grounded one: Lenovo will continue to have the DNA of a hardware company. In spite of the changes in the company, including a long-term diversification of revenue, Lenovo will continue to sell a massive amount of hardware, and the portfolio changes regarding the company’s vision around solutions and services will be additive in nature, not alternative, to provide customers with end-to-end solutions in a diverse set of commercial scenarios.

Lenovo is bringing AI to the data: CTO & SVP Yong Rui

Predictably, another main focus of the event was to showcase Lenovo’s capabilities and strategy in AI across the portfolio. This began with Yong Rui, Lenovo’s CTO and SVP, laying out the context of Lenovo technologies in eight areas: cloud and edge computing, advanced computing, wireless technologies, vehicle computing, device innovation, next-gen interaction, the metaverse and AI. Rui clarified that Lenovo’s play in foundational models would not be in creating such models but rather leveraging them in its future vision of AI ownership and accessibility.

The company believes that three primary buckets of AI models will emerge: public models (foundational models) accessible to all, private models accessible to a group (such as enterprises), and personal models accessible to a single individual. On top of this, Lenovo suggests these models will differ in size, location (and underlying hardware), and personalization. In essence, Lenovo contends that it will be bringing AI to data rather than bringing the data to AI, as the company envisions a future where each device Lenovo sells will have AI embedded in it.

 

However, there is still a large gap in Lenovo’s current capabilities as well as the overall AI landscape that needs to be bridged in order to reach such a vision. For example, the multimodal framework will need interoperability for public, private and personal models to interact, which creates an underlying challenge in governance and data privacy protocols. Additionally, the battle between foundational AI models in the market remains ongoing, meaning no one truly knows which models will survive and continue to be developed, creating a challenge in future-proofing innovations.

AI initiatives

Lenovo’s AI strategy is currently a broad one. It starts with the company’s core competency in hardware to be an AI-capable infrastructure provider with its data center server portfolio, which includes NVIDIA GPUs. On top of that, Lenovo has an edge server portfolio that spans in form factor from the data center servers to clients featuring a variety of silicon options including Intel Atom, NVIDIA Jetson and AMD EPYC processors. To drive adoption of its edge servers, Lenovo has committed to invest $100 million into its AI Innovators program, which has begun introducing use-case-specific offerings with the goal of creating seamless, verticalized, outcome-based solutions deployments. In storage, Lenovo has been targeting the entry-level market while partnering with WEKA to enable workloads for high-performance compute (HPC) and AI through the combination of Lenovo’s software-defined storage platform and WEKA Data Platform software.

 

In Lenovo’s services division, SSG, AI activity is relatively nascent but is developing quickly. The company is building capabilities and solutions that leverage its operational and customer data to train foundational models. These initiatives are designed to improve both customer support and internal operational efficiency. Lenovo also previewed two new consumption-based TruScale offerings for AI — Developing AI at Scale as-a-Service and Applying AI at Scale as-a-Service — that were announced during the Lenovo Tech World event.

 

In its Intelligent Devices Group (IDG) Lenovo aims to compete in the AI PC space leveraging its core PC portfolio. Lenovo envisions a world where PC users will leverage AI to achieve hyperpersonalized experiences. The company hopes that the AI PC concept will accelerate refreshes in PCs to end the past year’s market slump.

 

In summary, Lenovo’s AI strategy spans all three business units with the most mature and tangible offerings coming out of ISG while SSG and IDG continue to develop. From an overall organizational standpoint, the company is in the middle of the first wave of AI portfolio expansion, defined by its broad pursuit of applications. Lenovo remains in the stage of discovering where AI is a sensible fit and where it may not be. What will follow is an eventual consolidation and clarification stage, where the company will delineate the disparate efforts from the successful vision-fit initiatives and drive a focused expansion from there. It will be exciting to see how the strategy unfolds.

 

Adding Splunk will accelerate Cisco’s business model transition

While cloud solutions were originally meant to simplify IT, in many ways they have gradually become just as complex as traditional IT environments. From a performance and security point of view, the shift from delivering within customers’ own data centers to utilizing a multitude of external cloud providers has amplified the challenges of managing and securing these environments. This shift has given rise to a group of vendors that includes Splunk, which provides observability and security solutions that can address the variety of delivery methods used by most customers. The September announcement that Cisco (Nasdaq: CSCO) will acquire Splunk for $28 billion validates this new reality for customers and reflects the need for deep-pocketed traditional IT vendors to shift their own business models to incorporate more subscription revenue streams.

Cisco targets the PaaS space to become one of the largest software vendors in the world

Agreeing to acquire Splunk reflects Cisco’s recognition of the changing growth trends in the cloud space. During the acquisition announcement, Cisco CEO Chuck Robbins noted this purchase would make Cisco one of the largest software companies globally. That phrase seems a little dated, however, as all the largest software vendors are trying to shift their revenue streams to cloud-delivered subscription revenue, and even those revenue streams have slowed significantly in recent quarters.
 
The largest providers in the well-established IaaS space such as Amazon Web Services (AWS) (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT) have seen growth moderate, as have leading SaaS providers such as Salesforce (NYSE: CRM) and SAP (NYSE: SAP). The slowing growth for leading providers is due in part to market saturation, as most customers have already shifted to cloud-based solutions, but also reflects a consolidation in the vendor landscape. However, the PaaS market, in which Splunk participates, remains a broad and less mature space that continues to see expanding opportunity. TBR expects PaaS will be the fastest-growing segment of the overall cloud market over the next five years, increasing from $115 billion in 2022 to more than $300 billion in 2027, an average annual growth rate of 21.7%.

