Wave of growth that will outpace prior estimates expected for cloud professional services market

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Cloud professional services market overview

Market overview

Prior to the COVID-19 outbreak, the increasing complexity of enterprise hybrid and multicloud environments had already established a growing need for managed services and system integration vendors. Traditional deployment schedules and delivery timelines have been accelerated as the pandemic has created a short-term need to fulfill the demands of a new work-from-home reality, especially in the realm of security and privacy. The increased demand for cloud professional services will necessitate both immediate and ongoing advisory and implementation services as the pace of multicloud and hybrid cloud adoption will increase rapidly for many enterprises needing advisory and implementation services.

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.

EY and technology: Embedding AI and moving beyond trust

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Taking AI further

EY’s “six habits” study provides detailed information and assessments of digital transformation leaders’ best practices as well as “actions for the boardroom,” such as “create a culture of continuous learning” and “embed innovation with corporate governance.” In previewing the study, TBR noted that the recommendations for boards to consider when accelerating AI — “assess the current state,” “integrate AI into core” and “measure AI benefits” — perfectly mirror EY’s own consulting offerings around AI. In discussing AI further, Higgins and Little explained that the firm has been applying AI when making its own financial forecasting and HR management decisions, providing additional insights into how different solutions could be rolled out to clients. Little made explicit that the firm would “build AI into every solution we have,” laying down a clear marker of the firm’s bet on emerging technologies. The firm has been trying to move away from the historical consulting and systems integration approach of putting many people on projects and would instead be adopting more agile sprint methodologies, automation and AI. A concerted effort to embed AI both internally and in every solution built for clients echoes TBR’s November 2019 Digital Transformation Insights Report: Emerging Technology, which noted that, “to capitalize on the cost savings generated by AI, vendors must shift their value proposition toward navigating clients’ technical and business change management obstacles to implement solutions, a strategy requiring continued investment in consulting expertise.”

Building better ecosystems

In discussing changes to the partnering ecosystem for all consultancies and IT services vendors, TBR has emphasized the need for re-evaluation and constant management of alliances, particularly as the technology vendors themselves change their own partnering models and go-to-market approaches. EY has stepped ahead of this change, recognizing the firm needed to evolve its traditional partner program into strategic ecosystem management.

In February EY released a new study on the “six habits of digital transformation leaders,” based on a survey of global CEOs and board members. TBR spoke with Jim Little, EY’s global Microsoft Alliance lead and EY Americas Technology Strategy lead, and Dan Higgins, EY’s global Technology Consulting leader, to gain additional insights and comments on the study, as well as to understand how the firm has shifted its internal operations and strategy around technology. TBR has attended multiple EY events in the last few years, including those geared specifically toward highlighting the firm’s technology practice. Based on those events and the March 2020 discussions with Little and Higgins, TBR believes EY has substantially changed its approach to technology consulting, from enabled to embedded and scalable, which will increasingly expand the firm’s opportunities with global clients, potentially at the expense of traditionally more technology-centric competitors, such as Accenture (NYSE: ACN) and Deloitte. Little and Higgins explained that EY fully intended to embrace a new strategy around technology, with solutions designed for reach and scale, a brand seeking to move beyond trust, and an ecosystem managed to “create real outcomes” for clients.

CSP IoT revenue growth will accelerate gradually through 2024 as more 5G use cases become commercially available

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An increased focus on value-added services is necessary to maximize CSP IoT revenue as connectivity growth is limited by low ARPU connections

IoT revenue is growing steadily but has yet to significantly impact CSPs’ overall financial positions

TBR estimates global CSP commercial IoT revenue increased 20% year-to-year to $26.8 billion in 2019. Despite sustaining strong revenue growth, global CSP commercial IoT accounted for only 2.6% of global CSP wireless revenue in 2019, in TBR’s estimates, which was insufficient for many CSPs to fully offset erosion within challenged segments such as video and legacy network services.

Most Tier 1 operators have begun integrating multiple low-power network technologies such as LTE-M and NB-IoT to attract customers by providing greater flexibility and supporting a larger range of devices. However, offering multiple low-power connectivity options is proving to be unviable for some operators, due to added network costs and the need to generate high subscriber connections to achieve significant ROI because of low average revenue per user. This trend is evidenced by NTT Docomo’s discontinuation of its NB-IoT services in March.

Providing accompanying solutions beyond connectivity is essential for CSPs to maximize IoT revenue

Given the low ARPU generated by IoT devices, CSPs must evolve their IoT business models beyond solely providing cellular connectivity to maximize revenue. Taking a business model approach of being an agent of digital transformation, rather than merely an IoT connectivity pipe, enables CSPs to more effectively cross-sell accompanying solutions in areas including professional services, security and cloud.

