The telecom infrastructure services (TIS) industry is a $35 billion market that is expected to evolve and expand rapidly in the next 10 years. Government funding is driving network expansion projects by major telcos such as Verizon, AT&T and T-Mobile (as well as their international counterparts), and a whole ecosystem of large, established and interrelated vendors is jockeying for positions on deals.
 
That dynamic is making competition more challenging than ever. Labor shortages, wage inflation, workforce aging and other trends are pressuring vendors ability to stay above water, much less compete with peers.
 
TBR has helped telecom infrastructure services vendors navigate those dynamics for nearly 30 years. We publish research regularly that covers the TIS market and consult directly with hundreds of vendors.
 
In this white paper, we apply our expertise in the market and our learnings from those engagements to provide a playbook for how TIS vendors can win in 2023 and beyond. We analyze the trends facing the market, outline how we believe vendors can align themselves to compete, and share tactical steps on how to put this playbook into action.
 

 

Services power the build-out of global communications infrastructure

It is easy to picture the infrastructure that powers our global wireless and wireline communications networks. Even for the uninitiated, communications technology is everywhere. Driving down the highway, wireless towers are visible. Walking through a city, the communications infrastructure is noticeable on the outside and inside of buildings. Although they are not visible, we can envision the technologies comprising those networks: the towers and all the associated hardware and software as well as the fiber optic lines that run on poles and underground.
 
What is obvious, but often less buzzworthy than the technology itself, is the vast number of interconnected labor-based services that are required to build out these networks. There are thousands of different types of services involved in building a network, and thousands and thousands of global companies that supply those services.
 
TBR covers these services activities in the Telecom Infrastructure Services research stream, which tracks all of the capital expenditures and operating expenditures on services by communication service providers (CSPs), which by our definition include telcos, cable companies and hyperscalers such as Amazon Web Services (AWS), Azure, Google Cloud Platform (GCP) and others. The research stream covers all services related communications and IT infrastructure.
 
To help us make sense of this market and track it on an ongoing basis, TBR devised a services taxonomy framework for TIS that covers the full life cycle of activities associated with launching global communications networks. TIS comprises four main segments, and each segment contains a multitude of subsegments:

• Professional Services, including consulting, network planning and design, network optimization, network infrastructure integration, OSS/BSS integration, application integration, security services, training services, and interoperability testing
• Deployment Services, including engineering, site location and construction, equipment installation, and project management
• Maintenance Services, including remote technical support, onsite technical support, repair and exchange, and installation of software maintenance releases such as updates and upgrades
• Managed Services, including network out-tasking, network outsourcing, managed security services, managed OSS, managed BSS, and managed applications (VoIP, unified communications, internet applications, and all other types)

This standard services framework allows TBR to consistently and repeatably estimate the current and future size of the services market opportunity, as well as the financial performance and operational strategies of the key vendors that provide these services.
 

Telecom infrastructure services industry outlook

After several years of declines, the global TIS market overall returned to a positive growth trajectory in 2018, in line with TBR’s estimates in the Telecom Infrastructure Services Global Market Forecast for 2018-2023, now that the 5G cycle is underway and webscales continue to increase their spend on network technologies to drive their strategic initiatives. Leading operators globally have shortened their 5G timelines by up to two years, and this has correspondingly pulled forward the TIS market growth curve by two years. 2018 was a key year during which leading operators invested to prepare their networks for 5G and, in some cases, began deploying 5G technology. This trend will play out over at least the next five years as operators build out their 5G networks and continue their transformational journeys toward becoming digital service providers.

Salesforce has shifted its focus from revenue growth to profitability, with pressure from activist investors. The company aims to exceed 10% operating margin in fiscal 2024, a threefold increase from the previous fiscal year. By following the “Oracle playbook” and reducing costs, Salesforce could make billions in profit, leading to a change in financial focus across the industry, with revenue growth becoming a metric, rather than the only metric.

