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Opportunities for IT services abounding in a resurgent APAC market

In the most recent edition of the quarterly IT Services Vendor Benchmark, which published Oct. 7, TBR analysts took a deep dive into services vendors’ performance in APAC over the last few quarters, noting trends and anticipating how the market would react to easing pandemic restrictions and new investments in people and capabilities. The following comes from that deep dive; the full content is available from TBR.

IT services vendors see accelerating revenues as pandemic pressures slow and local investments grow

While pandemic-related pressures slowed APAC revenue growth for the vendors in TBR’s IT Services Vendor Benchmark during 2Q20, 3Q20, 4Q20 and 1Q21, regional revenue growth accelerated during 2Q21, supported by the gradual lifting of restrictions due to vaccine rollouts across the region. TBR believes the recent ramp-up of hiring of local market resources, leadership appointments, and acquisitions and partnerships will improve vendors’ ability to serve clients that are based in APAC and global clients that have operations in the region, and diversify global revenues during 2022.

APAC revenue leaders aim to better compete globally through investments outside core Japan market

The two benchmarked leaders in revenue size in APAC — Fujitsu and NTT DATA — remain deeply rooted in the APAC market, even as these vendors continue to invest in new resources and capabilities outside their core market of Japan to better attract and support clients abroad. Attempting to penetrate new geographies can be a double-edged sword for the two vendors, as it can help Fujitsu and NTT DATA compete abroad against more established peers in markets such as the U.S. and Europe, but also opens the door for peers to capture market share in Japan. The two companies have thus far taken somewhat divergent paths, with NTT DATA centering its efforts on augmenting U.S. operations through acquisitions, which is helping it gain traction in the market, while Fujitsu focuses on more internal transformations to grow its services resources and portfolio in new markets to earn client mindshare. 

NTT DATA closed the acquisitions of Acorio in 4Q20, Hashmap in 1Q21 and Nexient in 2Q21. The three U.S.-headquartered companies will add capabilities in digital, cloud and consulting, respectively, and, in the case of Acorio, horizontal technical capabilities around ServiceNow. We fully anticipate North America-focused NTT DATA Services will maintain an active acquisition pace over the next year, as synergies begin to increase and compound, boosting top-line revenue growth into 2022. 

Pursuing APAC expansion through innovation-led engagements around customer experiences

Quickly growing revenue leaders are eyeing opportunities to further penetrate the APAC market by leveraging digital design and creative capabilities to drive high-value opportunities across regions such as Japan and India. Consumer and enterprise preferences toward digital experiences and cloud-based “as a Service” solutions increasingly influences clients’ digital transformation agendas, providing growth opportunities for well-positioned vendors.

Accenture, No. 5 in revenue size in 2Q21, announced the opening of an office in Japan to host Accenture Interactive’s Droga5 team, along with plans to open similar facilities in the next 12 months in Brazil and China. Adding Droga5 capabilities in the country will augment Accenture’s innovation-led discussions to expand the company’s addressable market in areas such as marketing operations, including design, content development and content moderation, among others.

No. 6 in revenue size, Tata Consultancy Services (TCS) provided consulting and systems integration services for an India-based over-the-top streaming platform, SonyLIV, to help personalize subscriber experiences leveraging AI and machine learning. As a part of the engagement, TCS will also launch an Experience Design Center focused on rapid prototyping and digital innovation. Engagements such as this can provide a pathway into high-value services with TCS Interactive around digital design, branding and marketing. 

India-based talent serve as launching pad for services in APAC, diversifying revenue streams

The story in India is slightly different. India has traditionally offered an abundance of cost-effective global service delivery, but the local market itself only accounts for a small fraction of most vendors’ total revenues. Some companies are now viewing this juxtaposition as an opportunity, and despite a severe second wave of COVID-19 hitting between April and June 2021, vendors increasingly competed for new business with local clients in India in 2Q21. While India is unlikely to become the next frontier for growth in the near term, demand for digital transformation in the region can be an avenue for global revenue diversification, provided vendors can attract and retain skilled talent amid rising demand.

