As Senior Analyst Elitsa Bakalova notes this week, “Partners are key contributors to Capgemini’s technology-enabled transformations around next-generation technologies, such as digital and cloud. The expanded partnership with Amazon Web Services enhances Capgemini’s AWS business in North America and improves its ability to advance cloud adoption in a strategic region for Capgemini’s global expansion. Additionally, the integration of Altran continues, and as of Jan. 27, Capgemini holds 53.57% of Altran’s share capital and at least 53.41% of Altran’s voting rights. Altran will improve Capgemini’s ability to deliver digital transformation to the industrial sector and position as an intelligent industry vendor that can provide solutions around Engineering 4.0 and Industry 4.0.” Across the IT services spectrum, TBR has seen substantial changes in the way vendors partner with cloud and software companies, an area we will examine in greater detail throughout 2020.
Additional assessments publishing this week from our analyst teams
“Tata Consultancy Services closed 2019 with continued revenue growth, which TBR attributes to ongoing investments in its solution suite and talent pool, alongside aggressive pricing. Strengthening its digital capabilities that enable technology-based transformation, at scale, for the company’s global clientele will drive further growth in 2020.” — Kevin Collupy, Analyst
“TBR expects T-Systems’ revenue growth will slightly accelerate in 4Q19 as the company benefits from an improved delivery network and a realigned portfolio that offers clients cloud, IoT and security capabilities that support growth initiatives. T-Systems leverages partnerships that enhance scale and help to embed emerging technologies within its core portfolio offerings and equip the company to drive revenue growth around these capabilities. As T-Systems infuses growth areas throughout its portfolio and realigns business segments to focus on these profitable avenues, including the establishment of an integrated telecommunications business that will house telecommunication services and classified ICT business, the company will be able to leverage more flexible delivery and innovation models to position as more customer-led and customer-centric.” — Kelly Lesiczka, Analyst
acquired assets to provide advanced security and intent-based networking
solutions, we expect Cisco Customer Experience will benefit from
pull-through support and maintenance opportunities, allowing it to sustain
revenue growth in 4Q19. Additionally, portfolio growth to include hybrid IT and
multicloud will also provide migration and management engagements, creating new
areas of growth. Similarly, expanding its software and subscription portfolio
provides consistent revenue streams, contributing to Cisco Customer Experience
revenue growth through support and maintenance engagements. Leveraging its core
strength areas, such as security, networking and SD-WAN, will help Cisco to
maintain its existing engagements while also effectively combating competitive
pressures from vendors pursuing opportunities in similar growth areas. Cisco’s
technical expertise improves its ability to differentiate its professional services
portfolio from that of its peers.”
— Kelly Lesiczka
“The cloud solutions agreement with the National Association of State Procurement Officials through September 2026 is a milestone for Capgemini’s cloud services business in the U.S. as the simple contractual process will expand the company’s activities in the public sector, which TBR does not believe to be a leading industry in the country for Capgemini, unlike its business in financial services and manufacturing. Capgemini will provide joint offerings with Amazon Web Services, Microsoft, BMC, ServiceNow and Virtustream.” — Elitsa Bakalova
“TBR estimates HCL Technologies (HCLT) will sustain revenue growth of between 15% and 16.5% year-to-year through 2021, and will operate within its guided range of 16.5% to 17% in constant currency for FY20. Acquisitions provide HCLT with expanded market share and enhance portfolio offerings to appeal to dynamic client demand and propel revenue. Developing HCL Software and incorporating partner assets to support integration and management opportunities will create recurring and higher-profit revenue streams. We expect HCLT will leverage its software business to capture higher-value services engagements, but the company must be mindful of cannibalization within its traditional services streams, which comprise the majority of revenue. Additionally, deal size remains smaller than in previous years, with most clients in the $1-plus million category as HCLT benefits from an increase in software license and deployment deals. TBR believes most deals during the quarter were generated with new logos, as HCLT looks to drive recurring revenue streams tied to the HCL Software business unit, which will generate additional growth in the $1-plus million category from cross-selling and upselling other product and software offerings.” — Kelly Lesiczka
“IBM faced healthcare IT services (HITS) headwinds throughout 2019, plagued by media reports and customer dissatisfaction with emergent solutions leveraging AI, mainly Watson for Oncology. The newly appointed general manager of Watson Health, Paul Roma, will work to improve employee satisfaction in addition to building confidence among IBM investors and partners within the wider healthcare market. A more succinct portfolio and go-to-market strategy supported by recent internal restructuring efforts will be critical to returning IBM to growth in 2020, when TBR estimates the company’s annual HITS revenue growth will reach 2.2%. Further, IBM’s addition of Red Hat and background in emerging technology areas such as blockchain for insurance industries and AI — despite missteps in these areas in 2018 — will enhance the value of the company’s existing HITS suite and offer it differentiation in the market compared to peers.” — Kelly Lesiczka
Plus, this Wednesday, join TBR’s Chris Antlitz for his insights from TBR’s 2020 Telecom Predictions: “TBR’s research suggests 2020 will be a springboard year for the telecom industry’s development of the new architecture, with spend in the key markets of 5G, network virtualization and edge computing poised to ramp up significantly through the middle of the next decade. TBR also anticipates that systems integrators will play a much broader and key role in helping CSPs transform their businesses and networks and that webscales will increasingly encroach on CSP turf as they concurrently pursue new value created from the aforementioned technologies.”
