Cloud professional services revenue grows by double digits as pandemic increases demand for cloud migration

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Cloud professional services market summary

Market overview

In the most recent iteration of TBR’s Cloud Professional Services Market Forecast, we projected the market would grow at an 11.7% CAGR between 2019 and 2024 as vendors balance the effects of COVID-19 with rapid growth in digital transformation. Opportunity for benchmarked vendors comes from the large number of customers still operating on premises, which leads to the need for advisory, consulting and implementation services, as plans to shift to the cloud come to fruition. Additionally, the pandemic will likely have many businesses reevaluating their IT road maps, causing an inevitable uptick in cloud adoption. As a result, cloud managed security and application services, especially during a new working-from-home reality, will prove opportunistic for benchmarked vendors. Meanwhile, for existing cloud users, the need for hybrid and multicloud environments will necessitate ongoing integration and management needs from technology-neutral vendors.

Market disruptors

Changes in general purchasing habits brought on by the COVID-19 pandemic have proved disruptive for many professional services vendors; however, the market is expected to rebound quickly as customers replace legacy IT systems with cloud solutions. As a result, managed cloud services is expected to be the fastest-growing subsegment of the cloud professional services market, especially as hybrid IT sprawl intensifies. However, some other submarkets, primarily application development and maintenance, will feel some pressure from automation, especially as adoption of cloud-native technologies rises and plays a role in suppressing labor-driven resources.

TBR’s Cloud Professional Services Benchmark covers the professional services that are critical to enabling customers to take advantage of available technology as well as the market opportunity that exists for firms that cater to service needs. Additionally, the benchmark analyzes the size, growth and leading providers of services around cloud environments.

India-centric IT services vendors focused on protecting margins to survive rough market conditions

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Select vendors pursue alliances and deals in the growing cloud market to offset choppy financial performance

During the first couple quarters of the pandemic, Cognizant (Nasdaq: CTSH), HCL Technologies (HCLT), Infosys (NYSE: INFY), Tata Consultancy Services (TCS) and Wipro (NYSE: WIT), the India-centric vendors covered in TBR’s IT Services Vendor Benchmark, looked to form partnerships and sign new deals, especially those around cloud capabilities, with strong patterns of continued growth in cloud implementation, migration and advisory to offset deteriorating areas in traditional outsourcing engagements. For example, Wipro’s partnerships with cloud infrastructure experts, such as Google (Nasdaq: GOOG) and Microsoft (Nasdaq: MSFT), will allow Wipro to build solutions off these technologies and pair them with its advanced AI and automation capabilities to strengthen its position in the market.

To mitigate the damage caused by COVID-19, the India-centric vendors will also make resource management improvements, such as enhancing their training and hiring efforts, and solidify existing client relationships by supporting clients through optimization and digital transformation offerings as they transition to digital business practices. Cognizant must secure alliances to bolster the company’s cloud and analytics capabilities while focusing on internal stability.

HCLT performed rather well financially, all things considered, and should utilize its cloud and software power to further develop its portfolio mix, leading to improved client satisfaction. TCS, on the other hand, should capitalize on its global presence as well as its diverse portfolio to gain traction and improve its financial performance. Wipro also struggled during 1H20, but its financial performance is expected to improve if the vendor focuses on acquisitions, similar to its recent purchase of Europe-based 4C, to add new sources of cloud services revenue in the region while driving portfolio investments around cybersecurity. Similar to HCLT, Infosys came through 1H20 mostly unscathed, due to its healthy pipeline and a strong first quarter. The company should continue to tap into new areas of opportunity, such as digital transformation and blockchain, using its recent partnerships with Essential Utilities and the National Bank of Bahrain.

True to their business models even in a pandemic, India-centric IT services vendors prioritized margin protection as a primary damage control strategy during COVID-19. To adjust management operations and combat growing company expenses, IT service vendors will likely increase employee training and look to hire internally to fill positions. Additionally, TBR believes it is imperative for vendors to continue their focus on upselling to existing clients and leaning on strategic partnerships to offset revenue losses due to geographic macroeconomic disruptions.