Owning content and platforms, such as data visualization tools for car telematics, is another means for CSPs to augment IoT connectivity revenue. Collaborating with the broader technology industry, especially with webscales, is also enabling CSPs to foster portfolio innovation while capitalizing on reseller opportunities.

TBR’s Telecom IoT Market Landscape, which is global in scope, deep dives into the IoT-related initiatives of stakeholders in the telecom market including telecom operators, cable operators and vendors that supply the telecom market. This telecom-centric report focuses on the commercial IoT endeavors of stakeholders in the telecom market, but also touches on consumer IoT. The research includes key findings, market size, regional summary, technology trends, use cases, verticals, operator and vendor positioning and strategies, and acquisition and alliance strategies and opportunities specific to the telecom industry.

SAP and IBM were prepared, responding rapidly, but are still waiting for COVID-19’s peak impact

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The 1Q20 earnings releases of IBM and SAP offered the first glimpse into how COVID-19 is impacting IT vendors financially and into the strategies being used to respond. The two vendors are a positive litmus test for the rest of the IT industry, given their breadth of businesses and customer bases across geographies and vertical industries. From their performances and commentary, it is clear that 1Q20 was a tale of two halves. Before mid-February, business was progressing as normal, while after that point, customer priorities shifted and many deals stalled. In the latter half of the quarter, IBM’s and SAP’s priorities also shifted, including both vendors citing 95% of their workforces have been moved to working remotely. Revenue was slightly impacted during the quarter, but more significantly, the two vendors noted their reactions to the many facets of the virus.

Transactional businesses suffer the first negative impacts

Early results show the COVID-19 pandemic is having the most profound impact on transactional businesses. In broad terms, IT business models fall into two categories: transactional and annuity. Transactional businesses are those where an immediate one-time event results in revenue for the vendor and access to a product for the customer. For IT vendors, examples of transactional businesses are software licensing hardware sales and fixed-price services.

Both IBM (NYSE: IBM) and SAP (NYSE: SAP) cited the stalling of their software licensing businesses as the biggest weakness experienced during 1Q20. The quarter was progressing fairly normally until roughly mid-February, at which point customer priorities shifted dramatically and many sales engagements came to a halt. That behavior is understandable, as at first the uncertainty surrounding the virus caused customers to pause, and then attention shifted to direct COVID-19 responses, primarily the shift of most employees to working remotely. The impact during 1Q20 was amplified by the seasonal dynamics of the software license sales business, which relies on most deals closing just before quarter’s end. By the end of March, the impacts of COVID-19 were in full effect, as most customers dealt with huge disruption to normal operations.

There is both good and bad news for software licensing throughout the remainder of 2020. The bad news is that the first quarter is the lightest seasonal quarter for software licensing and hardware sales — both IBM and SAP expect to experience a bigger impact in the second quarter. The potential good news is that there is still a possibility some of the impacts caused by COVID-19 could fade before 2H20, when the majority of software licensing activity typically occurs. In this respect, the timing of reopening and resuming business as usual will have deep implications for any vendor with a transactional software business like that of SAP and IBM.

Annuity businesses are immune, at least for now

Annuity business recognize revenue from long-term contracts over time, which is an asset in the current environment. For IBM, SAP and Oracle (NYSE: ORCL), annuity businesses are primarily cloud subscriptions and software maintenance, and those businesses have so far remained resilient. Especially for these vendors, the resiliency of annuity businesses reinforces the benefit of shifting to a cloud subscription model, even though it was disruptive to the traditional software licensing model. There has been a marked shift to cloud for IBM, SAP and Oracle over the past 10 years, which increased the mix of their revenue from annuity businesses, of which IBM boasts more than 60%, Oracle 71% and SAP 70%.

For more insight on how COVID-19 is changing IT sales strategies, read Senior Strategy Consultant Geoff Woollacott’s blog COVID-19: Shifting customer loyalties and selling motions.

