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.

In an unlikely pairing, Oracle backs TikTok to drive OCI business and intimidate IaaS competitors

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Acquisition turned partnership: Oracle bands together with TikTok

Oracle’s presence in TikTok-related news — from competitive bid to strategic partnership to now minority stakeholder — has raised eyebrows from the beginning, given the company’s complete detachment from the social media business. Oracle executives have not been shy about expressing their support for the current White House administration, nor for their plans to take IaaS share from Amazon Web Services (AWS) (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT).

In fact, Microsoft, which showed great interest in TikTok initially, had far more to gain from a potential deal. However, regardless of how Oracle was brought into consideration, the agreement has the potential to benefit Oracle in several ways, including stronger governmental ties, gaining a win over Microsoft, onboarding a new Oracle Cloud Infrastructure (OCI) customer, owning a stake in a profitable company, and lastly, earning the chance to convince the market that Oracle is evolving from an old-school software company to an adaptive cloud vendor that has ties with an up-and-coming generation.  

What does this mean for Oracle’s cloud business?

Big logos give Oracle a confidence boost in chasing competitors, with AWS as leading target

In many ways, TikTok is just another name Oracle can add to its roster of recent high-profile OCI wins, including Zoom and 8×8. Despite the attention that was given to these deals amid COVID-19, Zoom still runs most of its workloads on AWS or in its own data centers. This latest win follows a similar trend, as TikTok is in the middle of a three-year agreement with Google Cloud (Nasdaq: GOOGL), promising to buy over $800 million in cloud services.

However, as part of Oracle’s 12.5% stake in the new company, TikTok will also run on OCI. While this allows Oracle to boast a win over Microsoft and Google Cloud, IaaS incumbent AWS remains the company’s primary target. Recent updates, such as a cost-analysis tool, plans to scale to 36 live public cloud regions by mid-2021, and strategic technology partnerships with Microsoft and VMware (NYSE: VMW) are just a few ways Oracle will continue to apply the pressure.

After months of deliberation on the fate of TikTok — a social media application owned by China-based internet technology company ByteDance — due to security concerns raised by the Trump administration, the U.S. government and involved parties came to a tentative agreement on Sept. 19.

Per the agreement, TikTok will transition to a publicly traded U.S. company, with Oracle (NYSE: ORCL) and Walmart (NYSE: WMT) as initial stakeholders. Under the new deal, ByteDance will hold an 80% stake in the new company, dubbed TikTok Global, which is scheduled to hit the market through an initial public offering in less than one year. Combined, Oracle and Walmart will hold the remaining 20% stake, leveraging data to improve their respective positions in technology and retail. While TikTok will maintain control of its algorithms, the deal will still bring TikTok under U.S. financial law and subject it to security oversight by Oracle as a vested technology partner.

Enterprise edge compute sees opportunity in COVID-19 economy as new use cases emerge

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COVID-19 increases demand for edge installments

Despite some challenges and resistance to adoption, the opportunity at the enterprise edge is vast, as edge workloads present a key solution to many of the new problems that have popped up due to COVID-19. For example, brick-and-mortar shopping was once seen as a leisure activity and has now become a front line from which a virus can spread. While retail is a key vertical with much to gain from edge workloads in the era of COVID-19, it is not the only one. Manufacturing floors now require social distancing of workers, which slows down production, and technicians cannot go on-site to fix malfunctioning hardware. The edge is the solution to many of these problems, with use cases including contact tracing, temperature-monitoring cameras, and AI-enabled surveillance to monitor for adequate social distancing and mask wearing.

TBR’s Enterprise Edge Compute Market Landscape, which is global in scope, details edge compute trends among both vendors and their customers. Vendor coverage includes: Amazon Web Services, Atos, Cisco, Dell Technologies, Digital Realty, Equinix, Huawei, Hewlett Packard Enterprise, IBM, Lenovo and Microsoft. This research includes current-year market sizing and a five-year forecast.

PwC’s design of a Central Lending Platform concept for Singapore: Acceleration and digitization for struggling SMEs

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A pandemic-induced national problem with a PwC-designed solution

In response to the COVID-19 pandemic and subsequent economic fallout, Singapore’s government sought to bolster the SME market, which employs 70% of the city-state’s workforce and generates 50% of its gross domestic product (GDP), in part through a risk-sharing program for loans to eligible SMEs. Early efforts attracted only 2% of the SMEs to apply for loans, which PwC attributed in part to lengthy loan application and approval processes exacerbated by the COVID-19 lockdown. The gap due to surge in demand and reduced supply provided an opportunity for PwC to design a Central Lending Platform to simplify the loan process, quickly connect SMEs to multiple banks in one single platform, facilitate faster access to capital, and provide Singapore’s government with analytics and data surrounding the SME sector and associated market share, including delivering insight into industry competitiveness to guide quicker and more meaningful policy decisions.

A platform to benefit Singapore’s banks and SMEs

PwC’s design of a Central Lending Platform provides a number of essential benefits for SMEs, Singapore banks and Singapore’s government, including the minimization of human efforts and errors in loan applications and processing; always-on, always available services; and the collection and assembly of previously uncollected data in a single, digital place.

According to PwC, banks prepared to loan to SMEs will rely on the platform for an “immediate eligibility assessment” of whether an SME meets the criteria developed by Singapore’s government. The digital platform will eliminate the need for banks’ loan relationship managers to check the completeness of documents, a process that PwC noted contributed to a 6- to 10-week waiting time from application submission to access to capital. Within three days of an SME’s application, banks will submit loan terms and conditions, although banks can submit loan terms and conditions ahead of the three-day window, and the applying SME can compare and evaluate. In addition, the platform should help banks more efficiently penetrate the SME market as well as accelerate the digitalization of Singapore’s banking sector.

In late August, PwC announced an initiative that can complement the Singapore government’s efforts to facilitate bank loans to small and midsize enterprises (SMEs). Given the confluence of technology, consulting and PwC’s continually evolving business model, TBR requested a discussion with the firm’s leaders working on this initiative. On Sept. 2, TBR spoke with Irene Liu, PwC’s Government and Public Services Co-Lead; Charles Loh, PwC Singapore Consulting Leader; Shierly Mondianti, PwC Southeast Asia Risk & Regulatory Consulting Manager; Andy Goldin, Southeast Asia Head of Advanced Analytics; and Lincoln Yin, CEO of Singapore-based financial technology (fintech) company RootAnt. This special report reflects the discussion and TBR’s ongoing analysis of PwC and its management consulting peers.