Break/fix maintenance disaggregation accelerates with profound business model implications for many

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Consumerization of IT continues its inexorable march up the IT complexity stack

“Faster, better, cheaper” has been the IT hardware mantra for decades, and this continues pending the step-function increase in compute capacity that enterprise-grade quantum computing will bring to market before the next decade. Edge compute is little more than traditional distributed computing in smaller, more reliable form factors. Ultimately, edge computing hardware selection will become a derived decision in much the same way that cable television set-top boxes are a derived decision when consumers select a content provider for home entertainment.  

As TBR’s Tailored Services Group has heard during customer interviews, this device simplicity has large enterprise IT organizations beginning to view simple server and storage elements as practically disposable items. Here is where the service arms of hardware manufacturers face market challenges. They have created reliable, simple, low(er)-cost devices, and enterprise buyers are less inclined to pay a premium for their break/fix repair services given the lower number of outages that occur and the lower cost to the devices in general. This market condition provides a greater opening for third-party maintainers (TPMs) to gain share against OEMs, particularly when the OEMs have considerably higher operating cost models than the TPMs.

OEMs hope software abstraction and analytics monitoring and management systems will trigger operational challenges and potential barriers to TPMs

Single pane-of-glass management is another longtime aspiration in the industry and is rising to the fore as technology entrants large and small seek to develop the requisite software orchestration and management layers to run hybrid cloud environments. Within enterprise IT, this move to software management shells has reduced the need for siloed storage and server admins who can revert back to green-screen technology and provision instances. Instead, automatic provisioning occurs based on drag-and-drop templates. On top of this technology, companies build out performance management tools to be able to monitor workload performance and the underlying reliability of the physical infrastructure. IBM purchased Red Hat, for example, for its Swiss Army knife flexibility in this space. Hewlett Packard Enterprise (HPE) has taken the basic analytics assets gained in the Nimble Storage acquisition and slowly extended them out across more of the company’s hardware assets.

At issue now is TPMs gaining the access to these monitoring systems as well as the requisite training to know what the appropriate actions are to take when receiving these automated alerts. This could lead to litigation about access and data ownership down the road, similar to how the issue of spare parts access led to court cases in the 1980s, which were ultimately decided in favor of broader market access and legitimized third-party maintenance operations in the eyes of enterprise customers. For now, however, TPMs take different measures to work around the issues associated with interacting with OEM software shells when supporting enterprise customers. Some deploy third-party diagnostic tools from firms such as BMC and ingest raw log files. Others merely hire ex-OEM employees who are well versed in older core systems and build their own consolidated remote diagnostic centers.

TBR’s Tailored Services Group has seen rising interest in understanding the ways in which hardware maintenance providers go-to-market and operationally deliver break/fix repair services to enterprise customers. The fundamental simplifications and reliability improvements that triggered shifts in laptop and desktop service delivery models are coming to the data center. Further, some enterprises seek to hold onto server and storage assets longer as an interim step while migrating workloads to the cloud.

Beyond these consumption demand shifts, technology vendors, it can be argued, have become victims of their own success by manufacturing more modular systems with easier-to-navigate abstraction layers that reduce the frequency of critical outages. In short, response times become less critical given software-driven failover provisioning and as the diagnostic skills required on the ground become less challenging due to this increased software abstraction. All of these issues point to a radical transformation of the operating model best practices to deliver break/fix repair services to end customers, and that trend accelerates rapidly each day the world operates without a known vaccine to mitigate the spread of COVID-19. 

Innovation and transformation centers: Smart strategies pre-2020 will lead to success in a hybrid future

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What the elite vendors have known: It is all about talent, location and network

In meeting with leaders at innovation and transformation centers around the world and discussing their approaches to talent, TBR learned that the most aggressive and successful vendors understood key human resources elements: Talent developed at a center could be dispersed across the globe to help establish new centers; the centers could be a magnet for new talent; and diverse talent on-site as a dedicated part of the center appealed to clients more than flying talent in for each engagement. 