Profit is replacing growth as Salesforce’s key financial metric

Since the inception of the cloud market more than 10 years ago, subscription contract value and revenue growth have been the key metrics used to determine vendors’ success and leaders in the space. That focus on growth and the top line was important for good reason, as there was fierce competition between vendors of different backgrounds and sizes to establish and protect their position in the market. Without a sizable business and base of customers, there could be no stability in the revenue streams and business models vendors were looking to establish.

 

The shift from high growth rates in subscriptions to a sustainable business model was always expected at some point, and the current economic environment is accelerating that shift. The pace of growth is slowing for most vendors in the cloud space, as illustrated by Salesforce’s (NYSE: CRM) recent performance.

 

Despite Salesforce’s significant size and milestone of recently becoming the largest enterprise applications provider globally, the company’s revenue growth has remained above 20% for most of its history. However, Salesforce’s pace of expansion has been 14% in the last two quarters, with projections for coming quarters closer to 10%. The slowing growth, combined with pressure from activist investors, has made efficiency and profit the company’s new primary financial focus.

 

On the company’s most recent earnings call, Salesforce CEO Marc Benioff alluded to taking a page out of the “Oracle Playbook” by re-evaluating internal operations and looking for ways to reduce expenses and increase profitability. We believe Salesforce is the first cloud vendor to undergo this change in financial focus, which is why we have dug into what the Oracle Playbook is and how it could be used to adjust other vendors’ cloud business models in coming quarters.

 

Using Oracle (NYSE: ORCL) strategies to reduce costs in select areas could yield billions of dollars in profit for Salesforce, causing other activist investors and cloud vendors to follow suit to optimize their bottom lines. Salesforce is projecting its fiscal 2024 operating margin to exceed 10%, which is a threefold increase from the prior fiscal year. If that comes to fruition, we anticipate the pressure will increase from activist investors and acquiring companies, with Broadcom’s (Nasdaq: AVGO) pending purchase of VMware (NYSE: VMW) and Zendesk’s (NYSE: ZEN) recent private equity buyout as examples.

Revenue growth will become a metric, not the metric

For Salesforce, much of this new focus on profit was precipitated by a slowdown in the pace of revenue growth. When the company was consistently growing at a rate above 20%, it had a certain amount of leeway in the rigor of its operational and cost models. Spending was necessary to support that rate of continued growth, and many inefficiencies were either masked or viewed as less of a priority than sustaining the expansion.

 

One of the takeaways from the Oracle Playbook is that the operating philosophy does not change based on the pace of revenue growth. Aside from large acquisitions, like the purchase of Cerner, which is driving the recent uptick in growth, Oracle’s year-to-year revenue growth has remained consistently in the single digits for much of the past decade. Whether revenue is contracting or expanding in a certain period, Oracle does not dramatically change its investment and expense strategy. Rather, it stays the course and focuses on efficiency and profitability. As Salesforce enters this new period of slower growth, we expect its approach to running the business to become more stable.

Salesforce can both improve sales productivity and reduce expenses

The largest difference between Salesforce’s current operations and Oracle’s strategy lies in sales and marketing expenses. In the most recent comparable period for the two vendors, Oracle reported sales and marketing expenses as a percentage of revenue of 18.1%, less than half of Salesforce’s 40.4%. The 22.3% gap between the two vendors is significant and represents the biggest opportunity for Salesforce to bolster its operating profitability through increased efficiency.

The first difference between Oracle and Salesforce in S&M strategy lies in productivity. On average, each Oracle sales and marketing employee generated more than $1.19 million in annualized revenue. Salesforce’s productivity steadily increased through the close of 2022 but is still well below that mark, with each sales and marketing employee most recently generating $816,000 in annualized revenue.

 

The challenge in improving productivity was reflected in Benioff’s comments, as he claimed that new employees were less productive than their more tenured counterparts. Especially in light of Salesforce’s recent layoffs and slowdown in hiring, we expect annualized revenue production per Salesforce sales and marketing employee to increase and eventually approach $1 million.

