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.

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.

Tech Mahindra unveils a dedicated metaverse practice

On Feb. 28, 2022, Tech Mahindra announced the launch of its new practice, TechMVerse, a metaverse-oriented business unit that will focus on developing immersive and digital experiences for clients. According to the company’s press release, the practice will combine Tech Mahindra’s network and IT infrastructure expertise with AI, blockchain, 5G, augmented reality (AR)/VR and quantum computing capabilities to build metaverse use cases, such as DealerVerse (a metaverse-based car dealership), Middlemist (a non-fungible token [NFT] marketplace), Meta Bank (a virtual bank), and a gaming center. While currently at about 100 employees, according to The Economic Times, Tech Mahindra announced that it plans to train 1,000 engineers in the coming years to support the practice’s growth.

5G as the company’s backdrop 

Tech Mahindra’s historical strengths as a telecom-oriented IT services firm help guide its future path. Today’s Tech Mahindra was born from a 2013 merger with Mahindra Satyam, which helped the company diversify into new verticals outside of its core telecommunications market, such as banking, financial services, and insurance (BFSI). As such, telecom infrastructure, network and IT services are Tech Mahindra’s bread and butter, accounting for approximately 40% of total revenue. And the company has continued to invest in 5G, network and software-defined architecture services, giving Tech Mahindra strong capabilities in the next-gen wireless technology that will help power many of the data-intensive metaverse use cases.

A recent example includes a collaboration with Nokia (NYSE: NOK) that will enable Tech Mahindra to leverage Nokia’s private wireless Digital Automation Cloud solution for customers and support 5G private wireless network automation and management through an “as a Service” model. Verizon’s (NYSE: VZ) “H1DD3N” AR/VR treasure hunt in September 2021 to promote its 5G network across several large U.S. markets and Apple’s (Nasdaq: AAPL) new iPhone lineup reflects 5G’s role in supporting metaverse use cases, and Tech Mahindra’s 5G private wireless network capabilities can make similar events and 5G speeds possible for its enterprise clients.

Tech Mahindra eyes 2 key areas of the metaverse 

Two components of Tech Mahindra’s investments related to the metaverse stand out to TBR, particularly around NFTs and gaming. As blockchain data and analysis firm Chainalysis stated in its 2021 NFT market report, “In 2021, users have sent at least $44.2 billion worth of cryptocurrency to … two types of Ethereum smart contracts associated with NFT marketplaces and collections.” Tech Mahindra is aiming to capitalize on the commercialization of new products related to this NFT spending. Specifically, the company plans to offer digital and professional experience services around design and content through TechMVerse and will also offer low-code NFT and blockchain platforms for enterprise clients.

We see this as a key opportunity for Tech Mahindra, as organizations increasingly devote resources to exploring the connection between NFTs and the metaverse — such as JPMorgan’s Onyx Lounge in Decentraland, where one can buy virtual land with NFTs — yet may lack the required IT infrastructure, skills or impetus to build their own use cases from scratch. Tech Mahindra is also planning to collaborate with Mahindra & Mahindra Ltd. to offer digital collectibles that will be listed and offered for sale through Tech Mahindra’s NFT Marketplace platform.

At the same time, the gaming industry is arguably the pioneer of the metaverse. From The Sims to Fortnite, consumers continue to spend real dollars on virtual things in virtual worlds. Hence, the metaverse is not a new concept, rather one that has already been quietly and successfully adopted by gaming companies, as new data from the Entertainment Software Association found that spending on gaming content reached $51.7 billion in 2021. While noting that it plans to develop use cases, Tech Mahindra also announced it is launching a new Cloud Gaming as a Service solution for telecommunications, cable and OEM companies in partnership with Ludium Labs, a firm that offers cloud adoption and interactive streaming of applications.

According to the press release, the 5G-powered, low-latency gaming solution will have a library of 150-plus AAA games stored in the cloud and will help these firms improve their customers’ access to compute-intensive games on any device, thereby eliminating the need for consoles and high-speed internet. The service mirrors Microsoft’s efforts to transform the gaming industry by bringing in subscription-based business models with the 3Q20 launch of Project xCloud.

According to TBR’s 4Q21 Microsoft Cloud report: “While Project xCloud — now called Xbox Cloud Gaming — was not the first subscription-based gaming service to be offered in the industry, TBR felt at the time of the launch that Microsoft’s ability to differentiate would be supported by the company’s expertise in operating subscription-based businesses and guide its gaming go-to-market efforts.” Tech Mahindra’s Cloud Gaming as a Service solution can open up similar opportunities to its core communications client base and enable telecom companies, cable companies and OEMs to compete with gaming incumbents, further expanding Tech Mahindra’s addressable market in the metaverse.

Average revenue growth for vendors in TBR’s Cloud Components Benchmark increased 12.6% year-to-year in 3Q21, partly due to a favorable year-ago compare considering the economic impacts of COVID-19 in mid-2020. Further, with many vendors operating transactional-heavy business models, rebounding demand for license products supported revenue growth during the quarter, especially for software-centric vendors like Microsoft and VMware. COVID-19 is causing customers to reevaluate their digital transformation plans; this may include migrating completely to a cloud environment, which will erode opportunities for some vendors while others will expand their existing data center investments through solutions like hyperconverged infrastructure (HCI).