 

Within the security and observability segment of the PaaS space, Splunk stood out as one of the largest providers, which led to Cisco’s interest in the vendor. In its fiscal year ended March 31, 2023, Splunk increased cloud revenue by 54%, and projections for fiscal 2024 have the company generating just under $4 billion in revenue for the year. Profitability has also been on the rise, with Splunk reporting a mid-20% non-GAAP operating margin for fiscal 2023. Most recently, Splunk has continued its momentum, with cloud revenue growth of 29% year-to-year in fiscal 1Q24 (calendar 2Q23) and declines in operating expenses during the quarter, accelerating margin improvement.

 

Splunk was the largest independent vendor in its market segment, but the acquisition will bring Cisco into greater competition with some of its more diverse peers and competitors, including Microsoft and IBM (NYSE: IBM). Despite the increase in competitive dynamics, this move is not novel, as many of the largest legacy IT providers have risked competitive overlap to accelerate the modernization of their businesses to include more cloud assets. The purchase is not the first for Cisco in the PaaS space, as it most notably purchased AppDynamics for $3.7 billion in 2017 and has acquired a dozen software- or cloud-centric firms in the past two years.

 

Splunk’s ongoing cloud transition is not unlike Cisco’s

From a top-line perspective, Splunk should add nearly $4 billion in revenue for Cisco post-acquisition and cloud annual recurring revenue of nearly the same amount. While total revenue, cloud revenue and even profitability have been bright spots for Splunk recently, they come after a more than three-year transition for the vendor. Founded in 2003, Splunk was too early to be born in the cloud, beginning with a traditional software licensing model that persisted well into recent years.

 

Just as other legacy vendors such as Cisco evolved toward subscription and “as a Service” business models, so did Splunk, and it did so while experiencing many of the same financial and leadership challenges that other vendors encounter. In fiscal year 2020 revenue was still growing but software remained a majority of Splunk’s revenue. In fiscal year 2021 cloud revenue grew 77% year-to-year but could not offset the downturn in licensing revenue, and total revenue declined by 5%. It was not until fiscal year 2022 that the company’s growth turned a corner. With new CEO Gary Steele installed in April 2022, total revenue grew by double digits in both fiscal 2022 and 2023, with cloud revenue growing as a percentage of the mix and leading the expansion. After two years of steady progress in Splunk’s cloud transition, it should continue post-acquisition.

Cisco is making progress in its own shift to a subscription model

While ICT hardware will remain a cornerstone of digital transformation, growth opportunities are shifting to the software layer across Cisco’s customer segments. This trend is also driven by customers preferring to consume solutions on a subscription basis. Cisco’s ambition is to align with customers’ digital road maps and capture both software and hardware revenue in a subscription model.

 

In line with this goal, Cisco continues to capture more of its revenue via subscriptions. The company has an ongoing restructuring program not solely to cut costs but also to reallocate resources to continue shifting to a subscription-based business model. Cisco’s Partner Program encourages participants to drive sales of subscription-based offerings. The company is helping partners support this business model transition with innovations in customer financing (Cisco Lifecycle Pay) and offering Cisco Powered Service specializations, which enable partners to be certified as proficient in delivering Cisco “as a Service” solutions, increasing customer confidence in partners.

 

Subscription revenue as a percentage of software revenue was 85% in 2Q23, a 200-basis-point increase from 2Q22, and software subscription revenue volume grew 20% year-to-year. Subscription revenue spanning hardware, software and services accounted for 43.4% of total revenue in 2Q23, a decline of 60 basis points from 2Q22, though total subscription revenue volume increased 13% year-to-year. Cisco is aiming for subscription revenue to reach 50% of total revenue in 2025. Despite progress and significant M&A events, subscription revenue is lower than TBR anticipated, given the number of resources dedicated to growing this revenue stream.

 

Integrating Splunk will help change this, given that it is by far Cisco’s largest acquisition to date. Splunk can supercharge Cisco’s security and observability businesses, enhancing existing products and enabling cross-selling opportunities. The Splunk portfolio will also capitalize on Cisco’s industry-leading channel partner ecosystem, which should enable Splunk to accelerate revenue growth.

 

In the medium to long term, Cisco will explore the use of Splunk’s generative AI capabilities in its observability and security portfolios, as well as in its networking portfolio more broadly. Generative AI will have applications in network management that will simplify the process of deploying and operating enterprise networks for CIO organizations, driving opex reduction.

Splunk will extend and advance but not dramatically alter Cisco’s transformation

The proposed acquisition of Splunk is not only the largest purchase in Cisco’s history but also one of the largest ever in the technology industry. Despite the size, we do not see this purchase as forging a new direction for Cisco, which has been steadily looking to expand into adjacent markets and grow software and subscription revenue streams.
 
Acquisitions have been a staple of Cisco’s strategy over the last decade, and many have focused on business model transformation efforts. Most notably, Cisco purchased AppDynamics in 2017 and added multiple smaller purchases since then to extend and complement the AppDynamics portion of its portfolio. Observability and security capabilities not only represent a growing stream of revenue for Cisco but also are not too far afield from Cisco’s core networking solutions. Although Splunk will continue its own transformation even after the pending purchase is completed, it will bring a sizable financial contribution and should integrate cleanly with the portfolio direction underlying Cisco’s own ongoing transformation.