Principal Analysts Geoff Woollacott and Patrick Heffernan are each publishing a piece this week that touches on the business of digital transformation. Geoff focuses on the massive change expected from quantum computing as the business applications begin to catch up to the science. In his opinion, “Quantum is on the cusp of delivering economic advantage. The achievable impact is real today in what can be described as Horizon 1 application use cases. Horizons 2 and 3 will be as much a function of taking existing quantum algorithms that operate with a certain precision under the current fidelity of Noisy Intermediate-Scale Quantum (NISQ) Systems and applying them to different use cases requiring greater precision delivered from higher fidelity, and ultimately fault tolerant, quantum systems to deliver economic advantage to the activity in question.” Patrick’s blog looks at a specific use case for digital transformation, Port Oulu in Finland, where he notes, “a port like Oulu’s, which is both small enough to be manageable through a disruptive digital transformation and large enough to be replicative of a larger port’s ecosystem and challenges, could be an ideal place for connectivity and emerging technology vendors to experiment and prove out the use case for bringing one of the most fundamental infrastructure environments fully into the digital age.”
Additional assessments publishing this week from our analyst teams
“DXC Technology’s leadership, headed by new CEO Mike Salvino, is actively pursuing strategic alternatives for three of DXC’s businesses — U.S., state and local health and human services; business process services; and workplace and mobility — that do not fit the company’s focused strategy for the future. DXC will leverage these three businesses, which account for roughly 25% of the company’s total revenue, to unlock value through potential divestitures to strategic or financial buyers or a spin-off.” — Kevin Collupy, Analyst
“Cisco Customer Experience expands its partner network, particularly with technology-led vendors, to incorporate hardware solutions and support contract generation around these solutions. Integrating automation capabilities will enable Cisco Customer Experience to maintain profitability while increasing the delivery range of solutions to new clients. We expect the company to continue strengthening its partner relationships to accelerate its portfolio transition; however, Cisco Customer Experience could face challenges differentiating its offerings from those of its peers, as they also leverage partner technologies to grow market share.” — Analyst Kelly Lesiczka
“With markets, portfolio offerings and people at the center of its Strategy 2025 initiative, BearingPoint is expected to continue to grow its management consulting revenue beyond 2019 and gain opportunities in its five segments of focus: data-driven banking operations, unified commerce, automotive operations, next-generation public services and digital twin business. BearingPoint is developing its organization in Europe and establishing the foundation for its business development in the U.S. to address growing client demand and enable European organizations to become global companies.” — Elitsa Bakalova, Senior Analyst
“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
Publishing this week from TBR’s federal IT research program are our initial assessments of SAIC’s and Perspecta’s 1Q19 earnings performances. Perspecta is wrapping up its first complete fiscal year as an independent business entity. Its inaugural year has been characterized by significant challenges integrating a trio of large-scale legacy federal IT competitors, and we expect this will be reflected in its fiscal performance for 1Q19 and its FY19. The company won major contract extensions and successful re-compete bids to close out its FY19, setting the stage for improved performance in an increasingly growth-friendly federal IT market in its FY20.
SAIC will fully integrate Engility and its nearly $1.9 billion in revenue and 7,500 employees during the year, finishing a process that started in 1Q19. SAIC will leverage Engility to further accelerate its expansion with a more balanced, diversified and de-risked portfolio and an enhanced competitive stance in markets (space and intelligence) adjacent to its core Department of Defense and federal civilian sectors.
Read more of Senior Analyst John Caucis’ assessment of federal IT services vendors through the quarter and the upcoming quarterly benchmark.