Zoom videoconferencing booms amid COVID-19, but Microsoft and Google will win with broader SaaS

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Zoom’s rapid adoption highlights security concerns; Microsoft and Google are better positioned

Microsoft (Nasdaq: MSFT) and Google (Nasdaq: GOOGL) were relatively well prepared for the unexpected demand for videoconferencing, with global data centers and strong security measures in place, while Zoom’s security was not ready for the same scaling. There have been numerous reports of “Zoombombing,” which is when hackers join a Zoom meeting and disrupt the workflow, particularly in online classrooms. While some educators did not use password protection to make their online classrooms private, TBR believes this security lapse also occurred because Zoom lacks end-to-end encryption. Microsoft and Google Cloud have experienced difficulty with outages but have performed well in terms of security with end-to-end encryption in Teams and Meet. The regularity of these hacks has led to a recent investigation by the FBI and caused some government agencies, companies and educational institutions to ban the use of Zoom. In TBR’s special report Security measures taken to combat impacts of COVID-19 on businesses will have long-term implications, Senior Analyst Nicole Catchpole discusses the security concerns with Zoom and other cybersecurity threats that have risen amid the COVID-19 pandemic.

Zoom, Microsoft and Google remove pay barriers, increasing usage and setting the foundation for a much larger base of paying customers post-COVID-19

Use of videoconferencing solutions is skyrocketing, but modernization of these platforms will be a long-term strategy

Zoom, Microsoft and Google are offering their video-collaboration tools for free to support the unexpected global shift to remote work and learning environments. For six months, Microsoft is removing paywalls for Government Cloud and certain Office 365 subscriptions — including Office 365 E1 for businesses and Office 365 A1 for educational institutions, both of which include Microsoft Teams. Google Cloud is also offering Meet for free until Sept. 30, but only to existing customers, which makes it slightly more restrictive than Microsoft’s offer. Finally, Zoom has also removed the 40-minute time limit on its free basic subscription tier for K-12 schools in numerous countries, including the U.S., where the company boasts roughly 60,000 customers as of mid-March. Within the “freemium” tiers that are available, Zoom customers can have up to 100 participants in a virtual meeting, whereas Teams and Meet can support up to 250 people in a meeting. Given that each of these vendors has reduced cost-related barriers to adoption, customers can select the vendor that best fits their broader IT environment.

The global shift to a virtual work-from-home and learn-from-home environment has drastically increased demand for SaaS solutions that support collaboration and remote workflows, particularly videoconferencing as companies and educational institutions try to maintain as much face-to-face communication as possible. Among the numerous SaaS offerings available, some of the most popular are Zoom, Microsoft Teams and Google Meet. Zoom quickly rose in popularity and became a household name, growing from 10 million users in December 2019 to 200 million users in March 2020. While Zoom’s (Nasdaq: ZM) number includes individual nonpaying consumers, the vendor has also signed paying business and organizational customers including IAC Group, Rubrik and Texas A&M. Microsoft Teams and Google Meet experienced growth spikes as well. The number of users on Teams more than doubled, from 20 million daily active users in November 2019 to 44 million in March 2020, including enterprises such as EY, SAP (NYSE: SAP), Continental AG and Accenture (NYSE: ACN). Google Meet grew by more than 25 times from January to the end of March and is adding 2 million new users per day, with customers such as Korean Air, Shopify (NYSE: SHOP) and TELUS (NYSE: TU). While Zoom’s total user growth is strong and its offerings are widely used, TBR expects Microsoft and Google Cloud will start to poach Zoom customers due to their value-add hardware and SaaS offerings Office 365 (200-plus million users) and G Suite (6-plus million users).

IaaS and PaaS leaders maintain their current positions in the public cloud market but face mounting competition

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Coopetition is growing among vendors to outcompete leaders in the public cloud market, and customers have responded positively by integrating multivendor environments. TBR expects this coopetition will enable multiline vendors to attain notable growth, but likely not until roughly 3Q20, after the COVID-19 pandemic abates, as enterprises manage remote workforces rather than undergo vast integrations.

Amazon Web Services (AWS), Microsoft, Google and Alibaba will continue to lead the global public cloud market, with Google and Alibaba driving the most significant total public cloud revenue growth among large vendors due to their smaller revenue bases. While these rivals battle globally, TBR expects competition will be greatest in Europe.

Public cloud remains the largest and fastest growing segment of the cloud market. Changes in customer acceptance, data integrations and innovation have combined to sustain the rapid growth of public cloud adoption. TBR’s Public Cloud Benchmark details how hybrid deployments, new use cases for enterprise apps, and trends in emerging technology will make public cloud even more relevant in the future.

Security measures taken to combat impacts of COVID-19 on businesses will have long-term implications

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The COVID-19 pandemic has unleashed an array of cyberattacks that threaten the health of our virtual systems, including but not exclusive to those in healthcare, banking and government agencies. Cyber criminals are capitalizing on widespread weaknesses with attack vectors in the form of spam, phishing scams, ransomware and malicious URLs. As the number of infected persons soars, so does the number of cyberattacks, but despite the short-term effects of combating threat actors, in the long term, the world will emerge more secure and better prepared, armed with lessons learned from strategies implemented and tested during the pandemic.

