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TCS Will No Longer Be World’s 3rd Biggest IT Firm Because Of This Surprise Reason!

“The Atos-DXC transaction could form the world’s second-largest global IT services vendor, closer to the size of Accenture ($45 billion revenue in 2020) and larger than TCS ($22 billion revenue in 2020), according to Elitsa Bakalova, Senior Analyst at research firm Technology Business Research, Inc. … This is something the company has been pursuing in fits and starts over the last five years, mostly through acquisitions and changes in leadership in North America, Bakalova said.” — Trak.in

An Atos, DXC merger no threat to Indian IT’s appeal

“‘If Atos acquires DXC Technology, three years of failed attempts by DXC Technology to turn around eroding revenues and thinning profitability would be forgiving …”‘ — India Times

More from Elitsa Bakalova

 

Atos’ DXC Technology deal will create second-largest IT services vendor

“Atos will be closer to the size of Accenture which has reported $45 billion revenue in 2020. Atos will be larger than Tata Consultancy Services (TCS) which will have $22 billion estimated revenue in 2020. Atos will also be larger than IBM Services after the Global Technology Services spin-off at the end of 2021. IBM’s Services revenue will be $23 billion after the spin-off, TBR senior analyst Elitsa Bakalova said.” — YouStartups Networks

More from Elitsa Bakalova

TCS may lose spot as world’s third largest IT services firm

“Elitsa Bakalova, Senior Analyst at research firm Technology Business Research, Inc, said in a report that the Atos-DXC transaction could form the world’s second-largest global IT services vendor, closer to the size of Accenture ($45 billion revenue in 2020) and larger than TCS ($22 billion revenue in 2020). IBM Services, after the Global Technology Services spin-off, is estimated to have a revenue of $23 billion in 2021.” The Hindu

Atos will gain scale it seeks in the U.S. with planned DXC Technology acquisition

France-based IT services giant Atos confirmed on Jan. 7 rumors regarding a “friendly transaction” with DXC Technology (NYSE: DXC), which could result in the second-largest global IT services vendor, closer to the size of Accenture (NYSE: ACN) ($45 billion revenue in 2020) and larger than Tata Consultancy Services ($22 billion revenue estimated in 2020) and IBM Services (NYSE: IBM) after the Global Technology Services spin-off at the end of 2021 ($23 billion annual revenue after the spin-off).

What is in it for Atos? Scale, and more scale

Atos has not been shy about making larger-scale acquisitions over the last decade, acquiring Siemens IT Solutions and Services, and its roughly 26,300 employees, in 2011; Xerox’s ITO business, with 9,600 employees, in 2015; and Syntel, and its 23,500 employees, in 2018, proving its capabilities at absorbing companies of different sizes. With DXC Technology, Atos would gain scale in the U.S., something the company has been pursuing in fits and starts over the last five years, often through acquisitions as well as changes in leadership in North America.

From a portfolio diversification perspective, though, acquiring DXC Technology is not the best choice, in TBR’s opinion, as Atos’ scale would increase in managed infrastructure services, an area in which it is already well-established. However, Atos would gain DXC Technology’s security services and solutions capabilities and add approximately 3,000 people to its more than 5,000 security professionals. Additionally, Atos would gain scale in digital security, an area of strategic expansion as Atos aims to increase its revenues in this segment from €0.7 billion (or $0.9 billion) in 2019 to €2.1 billion (or $2.6 billion) over the midterm.

Despite the recent challenging market environment, Atos has been on an acquisition spree, using its remaining free cash flow after dividend payments to make bolt-on transactions. Since the beginning of 2020, Atos has announced nine acquisitions in four expansion segments: cloud, digital, security and decarbonization. With DXC Technology, Atos’ global service delivery capabilities would also expand and the company would reach a combined low-cost resource leverage of approximately 53%, compared to 46% for Atos alone.

DXC Technology gains opportunity for payout and stability

If Atos acquires DXC Technology, three years of failed attempts by DXC Technology to turn around eroding revenues and thinning profitability would be forgiven. DXC Technology leadership would see a cash-out payday, while remaining assets (people and capabilities) would move to a more stable corporate environment with a long-term view and objective, something Atos is strong at setting up and following through on.

Two Back, Three Forward: All about consecutive quarters

In our new weekly blog series Two Back, Three Forward, we look at two numbers in TBR reports from the prior week as well as three numbers from our upcoming reports, highlighting the analysis TBR provides and the vast amount of data — the numbers — we’re working with every day. It’s all about the data and what that data means to you.

Two Back

$1.47B, Cognizant’s 4Q19 earnings from financial services clients: As noted in our full report, Cognizant’s Financial Services (FS) revenue increased last quarter, but at a slower pace than the company overall, partly due to softness from European banking clients, according to Cognizant. We’ve heard this complaint from other India-centric vendors and will be publishing a special report this month on what those companies have been doing to offset those pressures. To keep some context, FS remains Cognizant’s largest vertical, at 34.3%, but this trend bears watching.

