It’s a multicloud world: Dell Technologies embraces software innovation

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Dell Technologies (NYSE: DELL) will undoubtedly face stiff competition on its journey to multicloud leadership. Building a simplified and unified multicloud environment remains an elusive concept for customers operating on a diverse set of platforms serving unique stakeholders. While by TBR’s own analysis, building a fully unified cloud experience for customers remains a distant goal for many vendors, Dell Technologies is taking steps in this direction by giving customers the tools to manage workloads running on Dell Technologies platforms more seamlessly and enabling customers to utilize Dell Technologies’ stack in tandem with public cloud. Success will hinge on Dell Technologies’ ability to scale partnerships, the speed at which Project Alpine initiatives ae rolled out to the market, and the company’s ability to win customers’ favor in leveraging Dell Technologies’ SaaS platforms for multicloud management.

Dell Technologies unveiled a series of multicloud initiatives, with software taking center stage

Jeff Clarke, vice chairman and co-chief operating officer for Dell Technologies, opened Tuesday’s keynote by pointing out that software innovation across the industry is consistently outpacing hardware innovation. This theme resonated throughout the event, which focused on Dell Technologies and partner capabilities that can marry on-premises and public cloud data, automate IT management tasks and enhance security. Dell Technologies is building an ecosystem around its ISG portfolio that can increase the value of its own software and tools, particularly in the storage space.

ISG has performed competitively versus market peers over the past year, growing 4% year-to-year in 2021 to $34 billion in annual revenue. Although much of the product emphasis during Dell Technologies World focused on storage innovations, recent ISG growth has predominantly been driven by the server and networking business, which was up 4% in 2021, while storage has remained flat, partially due to marketwide challenges around securing components. Dell Technologies’ leadership position in the storage market is a key advantage for the company and is important to protect, particularly as competitors such as Pure Storage (NYSE: PSTG) and NetApp (Nasdaq: NTAP) have intensified their focus on hybrid cloud storage solutions via partnerships with major hyperscalers.

APEX and Project Alpine announcements focus on data protection and multicloud capabilities

The primary service expansion announced for Dell Technologies APEX, Dell Technologies’ portfolio of cloud and IaaS offerings, was Dell Technologies APEX Cyber Recovery Services. This managed service provides day-to-day management of cyber recovery vault operations and assistance with data recovery should a cyberattack occur — valuable capabilities that help customers not only deal with ever-increasing ransomware threats but also fill in gaps for customers whose IT teams lack the capacity and expertise to address security issues.

Dell Technologies also expanded its partnership with Amazon Web Services (AWS)(Nasdaq: AMZN), announcing CyberSense for Dell Technologies PowerProtect Cyber Recovery for AWS, which adds AI and machine learning-based monitoring of files to determine if a cyberattack has occurred as well as applies post-attack forensics to identify the customer’s last good backup copy.

While Product Group VP Caitlin Gordon noted that Dell Technologies is not new to hyperscale partnerships, with 1,500 companies already using Dell Technologies Data Protection on AWS, expanding the breadth of the company’s partnerships to include more services and a larger number of cloud providers is essential to address a more robust number of customer use cases. Gordon stated that the Dell Technologies PowerProtect Cyber Recovery Service, which was launched with AWS in 4Q21, will be available on Microsoft Azure in the second half of 2022.

Dell Technologies’ Project Alpine, introduced in January, encapsulates the company’s efforts to make more of its software available on public clouds. Project Alpine will make Dell Technologies’ block and file storage software available on public clouds to give customers a unified experience managing and moving workloads between their on-premises Dell Technologies infrastructure and public clouds. Gordon provided an update on the progress of Project Alpine, noting that customers will be able to access the same Dell Technologies management tools they are already familiar with via a SaaS interface to move data between environments. Project Alpine is a key step in not only increasing the appeal of Dell Technologies’ storage portfolio but also remaining competitive against storage peers that are taking a similar approach to cloud alliances, such as Pure Storage Cloud Block Store, Azure NetApp Files and Amazon FSx for NetApp ONTAP.

Dell Technologies lands the first on-premises partnership with Snowflake

Dell Technologies is the first hardware vendor to announce a partnership with Snowflake (NYSE: SNOW), a data warehouse company popular among public cloud users for analyzing and managing their company data. With this new partnership, Dell Technologies customers will be able to bring their on-premises data sets into the Snowflake cloud alongside public cloud data sets, a capability that is currently not available for other vendors’ on-premises systems. This type of partnership is an example of how Dell Technologies is expanding customer choice and the capabilities of its platforms, a trend that is likely to continue as Dell Technologies grows its partner roster and perhaps begins to ramp up acquisitions following the spinoff of VMware (NYSE: VMW) in late 2021.

Storage updates focus on software innovation
Dell Technologies focused on the software innovation theme as it highlighted improvements to its storage portfolio, which includes PowerMax, PowerStore and PowerFlex. For the enterprise PowerMax storage product line, Dell Technologies emphasized the zero-trust architecture and increased intelligence and automation, which reduces NVMe-over-TCP setup time by 44% and guarantees a 4:1 data reduction ratio. Dell Technologies highlighted a more SaaS-based approach for its midrange PowerStore operating system software, rolling out version 3.0 to customers free of charge with 120 new features.

Dell Technologies commits to making its products developer-friendly

Perhaps one of the most critical aspects of gaining share in multicloud environments for Dell Technologies will be winning over developers, an audience that has been more of a tangential focus for Dell Technologies in the past as its historical customer base has been rooted in infrastructure managers. In his keynote address, CEO Michael Dell noted the company is focused on making its solutions API-driven, increasing levels of automation and supporting Kubernetes platforms like VMware’s Tanzu and Red Hat’s OpenShift in addition to AWS EKS, which is available on Dell EMC VxRail and PowerStore.

Dell Technologies CIO and chief digital officer Jen Felch went on to discuss how the company has applied these principles to its own IT department. Dell Technologies focused on its own developer experience by creating self-service infrastructure through automation of virtual machine provisioning, networking and container deployment, in addition to providing developers with increased cost transparency to help them make more informed decisions. This was orchestrated through the Dell Technologies Developer Cloud, a user interface utilized by Dell Technologies’ developer and infrastructure teams. Per Dell Technologies’ own internal audit, enabling a self-service infrastructure helped the company’s developers increase their time spent on software development (versus administrative tasks) from 20% to 75%, a success point that Dell Technologies believes it can help its customer base achieve. Dell and Felch did not comment on what the company is doing to cultivate a Dell developer community, which will be another critical element to driving participation in the Dell ecosystem.

While multicloud took center stage, PC innovations highlighted collaboration and security

Dell Technologies’ PC business has been fueling the company’s revenue growth, with the Client Solutions Group (CSG) growing 27% year-to-year in 2021 to $61 billion in revenue, while also supporting strong margins. Highlighted PC innovations focused on the top end of Dell Technologies’ portfolio, for both business laptops and the Alienware gaming line, with a theme of collaboration, connectivity and security. Dell Technologies showcased a prototype of its Latitude 9330 laptop featuring buttons built into the trackpad to manage virtual conferencing functions such as turning the camera and microphone on and off, chatting, and sharing content. The PC also leverages AI-based features such as fixing videoconferencing performance issues by connecting to multiple networks simultaneously to increase bandwidth. From a privacy and security standpoint, the PC can detect whether onlookers are viewing the user’s screen and obscures the content from view.

Aside from innovations centered on user experience, Dell Technologies showcased the company’s focus on sustainability in PC design via Concept Luna, a three-pronged approach to reducing the carbon footprint of PCs by decreasing the size of components such as motherboards, intentionally choosing eco-friendly materials, and designing PCs to be more serviceable, which facilitates repairs and refurbishment.