Earlier this year, Infosys signed a contract with the Federal Bank of India to implement the Oracle Customer Experience Cloud solution, helping the bank improve customer experience. Infosys also developed a new SaaS offering designed specifically for Urban Cooperative Banks in India. Infosys is facing fierce competition in recruiting and sales opportunities from both India-native peers and multinational corporations such as Accenture and Capgemini. For example, during the quarter Accenture signed deals with India-headquartered Mankind Pharma and Bharat Petroleum.

Capgemini’s three awards in the inaugural edition of the NASSCOM Engineering and Innovation Excellence Awards 2021 in India indicate the company is well positioned in the segment. Infosys has an opportunity to double down on its partnerships with Amazon Web Services, Google and Microsoft similar to peers like Wipro and Cognizant, which have formed joint business units and have been investing heavily in the country to provide the infrastructure backbone needed for India to pivot from being a frontier to emerging as a more developed market. Managing messaging around these relationships and Infosys’ broad technology agnosticism might prove most challenging for the company.

The IT Services Vendor Benchmark details and compares the initiatives of and track the revenue and performance of the largest global IT services vendors. 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.

Logicalis’ local scale and investments in services transformation offerings position it well to withstand the COVID-19 headwinds in LATAM

Following one of the last in-person analyst events held in in Sao Paolo, Brazil, just before COVID-19 took over our personal and business lives, TBR had a chance to reconnect virtually with Logicalis LATAM CEO Rodrigo Parreira and Logicalis LATAM Director of Strategy Eduardo Harada. Expanding on our discussion at the analyst event in February, Parreira confirmed many of the regional market trends are still in place, although some initiatives have been paused, with COVID-19 forcing buyers to reorient their budget priorities toward run-the-business awards.

A spike in demand around supporting remote work, implementation and management of collaboration tools, and security plays to the strengths of Logicalis’ value proposition, particularly within the infrastructure services domain. Parreira is even more optimistic about a resurgence of opportunities in 2021 as regional buyers begin to solicit services in areas such as automation and AI, creating increased opportunities around IoT and connected devices. As Parreira positioned it, “The crisis accelerated automation.” He also highlighted that more than 50% of Logicalis new bookings have been geared toward services, accelerating the company’s efforts to become an IT services leader.

TBR is not surprised to hear there is an uptick in demand for automation considering the technology’s potential to lower the total cost of ownership, which is of particular importance to highly price-sensitive buyers in the LATAM market. We believe vendors that have experience adopting and scaling automation tools to drive down their own costs, improve remote delivery and retain savings will see immediate rewards. However, Logicalis may face an uphill battle educating regional customers on the value of AI beyond cost optimization, as many continue to see AI as a threat to their jobs. The company, however, is well positioned to capitalize on the trust it has built over the past six decades of operating in the region.

TBR previously wrote, “While the company’s business consulting unit spearheads outcome-based pricing initiatives, we believe Logicalis could further accelerate its value proposition transformation if it approaches every opportunity with scale in mind from the beginning. To execute on such a strategy, the company would need to further build out its consulting and application services capabilities, with acquisitions in these domains highly likely.” COVID-19 will likely fuel market consolidation, including in the LATAM market. Both Parreira and Harada believe consolidation in the LATAM market will be even greater as the challenging macroeconomic conditions will drive many smaller vendors out of business. Acquiring for capabilities, not for scale, would deepen Logicalis’ value proposition in both existing and emerging domains, including AI and SaaS. Larger global peers, though, including the Big Four and multinational corporations, are also scouting for price-competitive targets, possibly pushing Logicalis to take more aggressive action sooner.