Oracle and Salesforce differ strategically around not only productivity but also the composition of the companies’ S&M teams. This is best illustrated by the annualized cost per S&M employee. Salesforce incurs an average of $355,000 in sales and marketing expense for each employee per year, whereas Oracle spent $224,000, on average, in 4Q22. Not only is there a gap in the level of expense, but Salesforce also saw its average increase moderately during 2022 before falling in 4Q22 as the company sought to control costs.

 

Oracle, on the other hand, has seen average expenses increase slightly during the past year, partially driven by the integration of Cerner. Despite the increase, average expenses in 2022 remained marginally lower than 2019 expense levels. Oracle’s advantage in the area of average cost per S&M employee is a force multiplier, allowing the company to staff larger teams with lower expense levels and use each sales and marketing resource as a driver of bottom-line profitability.

For general and administrative functions, less will be more

Another area ripe for improvement is Salesforce’s G&A expenses. While the gap between Oracle and Salesforce in this area is narrower in terms of sheer size, proportionally it is quite significant. As a percentage of revenue over the past two years, Salesforce’s G&A expenses as a percentage of revenue were between two and three times what Oracle spends. With Salesforce spending more than $2.5 billion in G&A expenses during 2022, any efficiency improvement would have a noticeable impact on profitability.

 

One of the lessons from Oracle’s approach to G&A expenses is to minimize any investment that does not have a direct impact on the company’s core value proposition. Maintaining financial systems, administering human resource services and managing overall corporate functions that are included in G&A are important but do not differentiate a business in the market. This is also an area where Oracle relies on technology — mostly its own technology — to tout the efficiency of its operations. Oracle executives such as CEO Safra Catz frequently mention the company’s speed in completing quarter-end financial reconciliations and publishing periodic Securities and Exchange Commission (SEC) filings, attributing that speed to Oracle’s own financial management offerings.

Salesforce is already running the Oracle Playbook for research & development and cost of goods sold

While Oracle does shine a light on areas where Salesforce could reduce expenses and increase profitability, the companies’ respective R&D expenses and cost of goods sold (COGS) are two areas that are currently well aligned. Oracle is well known for its innovation and the overall quality of its offerings, and the vendor continues to prioritize its investment in R&D. Salesforce has a similar reputation, and the two vendors have remarkably similar levels of investment in R&D: Oracle most recently spent 17.4% of revenue in R&D, while Salesforce’s expenses were slightly lower at 16.1% of revenue. Due to the importance of improving offerings and funding innovation, we do not expect to see significant changes in R&D spend for Salesforce.

 

In a related area, the two vendors are also quite close in their gross margins, reflecting the efficiency with which both can deliver offerings to customers. The diversity of Oracle’s business, spanning traditional software, cloud and even hardware, is a complicating factor in its gross margin, which was 72.6% during 4Q22. Salesforce has a much more focused set of offerings and reported a 75% gross margin during 4Q22.

 

Long-term, there could be more opportunity for Oracle to improve its cloud gross margin levels, given the reliance on its own technology and data centers. Salesforce has been moving away from its own data centers and utilizes its Hyperforce program to shift delivery responsibility onto the major hyperscale platform providers. There could still be improvements in the efficiency of COGS for both companies, but that will be slower to develop and reflects broader trends like data center capacity and hardware depreciation cycles. Similar to R&D, gross margin is also tied closely to the customer experience and value, so the companies will have to balance cost reductions against customer impacts.

Salesforce will stop short of becoming a full-fledged Oracle clone

Salesforce will certainly implement and benefit from many of the cost-saving strategies that have led to Oracle’s sizable profit margins. However, we expect Salesforce to continue purposely avoiding many aspects of what makes the Oracle culture unique.