Conclusion

Dell Technologies World 2022 illustrated Dell Technologies’ intentions to enable a multicloud ecosystem for its customers. The company is taking a broader approach, rather than relying solely on its APEX “as a Service” portfolio to drive growth, by embracing partnership opportunities with public cloud vendors and turning its attention toward meeting the needs of developers who are consuming vast amounts of infrastructure services. Partnerships are also a focal point for building a broader ecosystem. While Dell Technologies’ relationship with VMware remains close, the company’s first major event since the VMware spinoff gave Dell Technologies greater opportunity to highlight a broader range of partnerships, including its new alliance with Snowflake and in support of customers using OpenShift. The multicloud messaging throughout the event demonstrated that Dell Technologies understands its customers’ most essential market needs, and now the company must focus on executing to meet those demands, particularly through Project Alpine and by expanding its strategies to better cater to developers.

Kyndryl has the freedom to choose its own destiny

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Kyndryl will grow as an independent company using mission-critical expertise, data capabilities, IP and partner ecosystem

Kyndryl (NYSE: KD), a $19 billion spinoff from IBM (NYSE: IBM), operates as an independent company in the managed infrastructure services segment and designs, builds, manages and modernizes mission-critical technology systems. Kyndryl has existing infrastructure services strengths that were built over the years when the company was part of the IBM Global Technology Services (GTS) business unit. Established relationships with 75% of the Fortune 100 companies and more than half of the Fortune 500 companies will enable a smooth start for Kyndryl customers.

 

The company brings with it skilled talent, intellectual property (IP) and a unified services delivery platform that will support business expansion in areas such as cloud, security, cyber resilience, data, AI, automation and network edge technology across industries. Kyndryl has established efficient organizational, go-to-market and operating models that are less complex compared to IBM’s models for the former GTS business unit.

 

Additionally, Kyndryl has the freedom to choose which vendors to work with, so the company is progressively expanding its alliances and partner ecosystem with emerging technology providers, hyperscalers and ISVs to improve its ability to deliver solutions based on customers’ choices and needs and collaboratively deliver business outcomes through holistic solutions.

 

Kyndryl at a glance

  • Kyndryl designs, builds, manages and modernizes complex, mission-critical information systems supporting customers’ digital transformation activities.
  • While Kyndryl is a new brand in the managed infrastructure services segment, the company has an established customer base, skilled talent, IP and expertise around modernizing and managing customers’ mission-critical systems.
  • Kyndryl has the freedom to establish a strategic direction that is aligned to the market in which it operates and has the flexibility to design its operations in ways that enable the company to deliver profitable growth.
  •  Kyndryl is positioning to deliver agnostic and multivendor technology capabilities through an expanded partner ecosystem, including by building strategic relationships with leading hyperscalers such as Amazon Web Services (AWS), Google Cloud and Microsoft (Nasdaq: MSFT).
  • Kyndryl is sixth in total IT services revenue and first in managed infrastructure services revenue among the 31 vendors covered in TBR’s IT Services Vendor Benchmark.
  • Kyndryl is taking actions to transform its business and strengthen its revenue, signings and margin profile through 2025, following a plan focused on three areas: alliances, advanced delivery and accounts. The company’s revenue declined 7.5% year-to-year to $4.6 billion in 4Q21 as reported in U.S. dollars and 3.6% year-to-year to $18.7 billion in calendar 2021. Adjusted EBITDA margin decreased to 14.6% of revenue in 4Q21 on a pro forma basis, down from 18.2% in 4Q20, and to 14.7% of revenue in 2021 on a pro forma basis, down from 15.3% in 2020. Signings declined 22.8% year-to-year to $4.4 billion in 4Q21 and 24.2% year-to-year to $13.5 billion in 2021, negatively affected by uncertainty around the spinoff of Kyndryl from IBM.

 

Freedom and flexibility are the defining principles of Kyndryl’s organizational development

On Nov. 3 IBM completed the separation of its managed infrastructure services business to form Kyndryl, which has operations in 63 countries, approximately 89,000 service professionals with an average field experience of more than 10 years, and more than 4,000 blue-chip customers.

 

Kyndryl has the freedom to establish its own market-specific strategic direction and the flexibility to design its operations to drive profitable growth. The guiding principles for its organization are flatter, faster and focused — flatter in terms of Kyndryl’s new operating model; faster related to speed in delivery through simplification; and focused on providing innovation and value through agility. Kyndryl is also using its existing expertise in infrastructure services, which are supported by a global delivery network and operations in more than 100 countries, and capabilities in designing, building, managing and modernizing mission-critical information systems to bolster its growth. Existing expertise, coupled with global scale; IP, including more than 4,000 patents; methods; models; and breadth and depth of talent enable Kyndryl to advance customers’ digital transformations.

Having an operating model that is organized around customers and their geographic locations improves Kyndryl’s ability to align its expertise with local market trends and deliver business outcomes. Country leaders and managing partners collaborate with customers in their home geographies, and knowing the language and having a cultural affinity enable Kyndryl to establish strong customer relationships.

 

Kyndryl has six global practices — Cloud; Applications, Data & AI; Security & Resiliency; Core Enterprise & zCloud; Network & Edge; and Digital Workplace — and an Advisory and Implementation Services practice that underpins these six businesses to enable adoption and integration of advanced technologies that drive business progress. As Paul Savill, global practice leader, Network & Edge explained during a briefing on the practice, Kyndryl is developing competencies and innovation at the global practice level, and teams in regions look to the six practices to create solutions that customers request.

 

The company delivers integrated solutions across the six global practices and provides customers with holistic solutions and a unified customer experience. Kyndryl enables customers to modernize technology and operations with faster time to value, improving business outcomes and experiences. Kyndryl’s new structure resembles the growth model Accenture launched in March 2020, rolling up the P&L on a geographic basis due to the need for client proximity and culture affinity and also because most technology partners’ sales models are aligned by territory.

 

 

In March Kyndryl’s Third Party Advisor group organized virtual briefings on the six global practices. Key highlights from the briefings include:

  • Cloud: Drawing on its years of experience managing complex infrastructures under the GTS umbrella at IBM, Kyndryl has built a dedicated cloud practice centered on hybrid multicloud. With 3,000 cloud-related patents spanning multicloud management, orchestration and monitoring, among other close-to-the-box software assets, Kyndryl is enhancing its traditional managed services business model with self-service solutions. IP within GTS has translated to what is now the Kyndryl Cloud Management Platform (KCMP), which acts as a landing spot for Day 2 provisioning, monitoring, and managed IaaS and PaaS consumption for the enterprise. While the largest segment for Kyndryl’s Cloud practice, hybrid multicloud is only one piece of the puzzle as the company also offers end-to-end services, including cloud consulting, migration, modernization and optimization. Historically, GTS was solely responsible for IT consulting and infrastructure management, leaving the higher-value services to IBM’s former Global Business Services business unit, so naturally there will be some competitive overlap between Kyndryl and what is now IBM Consulting as Kyndryl expands its cloud consulting capabilities and delivers holistic solutions; this competition will appear in the initial advisory phases of cloud adoption but perhaps more so within modern operations as both companies build out their respective ITAM (IT asset management), enterprise catalog and AIOps tooling to help customers optimize investments in the cloud. To effectively monetize its offerings across the cloud consulting, hybrid multicloud and modern operations pillars, Kyndryl will execute on brand-name business groups with AWS, Microsoft and Google Cloud. While Kyndryl is currently an IBM Cloud customer, we also expect the company to use other platforms as these relationships develop. Kyndryl’s cloud alliances may add another layer of friction in its relationship with IBM, although TBR expects impacts will be minimal as IBM takes an infrastructure-agnostic approach, enabling its software and services on clouds other than its own. Even considering its base of 1,600 cloud customers and streamlined go-to-market model, Kyndryl is playing in a competitive space and will be challenged for deals from brand-name global systems integrators (GSIs) and, to a degree, IBM Consulting. As such, partnerships with the hyperscalers alone may not be enough to give Kyndryl the competitive edge it needs; focusing on tactical services while translating metadata into business value and quick ROI could be Kyndryl Cloud’s top routes to success, yet this suggests IBM, while a strategic partner, could end up evolving into one of Kyndryl’s notable competitors.
  • Core Enterprise & zCloud: Kyndryl positions itself as a leading provider in mainframe solutions and services as it brings years of experience in the segment from its work as part of IBM. While the company delivers a broad range of services, including managed infrastructure and managed cloud, for the IBM Z and IBM i product solutions, it is expanding its services portfolio through internal development, acquisitions and alliance partners to address customers’ specific needs around integration with hyperscale public cloud, application modernization and operation, and migrating and managing mission-critical workloads onto the most suitable platform. Scaling IT consulting and implementation services improves Kyndryl’s ability to capture infrastructure transformation opportunities and support customers’ adoption of hybrid cloud. As Jamie Rutledge, global practice leader, Core Enterprise & zCloud, explained, Kyndryl’s goal is to be a partner to customers by working with them and taking into account their viewpoints to develop the right solutions, recommend the best practices, deliver advisory and implementation services to design the right customer strategy, and push IBM technology to perform at its best and with a high ROI. In a shift from IBM’s strategy, Kyndryl will broaden relationships with and build the ecosystem of technology and service providers. The company will integrate platforms, assets, IP-based solutions and automation to facilitate activities and increase value for customers. Drawing on its history of operating in the segment, bringing skilled talent and investing in developing personal learning journeys for its approximately 8,000 mainframe experts will improve Kyndryl’s ability to address dynamic market shifts.
  • Digital Workplace: Digital Workplace positions employees at the center of the hybrid workplace and emphasizes delivery of consumer-like experiences in a corporate world. Kyndryl bundles service-level agreements (SLAs) and experience-level agreements (XLAs) and cocreates with customers tailored XLAs around measurements that are important and tie with customers’ targeted business outcomes. The company supports digital workplace customers on a global scale and has the freedom to act and partner with whichever vendors it wants. The Digital Workplace organization already existed in the former GTS, so the move to Kyndryl was quick and easy and enables continuity of customer relationships. As Mark Slaga, global practice leader, Digital Workplace explained, Kyndryl is making a big investment in customer satisfaction and ensuring it turns customers into references that can fuel sales growth. For example, Kyndryl increased its number of new customer references fivefold in 2021 compared to 2020. Advisory, implementation and workflow orchestration, and experience management services cut across all pillars of the Digital Workplace portfolio, and Kyndryl is expanding its advisory and implementation capabilities in the Digital Workplace practice to improve its ability to enhance customer experience, drive organization and change management, and ensure technology is used as a tool to achieve core business outcomes.
  • Applications, Data & AI: Kyndryl’s Applications, Data & AI practice helps customers solve complex applications, data management and AI problems through comprehensive SAP and Oracle applications and data management services such as data modernization, data platform management and enterprise AI services. Utilizing a unified console, customers can also leverage open and secure design and methodologies to build augmented workflows and processes. Kyndryl utilizes its advisory and implementation services to accelerate customers’ digital transformations and to benefit from cloud, security and data solutions. Integrating consulting with global processes, architectures and methods, and accelerators increases Kyndryl’s value proposition.
  • Security & Resiliency: Kyndryl enables customers to integrate cyber resilience into their IT and operational strategy and to anticipate, protect against, withstand and recover from adverse conditions such as cyberattacks. While after the spinoff IBM maintained parts of the IBM Security portfolio, such as the IBM Security QRadar solution portfolio, from a customer perspective Kyndryl is the primary integrator and manager of security content. Kyndryl delivers cyber resilience services that encompass security assurance services, zero-trust services, security operations and response services and incident recovery services. Each offering has a set of consulting and managed services to address specific problems. As Kris Lovejoy, global practice leader, Security and Resilience, explained, Kyndryl differentiates based on its history in the segment and experience across a range of products, technologies and platforms. As Kyndryl modernizes IT environments, the company is utilizing a vendor-agnostic approach to technologies and focusing on the people and customer needs, solving problems through advanced technology skills and security expertise. Kyndryl has a well-developed portfolio of IP in security and resiliency, including approximately 480 patents and methodologies established throughout the years. The company utilizes its 7,500 skilled practitioners across the globe to support customers’ distributed environments and address local regulatory requirements. Kyndryl implements and orchestrates recovery for customers, tapping into a library of more than 800 predefined automation patterns that enable recovery across levels such as data, applications and business processes. Kyndryl’s automated and orchestrated recovery capabilities, such as the Cyber Incident Recovery offering, are based on a Kyndryl-owned IP asset that the company continues to develop and enhance and are an example of Kyndryl’s differentiation in market.
  • Network & Edge: Kyndryl utilizes network and edge technologies to help customers transform their businesses and create new business models, generate cost savings, and improve agility. As Savill elaborated on during the briefing, Kyndryl’s promise is to help customers in an unbiased way to evaluate the technology and build best-in-class network and digital distribution platforms leveraging network and edge compute technology. Expanding the partner ecosystem by teaming with vendors such as Microsoft, AWS, Google, Nokia (NYSE: NOK) and VMware (NYSE: VMW) around managing edge compute and private 5G solutions increases Kyndryl’s value proposition and expands its customer reach. Delivering integrated solutions by working closely with the rest of Kyndryl’s global practices improves the company’s ability to deliver holistic transformations and expand wallet share with existing customers. What sets the company apart from its competitors in the network and edge segment are Kyndryl’s global scale, vendor neutrality, certified resources and customer trust with critical network infrastructure and management. While Kyndryl brings its own opinion to customers’ transformations, the company is committed to scanning the technology landscape to get to the best advice and fit for customers.

 

Developing its alliance partner ecosystem enables Kyndryl to diversify its portfolio and support its revenue growth and profitability expansion

Prior to the spinoff, the GTS business unit revolved around traditional IBM infrastructure services; however, Kyndryl has an opportunity to expand in areas related to digital transformation, data, applications and security services. IBM is Kyndryl’s largest technology partner, given the historical relationship between the two companies. Kyndryl is also broadening its partner ecosystem by building relationships with hyperscalers, systems integrators, hardware and software providers, and next-generation technology providers as well as investing in broader service capabilities to diversify its portfolio, support growth and remain focused on solving customer challenges.

 

While Kyndryl has IT consulting and implementation experts who were brought over from GTS and are responsible for architectures and the technology side of transformations, the company is investing in expanding its advisory and implementation services to support its goal to increase revenue share in the service area from approximately 10% of revenue before the spinoff to 15% of revenue in the midterm. While Kyndryl has strong IT consulting expertise, areas such as business consulting and application modernization and transformation are less developed because such capabilities remained within IBM after the spinoff and are now part of the new IBM Consulting. Developing new joint solutions with partners is one lever for evolving the business mix and expanding advisory and implementation services.

 

TBR expects Kyndryl to increase interactions with strategy firms, such as McKinsey & Co. and Boston Consulting Group and Big Four firms, such as EY and PwC, to address the business side of transformations and be able to characterize what technology-enabled solutions Kyndryl needs to increase value for customers. TBR also expects Kyndryl to increase interactions with the new IBM Consulting to address business, applications and the process side of transformations.