Additional assessments publishing this week from our analyst teams
- Salesforce continues to expand its global reach with new infrastructure investments and local partnerships in key regions. These developments, alongside ongoing improvements to its core portfolio in recent quarters, will enable Salesforce to deliver $3.68 billion in revenue for CY1Q19, according to TBR estimates. — Jack McElwee, Analyst
- TBR’s 1Q19 Cisco report explores how Cisco sustained revenue growth momentum in 1Q19 despite a significant slowdown in its Service Provider customer segment, where communication service providers are focusing much of their investment on the RAN layer and software-defined networking is causing disruption. Outside the service provider segment, however, Cisco’s refreshed product lines and strong brand are resonating across SMBs, large enterprises and public sector organizations. Cisco completed the refresh of its enterprise switching lineup with the introduction of the latest Catalyst product in 1Q19, which will help drive continued growth across non-service provider segments. — Michael Soper, Senior Analyst
- Cisco Customer Experience’s use of partners to develop its portfolio around analytics, IoT and security as well as supplement delivery enables the company to maintain profitability and generate growth, as highlighted in TBR’s 1Q19 coverage of the company. Its pursuit of partnerships with technology-led vendors, including Microsoft Azure, Amazon Web Services and Google Cloud, will help Cisco Customer Experience generate additional advisory, implementation, and software and solutions support engagements. — Kelly Lesiczka, Analyst
And sign up here for the next TBR webinar, The Makings of the Telecom Edge Compute Market.
Chicken or egg first? For partner programs, that makes a big difference
As Intel (Nasdaq: INTC), Microsoft (Nasdaq: MSFT) and Cisco (Nasdaq: CSCO) created the modern computing era in the 1990s, partner programs were at the forefront. The success of these companies and the distributed computing era in general was largely built on the backs of technology and distribution partners. In fact, these companies still rely on partners to drive a majority of their revenue today. The same cannot be said for the cloud era of IT, which was led by the direct sales strategies of top vendors such as Salesforce (NYSE: CRM) and Amazon Web Services (AWS; Nasdaq: AMZN). These two vendors became leaders in their respective cloud markets by selling directly to customers, bypassing distribution partners altogether. Partners are certainly playing a larger role now, but the timing does impact their position in the value chain for cloud. Without a well-defined value-add in the self-service, transactional and passive sales strategies for cloud, partners are forced to create or carve out activities that are both unaddressed by the cloud provider and hold value for the end customer. Rather than traditional IT vendors relying on partners to drive their business, in cloud those partners are on their own in many respects to identify and develop their own value-add. Being creative, developing intellectual property and focusing on the gaps between multivendor solutions are much more important activities for partners in cloud programs compared with traditional ones.
Partners may look the same, but are in fact quite different
“What does a cloud partner look like?” was a common question as these new cloud-centric programs came to be. It was unclear if a new startup class of born-on-the-cloud partners would come into existence, or if the existing stock of VAR, distributor, MSP, systems integration (SI) and hosting partners would eventually transform their businesses to align with the new cloud business opportunities. As shown in Figure 1, the types of partners participating in new cloud programs is just the first category of changes programs are undergoing. As the answer to what type of partners are needed for these programs comes into view, it is looking like a little bit of the former and a lot of the latter. Cloud-native partners that are focused on consulting, managed services, intellectual property development and cloud solution integration hold a small but important space in the market. The difficult thing for vendors is that there are not very many of these newly formed partners, and to make matters worse, many are being acquired. It is also difficult to spur their creation or fit them into a traditional partner program. While traditional partners are cattle that can be controlled and herded in a consistent direction, cloud-native partners are wilder animals that create, forge and follow their own path. In terms of existing partners changing to focus on cloud solutions, that, too, is a difficult task. The truth is that many traditional VAR-type partners, focused on reselling and implementation activities, may not survive the transition to cloud solutions. Part of this is generationally driven, as many of the baby boomer-owned partner businesses lack the incentive to adapt their business model with retirement looming. Many of these partners will ride the slow decline of traditional IT opportunity until eventually closing their doors. Those traditional partners that do make the transition to a more cloud-focused business model will compose the largest segment of cloud partners. While they may keep the same name, these partners will be operating in a fundamentally different manner compared with traditional partner models.
U.S. cable operators and Dish Network are exploring building out their own 5G networks
Rakuten’s mobile broadband network deployment demonstrates that vendors must be aware of new opportunities to deploy 5G networks for customers that do not currently own mobile broadband networks. In November Dish Network selected Ericsson to supply a radio access and core network for Dish’s Narrowband IoT (NB-IoT) network, which is expected to be completed in March 2020. Dish, which has been closely watching Rakuten’s build-out, is also contemplating a nationwide 5G network, on which it could spend up to $10 billion. Cable operators Comcast, Charter and Altice, which are currently mobile virtual network operators (MVNOs) of Tier 1 mobile operators, are contemplating greenfield 5G network builds as well.