 

Coming from Oracle, Benioff consciously decided to make Salesforce a fundamentally different company in many respects. Salesforce’s family-like “Ohana” culture is in stark contrast to the more aggressive, competitive and cut-throat culture that defines Oracle. Salesforce’s culture did take a hit and moderate a bit considering the recent layoffs, but many aspects of it will endure.

 

The other major difference in culture that will persist is Salesforce’s customer centricity. Oracle is known for aggressive contracting and for locking in customers, even if its technology and offerings provide significant value. Salesforce should continue to take a softer approach, emphasizing customer success and offering the scale-up, scale-down nature of cloud, which provides a relief valve for negotiations should customer situations change. The downside of that model is part of what has precipitated Salesforce’s recent slowdown in revenue, as customers require fewer seats and grapple with more challenging economic conditions. So, while the Oracle Playbook should yield significantly greater profitability, we see limits in how far Salesforce will go to emulate the strategies of its more mature peer.

 

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On Feb. 21, 2023, Infosys hosted industry analysts and advisors for a packed-agenda afternoon in the company’s offices at One World Trade Center in New York City. U.S. Analyst and Advisor Meet 2023 included client stories and technology partner presentations to reinforce Infosys’ role in the IT services and cloud market. Infosys executives consistently returned to a few main themes, including delivering business outcomes, maintaining trusted relationships, and focusing on speed, agility and simplification.

Sustaining relationships to deliver tangible business outcomes: Infosys in NYC

Across an afternoon at One World Trade Center, Infosys (NYSE: INFY) leaders hosted a steady stream of clients and technology partners discussing how they have worked with Infosys to apply technology to business problems and generate both cost saving and growth opportunities. Notably, every panel included at least one client, coming from a wide range of industries and describing a variety of problems addressed — and solved — by Infosys. In the latter half of the afternoon, Infosys shifted the event’s focus to SAP (NYSE: SAP), including a presentation by Thorsten Leiduck, SVP and Co-lead Global SAP Ecosystem, Business Technology Platform. In TBR’s view, Infosys’ decision to persistently turn over the stage to clients and partners reflects the company’s confidence in its message and capabilities and a maturing of Infosys’ strategy.

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In opening remarks about Infosys’ localization strategy, Srikantan Moorthy, EVP, Infosys, described the company’s six U.S. hubs focused on innovation, technology and education, with a few explicitly tied to universities and all focused on a core set of offerings, such as AI, machine learning and user experience design in Rhode Island and telecommunications in Texas. Complementing Infosys’ six Innovation and Technology Hubs, Moorthy described the company’s 21 Proximity Centers — in locations ranging from Quincy, Mass., to Bellevue, Wash. — as a foundational investment in Infosys’ effort to embed localization into the company’s overall strategy. Moorthy noted that the diversity among the partner universities, including Purdue University, North Carolina State University and the Rhode Island School of Design, resulted in multiple disciplines and specializations for Infosys’ professionals.

 

Overall, Moorthy’s description of Infosys’ commitment to developing talent, through university programs, apprenticeships and professional development, revealed a commitment to the U.S. market and to Infosys’ people. In TBR’s view, IT services vendors like Infosys, whose India-based talent pool is necessary for its business model, must smartly balance low-cost delivery with on-site, highly trained, localized professionals who can go beyond clients’ technology and into their core business challenges.

Cloud and partnering evolutions bring forth Infosys’ ecosystem role

For the remainder of the afternoon, Infosys’ presentations with clients and technology partners included sessions on Infosys Cobalt (Infosys’ cloud professional services platform); SAP transformations; examples of how customers and partners are tackling supply chain transformation; and clients from the insurance, banking and distilleries businesses. Highlights included the following:

 