Given some customers’ reluctance to move outside the data center, opportunities arise for vendors to push ‘as a Service’ offerings

According to TBR’s 2H21 Cloud Infrastructure & Platforms Customer Research, 42% of respondents plan to keep most of their workloads inside the data center over the next three years. As COVID-19 accelerates customers’ cloud migration timelines, many enterprises turn to self-built private cloud environments as an intermediary step to a fully managed vendor-hosted private or public cloud model.

Further, many larger, established enterprises are looking to protect their existing investments in IT and find that their own data centers are a better fit for certain workloads, particularly those with stringent security or latency requirements. These customer trends present opportunities for hardware-centric vendors such as Hewlett Packard Enterprise and Dell EMC to capitalize on demand for cloud-like consumption services on premises in the coming years.

Data center consolidation persists

Many self-built private cloud customers adopt HCI solutions to modernize their legacy systems and consolidate their overall data center footprint, a trend brought on by cloud migrations and exacerbated by the pandemic. Colocation is emerging as a notable alternative to privately owned data centers in this model, as customers are offered a secure landing spot for their hardware while providing high proximity to major public cloud platforms. Recognizing this trend, OEMs are partnering with colocation providers to offer central management and governance capabilities that facilitate customers’ workloads.

Vendor competition ramps up amid high demand for cloud-like economics on premises

The cloud components market is consolidating around select vendors, such as Microsoft and VMware, specifically in the virtualization space. However, on the hardware side, vendors are emphasizing their consumption-based pricing offerings, seeking differentiation by taking a workload-by-workload approach. While in general IBM has been lacking in consumption-based hardware, the company is expanding its investments in the area, evidenced by the release of the company’s Tailor Fit Pricing solution for hardware consumption, which applies a pay-as-you-go model to a highly scalable, premium solution like IBM Z.

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On Feb. 13 Lockheed Martin (NYSE: LMT) pivoted and severely altered its FY22 outlook by withdrawing from its $4.4 billion plan to acquire missile and rocket propulsion expert Aerojet Rocketdyne (AR) (NYSE: AJRD) after months of mounting antitrust pressure and the recent unanimous U.S. Federal Trade Commission (FTC) decision to sue Lockheed Martin to obstruct the planned acquisition of AR.

Lockheed Martin looked to challenge Northrop Grumman for missile and rocket propulsion market dominance

In December 2020 Lockheed Martin announced it had entered into a definitive agreement with AR to acquire the missile and rocket propulsion innovator. With this proposed purchase, Lockheed Martin indirectly revealed its plans to disrupt the market dominance Northrop Grumman (NYSE: NOC) has enjoyed since 2018 when it purchased renowned rocket booster manufacturer Orbital ATK. Lockheed Martin hoped that its acquisition of AR would follow a similar trajectory as Northrop Grumman’s purchase of Orbital ATK, where the FTC would approve the acquisition so long as Lockheed Martin followed FTC stipulations, such as refusing to discriminate access to its missile system products and services to competing contractors.

With the world’s largest defense contractor planning to dedicate significant resources to acquire AR, Lockheed Martin expected the FTC to approve its acquisition as the combination of Lockheed Martin and AR would be a stronger competitor against Northrop Grumman, giving the U.S. government an additional option when selecting contractors. Expecting approval in 1Q22, Lockheed Martin forecasted its FY22 based on gaining an expanded propulsion systems and rocket engines portfolio and priority access to AR resources during the ongoing supply chain chaos seen in all industries.

After a year of setbacks, the FTC intervenes with Lockheed Martin’s proposed acquisition

Lockheed Martin experienced several setbacks almost immediately after announcing the planned acquisition. In February 2021 Raytheon Technologies (NYSE: RTX) stated it would implore regulatory agencies to block Lockheed Martin’s proposed purchase, arguing that the acquisition would give Lockheed Martin an unfair market advantage and Raytheon Technologies would have to purchase approximately 70% of its missile propulsion systems through Lockheed Martin as a result.

In July 2021 Senator Elizabeth Warren petitioned the FTC to probe the acquisition. Despite a bipartisan appeal to the Pentagon by a group of 13 U.S. Congress members in support of the merger in August 2021 and rumors circling that the Pentagon was in favor of the deal, the FTC voted 4-0 in January 2022 to file a lawsuit impeding Lockheed Martin’s $4.4 billion acquisition.

After initially postponing the vote, the FTC finally argued that Lockheed Martin would damage the national defense market and its rivals by acquiring the United States’ only independent provider of essential missile inputs. By reducing industry competition, Lockheed Martin would be able to relax innovation efforts and not be as competitive with its pricing, which could result in higher prices for the government. The acquisition would also potentially limit rivals access to resources and provide Lockheed Martin with unfair insight into their confidential information as AR operated as a subcontractor for many of them in the market.

Rather than face an arduous administrative trial against the U.S. government in mid-June, Lockheed Martin opted to simply abandon its acquisition plans.