AI, Accenture and Amazon: HITS acquisitions update 2020

Accenture’s steady appetite, Amazon’s potential new offering and Google’s uncertain moves

Accenture’s acquisition of Clarity Insights follows the company’s INTIENT purchase and rounds out a typically active acquisition year for one of the leaders in TBR’s HITS benchmark. Clarity Insights brings Accenture AI and machine learning capabilities, 350 healthcare data scientists, and healthcare industry clients. As noted in our most recent full report on Accenture’s HITS business, “Accenture targeted the AI opportunity in life sciences in mid-2019, launching its INTIENT platform for collecting, storing, monitoring and analyzing data from life sciences clients’ business environments. The platform leverages Accenture Applied Intelligence to provide AI and analytics services, improving efficiency and data management.” Beyond extending Accenture’s capabilities, the Clarity Insights acquisition reinforces Accenture’s strategy around AI and life sciences that the INTIENT purchase supported. The report adds, “TBR believes Accenture must foster industry-specific partnerships to extend the capabilities of INTIENT and drive traction for the platform in the industry.” TBR will closely track how Accenture’s partnerships evolve and how the company drives new revenue based on these acquisitions.

Echoing Accenture’s focus on AI, Amazon acquired Health Navigator, a platform designed to foster more expeditious collaboration between healthcare providers and patients, in part through natural language processing and enhanced analytics. Amazon reportedly purchased the company amid efforts to build out Amazon Care, its in-house healthcare services, which it launched in September 2019. On the surface, Amazon’s healthcare-related acquisitions and moves denote neither an immediate threat to traditional HITS vendors nor a clear signal Amazon intends to become a different kind of player in the HITS space. Analyzing Amazon only on the surface would be foolishly shortsighted. Once the company irons out the challenges within Amazon Care, including fully integrating Health Navigator, TBR expects the company will craft a new offering for Amazon clients, potentially starting first with healthcare joint venture partners JPMorgan (NYSE: JPM) and Berkshire Hathaway (NYSE: BRK.A; NYSE: BRK.B). At 1.2 million employees for those three companies combined, Amazon would have a sizable test bed for enhancing current capabilities and developing new offerings. If Amazon can demonstrate an ability to provide top-notch healthcare services for its own employees and a few select partners, every household will wonder if the first step in getting healthcare should start with, “Alexa …”     

In acquiring Fitbit, Alphabet (Google) alarmed some data privacy and industry analysts concerned that the search engine and advertising giant bought the wearables company to gain access to massive amounts of personal, and specifically healthcare-related, data. Both companies’ executives declared data protections would be unchanged and the underlying reasons for the acquisition centered on Fitbit’s expertise and intellectual property around wearable devices and health-tracking applications, platforms and user experience. In TBR’s view, acquiring Fitbit conforms with Google’s overall expansion strategy and specifically boosts the company’s potential role in the overall HITS space. Enhancing Fitbit’s platform with Google’s AI capabilities could further minimize perennial HITS challenges, such as around data privacy and population health, but only if Google can manage the delicate tasks of leveraging user data without violating privacy, crafting and enhancing algorithms that improve the user experience, and maintaining the streamlined seamless flexibility of Fitbit even as the data flows into the highly regulated healthcare ecosystem.  

Cisco acquisitions in 2019 bolster service provider strategy

“Chris Antlitz, an analyst at Technology Business Research Inc., said Cisco’s DX strategy stems from its longtime relationship with carriers, which he said accounts for about a quarter of Cisco’s overall revenue.

“‘They’re building an architecture that telcos want to align with,’ Antlitz said. ‘These acquisitions strengthen the value proposition of the architecture they’re building.'” — TechTarget Network

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Acquisitions help European-heritage vendors Atos and Capgemini continue expanding in North America and globally