 

Kyndryl’s hyperscaler alliances include:

  • Microsoft: In November 2021 Kyndryl and Microsoft entered into a global strategic partnership to deliver solutions built on the Microsoft Cloud to enable hybrid cloud adoption, applications modernization and process improvement; support mission-critical workloads; and improve customers’ work experience. The partnership will expand Kyndryl’s reach to enterprises across industries through solutions such as data modernization and governance, AI-driven innovation, cybersecurity and resiliency, and transformation of mission-critical workloads on the cloud. The partners have established a coinnovation lab to develop service solutions built on Microsoft Cloud and show the value of transformations through investments and expertise from all parties involved in the process. Kyndryl will enable hybrid IT models through advisory, implementations and managed services utilizing more than 15,000 Microsoft certifications at the end of 2022, up from 1,000 at the end of 2020.
  • Amazon Web Services (a new relationship for Kyndryl): In February Kyndryl and AWS established a partnership to work with enterprises to build infrastructures in the cloud. The partners are establishing a global AWS practice with skills, offerings and expertise and are establishing an AWS Cloud Center of Excellence to support mission-critical infrastructure, innovation through next-generation technologies, and modernization of applications and workflows. The partners are also developing an accelerator for VMware Cloud on AWS and will provide expertise and custom solutions to combine customers’ existing VMware investments with AWS solutions. Kyndryl has approximately 4,100 AWS certifications to design, build and manage mission-critical systems on AWS, a more than fourfold increase compared to the end of 2020, and plans to invest in educating more than 10,000 Kyndryl professionals on AWS by the end of 2022.
  • Google Cloud (a new relationship for Kyndryl): In December 2021 Kyndryl partnered with Google Cloud to enable digital business transformations for enterprise customers through infrastructure modernization and Google Cloud’s data, analytics and AI solutions. Kyndryl will deliver managed services for Google Cloud to enable customers to run critical business systems on Google Cloud’s infrastructure. Kyndryl, which has more than 2,300 Google Cloud certifications, up from zero certifications at the end of 2020, will scale skilled resources by establishing a Google Cloud Academy for Kyndryl that will support Google’s goal of training 40 million new people on Google Cloud skills in the coming years.

 

Examples of Kyndryl’s partnerships with other vendors:

  • IBM: IBM and Kyndryl will continue their long-term relationship across technology and consulting to create platforms that drive business outcomes for customers. Kyndryl has access to IBM’s expertise and resources to jointly develop innovative solutions across Kyndryl’s portfolio of services capabilities. Kyndryl’s consultants are certified on IBM offerings and have access to IBM resources such as the IBM Lab Services support and expertise around IBM technology such as hybrid cloud, AI and security.
  • VMware: In November 2021 Kyndryl and VMware expanded their strategic partnership, which is based on a 20-year collaboration between VMware and IBM to support customers’ application modernization and multicloud initiatives through solutions around multicloud infrastructure and management, digital workspace services, managed applications, resiliency and security, and network and edge computing. VMware will help Kyndryl expand its existing multicloud advisory, implementation and managed services around the VMware Tanzu platform and build capabilities around deploying vSphere workloads to VMware multicloud infrastructure on public clouds. In addition to being VMware’s largest MSP, responsible for over 67,000 virtual systems, Kyndryl has more than 3,500 certifications in VMware technology. Kyndryl and VMware are developing and delivering solutions in a joint innovation lab.
  • Nokia (a new relationship for Kyndryl): In February Kyndryl and Nokia announced a global network and edge computing alliance to enable enterprise customers to benefit from industrial-grade LTE and 5G private wireless networking solutions. Joint solutions combine Nokia’s Digital Automation Cloud application platform with Kyndryl’s consulting, design, implementation and managed services capabilities and support customers’ move to Industry 4.0. The partners plan to develop integrated solutions for edge cloud, IP networking, optics, fixed access, 4G and 5G core, and network operations software technologies that address demand for mission-critical, industrial-grade wireless networking.
  • Pure Storage (a new relationship for Kyndryl): In February Kyndryl partnered with multicloud Storage as a Service provider Pure Storage to offer cyber resiliency solutions at the storage layer to address customers’ challenges around application and infrastructure modernization, automation, multicloud management and containerization, and enable cloud-based applications and data portability on premises and in the cloud.
  • Cloudera (a new relationship for Kyndryl): In March Kyndryl and Cloudera announced a global partnership to enable customers to support hybrid cloud, multicloud and edge computing data activities. The partners are establishing an innovation center to develop solutions and capabilities that support migration to the cloud platforms that they choose, such as AWS, Google Cloud and Microsoft Azure.
  • Lenovo: In March Kyndryl and Lenovo expanded their existing global partnership to develop hybrid cloud solutions and edge computing implementations. Joint offerings will emphasize automation, optimization and IT infrastructure services to address customers’ needs around managing distributed applications on premises and in the cloud. Lenovo and Kyndryl will jointly work in IT server projects for PCs, servers, storage and edge compute, and Kyndryl will provide managed services skills. The joint initiative will provide solutions around hybrid cloud, hyperconverged infrastructure and edge computing applications.

 

Kyndryl ended 2021 with declining revenue and deteriorated profitability

On March 1 Kyndryl reported financials for the first time since its inception. During 4Q21 Kyndryl’s revenue declined 7.5% year-to-year as reported in U.S. dollars and 4% year-to-year in constant currency to $4.6 billion. For 2021, revenue on a pro forma basis declined 3.6% year-to-year in U.S. dollars and 5% year-to-year in constant currency to $18.7 billion. Adjusted EBITDA margin decreased to 14.6% of revenue in 4Q21 on a pro forma basis, down from 18.2% in 4Q20, and to 14.7% of revenue in 2021 on a pro forma basis, down from 15.3% in 2020. Operating margin declined to -15.3% in 4Q21, down from -14.1% in 4Q20, and to -9.8% in 2021, down from -8.7% in 2020. Signings declined 22.8% year-to-year to $4.4 billion in 4Q21 and 24.2% year-to-year to $13.5 billion in 2021, negatively affected by uncertainty around the spinoff of Kyndryl from IBM.

 

 

The revenue growth pressures reflect the negative effects from Kyndryl’s operation as a captive business to IBM prior to the spinoff, including its inability to adjust its portfolio to dynamic market trends and its limited opportunities within the partner ecosystem. Prior to the spinoff, revenue in GTS’ Infrastructure & Cloud Services segment, which moved to Kyndryl, declined for 11 consecutive quarters beginning in 3Q18 before returning to revenue growth of 0.5% year-to-year in 2Q21. While IBM was ramping up activities around modernizing infrastructures through hybrid cloud and managing mission-critical workloads, lower business volumes and commoditization were driving growth pressures in classic infrastructure services areas, a trend that continued somewhat for Kyndryl in 4Q21.

 

Kyndryl’s adjusted EBITDA margin and operating margin were negatively affected by transaction costs of $129 million in 4Q21 related to the spinoff, such as advisory banking and legal fees and employee retention expenses. The company also took a goodwill impairment charge of $469 million in 4Q21, associated with its business in EMEA and the U.S., which negatively affected operating margin in 4Q21 and for the full year. Kyndryl expects to have a considerable amount of separation work, which will lead to higher expenditures during 2022, such as costs related to migration of systems, rebranding and execution on an employee retention plan that IBM initiated prior to the spinoff.

 

TBR expects it will take approximately two years for Kyndryl to return to revenue growth and improve profitability, exposing the company to competitive pressures

Kyndryl is taking actions to transform its business and strengthen its revenue and margin profile in the next three years. Augmenting advisory and implementation services capabilities will positively affect revenue growth as such projects have a shorter duration, convert faster to revenue compared to long-term and large-scale outsourcing engagements, and are also margin accretive. On the profitability side, the company will be lowering its asset intensity ratio and following an expense management initiative. However, Kyndryl expects financial results for fiscal year 2023 (ending in March 2024) to resemble results for the full-year pro forma 2021, with declining revenues year-to-year in constant currency, adjusted EBITDA margins in the midteens and breakeven-adjusted pretax income.

 

Kyndryl has the opportunity to improve signings performance as a result of its expanding partner ecosystem and expects to generate double-digit signings growth during fiscal year 2023. While such activities will enable Kyndryl to return to revenue growth in 2025, during the next two years the company will be exposed to competitive pressures and dynamic market trends. Generally, companies that provide infrastructure services, including Kyndryl, are not able to shift direction quickly. Kyndryl usually starts its year with approximately 85% of projected revenue already under contract due to its multiyear engagements. Long sales cycles and long ramp-up times in managed services elongate signings conversion into revenue and profitability, most likely leaving Kyndryl with financial performance below peer averages in the next two years.

 

Kyndryl’s three initiatives in the areas of alliances, advanced delivery and accounts will enable the company to drive revenue and signings growth and improve profitability in the near term. Increased activities with new alliance partners enable the company to operate across a wide range of technologies, increase wallet share with customers, attract new customers and drive revenue growth. Kyndryl is targeting approximately $1 billion in signings by fiscal 2023 from partnerships with hyperscalers such as AWS, Google Cloud and Microsoft, which will lead to incremental revenue streams, a new profit source for the company.