Malicious actors target victims through various tactics and ploys

Hot zones of cyber vulnerability have typically been localized or within a specific organization. While such attacks have disastrous ramifications in their own right, never before has the number of threat vectors been so far-reaching. As the COVID-19 pandemic forces the majority of the global workforce to stay home, employees have had to create makeshift ways of working while longer-term solutions are devised. The surge in the number of individuals working remotely and the strain that places on existing infrastructures is an underlying cause for a large majority of these attacks.

Many corporations and individuals are turning to user-friendly and feature-forward solutions. In particular, Zoom has seen a rampant surge in daily users, from 10 million in December to 200 million in March, as what was once meant for use by businesses is now also being used for daily work life and personal communication. Unfortunately, the company did not have the adequate levels of security infrastructure to support this surge, resulting in self-proclaimed “Zoombombers” infiltrating private corporate meetings, Alcoholics Anonymous meetings, online learning environments and more. The company was quick to issue a statement and plan to address these issues, with Zoom CEO Eric Yuan stating in a blog post, “We did not design the product with the foresight that, in a matter of weeks, every person in the world would suddenly be working, studying, and socializing from home.” Yuan added that over the next 90 days the company will “[enact] a feature freeze … shifting all of our engineering resources to focus on our bigger trust, safety and privacy issues” and release a transparency report, similar to reports shared by tech giants such as Facebook, Google and Twitter.

In addition to hacking into and taking command of private meetings, threat actors are masquerading as legitimate organizations with the intention of collecting highly personal information, such as a COVID-19 safety portal allegedly from the World Health Organization and a fake disease prevention waitlist portal. Additionally, a Venmo-like interface was recently discovered in the form of an emergency fund to generate relief dollars for those in need, and the Better Business Bureau has received numerous reports of individuals acting as U.S. Department of Health and Human Services and other government department employees, instructing text message recipients to click on a link for a so-called mandatory online COVID-19 test.

2020 will be challenging for IT services vendors that are slow to adjust their business models to address rapidly changing market needs

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IT services revenue will retain its low single-digit growth trajectory through 1Q20 before it begins to decelerate due to COVID-19

IT services year-to-year trailing  12-month revenue growth, at 2.2% in USD, was up 30 basis points sequentially in 4Q19 and down 400 basis points against the year-ago compare. During 4Q19, benchmarked IT services vendors continued to invest to expand their portfolios and resources to enable business transformations through next-generation technologies that support enterprisewide transformation initiatives across front-, middle- and back-office functions. Lingering growth challenges in traditional IT service areas; competitive pressures in growing IT service areas such as digital, cloud and cybersecurity; and unfavorable market dynamics tied to rising macroeconomic uncertainties and pockets of tight spending slowed vendors’ revenue performance in 4Q19.

Average profitability for benchmarked vendors contracted 80 basis points year-to-year to 11.2% in 4Q19 as some vendors continued to find it hard to balance addressing revenue pressures with investing in portfolio expansion, talent development, organizational restructuring and service delivery improvement such as through automation, AI and platform-delivered services.

In the 3Q19 IT Services Vendor Benchmark, TBR predicted a correction in economic performance in 2020 that will stall digital transformations and slow growth for IT services vendors and consultancies. TBR’s expectation is that IT services revenues will continue to grow in 1Q20 following a flat trend over the past four quarters; however, we anticipate revenue growth will begin to decelerate in 2Q20 due to the COVID-19 pandemic, which spread more widely in February before accelerating its impact in March and April. As widespread business disruption occurs in Europe, the U.S. and Asia Pacific due to COVID-19, it will affect customer demand for IT services in 2020.

TBR’s IT Services Vendor Benchmark details and compares the initiatives of the largest global IT services vendors and tracks their revenue and performance. The report includes information on market leaders, vendor positioning, the IT services market outlook, key deals, acquisitions, alliances, new services and solutions, and personnel developments.