Atos is preparing to accommodate the explosion of data across enterprises by effectively managing, storing, securing and analyzing data. Revenue and cost synergies from the Syntel acquisition will enable Atos to achieve its financial goals in 2019. Newly established relationships with technology partners, the release of new product offerings that support edge and quantum computing, and the planned acquisition of IDnomic in cybersecurity will improve Atos’ ability to deliver business outcomes to clients through next-generation technologies and  sustain the company’s growth through 2020. Atos Europe-based rival Capgemini is reaping the rewards of its strategic expansion into next-generation and industry-specific solution areas, as evidenced by sustained midsingle-digit organic revenue growth over the past several quarters and an increase in digital and cloud revenue as a percentage of total revenue, from 45% in 1H18 to 50% in 1H19. The planned acquisitions of Altran and KONEXUS Consulting Group will solidify Capgemini’s ability to deliver digital transformation to industrial and energy & utilities clients and expand its reach across clients’ C-Suite, increasing its access to budget stakeholders. Portfolio expansion and bookings growth with technology partners such as Amazon Web Services and Microsoft will enable Capgemini to maintain its digital and cloud momentum and modernize its applications development and maintenance services portfolio to sustain growth in Application & Technology, which accounted for 71.1% of revenue in 2Q19. — Elitsa Bakalova, Senior Analyst

Additional assessments publishing this week from our analyst teams

Utilizing partners and leveraging emerging technologies enabled Cisco Customer Experience to maintain profitability and generate growth in 1Q19. As the company continues to invest in its portfolio to offer a broader range of software-driven services, such as for security solutions, and leverage its partner network to support the development of emerging technologies and delivery, we expect revenue growth will improve in 2H19. — Kelly Lesiczka, Analyst

Fujitsu Services’ portfolio investments such as for cloud and hybrid IT are evolving, but an increased pace of restructuring and new branding initiative would further sustain growth. Fujitsu continues to update North America and Europe sales operations to drive productivity and adoption around new portfolio offerings, which will help the company offset challenges within its legacy business. — Kelly Lesiczka

AT&T is becoming a more profitable company despite market saturation, competitive challenges and shifting consumer trends limiting subscriber growth. AT&T’s Entertainment Group and Mobility EBITDA margins continue to improve as the company moves from promotional pricing and transitions customers to premium service plans to boost average revenue per user. Subscriber growth remains challenged, however, due to T-Mobile’s continued dominance in postpaid additions, Xfinity Mobile’s growing momentum and video customers moving to rival streaming platforms. — Steve Vachon, Analyst

T-Mobile’s strong financial and subscriber performance in 2Q19 highlights how the company’s long-term outlook remains favorable regardless of whether the proposed Sprint merger gains final approval. 600MHz network deployments are at the foundation of T-Mobile’s success as its expanded LTE coverage, which is now on par with that of Verizon and AT&T, contributed to reduced churn in 2Q19, enabling T-Mobile to increase postpaid and prepaid subscriber net additions year-to-year despite the maturing wireless market. —Steve Vachon

The federal IT earnings season concludes at TBR this week as Perspecta releases its 2Q19 fiscal results after the close of business on Wednesday, August 14. FY20 began for Perspecta in 2Q19, its second year as an independent federal IT contractor, and the company looks to build off a strong close to FY19, when it successfully defended its incumbency on several ongoing federal programs and accelerated bookings of net-new awards. TBR projects the company will realize year-to-year growth in 2Q19 of between 4% and 5% to reach revenue of between $1.08 billion and $1.09 billion, owing in part to $1.7 billion in new cybersecurity-related programs won during the quarter — much needed contract awards that will help offset the loss of the $2.9 billion NASA End-User Services and Technologies contract to Leidos in 1Q19. Federal budgets in IT and programs to support national defense priorities are expected to sustain growth into 2020. With this spending environment as a backdrop, Perspecta appears well positioned for improving growth and profitability in its FY20. — John Caucis, Senior Analyst

Apple faced another quarter of sluggish revenue as Western consumers hold out for the next generation of the iPhone. However, the company is growing its install base in China and emerging markets, which are paramount for its long-term services play, through discounting, reselling and financing iPhones and other Apple devices. — Daniel Callahan, Analyst

Lenovo has had a few stellar quarters in a row, as it consolidated premium PC market share, reaped higher ASPs as a result of the Intel silicon shortage and benefited from inorganic revenue compares from its Fujitsu PC business acquisition. As we move into 2Q19, inorganic growth will decrease (only one month will include inorganic revenue), the silicon shortage will begin to subside and PC consolidation opportunities will slow. TBR still expects Lenovo will see growth, but it will fall in the midsingle digits. Details on Lenovo’s mobile and data center business will be published this week in TBR’s 2Q19 initial response on the company. — Daniel Callahan

And this week join TBR for a webinar, “The Evolving Battleground for Winning Private Cloud Customers.”  