 

Kyndryl expects to generate approximately $200 million in annualized margin-accretive revenue by fiscal year 2023 from engagements with hyperscalers and continue to increase hyperscaler certifications, which collectively stood at 16,000 at the end of 2021. Advanced delivery is tied to establishing skills to address demand, such as upskilling people, developing certifications and positioning close to customers. Expanding automation in service delivery will enable the company to redeploy people to work on higher-value and higher-margin activities, such as freeing up experienced technologists and delivery experts to work on new opportunities with hyperscalers; enhance the quality of its service delivery; and reduce costs, such as eliminating approximately $200 million in annualized costs by fiscal year 2023.

 

On the accounts side, Kyndryl aims to address challenges in low-margin business areas, which will drive approximately $800 million in pretax income opportunity. The company will emphasize turning around margin-dilutive engagements, such as by expanding relationships around new revenue streams with new alliances and increasing activities around the six global practice offerings and the advisory and implementation services business. Kyndryl plans to deliver a $75 million benefit through March 2023 and begin fiscal 2024 with $200 million in annualized run-rate benefits. Strictly executing on strategic priorities will be key to the company’s success in the next two years.

 

Kyndryl is sixth in total IT services revenue and first in managed infrastructure services revenue

Compared to IT services peers, Kyndryl, which reported $18.7 billion in revenue in 2021, ranked No. 6 in revenue size among the 31 vendors covered in TBR’s 4Q21 IT Services Vendor Benchmark report. Kyndryl is slightly larger in revenue size than Cognizant, which generated $18.5 billion in revenue in 2021, but is smaller than Fujitsu, which garnered $21.3 billion in revenue, and Capgemini, which reported $21.5 billion in revenue. With a TBR-estimated $15.1 billion in revenue in managed infrastructure services in 2021, which includes IT outsourcing and managed cloud services, Kyndryl is the revenue leader in the segment among the 31 vendors in TBR’s IT Services Vendor Benchmark. The closest competitors in the segment are DXC Technology with $8.2 billion in revenue in 2021, NTT DATA with $6.4 billion and Atos with $6.1 billion.

 

Note: The above graph is from TBR’s 4Q21 IT Services Vendor Benchmark, which will publish on April 18. TBR’s IT Services Vendor Benchmark is a quarterly research program that covers 31 leading vendors in the IT services segment and analyzes their go-to-market strategies and investments, alliances and acquisitions, resource management and financial performance.

 

TBR’s coverage of Kyndryl will evolve into a more comprehensive analysis

Kyndryl will be part of TBR’s Professional Services and Cloud Services research areas and will be included in TBR’s IT Services Vendor Benchmark and Cloud Professional Services Benchmark. TBR will include Kyndryl data and analysis in TBR Insight Center™, an interactive platform that provides robust and dynamic visualizations of TBR’s benchmark and customer study data, saving customers time and speeding business decision making. After two quarters of earnings, TBR will evolve the Kyndryl profile into a more comprehensive report, with details to be determined based on our analysis of the vendor.

Playing to its strengths, Infosys has a clear path forward to deliver business outcomes through Infosys Cobalt

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In the company’s first event since the Infosys Leadership Forum in Americas in 2021, Infosys once again hosted clients, analysts and partners for in-person and virtual sessions during its one-day Infosys Cobalt World Tour, which was held at Madison Square Garden. With Infosys Cobalt increasingly becoming the backbone of the company’s performance and go-to-market efforts, the themes of the event were well aligned with Infosys’ goal of becoming a digital transformation partner known for its strong execution capabilities.

 

TBR left the Infosys Cobalt World Tour event with three takeaways that will guide our continuing analysis of Infosys’ cloud capabilities and performance:

  • Infosys embraces a business-outcomes mindset, and Infosys Cobalt will enable the transformation.
  • Infosys is obsessed with customer centricity, which we believe will be critical as the company scales “as a Service” sales and as renewal cycles shrink.
  • Partners, talent and leadership culture strategies are mixing well at the moment, enabling Infosys to enhance results.

Infosys Cobalt becomes the de facto framework for accelerating performance in both legacy and new technology areas

With revenues from Digital reaching 59.2% of Infosys’ (Nasdaq: INFY) total sales in 1Q22, up from 51.5% a year ago, the company is demonstrating its ability to capitalize on its investments in portfolio, talent and alliance partners, all necessary ingredients for expanding client wallet share. Infosys defines its Digital services as being “comprised of service and solution offerings of the company that enable our clients to transform their businesses. These include offerings that enhance customer experience, leverage AI-based analytics and big data, engineer digital products and IoT, modernize legacy technology systems, migrate to cloud applications and implement advanced cyber security systems.”

 

Infosys wrapped up FY22 on a high note as the company registered its largest growth in over a decade, increasing revenues 20.3% on an annual basis to $16.3 billion. Infosys added $2.75 billion in net-new revenue in FY22, which was higher than the combined $2.62 billion in revenue from the three previous years. Infosys’ success was largely enabled by Infosys Cobalt as the company has been able to up- and cross-sell Cobalt to clients seeking to modernize and optimize IT architectures and business processes through adoption of cloud-ready services and solutions while lowering total cost of ownership. Infosys launched Infosys Cobalt, a suite of platforms, solutions and services, in August 2020.

 

Today Infosys Cobalt taps into the company’s catalog of over 35,000 assets, 300 cloud solutions blueprints, and a developer community of startups as well as public and private providers. While Infosys Cobalt has its own global leadership structure and P&L, Infosys’ decision to not set it up as a stand-alone unit but rather as a go-to-market framework that pulls assets from within Infosys and its broader ecosystem enables Infosys Cobalt to better support the company’s cloud performance. (TBR’s estimates of Infosys’ cloud revenue and growth can be found in TBR’s Cloud Professional Services Market Forecast).

Zooming in on client-centric support throughout the customer life cycle paves the way for ‘as a Service’ sales at scale

During the event, Infosys let clients tell the company’s story rather than having leadership lead the presentations, an approach that in TBR’s view was different than how peers usually run similar forums. The experiences and use cases they all shared further solidified Infosys’ cloud expertise including not only traditional lift-and-shift migration support but also its ability to engage in security-wrapped outcome-based business discussions rooted in Infosys’ technology execution prowess. Infosys’ clear vision around its cloud value proposition takes into account important aspects of enterprises’ business and digital transformation programs, including culture, talent and deepening clients’ trust.

 

In addition to facing challenges around culture and talent — issues that all vendors are grappling with industrywide — Infosys must also focus on deepening clients’ trust, particularly as it seeks to adopt “as a Service” pricing models at scale. Managing client relationships beyond the initial point of sale is key, and we believe Infosys will accelerate its efforts to adopt a beyond-the-contract type of mentality to ensure renewal rate goals are met, especially as cloud contracts pivot from traditional large, five-plus-year outsourcing setups to shorter-term subscription-based contracts where clients have an opportunity to switch between providers, further compelling Infosys to stay on top of relationships.

 

Though Infosys continues to hire in bulk, sales and support staff declined 50 basis points as a percentage of the total workforce to 5.1% to 16,156 in FY22, up from 14,582 in FY21, reflecting the company’s focus on its delivery staff as Infosys’ sales strategy succeeds in the market. Additionally, automation enables Infosys to standardize processes in service delivery, which we believe will be critical as Infosys scales “as a Service” sales. “Operation remains very core to us, [helping with] cost optimization every year. We’ve taken out between 3,000 to 4,000 people, automating and putting in bots, and this is fourth quarter.” — Nilanjan Roy, CFO, Infosys, 1Q22 earnings call

 

With business services pivoting from noncore to core, Infosys must also account for the twofold implication of scaling “as a Service” sales at scale. Monetizing both the development and management of cloud applications through a consumption-based commercial model carries risks and rewards for Infosys, a paradigm many systems integrators face. For example, Infosys needs to bear the cost of staffing its bench with engineers to develop the applications far in advance, often without knowing how long it will take to monetize the SaaS offering. Infosys has tried to pursue SaaS sales at scale in the past, but we believe the company now has a clearer vision, expectation and path forward on how to approach the opportunity. The incremental approach Infosys takes to scale its cloud-related sales is centered around Infosys Cobalt’s ability to deliver value-wrapped proprietary and partner assets in a services-oriented architecture, which solidifies Infosys’ value proposition within the ecosystem. Such a strategy allows Infosys to stay within its swim lane while also helping it demonstrate the company is willing to share risk without jeopardizing performance by attempting to sell stand-alone software solutions.