People and productivity: PwC’s approach to helping clients cope with COVID-19

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Who is working from home? Do they have everything they need? Can they stay connected? Are they OK? Companies around the world have been struggling to answer those questions in recent weeks as the COVID-19 virus became a global pandemic and suddenly forced many workers, and their employers, to adjust to remote working. As human resource policies, security concerns, connectivity and productivity have all been challenged, PwC U.S. rolled out a solution to answer the most basic and pressing question: “Are you able to work today?” With a simple interface, a quick and anonymous process, and with security and privacy baked in, PwC’s solution helps clients quickly determine what percentage of their workforce is enabled to work effectively and what percentage has issues with technology, mobility, supplies or well-being. If widely adopted, the solution should pave the way for a second PwC product: an application designed to help track and trace employees in the event of someone contracting COVID-19. In TBR’s view, these paired solutions demonstrate a concrete and immediate response — from idea to launch in five weeks — to some of the issues facing global companies during the pandemic and should set PwC’s clients up to better understand and manage remote working productivity in a post-COVID-19 world. 

First: Confirm status

Every company needs to know whether its workforce can be productive on any given day — an issue that hardly seemed critical or hard to measure at the start of 2020. Now, getting a daily picture of potential productivity has become an ongoing challenge for many companies navigating COVID-19, raising questions around what percentage of the workforce can be expected to be productive. On April 1 PwC launched a solution, Status Connect, to address that challenge while still conforming to privacy and security standards. At its core, the solution allows administrative professionals within an organization to know what percentage of the workforce in any specific geography and/or business group has an issue preventing them from working effectively. With that information, particularly as daily responses turn into trends, a company can deploy additional resources where needed, forecast potential slowdowns, and gain insights into what kinds of underlying problems hold back the company’s overall productivity.

Initially the solution offered employees only two choices, technology and other, in essence to gauge what is challenging their ability to work effectively, but PwC has already expanded the choices to technology, mobility/travel, business supply and well-being. PwC leaders noted that some clients already adopting the solution anticipated needing a more complex set of options to gain meaningful insights, until PwC explained the richness of data insights available across a large population based on a simple user experience. As the firm continues developing Status Connect, it is adding gamification to enhance the sense of community and drive adoption and commitment to using the solution every day, as well as daily custom broadcast messages and company customizations. Notably, the firm has implemented the solution across some parts of the U.S. member firm, but not yet globally.

As TBR has previously noted: “With risk permeating every business conversation and PwC accelerating investments in digital-related offerings, including PwC Connected Solutions, which sits within its Risk and Regulatory Platform business, the firm has prepared for the next wave of opportunities. Trading on trust remains at the core, especially as the politics of data continue to disrupt PwC and its clients. Becoming customer zero keeps PwC consistent with peers, while pulling in risk differentiates, particularly against non-Big Four competitors. But the firm creates a good use case for embracing digital when it comes to managing risk.” PwC is not immune to COVID-19 and all of the workforce management implications that come with it. Adopting the solution internally is certainly the proper next step as the firm strives to protect its spot in the market as the shift to digital operations elevates the strategic importance of risk and compliance functions.

COVID-19 outbreak allows SAP and SIs to work on their relationships

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COVID-19 delays the already slow process of taking S/4HANA customers live

For decades, service partnerships have been of utmost importance to SAP (NYSE: SAP). Migrating customers onto S/4HANA is a key part of SAP’s growth strategy, and none of those deployments happen without the involvement of partners. At the end of 2019 SAP reported a total of 13,800 S/4HANA customers; however, most of those customers are not yet running the solution live in production. As SAP has clearly noted, the time lag between when customers sign up for S/4HANA and when they actually deploy it is due to the business processes changes required, rather the technology challenges involved.

Although SAP and its services partners have been working to increase the number of trained resources available to help customers navigate business process changes associated with the upgrade to S/4HANA, the current lack of skilled resources has been a persistent and enduring problem. The COVID-19 outbreak has exacerbated the issue for SAP and partners, as 42% of IT decision makers in a recent TBR survey indicated they would be delaying existing projects due to the virus’s impact. The rollout of S/4HANA is among those existing projects that will be delayed, slowing the shift to live production for the majority of the 13,800 contracted S/4HANA customers.

The COVID-19 outbreak has certainly stressed the networks, the IT support staff at most enterprises, and the employees themselves as they adjust to new work-from-home (WFH) realities. In addition, traditional IT services deployments, such as upgrades to existing SAP instances or a move to SAP Business Suite 4 HANA (S/4HANA), and nontraditional technology-infused consulting engagements, such as design thinking sessions or agile enterprise workshops, have come under new pressures, including requiring creative solutions to carry out engagements that have not been postponed or outright canceled. The new challenges around deployment and execution are accelerating, in TBR’s view, industrywide trends around partnering, forcing consultancies, IT services vendors and technology providers to reconsider the strength of their alliances, address the gaps and shortfalls made evident by the COVID-19 pandemic, and take advantage of the opportunity to serve a broader client base as the global economy recovers.