Understanding an acquisition: Capgemini snaps up Germany’s energy-centric KONEXUS

Capgemini’s acquisition of KONEXUS, a 30-person Germany-based energy strategy and management consultancy, triggered a reaction at TBR, as earlier this year we had looked at consulting for the energy sector and had been surprised at the relatively small number of acquisitions across the firms we track. Thirty management consultants will be a fractional addition to a company of Capgemini’s size with headcount of roughly 215,000, and the revenue increase will likely be marginal, but the decision speaks to Capgemini’s strategy to build capacity in both emerging areas and areas where the firm has established strengths. Perhaps Germany’s politically charged Energiewende will limit the impact of KONEXUS on Capgemini as a whole, as the strategic advice for companies working in Germany’s energy sector may not easily translate to other countries and regions. More likely, though, energy companies globally will face ever-increasing political pressures to reform and will seek strategic guidance — maybe ever-increasingly from Capgemini.

In our May 2019 full report on Capgemini, we noted that the company’s Energy, Utilities, and Chemicals practice earned the smallest share of revenue by industry (11.3%, but was leading in growth compared to other verticals) and predicted the company would seek acquisitions that will “bolster its services expertise around digital and cloud, such as in automation, analytics, cloud, digital services, AI and IoT, in addition to expanding its onshore presence.” With that context, acquiring KONEXUS appears to be a small move tangential to the company’s broader strategy. Folding KONEXUS into Capgemini Invent could be a way to use experienced management consultants to guide innovation and transformation engagements with a broader set of clients. Some of Capgemini’s peers have similarly made acquisitions expected to provide traditional benefits — enhanced offerings, new clients, additive revenue — while also changing go-to-market strategies, operational approaches to engagements, and overall brand. That may be too much to expect from KONEXUS, but this may indicate where Capgemini is headed.

Look for our initial assessment of Capgemini’s earnings this week.   

Cloud marketplaces are small in revenue impact but mighty in market impact

Cloud marketplaces are more of a slow burn compared to pronounced market impacts in books, retail and music

To predict the impact of cloud marketplaces, it is worth evaluating how similar changes in go-to-market strategies have impacted other markets. Sears (Nasdaq: SHLDQ), Amazon (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) are three very different companies that illustrate just how profound an impact sales motions can have. Sears rode the impact of its mail-order catalog for nearly 100 years in a wave of success that only recently petered out. Amazon and Apple have much broader business strategies, but both owe a considerable amount of their success — which has them jockeying for the title of the world’s largest company in terms of market capitalization — to their selling methods. Both Amazon and Apple entered well-established markets and disrupted them, not by competing on the merits of their offerings but by challenging the existing sales motion with a marketplace approach. Amazon’s online approach to the book market is a very pronounced example of marketplace disruption, as Figure 1 illustrates. Amazon began selling books online in mid-1995, overtook traditional market leader Barnes & Noble less than eight years later, and subsequently expanded and dominated the market. Today, Amazon controls over 50% of the total book market in the U.S., including both physical and digital titles.

Market overview: Online marketplaces, where customers can browse, search and then buy or subscribe to software titles, have been around for quite some time. Salesforce (NYSE: CRM) rolled out the first cloud app store in 2005, and a wide variety of new options have been introduced since. Despite their longevity, the impact of these marketplaces is still uncertain. Salesforce AppExchange is a standout success, but the impact is more nuanced for most other marketplaces and the industry overall. Marketplaces have not yet become a prominent distribution model for software and cloud services, but they play a niche role in overall go-to-market strategies that include traditional direct sales, partner-driven sales and customer self-service sales. Although marketplaces currently hold a small portion of overall cloud and software revenue share, trends could bolster their role in the market moving forward.