 

While Infosys’ Products and Platform offerings are available on both a license and subscription basis, the company still largely uses many of these assets to drive services engagements. As it relates to Infosys cloud sales, the Infosys Cobalt store provides an access point for clients to explore catalog offerings, with the underlying goal of driving services engagements for Infosys. The additional value of Infosys Cobalt offerings also comes from the company’s ability to wrap an industry layer on top of the technical functionality of these assets, such as the launch of the Infosys Cobalt Financial Services Cloud offering. The solution will support Infosys’ efforts to accelerate performance within its largest industry vertical and address client pain points around areas such as anti-money laundering, transaction reconciliation, open banking, consumer lending and mortgages. Such an offering enables Infosys to build trust with business unit leaders and expand the company’s addressable market especially as clients seek to monetize their user data generated through B2B and B2C interactions with cloud enabling the speed of access.

Balancing relationships within the stakeholder ecosystem without losing focus on talent and partners is key to strengthening trust with clients

As much as Infosys values the role of partners, the company recognizes the importance of its greatest assets — its people. However, Infosys has not been spared in the war for talent. The company continues to evolve its resource management value proposition from hiring for skills to hiring for potential, investing in talent development programs that target nontraditional recruits with the goal of establishing emotional connections with the brand, which could help strengthen loyalty and improve retention. For example, a collaboration between the Infosys Foundation USA and the CBS television series “Mission Unstoppable” will highlight three teachers from the foundation’s Pathfinders Institute program — Infosys’ professional development program for K-12 teachers in computer science. The company also expanded the Infosys Springboard learning program to the U.S., which currently has 1.2 million users largely in India, to support early learning as well as career reskilling programs in the U.S. as the region remains a priority for Infosys.

 

Further, the first group of apprentices graduated from Infosys’ New Apprenticeship (NEW) program, having undergone 12 months of structured and on-the-job training in IT services and incident management. NEW cohorts also earn certifications, such as ServiceNow Certified Systems Administrator, and can earn college credits at Southern New Hampshire University. While much of the cloud-related work today is largely geared toward cloud application development, migration and managed services, Infosys’ leadership sees a bigger gap in the support domain moving forward due to increasing use of low-code development tools, especially as the company seeks to scale deployment of Infosys Cobalt’s 35,000 assets including 300 industry solutions. Training staff on low-code/no-code solutions will help it build trust with business buyers while supporting Infosys Cobalt’s goal to evolve its value proposition toward delivering business outcomes.

 

As Infosys’ portfolio and go-to-market efforts enable the company to climb up the value chain within enterprises, the company remains realistic about its core strengths. The role of alliance partners is key across both technology and advisory services. Just as Infosys seeks to capitalize on partners’ capital expenditures outlays — particularly hyperscalers — and position itself as an ecosystem orchestrator, the company also appreciates the value consulting partners bring to the table. The recent formalization of the global partnership with EY, which is focused on deployment and management of industry-aligned digital assets, further solidifies Infosys’ ability to recognize its strengths rather than pursue risky bets and try to branch out into uncharted territories.

Infosys proves its value as an ecosystem orchestrator by applying the right technologies and partner-backed innovation to clients’ sustainability initiatives

The event showed across multiple levels that Infosys sticking to what it does best is highly advantageous when applied in a partner innovation setting, including around sustainability. Recognizing that no one vendor can do it all, Infosys’ EVP and head of manufacturing spoke at length during one session with a client executive from a global HVAC company about the two companies’ relationship around HVAC and building system sustainability, including how Infosys is leveraging the HVAC company’s capabilities as both a client and an innovation partner. With nearly 40% of the world’s carbon emissions coming from buildings, decarbonizing physical estates will be one of the most challenging tasks for enterprises, particularly as the majority of existing HVAC systems are not intelligent or connected in any way. The two companies are trying to tackle this issue and make the well-known phrase “what gets measured gets managed” a reality for the HVAC industry.

 

Through the conversation TBR came to understand that Infosys Cobalt provides the bridge for its partner’s HVAC expertise with the possibilities of IoT and big data. Work between the two companies has helped Infosys reduce its emissions (Infosys became carbon neutral as of 2020) and enabled the global HVAC company to track building efficiency and troubleshoot issues before even arriving on customers’ sites by leveraging the cloud and IoT-powered HVAC systems. While Infosys’ services line of business does not create emissions from manufacturing, its manufacturing clients can be confident that Infosys is bringing the right partners to the table, is a carbon-neutral supplier (therefore supporting its clients’ scope 3 downstream emissions targets), and can apply its technical prowess to help measure where clients are starting out, enabled by cloud.

Conclusion

From cyber to AI to industry specialization, Infosys Cobalt will continue to provide the bridge between Infosys’ core and new portfolio offerings while supporting the company’s efforts to extract additional wallet share from its client roster and pursue new logo opportunities. Just as Infosys’ leadership, clients and partners throughout the event recognized that scaling adoption of new ideas and solutions is less about technology and more about the culture of an organization, the same sentiment applies to Infosys’ internal transformation. Infosys’ organizational culture has gone through growing pains associated with its portfolio as well as client demands over the past four decades. It has not always been easy or straightforward and has sometimes resulted in shaky performance.

 

Today, Infosys’ culture is strong largely due to leadership’s ability to recognize the company’s place within the ecosystem. Despite rising attrition levels, which is an industrywide trend, Infosys’ approach to talent training and inclusion provides the strong foundation necessary to pursue organizational goals. Infosys Cobalt is no exception. Instead of setting it up as a stand-alone unit, an approach many of Infosys’ peers have taken with similar offerings, Infosys Cobalt spreads across the entire organization, leveraging the skills, expertise and industry knowledge of the company’s sales and delivery personnel. Ensuring Infosys Cobalt provides consistent and standardized client support is key, but could create internal competition when trying to pull the most skilled resources in multiple client engagements at the same time. However, this also presents an opportunity for Infosys to test its ability to become an ecosystem orchestrator. Adopting a customer zero mindset often provides the most valuable use case before deploying at scale to market.

 

TBR will continue to track and analyze Infosys’ performance and investments as part of its quarterly Infosys report, IT Services Vendor Benchmark, Global Delivery Benchmark and Digital Transformation research. Contact us today to gain full access to these upcoming publications.

EY on sustainability reporting: Data, credibility and transformation  

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Lessons learned from the EY-hosted webcast “How the Corporate Sustainability Reporting Directive will transform your organization”

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KPMG Decarbonization: The change agent helping the firm pivot toward its next chapter

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The KPMG Global Decarbonization Hub supports the organization’s ESG agenda by bringing skills, partnerships, tools, and data and analytics solutions that further enhance KPMG’s advisory-led value proposition.

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Taking innovation to 4 dimensions: EY, Nottingham Spirk and the metaverse

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In mid-February, TBR met with EY-Nottingham Spirk Innovation Hub leaders and learned further details about the goals and operations of the relatively new center. The EY team included Greg Sarafin, EY’s Global Alliance and Ecosystem leader; Jerry Gootee, EY’s Global Advanced Manufacturing Sector leader; and John Nottingham, cofounder and copresident of Nottingham Spirk. Three weeks later, Gil Forer, EY’s Digital and Business Disruption leader; Woody Driggs, EY’s Americas Consulting Digital Transformation wavespace leader; and Shubhra Kathuria, Metaverse, NFT and Foundry Leader at EY wavespace, walked TBR through how EY has been delivering wavespace sessions in the metaverse. On the surface, EY presented approaches with stark contrasts between “not much that can’t be made here” and “mapping a client’s journey to the metaverse.”