Industry 4.0 will drive demand for cellular connectivity within the enterprise, but not for a few years
TBR’s research suggests that Industry 4.0, which includes mass 5G adoption globally, will not ramp up until between 2022 and 2025, at which point business cases will be proven, justifying an increase in market spend on ICT infrastructure. Cellular technologies, namely LTE and 5G, have better uplink and security capabilities, and lower latency than Wi-Fi, all of which are necessary as enterprises begin to use network technology for mission-critical workloads rather than “best effort” communications. Certain vendors, namely Nokia, Huawei and Cisco, are better positioned than others to capitalize on this trend as they sell both directly and indirectly into enterprises, as well as through communication service providers (CSPs). Ericsson, in contrast, plans to go to market almost exclusively through CSPs, which will place it at a disadvantage as many large enterprises will want private networks.
TBR’s Telecom Vendor Benchmark details and compares the initiatives and tracks the revenue and performance of the largest telecom vendors in segments including infrastructure, services and applications as well as in geographies including the Americas, EMEA and APAC. The report includes information on market leaders, vendor positioning, vendor market share, key deals, acquisitions, alliances, go-to-market strategies and personnel developments.
Realizing the intelligent world presented by the mobile industry at Mobile World Congress Barcelona 2019 (MWC19) will require a fundamental change in how networks are architected, including a radical reduction in the cost of providing connectivity. It will also require business transformation for companies tied to the old world, namely communications service providers (CSPs) and their incumbent vendors.
It was readily apparent at the event that technology is advancing at a much faster pace than the establishment of business cases that economically justify deployment of the technology. The reality for the mobile industry is that the cost of building, owning and operating networks is too high and networks are too inflexible to support the business realities of the digital era, whereby connectivity is relegated to a commodity service and the value lies in the platforms and applications that run over the network. The industry has known this for years, but changes have been minimal, until maybe now.
The entrance of Rakuten to the mobile industry could be a game changer and provides a glimpse into what a digital service provider will look like. In what could arguably be the most important takeaway from the entire event, Rakuten’s approach to building and operating a network could signify a paradigm shift in the industry. Not only will Rakuten’s network be agile, flexible and dynamic to provide digital services, it will also enable a dramatic reduction in the cost of connectivity.
The theme of MWC19 was “intelligent connectivity” and centered on how 5G, IoT, AI and big data are coming together to enable the intelligent world. Against this backdrop, Rakuten stole the show with the evangelization of its end-to-end virtualized and cloud-native network, which is being deployed across Japan this year. Rakuten’s network provides a glimpse into what the intelligent network of the future will look like.
As we start winding down beginning-of-the-year earnings calls, here’s what you can expect from the TBR team this week:
- In 3Q18 TBR noted Salesforce built on its industry-specific strategies by releasing Financial Services Cloud for retail banking and by expanding its target audience for Education Cloud. Salesforce’s ongoing innovation to address vertical use cases and ability to understand customers’ business needs enabled the vendor to execute multiproduct deals in 4Q18. TBR expects Salesforce will close 4Q18 with $12.2 billion in annual revenue, keeping the vendor on track to attain its $21 billion to $23 billion annual revenue goal in 2021. (See Jack McElwee for more analysis.)
- Google Cloud’s hiring of Thomas Kurian as CEO (replacing Diane Greene) is meant to attract enterprise customers and facilitate stronger competition at scale with Amazon Web Services and Microsoft; Kurian, former Oracle president of Product Development, brings deep understanding and detailed messaging on the technical and business impacts of cloud. TBR’s 4Q18 report will detail Google Cloud’s continued innovation among its core AI and ML portfolios while partnering and leveraging Kurian’s clout to gain enterprise mindshare, which will be increasingly critical to long-term success. (For everything Google and cloud, see Cassandra Mooshian.)
- Cisco continues to grow revenue as it transforms itself through acquisitions, divestments and new product releases that enable the company to reduce its reliance on hardware — a commoditizing market — and embrace software. TBR’s 4Q18 Cisco report will include deep dives on Cisco’s most recent acquisitions, including Luxtera, which will help Cisco attract more webscale spend and improve the performance of its proprietary-based solutions, as well as Ensoft and Singularity Networks, which will broaden Cisco’s software capabilities in the service provider space. (Mike Soper leads TBR’s analysis on Cisco.)