Whether by R&D or acquisition, money can’t buy SaaS performance

The SaaS market appears to provide an easy opportunity for vendors to garner significant revenue and growth. SaaS is the largest segment of the cloud market — bigger than the IaaS space, which draws so much attention due to leaders Amazon Web Services and Microsoft Azure. The SaaS market is also much more fragmented, littered with thousands of providers, which would seem to imply that consolidation is a foregone conclusion. However, even for three of the largest leading SaaS providers, the investment level required to compete in the space remains high, and even spending billions of dollars in R&D and acquisitions does not guarantee success.

This is not to say that these billions of investment dollars are all for naught. Despite being around for more than a decade, the SaaS space remains quite immature. Customers are still figuring out which of their applications can be moved to cloud delivery, and how, when and with which vendors those moves can take place. Until a longer track record exists for making these decisions and vendors consolidate disparate offerings into packages more closely resembling integrated solutions, the market remains very much in flux. It’s not the functionality holding back the adoption of hybrid solutions, it’s the difficulty of integrating and managing the multicloud and multivendor solutions. In the meantime, vendors such as Oracle, SAP and Workday have no other choice but to continue accelerating their investments. Their dollars will not buy SaaS performance in the short term, but this is the only way these vendors have a shot as the SaaS space becomes more predictable.

Whether by R&D or acquisition, money can’t buy SaaS performance

The SaaS market appears to provide an easy opportunity for vendors to garner significant revenue and growth. SaaS is the largest segment of the cloud market — bigger than the IaaS space, which draws so much attention due to leaders Amazon Web Services and Microsoft Azure. The SaaS market is also much more fragmented, littered with thousands of providers, which would seem to imply that consolidation is a foregone conclusion. However, even for three of the largest leading SaaS providers, the investment level required to compete in the space remains high, and even spending billions of dollars in R&D and acquisitions does not guarantee success.

This is not to say that these billions of investment dollars are all for naught. Despite being around for more than a decade, the SaaS space remains quite immature. Customers are still figuring out which of their applications can be moved to cloud delivery, and how, when and with which vendors those moves can take place. Until a longer track record exists for making these decisions and vendors consolidate disparate offerings into packages more closely resembling integrated solutions, the market remains very much in flux. It’s not the functionality holding back the adoption of hybrid solutions, it’s the difficulty of integrating and managing the multicloud and multivendor solutions. In the meantime, vendors such as Oracle, SAP and Workday have no other choice but to continue accelerating their investments. Their dollars will not buy SaaS performance in the short term, but this is the only way these vendors have a shot as the SaaS space becomes more predictable.

Oracle is in too far to turn back now

By virtue of its long legacy in a diverse field of software, Oracle finds itself in a unique position with cloud solutions. Aside from databases, Oracle is a company built on acquisitions, and that approach holds true with its expansion in cloud. After first downplaying the overall concept of cloud delivery, even while acquiring cloud assets, the vendor recently quickly shifted its messaging and doubled down on internal- and external-driven innovation. The results from a dollar perspective are laid out in Figure 1, representing a steady and significant stream of acquisitions focused on building out mainly SaaS offerings and R&D that funds cloud solutions across the spectrum of IaaS, PaaS and SaaS. The significant amount of Oracle’s investments is undeniable, but the returns are far from overwhelming. The downfall of Oracle’s SaaS investment plans played out quite publicly, as the company first bet it would become the first SaaS/PaaS vendor to achieve a $10 billion run rate, then recently changed its reporting structure midyear to blur the actual results.