In addition, the earliest successful centers featured a physical location separate from the rest of the company’s facilities to reinforce the idea as new and different while also encouraging clients to think more broadly about the vendor’s capabilities and offerings, getting clients out of their own offices into a more creative space, and providing the vendor with an attractive location for its own professionals to expand their own thinking about what was possible.

While all of these IT services vendors and consultancies have maintained global operations, the elite vendors have combined the talent elements and the benefits of a physical location and understood the importance of creating vibrant virtual networks to facilitate spreading ideas, sharing industry- or technology-specific best practices, and tying together multiple teams and solutions. In contrast, TBR visited vendors whose centers acted as stand-alone silos, with a minimal amount of or leadership emphasis on cross-border cooperation or sharing, limiting the impacts of the centers on clients’ transformations or the innovations within the vendor itself. Overall, the elite vendors understood that these centers catalyzed change throughout their own organizations, accelerating their own transformations even as they worked with clients.

“One additional current operational element stood out during the informal tour: PwC now engages in daily briefs to share success stories and exchange knowledge about solutions and creative approaches to clients’ issues. TBR has pressed every consultancy and IT service vendor on the issue of ensuring new ideas do not stay siloed in one location (diminishing the value of a global firm); to date, TBR believes no firm has developed a comprehensive, robust, and truly global means for sharing innovations and accelerating knowledge dispersion among digital transformation centers, although PwC, EY and Accenture likely have progressed the most.” 

TBR Special Report, Peak PwC or just getting started? PwC’s NYC EC, April 2019

Everyone has a digital transformation center: Over the last 10 years, every vendor in the consulting, IT services and broad technology space has opened a physical center dedicated to working with clients on their digital transformations and collaborating on innovation of products, processes or business models. TBR has visited at least one of nearly every vendor’s centers, from nine-story buildings in India to one-room product showcases in Texas. Among the common themes, three of the most persistent have been around people and clients.

Vendors have also wrestled with the best approaches to having technology partners on-site, choosing industry focus areas, selecting suitable spaces and/or locations, and managing intellectual property. The most common unknown is how to measure success. While disparities persist on how best to establish, run and monetize these centers, the common themes and challenges present an opportunity for vendors to examine which elements within a partner’s or peer’s center have contributed to what remains the common goal: retaining clients and expanding opportunities.

Globally diversified government IT vendors buffered pandemic-related turbulence overseas with growth in U.S. federal sector

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Overall government IT spending will take a significant hit from COVID-19; growth opportunities will eventually arise but on a longer-term horizon

Public sector market growth drivers

State and local governments in the U.S. as well as civilian agencies of international governments saw significant disruption to tax revenues and their ability to provide even basic levels of citizen-facing services as a result of the pandemic. Employment services agencies, for example, were suddenly forced to operate at sharply lower levels, if at all, while experiencing surges in new jobless claims. As a result, ongoing IT programs were put on hiatus while moratoriums on new technology initiatives were implemented. Conversely, spending on defense, intelligence and national security initiatives by foreign governments, even with temporary stoppages in delivery, was less affected by COVID-19, though essentially profiting only defense contractors like Raytheon Technologies, Northrop Grumman and others that have long-standing relationships with international defense agencies.

TBR’s Public Sector IT Services Benchmark compares and contrasts covered vendors’ go-to-market models, recent investments and key deal wins. The benchmark also reviews numerous key financial performance metrics and highlights vendors that have been particularly successful in expanding market share and improving profitability.