3, consecutive quarters IBM’s healthcare IT services revenue has declined: 2019 was unquestionably an off year for IBM’s healthcare IT services (HITS), but our most recent analysis indicates the company will rebound in 2020 through new leadership, partnerships and technologies. Considering IBM’s long history of excelling in all three of those areas, we’re predicting a modest 2.2% expansion this year. See the full IBM HITS report for all the analysis.

Three Forward

71.2%, contribution of DXC Technology’s Cloud Professional Services segment to overall cloud revenue, per TBR estimates: Nothing surprising about cloud professional services earning the greatest share of revenue, but what stands out is the 9.6% growth rate of that service line within DXC’s overall cloud practice. Ahead of the other service lines and far better than the company as a whole (-3% over the same period). As we note in the upcoming full report, “DXC’s established relationships with major public cloud providers such as Microsoft and AWS [Amazon Web Services] enable the company to build out integrated solutions and maintain healthy growth in 2020 providing cloud management and migration services.” Further, the company continues investing in cloud-savvy professionals even as it bolsters its traditional IT services talent. DXC’s long-term strategy, including around cloud, appears solid.

More than 50%, Capgemini’s digital and cloud revenues as a percentage of total revenue: Like most IT services peers, Capgemini has strategically shifted resources and investments toward new opportunities in cloud and digital, in part through expanding capabilities alongside partners, developing solutions with partners like AWS, and acquiring talent and IP. Even if revenue growth slows from 5.3% year-to-year in constant currency in 2019 to something closer to 4% in 2020, as Capgemini expects, we don’t expect digital and cloud revenues will ever again dip below the 50% line, even if Capgemini joins market leaders in moving beyond the term digital.

3, consecutive quarters in which Perspecta elevated its FY20 guidance: Due to accelerated demand and strong bookings of net-new work, Perspecta is now guiding for annual revenue growth of between $4.45 billion and $4.5 billion, or 4.1% and 5.3%, over FY19. Even with healthy revenue growth, TBR projects the company’s full-year gross margin will erode 2020 (declining from 24.9% in 2019 to 23.6% in 2020) due to  accumulating costs from its acquisition of Knight Point Systems, the launch of new delivery facilities, and investment in Perspecta Labs. Perspecta’s 2020 operating margin should increase 10 points over 2019, from 6.2% to 6.3%, as unprofitable contracts are completed and Perspecta converts strong bookings of more lucrative and net-new contracts featuring the company’s expanding store of homegrown IP. In all, TBR sees steady growth as more important than financial guidance adjustments, given our concern for strategy and performance, not stock price.

Traditional ports and quantum computing: The now and the future

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

TBR’s Quantum Computing Market Landscape details emerging uses cases, economic disruption and alliances

TBR’s first Quantum Computing Market Landscape focuses on multiple facets of the quantum computing market, exploring the vendor landscape of a variety of competing hardware vendors with differing quantum theories, as well as software services and security vendors playing in the quantum computing space. Emerging customer sentiments, as well as recent alliances, emerging use cases and economic disruption are all themes explored within this first iteration of the report. A previous TBR special report by Analyst Stephanie Long looked at the “economic advantage” of quantum computing, and our May Digital Transformation Insights Report: Emerging Technology put the consulting and services around quantum in the context of digital transformation. The new market landscape builds on all TBR’s research and analysis to date.

 And don’t forget to sign up for Stephanie’s July 24 webinar, Quantum computing leaps into customers’ transformation-centric conversations.

Additional assessments publishing this week from our analyst teams

TBR’s Hewlett Packard Enterprise’s (HPE) full report, scheduled to publish June 14, further explores the vendor’s quarterly performance and deep dives into HPE’s infrastructure strategy amid recent and ongoing changes. The report provides greater details on themes covered in the initial response, which published May 24, including how commoditization continues to take its toll on infrastructure vendors’ bottom lines, increasing competition and encouraging more nuanced strategies to get ahead. It also talks about competitive changes in the server landscape hindering HPE as well as its peers and touches on the various strategies playing out in the consumption-based pricing realm, which is a key strategic focus for HPE. Stephanie Long, Analyst

TBR’s Hosted Private Cloud Market Forecast, publishing Wednesday, details how growth will persist up and down the hosted private cloud stack despite the relative cost-effectiveness of public cloud options. IBM remained the vendor to beat overall in 2018, while Microsoft is expected to take on significant additional market share through 2023 as it expands its portfolio of hybrid delivery options and migrates its legacy Office and Dynamics customers to cloud-native versions. — Cassandra Mooshian, Senior Analyst

TBR is publishing the 1Q19 DXC Technology (DXC) report June 14. DXC reported revenue of $5.3 billion, a year-to-year decline of 5.4%, pressured by the completion of several large contracts without replacement and ongoing headwinds in legacy applications work. DXC continues to execute its aggressive cost-cutting initiatives including headcount reduction and facility rationalization, which are being reinvested into funding its active M&A strategy, optimizing service delivery, and developing standardized and automated service delivery capabilities.” Kevin Collupy, Analyst