Graph showing Oracle cloud acquisitions, R&D investments and cloud revenue for 2016, 2017 and estimate 2018

Figure 1

Oracle maintains worse performance than SAP and Workday for the return on its acquisition and R&D investments, spending more on these investments than the company generated in total cloud revenue during 2016, 2017 and 2018 (estimated). That does not mean Oracle is without successes, however, as the purchase of NetSuite, reflected in Oracle’s large acquisition expense in 2016, contributes to revenue growth and complements the organic development of Fusion Cloud ERP. A lot of Oracle’s struggles in cloud come from organic initiatives, such as its PaaS and IaaS services, which have not taken root with customers despite aggressive sales tactics. Those categories of services account for a significant portion of Oracle’s R&D investments over the past three years, but still generate relatively small revenue streams for the vendor. Nevertheless, despite the investment outweighing the associated revenue contributions, we believe Oracle will and should remain committed to its current cloud strategy. It may not pay off in the near term, but these investments are the best shot for Oracle to execute a longer-term cloud turnaround.

SAP is making all the right financial decisions, but still falling short

Though still acquisitive, SAP’s cloud strategy has been more focused on internal innovation compared with Oracle. A more even mix of R&D and acquisition investments, combined with an earlier commitment to cloud delivery, is producing a better rate of revenue return for SAP, as shown in the graph below. SAP ranks fairly close to Oracle in total cloud revenue but is achieving those run rates after incurring significantly fewer R&D and acquisition expenses. TBR estimates SAP’s combined R&D and acquisition investments for cloud were $6 billion for the past three years, compared with more than $21 billion for Oracle over the same time period.

Graph showing SAP cloud acquisitions, R&D investments and cloud revenue for 2016, 2017 and estimate 2018

Figure 2

Despite the comparatively positive financial returns for SAP in cloud, the vendor is still struggling with multiple elements of its portfolio. After allowing Salesforce to capitalize on the shift to moving front-office apps to cloud, SAP recently started circling back to carve out territory in that domain. Through multiple acquisitions in the customer experience space and new messaging, SAP is making a concerted push, but it faces an uphill battle winning more market share in that space. Furthermore, SAP’s effort with SAP Business Suite 4 HANA is a long-term one, and in the meantime, assets such as SAP Cloud Platform are underrepresented in the platform space. The net is that SAP has managed investments well and grown revenue in cloud but is still not achieving at a scale that ensures the vendor’s leadership in the SaaS space.

Workday is opening its wallet after trying the DIY route

Historically, Workday has been more reliant on internal R&D as the sole means of advancing its cloud strategy compared with Oracle and SAP. That certainly does not mean the company was shy about entering new markets or delivering new products, as Workday has rapidly increased its activities in both regards over the past three years. The addition of student, financial and now platform offerings illustrates how broadly Workday has expanded its portfolio beyond core human capital management (HCM) offerings. Part of Workday’s reliance on R&D comes from its core focus on a “single line of code,” which provides simplicity and consistency in the vendor’s offerings to customers. Integrating multiple offerings and services is part of the challenge with acquisitions, which Oracle and SAP know all too well. Workday’s past acquisitions have always been functionality-focused and intermittent. The company’s three acquisitions in 2Q18, including its $1.55 billion purchase of Adaptive Insights, is a departure from that strategy but is likely not indicative of broader plans to acquire more fully baked applications. Workday Cloud Platform will allow Workday to leverage partner-developed, inherently integrated technology to expand portfolio breadth.

Graph showing Workday cloud acquisitions, R&D investments and cloud revenue for 2016, 2017 and estimate 2018

Figure 3

The assumption that Workday’s acquisition-lite approach to investment would be advantageous is not necessarily true. Even without significant acquisitions, Workday’s investment ratio (R&D + Acquisitions/Cloud Revenue) is higher than SAP’s for the three years from 2016 to 2018. Workday had a lower ratio than Oracle, which is spending aggressively on acquisitions, but Workday ranked above SAP in internal R&D investment level proportional to revenue. Additionally, Workday’s streamlined “single line of code” approach is not guaranteeing success in new product categories. HCM revenue growth remains strong, but Workday’s new expansions in Financials and Student are not seeing accelerated early revenue growth. The new offerings are certainly growing, but not at the rate one would expect given the strong HCM base into which they can be cross-sold. The large acquisition of Adaptive Insights could be part of a change in strategy to add inorganic revenue and could lead to greater cross-selling possibilities for the Financials business.