EY-Nottingham Spirk: Commercialization at speed and innovation with partners

Since TBR’s visit to the grand opening of the EY-Nottingham Spirk Innovation Hub in October 2021, the pace of engagements has stayed consistent with EY’s expectations, steadily increasing as the firm’s leadership, technology partners and clients appreciate the potential for taking innovation straight through to commercialization at scale. According to Gootee and Nottingham, many industrial clients have come to the Innovation Hub looking for both a strategy reset and guidance on how to innovate differently. Nottingham said manufacturing clients, in particular, have been “firefighting” through the current market due to supply and demand imbalances and a generally turbulent environment. Even while focused on operational challenges, these clients continue to be interested in looking to the future and understanding emerging opportunities. Gootee reinforced that EY’s role remains convening a value chain that can drive innovation for clients.

Both the EY and Nottingham Spirk professionals remain committed to commercialization at speed and scale, as well as strategies and business model transformations, product innovation and immersion, and the future of technologies and markets. Gootee, in particular, re-emphasized many of the priorities and characteristics described in detail in October. TBR asked specifically about the role of EY-Nottingham Spirk’s technology partners, such as Microsoft (Nasdaq: MSFT) and SAP (NYSE: SAP), which led Gootee to note that ideally three-quarters of the clients coming to the Innovation Hub will be led through by EY, while the remaining quarter will be shepherded by technology partners. In TBR’s analysis, no other IT services vendor or consultancy has a similarly tightly intertwined engagement structure, which allows and even encourages technology vendors to lead clients through this kind of digital transformation and innovation space.

Wavespace metaverse: Building trust through familiarity and faces

Over the last seven or eight years, TBR has visited more than 30 innovation and transformation centers, soaking in the immersive experiences and trying out the funky chairs. The COVID-19 pandemic forced IT services vendors and consultancies to shift to entirely virtual engagements, and TBR has been predicting an evolution toward hybrid sessions since the start of 2021. Over the last year, TBR has attended some virtual analyst sessions, which included avatars and kind-of-still-beta versions of the metaverse. Just as the EY-Nottingham Spirk Innovation Hub broke new ground in innovation and transformation centers, EY’s wavespace metaverse is breaking new ground in an entirely new space.

Evolving at a perfect pace: PwC EMEA Products

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In mid-February, TBR met with leaders from PwC’s core Products team for EMEA, including David Padwick, PwC EMEA Consulting chief operating officer; Ralf Jaspert, PwC Germany, Advisory Digital Products leader; and Nele Van Buggenhout, PwC UK Perform Plus Leader, to discuss TBR’s observations, based on multiple interviews with current and former PwC professionals as well as with PwC clients, that PwC Products has not been adopted as enthusiastically across Europe as it has been in the U.S. Not surprisingly, the PwC leaders told a more complete and nuanced story about Products in EMEA, the emerging role of software and managed services sales, and expectations for near-term growth, describing in detail to TBR how the firm expects the next few waves of PwC Products to play out.

Creativity, if not scale, and client-driven technology in EMEA

Drawing contrasts between PwC US and PwC EMEA, Padwick noted that while PwC EMEA adheres to the firm’s global advisory strategy, at least two differences stand out. First, the PwC brand in the U.S., according to Padwick, is more technology-centric than the PwC brand in Europe, which influences how PwC EMEA consultants tailor their go-to-market messages in the region. Given the technology-centric nature of engagements in the region, combined with a higher volume of services, PwC EMEA’s sales structure has not been able to pivot to support business development through products and solutions. Second, PwC EMEA has focused on developing software assets to expedite the delivery of consulting solutions to clients and has not been designing them specifically to be sold, independent of traditional consulting engagements.

Padwick stressed that PwC EMEA contains “plenty of creativity, even without the scale” of the U.S. and that the various EMEA member firms and professionals have developed a “long list of [software assets] with applicability … and [PwC EMEA is] getting better at prioritizing.” While this initial characterization painted a picture of PwC EMEA trailing the U.S. to a significant degree, Padwick and his colleagues explained that the longer incubation periods and slower sales cycles do not preclude PwC EMEA from having a strong position with Products.

Perform Plus platform evolves to meet client needs

The PwC EMEA team walked TBR through a couple of specific offerings developed organically within the firm’s Europe practices. As far back as 2016, PwC had been working with financial institutions on stress-testing their risk and asset management systems, an effort Jaspert said had been codeveloped with clients, lending the resultant solution greater applicability and credibility in the market. This stress-testing solution as a product was a start and  is now one of 47 consulting-centric products that PwC EMEA clients license directly from the firm.

Another solution, as described by Van Buggenhout, started with a 12-week coaching program encompassing a wide array of enterprise activities, such as sales and product development. Urged on by clients, PwC EMEA built a digital solution, Perform Plus, to capture daily performance information and ideas and employee well-being, enhancing clients’ internal teamwork. The COVID-19 pandemic accelerated PwC’s efforts behind the Perform Plus platform, which the firm has now deployed with 25 clients across EMEA, as well as the U.S. and Canada. Perform Plus is built on Google Cloud with a standard API that allows integration with other technology enabling it to handle a variety of platforms, including a recent large-scale deployment integrating a client’s daily Salesforce (NYSE: CRM) data.

For TBR, PwC EMEA’s decision to codevelop solutions with clients and let the consulting engagements drive the technology solutions (not the other way around) reflects the global firm’s lessons learned from the last 10 years as emerging technologies have permeated nearly every consulting engagement and clients have come to expect a technology-enabled solution to their business problems. In previous discussions with PwC professionals in Europe, TBR repeatedly heard comments indicating that clients do not perceive PwC to be a software company, but the European clients that have recently purchased PwC Products have become excellent use cases and reliable references for other European clients. The firm’s brand perception may be slow to change, but the quiet reality is that PwC is steadily increasing revenues tied to Products.

Risk management: PwC’s newest Next platform

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In mid-February, TBR met with senior leaders from PwC’s U.S. Cybersecurity, Risk & Regulatory practice, including Vikas Agarwal, the firm’s Financial Crimes Unit leader, and Arlene Laungayan, a director in the firm’s Cyber Risk & Regulatory practice. The PwC team brought TBR up to speed on developments across the firm’s range of offerings, focusing on the Risk Management Portfolio. PwC’s risk management strategy is driven by the firm’s Cyber, Risk & Regulatory leader Sean Joyce and his managing partner John Sabatini under consulting and firm leadership. The following reflects both the mid-February briefing and TBR’s ongoing analysis of PwC within the larger management consulting space.

Risk evolves along with The New Equation

After setting the stage with an update on organizational changes and a description of some recent client engagements, including timely advice provided to clients on the secondary and tertiary effects of economic sanctions imposed against Russia over the invasion of Ukraine, Agarwal commented that while PwC has collaborated closely with the largest technology vendors, the professional services firm does not aim to “be a tech company.” PwC instead aspires to be “the best knowledge company, well equipped to merge knowledge with technology.”

In the context of risk and regulations, PwC is capable of helping clients understand key issues and challenges, develop meaningful content, and deliver services through a solution. Not surprisingly, Agarwal led the discussion with PwC’s The New Equation, and his description of PwC’s value and how it is delivered dovetailed well with both The New Equation and TBR’s evolving view of PwC as a firm. Risk and compliance may be one of the oldest service lines offered by PwC and its Big Four peers, so successfully pulling technology through to the heart of risk offerings requires balancing speed, efficiency and evolving client expectations for the tried-and-true characteristics of risk and compliance (consider that one of The New Equation’s founding principles, according to PwC, is that “when our better selves and the greatest aspects of technology are brought together, there is no opportunity too great for us to achieve.”).