 

Following a year of acquisitions, VMware integrates across the technology stack to support customer transformations

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TBR perspective

Gone are the days of the legacy virtualization giant that only serviced customers in their data centers. Among the key takeaways from VMworld 2020 was that VMware is rapidly evolving to meet clients wherever they wish to consume their data, whether that is across multiple clouds, in the core data center or at the edge. The slew of new or updated cloud, edge, desktop and security offerings announced at VMworld are the result of the company’s ongoing acquisition spree as well as strategic partnerships with some of the industry’s most powerful players. However, VMware cementing its “Any App, Any Cloud, Any Device” mantra was only half of the VMworld story, as the company also unveiled innovations that are completely new for the company, including full-stack automation, enterprise AI and support for graphics processing unit (GPU) technology. Specifically, VMware’s groundbreaking partnership expansion with NVIDIA and proposed acquisition of SaltStack suggest the infrastructure specialist is trying to help clients look up the technology stack, where enterprise value is ultimately created. This proposition largely aligns with VMware’s recent business model shift — in which Subscription & SaaS revenue is starting to outweigh traditional license revenues from both a volume and growth perspective — to capture enterprise mindshare. Recurring business has been led by acquisitions, and given the company’s success targeting niche players and integrating them across all layers of the technology stack, future acquisitions in areas like containers, security, automation and cloud management cannot be ruled out. As Gelsinger likes to say, “vSphere is the new VCF” and “Kubernetes is the new Java.” VMware’s ability to unify and sell an underlying cloud-ready platform with additional modern application development products and services will be key to the vendor’s positioning as a partner working alongside customers’ transformations.

As COVID-19 continues to take its toll, VMware (NYSE: VMW) hosted its annual VMworld event virtually. VMware CEO Pat Gelsinger kicked off the event with a keynote session discussing the broad role technology plays in everyday life, a theme that particularly resonates in the middle of a pandemic. The three-day event offered breakout sessions, product demos and customer success stories at each level of VMware’s digital transformation-enabling strategy.

IBM pivots again

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IBM Services is removing low-growth and low-profit areas, so growth in cloud transformation and AI-related services will no longer be diluted

IBM will spin off a large share of GTS’ activities, or 72% of GTS’ revenues, and 44% of IBM Services’ external revenue, into a separate company. IBM will establish a new entity over the coming quarters, temporarily called NewCo, and expects the transaction to close by the end of 2021. NewCo, which will have $19 billion in trailing 12-month (TTM) revenue and 90,000 employees, will be a managed infrastructure services provider that will deliver traditional infrastructure outsourcing services; transformational services such as infrastructure modernization, public and private cloud management, security, IoT and edge; and innovation services with data and AI integration. GTS’ technology support services, together with the entire GBS segment that encompasses consulting, global process services and application management services, will remain part of the “new” IBM, which will focus on becoming a leader in hybrid cloud platform and AI. Under the new IBM structure, IBM Services will account for $25 billion in TTM revenues, or 42% of IBM’s total revenue, instead of 59% of IBM’s total revenue prior to the spin-off, and will have approximately 94,000 employees in TBR’s estimates.

Because of the current largeness of IBM, the split into two entities — new IBM and NewCo — is a positive change as it enables more versatility and the ability to adjust strategies according to the needs of specific markets in which each entity will operate. Peeling out GTS’ managed infrastructure services activities, such as traditional information technology outsourcing, which has been negatively affected on the revenue and profitability sides by increased competition and commoditization, will help the new IBM Services return to revenue growth and improve its profitability profile as both metrics have been dragged by the underperforming GTS segment. GTS has been experiencing declining revenues over the past eight quarters and its pre-tax margin was 5.8% in 2019 compared to 9.6% for GBS. While in 1Q20 IBM implemented structural actions to improve cost competitiveness in the GTS portfolio and GTS’ pre-tax margin dropped to a loss of 2.6%, the activities were not sufficient to convince IBM’s new CEO, Arvind Krishna, to keep GTS and IBM Services in their current structure.

After pursuing multiple strategic initiatives over the past several years to better integrate the IBM Global Business Services (GBS) and Global Technology Services (GTS) segments within IBM Services and provide holistic design-build-run solutions to clients, on Oct. 8 IBM (NYSE: IBM) announced it is making a major — and reportedly final — change to the IBM Services organization. IBM is splitting into two entities: IBM, which will be a hybrid cloud platform and AI company with $59 billion in annual revenues, and NewCo, which will deliver managed infrastructure services and generate $19 billion in annual revenues.