- TBR will also report on Cisco Services and the company’s expansion around software and next-generation solutions, which has created advisory and implementation opportunities that enabled Cisco Services to accelerate growth in 2018. An increase in software-related services as well as adoption of next-generation secure and intelligent platforms and products that support clients’ digital business will create attached services opportunities for Cisco Services, driving revenue expansion throughout 2019. (For more on Cisco Services, see Kelly Lesiczka.)
- TBR’s latest report on Perspecta will provide an update on how the fledgling company is managing the task of integrating three legacy organizations into a unified whole. In past reports, we have talked about how the company’s innovation incubator, Perspecta Labs, underpins its long-term position in the federal services landscape. Our 4Q18 Perspecta report will dive more deeply into how the company introduces Perspecta Labs to its biggest client, the U.S. Navy, in advance of the recompete of Perspecta’s largest contract, which entails managing the Navy Next Generation Enterprise Network. (Joey Cresta heads up TBR’s Public Sector practice.)
- As reported in our initial response, NetApp earned $1.6 billion in revenue in 4Q18, representing a 1.6% year-to-year increase. Strong 1H18 revenue momentum enabled the vendor to achieve solid year-to-year revenue growth for 2018, demonstrating the success of some of NetApp’s strategic moves during the year. Our full report will dive into the 2018 establishment of a cloud infrastructure business unit that will enable NetApp to pivot its portfolio further in 2019, as the company, one of the few major pure play storage vendors left in the market, transforms itself to establish its brand as one that enables customers’ digital transformations. (See Stephanie Long for more analysis.)
- Utilizing its technology expertise and ability to address clients’ business challenges, Capgemini reached its 2018 revenue growth and profitability goals and is confidently moving into 2019. Capgemini’s bookings reached their highest level since 1Q17 in 4Q18. In the latest full report, TBR will note how the increase in bookings, combined with Capgemini’s unified go-to-market approach; enhanced offerings around digital, cloud and industry-specific solutions; and reinforced expertise via training and reskilling, will enable the company to sustain revenue growth. (Elitsa Bakalova covers Capgemini for TBR.)
Be on the lookout for additional analysis from TBR, including assessments of Accenture Technology and TELUS International. TBR’s next webinar will be held March 20 and feature Senior Analyst John Caucis talking about healthcare IT services.
According to Technology Business Research, Inc.’s (TBR) 3Q18 Telecom Infrastructure Services (TIS) Benchmark, the TIS market grew as communication service provider (CSP) investment in areas tied to 5G-readiness increased. CSPs are rearchitecting their networks leveraging NFV, SDN and the cloud as well as implementing new business models, which requires growing spend across a broad range of professional services. Deployment services spend grew slightly, but the market will strengthen as the 5G spend cycle ramps up over the next couple of years, although the spend intensity will be lower than during the LTE cycle. RAN suppliers Nokia (NYSE: NOK), Ericsson, Huawei, ZTE and Samsung will capture incremental TIS market share as they drive high volumes of services attached to their 5G RAN. This is already occurring to some extent as CSPs densify networks as part of their 5G-readiness strategies. Though 5G will require significant hardware spend, the aggregate amount will be lower compared to LTE, which will drive vendors to explore new market areas, such as Industry 4.0.
The managed services market was flat year-to-year in 3Q18 as a decline in outsourcing was offset by growth in the out-tasking market. Generally, vendors are exercising pricing discipline when determining which outsourcing contracts to take on in an effort to improve margins. Ericsson is currently leading the way in this regard as it evaluates 42 contracts for exit or rescoping. Huawei, ZTE and CCS have been less concerned with price and are focused on consolidating the outsourcing market. Other vendors, including those that are historically hardware-centric with little to no footprint in the managed services market, are increasingly playing in out-tasking as they will manage applications deployed in CSP networks. Ciena (NYSE: CIEN) is an example of this trend.
TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers. Suppliers covered include Accenture (NYSE: ACN), Amdocs, Atos, Capgemini, CGI, China Communications Services, Ciena, Cisco (Nasdaq: CSCO), CommScope, CSG International, Ericsson, Fujitsu, Hewlett Packard Enterprise (NYSE: HPE), Huawei, IBM (NYSE: IBM), Infosys (NYSE: INFY), Juniper Networks (NYSE: JNPR), NEC, Nokia (NYSE: NOK), Oracle (NYSE: ORCL), Samsung, SAP (NYSE: SAP), Tata Consultancy Services, Tech Mahindra, Wipro (NYSE: WIT) and ZTE.