HPE Pointnext report will publish June 14 and will discuss how HPE is beginning to reap the benefits of its Next initiative, reducing its global footprint to focus on profitable regions. Pointnext continues to act as a key profit generator for the company, enabling investments both internally and through acquisitions to generate new innovative solutions around its core infrastructure offerings.” — Kevin Collupy, Analyst

On June 13 TBR will publish its semiannual Alibaba Cloud report. This report discusses the current investments Alibaba is making to win share from public cloud leaders, namely Amazon Web Services (AWS), and the progress the business is making in doing so. TBR also discusses recent changes to Alibaba Cloud’s leadership structure and the growing importance to the broader Alibaba Group that these changes signify. Meaghan McGrath, Senior Analyst

TBR’s upcoming 1Q19 Booz Allen Hamilton (BAH) report details how BAH wrapped up its FY19 with robust top-line expansion and record revenues and solid earnings, which in turn enabled BAH to reward shareholders with the largest quarterly dividend increase in recent memory. BAH’s performance reflect a soundly differentiated market position and close alignment of its technology and consulting solutions with the missions of its federal customers. BAH is well positioned to sustain its FY19 performance in FY20 in a federal IT market burgeoning with opportunities for IT modernization and the integration of advanced technologies. John Caucis, Senior Analyst

Lastly, if you haven’t already, sign up now for the this week’s webinar, The Makings of the Telecom Edge Compute Market.

DXC Technology lands award in the Middle East, highlighting long-standing core strengths of its solution suite for the health payer sector

In 2016 United Arab Emirates (UAE)-based insurer United Insurance Co. (UIC) hired a new CIO and tasked him with digitally transforming the company’s IT infrastructure and operations to a cloud-based infrastructure (see below for a snapshot of UIC). Within the CIO’s first five months, UIC migrated its core IT applications (e.g., Office 365) to the Microsoft Azure cloud. The initial digitization of UIC’s IT foundation was successful, and the insurer then proceeded to seek out systems integration vendors capable of fully deploying its core insurance applications, additional elements of its IT infrastructure, and other workloads to the cloud.

UIC eventually selected DXC Technology (DXC), citing DXC’s wide range of insurance-centric platforms, products and services as key differentiators that made DXC the optimal choice. UIC also noted DXC’s insurance solutions have been developed and used in the insurance market for several decades, including in many different geographies, further emphasizing how the breadth and depth of DXC’s insurance sector expertise are deeply woven into its industry platforms and make it a compelling choice for insurers seeking digital transformation. UIC chose Integral, DXC’s open standards-based, end-to-end insurance solution spanning the entire insurance life cycle, and was able to quickly deploy core functions to the cloud, including customer and agent administration, proposal capture, claims and policy processing, and accounting. DXC’s Integral Life application has already been deployed, and in 2Q18 UIC announced that DXC’s Integral Health solution will soon go live.

In TBR’s view, DXC offers payer clients a robust suite of solutions developed over a long tenure serving the insurance sector, but despite strong insurance sector offerings DXC does not appear to be replicating the success with UIC with other insurance clients in its core U.S. market. While global payer IT spend is accelerating as insurers digitize operations to enhance connections with policyholders and increase customer loyalty, DXC risks losing out to competitors with similar scale and experience in the insurance IT sector if it fails to stabilize operations in its central markets.

 

 

UIC is a Dubai, UAE-based insurer established in 1998. UIC provides retail and commercial insurance products in areas including life, health, automotive, property, engineering, liability and marine to commercial enterprises and government entities in the UAE and the Middle East. UIC saw digital transformation as critical to its ability to differentiate in a highly competitive insurance market while ensuring that the company was prepared for the inevitable industry embrace of digital insurance.

Services Weekly Preview: November 26-30, 2018

In this magical time between Thanksgiving and Christmas, despite racing to get as much analysis and as many predictions published before the new year, we’re able to enjoy a slight pause in the usual news cycle and company activity to reflect on 2018 and predict what will be coming in 2019. In two upcoming webinars, we will be looking at many marketwide trends, starting with an assessment of management consulting in the digital transformation age.

 

Here’s what’s coming this week:

Thursday: Last quarter when we looked at DXC Technology, we noted the company’s spike in revenue growth following its formation last year normalized to single-digit growth in 2Q18. The underlying businesses of both legacy CSC and Hewlett Packard Enterprise’s (HPE) Enterprise Services are still experiencing pressures around commoditized legacy services. This quarter TBR will highlight and discuss DXC’s recent M&A activity and its resource management strategy, anticipating similar growth results and performance.

Monday: In our full report on T-Systems for this quarter, we will note that strict execution of efforts to become an efficient organization will sustain the company’s slightly improved performance. New offerings in cloud shift T-Systems’ portfolio away from traditional IT services and increase its opportunities in a segment with growth potential.

Coming in the next few weeks: the Management Consulting Benchmark and 2019 IT Services Predictions.