Cloud vendors go deep with industry solutions

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Google Cloud and SAP are flagship examples of vendors building vertically oriented strategies with the introduction of industry cloud solutions

Over the last year, as more organizations accelerated the migration to the cloud, it has become evident that a horizontal cloud does not always meet the specific needs of certain industries, especially highly regulated ones such as banking or healthcare. In response to the increasing complexity of certain industries and the regulations that they are governed by, along with the overall uptick in cloud adoption during the era of COVID-19, cloud vendors are investing in the development of clouds that cater to industry-specific nuances and the demands of safely distanced or remote work. The narrowing of focus is part of broader strategic objectives that extend beyond just the immediate commercialization of opportunity and revenue impact.

Initiatives by SAP and Google highlight how innovation and technological advancements in AI and machine learning (ML) factor into the evolution of industry clouds. With recent rollouts and announcements, both vendors have highlighted the importance of creating new types of data-driven cloud solutions powered by AI and ML, augmented by networks of customers and partners. While SAP and Google currently participate in fruitful partnerships together, it will be interesting to watch the common goal of delivering vertical-specific capabilities to their customers unfold to see whether the two companies align or compete in this new chapter of cloud defined by industry.

Google leads with innovation in ML and AI to augment, rather than replace, legacy solutions

In February Google Cloud CEO Thomas Kurian emphasized that Google Cloud’s top priority is to develop a new generation of applications, which will be able to extract data from traditional line-of-business (LOB) applications such as those used for CRM and use technologies like AI and ML to optimize outcomes. Kurian reinforced the strategy of veering away from the development of traditional enterprise applications in favor of industry-specific apps that are designed to extract data from these traditional applications.

Leading up to 2020, the migration timelines for the 80% of companies that had not yet made the move to the cloud rested on comfortably planned milestones that indicated an evolution versus an urgent call to change. Looking back over the last six months, organizations suddenly found themselves in the thick of the impetus to migrate to the cloud and to do so quickly. Even organizations whose cloud journeys were well underway prior to the COVID-19 outbreak are narrowing their strategies and turning to clouds that cater to the specific requirements and compliance standards that industries, especially those that are highly regulated, including the government, require. As a result, a number of leading cloud vendors such as IBM (NYSE: IBM), Google (Nasdaq: GOOGL) and SAP (NYSE: SAP) have recently made strides in building out and refining their cloud strategies to cater to the specific requirements and demands of certain industries.  

COVID-19 fallout unlocks unique opportunities for the telecom industry to build out edge infrastructure

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vRAN will become a major driver of edge compute scale-outs

Communication service providers (CSPs) that are driving forward with virtualized radio access network (vRAN), most notably Rakuten and Dish, will build many thousands of edge sites over the next few years to support their vRAN topologies. These edge sites will need to be located within 10 miles of the remote radio unit to meet the strict time synchronization requirements of vRAN. Additionally, these edge sites, which will house the virtualized baseband unit, can be multipurposed, supporting more workloads than just RAN traffic, which could unlock new monetization options for these CSPs.

CSP spend on edge compute infrastructure will grow at a TBR-projected 54.5% CAGR from 2019 to 2024 to reach $90B by 2025

TBR estimates CSPs will own or lease over 1.2 million local edge sites (i.e., mini data centers) globally by 2025, up from nearly 9,000 sites globally at the end of 2019. The primary driver of edge build-outs during the forecast period is telcos’ and cablecos’ network transformations, which entail migrating to a cloudified and virtualized network, and webscales’ edge initiatives to support their cloud businesses and digital ecosystem endeavors.

In this new architecture, network functions will be virtualized and housed in NFV infrastructure, which is essentially a data center. Network sites, such as central offices, have been the primary edge compute locations to date, with cell site builds expected to ramp up significantly in 2021 and become the primary locations for the CSP edge by 2025. Converted retail store locations and customer premises locations are other site types where CSPs will locate their edge infrastructure. For more information pertaining to the market size and for further breakouts of the data, see TBR’s Telecom Edge Compute Market Forecast.