• While the value proposition for migrating to cloud has proved to be increasingly compelling in recent years, Infosys EVP and Infosys Cobalt leader Anant Adya noted that clients have begun questioning their cloud spending, looking for tangible business outcomes, not just an improved internal technology experience. According to TBR Senior Analyst Evan Woollacott, “With cloud adoption getting to an inflection point beyond infrastructure, at least here in the U.S., and more into ERP workload migration and management, extracting insights through automation and AI will put even more pressure on vendors. Cloud has now graduated from being a price play to a value driver.” During the event, Adya noted that the recent hype around analytics and AI has muddied clients’ perception of the value they can get from these technologies. Infosys, according to Adya, helps clients define what business outcomes could be and then delivers through technology implementation, frequently further helping clients by uncovering business model shifts that create network effects. In short, Infosys facilitates transformation and innovation, with a commitment to delivering business outcomes.
• According to Ramesh Chougule, Infosys’ VP of SAP Practice Sales and Go to Market for North America, SAP brings domain capabilities, end-to-end delivery, and the ability to take over and transform a client’s SAP environment. One slide in particular captured the breadth of Infosys’ SAP practice, describing 12 transformation offerings and go-to-market themes. These included SAP S/4HANA supply chain Finance and OTC transformations, SAP Business Technology Platform including data and analytics, and spend optimization with SAP Ariba, FG and Concur. A subsequent presentation by Leiduck cemented Infosys’ role in SAP’s approach to industry clouds, detailing Infosys’ solutions built on SAP Business Technology Platform across five different industries.
• During a separate panel, leaders from Infosys, SAP and Microsoft detailed how Microsoft’s device and cloud businesses have complex supply chains and have experienced huge disruptions, along with the rest of the market. These supply chains are currently managed with Azure services and SAP ecosystem including ECC, IBP, MDG and other applications. Microsoft has been working with Infosys in pursuing the transformation goals and continues to invest to guard itself from future disruption. Expanding the discussion, an SAP leader shared that SAP has launched a suite of products to help customers achieve sustainability. Specifically, SAP’s Product Footprint Management and Control Tower help measure, control and report the carbon emissions. Infosys collaborated with SAP and developed a solution on SAP IBP and S/4HANA to help customers make real-time decisions around supply planning, procurement and manufacturing considering the actual and projected CO2 emissions from their products.

Staying committed to clients and partnering for strategic transformation initiatives

Throughout the event, TBR repeatedly saw evidence of Infosys’ changed relationships with its clients and technology partners. Clients’ comments — on stage and after the presentations — solidified the impression that Infosys has whole-heartedly embraced a long-term view of its clients’ IT services and technology needs, working with clients on what they can do together, not just plugging in the next technology fix.

 

In TBR’s most recent quarterly report on Infosys (published on Feb, 2, 2023), we noted that:

 

“Infosys Cobalt will remain the backbone of the company’s financial expansion efforts, with new sales opportunities stemming from developing and delivering industry cloud offerings. Additionally, Infosys has rebuilt trust within the stakeholder ecosystem, largely because the company’s executives have stuck to Infosys’ core value proposition, enabling the company to win business at a time when enterprises are evaluating their third-party services providers’ rosters and pursuing vendor consolidation.

 

“Robust performance in the past two years and an even healthier pipeline position Infosys well to meet its revenue guidance, which has once again been revised upward, for FY23. Consistent, quality execution will also help the company maintain momentum moving into FY24 despite facing a volatile macroeconomic environment.”

 

Positive sentiment from Infosys’ clients and that commitment to relationships, not transactions, contributed to TBR’s outlook on Infosys’ expected performance for the next few years.

TBR’s extensive, ongoing coverage of Infosys

TBR will continue covering Infosys within the IT services, cloud and digital transformation spaces, including quarterly reports with assessments of Infosys’ financial model, go-to-market, and alliances and acquisitions strategies. For comparison with Infosys’ peers and other IT services vendors, TBR includes Infosys in our quarterly IT Services Vendor Benchmark, our semiannual Global Delivery Benchmark and Cloud Ecosystem Market Landscape, and our annual Decarbonization Market Landscape and Innovation and Transformation Centers Market Landscape.

 

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The ecosystem CSPs belong to is not waiting to capitalize on these new technologies and market opportunities, nor is it waiting for CSPs

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