While internal change continues to drive PwC’s evolution, Agarwal and his colleagues did note the importance of changing client demands, particularly as the total number of chief compliance officers has increased in recent years, particularly within the Fortune 500. CEOs and CFOs, in Agarwal’s telling, have become “sick of chasing the issues” and have looked to chief compliance offices to “solve risks in silos, but [to] tell the story at the top [and to] understand and communicate” to the full enterprise the criticality of risk and compliance to the overall business.

Dealing with multiple people within an organization around risk issues could be a winning strategy in two ways. First, the more people and personas PwC interacts with, the more the firm’s value becomes clear to its clients. Conversely, consulting on risk only with a chief compliance officer and a limited risk team potentially places restrictions on PwC’s overall relationship with the client. Second, maturity, with respect to risk, will vary across an organization, providing an opening for PwC to serve clients with appropriate solutions for their needs. Of course, being able to serve multiple stakeholders within a client and at various maturity levels requires a robust set of risk and compliance offerings.

Digital transformation, cybersecurity and cryptocurrency: How the war in Ukraine will change technology forever

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The war in Ukraine and ICT vendors: 3 coming challenges in a changed world

Less than two weeks into Russia’s invasion of Ukraine, TBR’s assessment of the effects on the ICT market remains necessarily constrained. The majority of the largest ICT vendors TBR covers do not have tremendous local market and/or client exposure to Russia or Ukraine, so the impact of the war on ICT companies, if the conflict remains limited to those two countries, will be marginal — not insignificant, but marginal — with some exceptions, such as Ericsson (Nasdaq: ERIC), Nokia (NYSE: NOK) and SAP (NYSE: SAP). Longer term, absent either a miraculously positive or an existentially negative development (peace blooms or mushroom clouds), TBR expects the pressures detailed below will force IT services, cloud and software, data center and infrastructure, and telecom vendors to adjust their strategies and their business models.

 

Digital transformations slow, opening new opportunities

Already stressed supply chains will experience additional sand in the gears, slowing down deliveries of essential hardware and delaying build-outs of data centers, enterprises’ IT infrastructures, and even the physical towers needed for telecommunications. While IT services vendors and consultancies have sold digital transformation (DT) as a method of addressing business problems through agile application of emerging technologies, enterprises and their technology suppliers need the actual physical components to make the “digital” part of digital transformation work. A slowdown in hardware availability will convert into a slowdown in enabled applications and soon everything around DT will become slower and more expensive.

 

In this DT winter, consultancies advising on supply chain issues and global systems integrators (GSIs) and their technology partners enabling hybrid cloud while bolstering on-premises enhancements will flourish. Chip manufacturing investors will receive government backing and may find technology vendors across the entire ecosystem willing to make long-term commitments to mitigate the risks they are facing now. In a reversal of fortune from the last few years in IT, third-party maintenance specialists — the very boring techies who are keeping the old systems running while the young geeks play with AI and the metaverse — may see a boom as a constrained chip supply and slowed digital transformations make keeping the current technology operational increasingly important.

 

Cybersecurity commands center stage (hopefully, for real this time)

In every survey TBR has conducted around IT services and digital transformation, buyers have prioritized cybersecurity as a top three — and frequently No. 1 — concern. And yet, enterprises underinvest and remain vulnerable, humans fail to take precautions and fall prey to ransomware attacks and worse, and cybersecurity remains more talked about than acted upon. Russia’s invasion of Ukraine will change that. While pre-invasion predictions anticipated an aggressive Russian cyber campaign, the first week of fighting featured exclusively kinetic military action, with limited, negligible cyber strikes. Analysis conducted in the middle of combat rarely survives intact once the smoke clears, but TBR believes a couple of scenarios could account for Russia’s relative cyber silence. The most encouraging one is that Ukraine’s defenses worked. While NATO, particularly the U.S., shared near-real-time intelligence in the lead-up to the invasion as a means of applying diplomatic pressure and denying Putin a war narrative suited to Russia’s needs, the West and Ukraine would be less likely to share cybersecurity victories in the same way military successes have been touted and with the same divulgence of critical intelligence. A less-encouraging scenario would be that Russia is saving its cyber strikes for an anticipated second stage of the war, when the shooting slows and economic and political wills are tested. Cyberattacks that take critical energy infrastructure offline in Western Europe would be damaging now but would have a greater effect on NATO countries’ populations during a prolonged economic slowdown tied to a standoff in Ukraine. In either scenario, consultancies, GSIs and technology vendors providing cybersecurity services and infrastructure will benefit from renewed concentration in the C-suite on cyber risks, provided those vendors have invested in country-specific, locally sourced, certified talent.

 

 

Russian aggression will not dampen pandemic-driven cloud demand

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After benefiting from COVID-19 disruption, cloud should fare well yet again in the face of the war in Ukraine

We expect cloud vendors to experience limited financial and operational disruption as a result of Russia’s invasion of Ukraine. Most cloud and software vendors generate a small percentage of their revenue from the two countries combined and maintain limited direct investment, partly due to Russian business regulations. The larger potential impact, in terms of the cloud market, is a slowdown in adoption and investment. The effects of the invasion on the global economy, COVID-19 recovery, and energy markets are all still uncertain.

During the last prolonged economic downturn in 2008, the cloud market was still very early in its development and still quite a small part of most customers’ IT environments. That challenging economic environment was a boon for cloud adoption, largely due to the cost reduction and capital expense avoidance benefits it could provide to customers. The general perception and value of cloud have evolved since then to be more focused on agility and innovation rather than just cost savings, a change we believe may again benefit the cloud market.

In times of uncertainty, cloud’s ability to help customers change business processes, gain greater insight into data, and ensure IT services are available regardless of geolocation have proved invaluable. While prolonged economic uncertainty could pressure IT budgets, we expect cloud to remain a priority given the value customers have realized especially during challenging times. The cloud space may not directly benefit from this invasion as it did with COVID-19, but we expect its growth will continue.

Global hyperscalers do not stand to lose significant revenue streams, but will see delays in the already lagging eastern European cloud markets

The most obvious and direct impact of the war is the disruption of revenue streams for cloud vendors with business and footprints in Ukraine and Russia. Especially in Ukraine, business operations have been all but halted as citizens flee, protect their families, and defend their nation from the Russian military.

While the magnitude is not overly significant to most cloud vendors due to the relatively small size of Ukraine in population, economy and overall cloud adoption, certain global vendors, specifically Microsoft (Nasdaq: MSFT), have a sizable presence and generate revenue streams within the country. Microsoft announced a partnership with the Ukrainian government for cloud services and security in 2014 and in 2020 was discussing plans to invest up to $500 million, including two new data centers, to service the Ukrainian market. That investment has not yet come to fruition, but Microsoft’s relationship with the Ukrainian government has intensified as it works to thwart cybersecurity threats arising from the war.

Russia is certainly a larger economy, but also should not lead to material pressures for cloud vendors during the war and its aftermath. As the aggressor, Russia does not face security threats like Ukraine does, but sanctions have wreaked havoc on Russia’s economy. With the ruble plummeting, Moscow Stock Exchange closed, and financial systems facing chaos, the IT and cloud spaces are impacted along with every other industry in Russia. The effects are mitigated by the fact that cloud adoption has been quite low in the country. Europe in general lagged the U.S. in the acceptance and implementation of cloud solutions, and Russia is even farther behind.

According to industry estimates, 5% or less of IT spend in Russia is cloud related, well below worldwide rates in the 25% range, which means that Russia accounts for less than 1% of the total cloud market opportunity. For the U.S.-based cloud leaders, the revenue effects are mitigated even further by the regulatory challenges of competing in the country. Similar to China, Russia’s laws prevent direct operations by foreign firms. Local providers like Yandex, SberCloud and Mail.ru control a majority of the market. Microsoft and Amazon Web Services (AWS) (Nasdaq: AMZN) have partnered with some of these local providers to participate in Russia, but we do not believe those relationships have grown into significant revenue streams. The war will mean cloud revenue will be delayed further for AWS, Microsoft and other leading global cloud providers, and some vendors might opt to shutter their operations in the country.