TBR’s Telecom Edge Compute Market Landscape, which is global in scope, deep dives into the edge compute-related initiatives of stakeholders in the telecom market including telecom operators, cable operators, webscales and vendors that supply the telecom market. The research includes key findings, market size, regional summary, technology trends, use cases, operator and vendor positioning and strategies, and acquisition and alliance strategies and opportunities.

AR and mixed reality: A view of the use cases driving change in industrial operations

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In TBR’s recently published report Digital Transformation: Emerging Technologies: AR/VR, we discussed the AR, mixed reality (MR) and VR ecosystem and various applications of the technologies across industries such as automotive, healthcare and consumer. The report outlined key solutions being deployed today across the device spectrum, covering augmented, mixed and virtual reality headsets, which are characterized by how they manipulate or transfix virtual images on a physical environment, in addition to smartphone, tablet and heads-up displays in automobiles. This report’s focus will center around the Head Mounted Device Spectrum and the leading use cases that are being deployed within operational and industrial environments.

As you move from AR to VR, the level of immersion a device provides to its user increases. For instance, monocular and binocular AR devices are typically providing a fixed image over the physical environment, while MR and VR devices are capable of superimposing images on the physical environment and allow the user to manipulate those images. While MR and VR devices offer similar capabilities in regard to layering virtual information on the real world, a VR device closes the user off from the physical environment, providing a completely immersive experience for the user.

MR devices, such as Microsoft’s (Nasdaq: MSFT) HoloLens 2, rely on a digital field of view to place virtual images over the actual physical environment, providing users with a better field of vision compared to their VR counterparts. Further, leading VR devices in the market today, such as the HTC VIVE, require a tether to a high-powered PC as they do not contain onboard computing like the HoloLens 2 does, increasing their cost over device counterparts and limiting their appeal among customers.

TBR believes these form-factor constraints limit the addressable market of VR headsets to consumer industries, such as gaming and entertainment, as they create significant challenges regarding user safety within industrial environments such as aerospace as well as in operational use cases such as field servicing. While VR devices will find traction in enterprise and industrial settings for use cases such as training or productivity, this report will focus on AR and MR devices supporting operational use cases in industrial environments today, and the market dynamics that are keeping the technology from reaching mainstream adoption. 

Understanding industrial use cases

AR technologies have been tested in industrial settings for years, with the majority of these early trials centered on monocular AR devices. For instance, dating back to 2016, the AR device specialist Vuzix (Nasdaq: VUZI) has worked with clients such as Airbus, General Electric (NYSE: GE), ExxonMobil (NYSE: XOM) and Merck (NYSE: MRK) around deployments of its M100 Monocular device. These early pilots largely focused on low-complexity use cases such as remote support and component assembly. The top challenges cited in these pilots largely centered on the immaturity of device form factors, with basic aspects such as device comfort, battery life or overheating limiting their appeal to customers.

Further, early devices contributed to the market perception that AR devices were highly futuristic yet unrealistic. For example, Google Glass, which was largely targeted at consumers, was piloted unsuccessfully by industrial customers due to form-factor challenges. While these early pilots did not reach mainstream adoption, they provided customers with a glimpse into the technology’s potential as they offered tangible ROI metrics, including error reductions during the assembly process and an increase in units produced, but would require significant maturation to the underlying device hardware for organizations to successfully deploy the technology.

It is easy to get lost in all of the marketing hype related to AR and mixed reality (MR) devices and solutions. In this report, TBR explores the leading use cases that characterize the near-term opportunities within industrial environments today, while also taking a closer look at the market challenges that technology suppliers and industrial customers are grappling with. Though end-user intrigue around AR and MR in industrial settings is high, the market has yet to develop and may require greater involvement from IT services vendors to push the technologies out of niche deployments and toward mainstream adoption.