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Digital transformation, cybersecurity and cryptocurrency: How the war in Ukraine will change technology forever

The war in Ukraine and ICT vendors: 3 coming challenges in a changed world

Less than two weeks into Russia’s invasion of Ukraine, TBR’s assessment of the effects on the ICT market remains necessarily constrained. The majority of the largest ICT vendors TBR covers do not have tremendous local market and/or client exposure to Russia or Ukraine, so the impact of the war on ICT companies, if the conflict remains limited to those two countries, will be marginal — not insignificant, but marginal — with some exceptions, such as Ericsson (Nasdaq: ERIC), Nokia (NYSE: NOK) and SAP (NYSE: SAP). Longer term, absent either a miraculously positive or an existentially negative development (peace blooms or mushroom clouds), TBR expects the pressures detailed below will force IT services, cloud and software, data center and infrastructure, and telecom vendors to adjust their strategies and their business models.

 

Digital transformations slow, opening new opportunities

Already stressed supply chains will experience additional sand in the gears, slowing down deliveries of essential hardware and delaying build-outs of data centers, enterprises’ IT infrastructures, and even the physical towers needed for telecommunications. While IT services vendors and consultancies have sold digital transformation (DT) as a method of addressing business problems through agile application of emerging technologies, enterprises and their technology suppliers need the actual physical components to make the “digital” part of digital transformation work. A slowdown in hardware availability will convert into a slowdown in enabled applications and soon everything around DT will become slower and more expensive.

 

In this DT winter, consultancies advising on supply chain issues and global systems integrators (GSIs) and their technology partners enabling hybrid cloud while bolstering on-premises enhancements will flourish. Chip manufacturing investors will receive government backing and may find technology vendors across the entire ecosystem willing to make long-term commitments to mitigate the risks they are facing now. In a reversal of fortune from the last few years in IT, third-party maintenance specialists — the very boring techies who are keeping the old systems running while the young geeks play with AI and the metaverse — may see a boom as a constrained chip supply and slowed digital transformations make keeping the current technology operational increasingly important.

 

Cybersecurity commands center stage (hopefully, for real this time)

In every survey TBR has conducted around IT services and digital transformation, buyers have prioritized cybersecurity as a top three — and frequently No. 1 — concern. And yet, enterprises underinvest and remain vulnerable, humans fail to take precautions and fall prey to ransomware attacks and worse, and cybersecurity remains more talked about than acted upon. Russia’s invasion of Ukraine will change that. While pre-invasion predictions anticipated an aggressive Russian cyber campaign, the first week of fighting featured exclusively kinetic military action, with limited, negligible cyber strikes. Analysis conducted in the middle of combat rarely survives intact once the smoke clears, but TBR believes a couple of scenarios could account for Russia’s relative cyber silence. The most encouraging one is that Ukraine’s defenses worked. While NATO, particularly the U.S., shared near-real-time intelligence in the lead-up to the invasion as a means of applying diplomatic pressure and denying Putin a war narrative suited to Russia’s needs, the West and Ukraine would be less likely to share cybersecurity victories in the same way military successes have been touted and with the same divulgence of critical intelligence. A less-encouraging scenario would be that Russia is saving its cyber strikes for an anticipated second stage of the war, when the shooting slows and economic and political wills are tested. Cyberattacks that take critical energy infrastructure offline in Western Europe would be damaging now but would have a greater effect on NATO countries’ populations during a prolonged economic slowdown tied to a standoff in Ukraine. In either scenario, consultancies, GSIs and technology vendors providing cybersecurity services and infrastructure will benefit from renewed concentration in the C-suite on cyber risks, provided those vendors have invested in country-specific, locally sourced, certified talent.

 

 

Logicalis: The partner for helping with today’s problems and providing solutions for the future  

In February 2022 TBR spoke with Logicalis Group Chief Operating Officer Michael Chanter and Chief Technology Officer Toby Alock for an update on the company’s strategy as well as an overview of the company’s new Global Services Organization (GSO), including its solutions portfolio and road map. The conversation, which contained specific details on strategy, was a continuation of the journey Logicalis embarked on nearly two years ago when it appointed Bob Bailkoski as CEO.  

In TBR’s special report Know-your-tech strategy could be invaluable as Logicalis aims to disrupt peers in cloud managed services, we wrote, “Logicalis’ efforts to optimize its legacy operations while doubling down on key growth areas such as cloud will largely depend on the company’s ability to develop integrated scale to ensure standardized service delivery.” The launch of Logicalis’ GSO highlighted these efforts and marked a new stage in the company’s ability to deploy practical solutions that build a foundation of trust with partners, employees and clients.  

Transforming into a modern managed services provider  

Logicalis Group’s executives understand the need to develop an ever-evolving strategy that allows the company to stay abreast of market trends. Pivoting from historically employing a regional focus to now building outcome-based solutions that are global in nature paves the way for Logicalis to build scale. Ensuring internal organizational silos are removed will be key, as clients expect vendors to deliver services locally through globally integrated operations.  

At the same time, Logicalis realizes the importance of nurturing local relationships, ensuring its consultants and professional services organization continue to operate as close to the customer as possible. Developing a “modern managed services organization,” as Chanter describes the company’s transformation, is not an easy task, especially when executed at scale.  

Accounting for the permeation of automation to drive efficiency and fine-tuning operations and business models to facilitate cloud-enabled sales, service delivery and support are among the key pillars of GSO. Continuing to provide existing clients with support also enables GSO to secure foundational revenues and maintain relevance, as often clients take time to move to the next phase of their digital transformation (DT) programs.  

When TBR asked about the change management that typically comes with such evolution, especially due to the increased use of automation in service delivery, Chanter provided a strong use case for how the company is handling it. Starting with the appointment of an executive dedicated to overseeing transformation, the main focus then has been teaching staff how to be agile while also considering new compensation models in connection with cloud-enabled service delivery.  

Providing support to external clients has been enabled by a three-part framework: Align, Transform, Scale. Logicalis first assesses where clients are in their DT journey compared to their desired outcome. The company then maps out the kind of support it can provide at different points in the journey, relying on its professional services organization to feed regional market nuances. With sales teams trained and certified before going to market, Logicalis also tries to align and close the feedback loop with staff at the Centers of Excellence (CoEs), which are typically responsible for the development and management of global solutions.  

As Logicalis Group aims to increase its share of the managed services market, we believe the company will continue to work toward striking the right balance between developing automation-enabled services P&L and achieving integrated scale. Previously, TBR wrote, “Logicalis has begun to identify areas across geos, industry verticals and horizontal areas that can support its goal of expanding share of highly profitable ‘as a Service’ managed service sales, which currently garner about 25% of its global revenues. … As Logicalis works out the details around managing its partner ecosystem, Bailkoski and [Chief Customer Experience and Service Transformation Officer Vincent] DeLuca are also increasing the company’s investments in internal portfolio offerings that will not simply standardize global service delivery but also pave the way for an innovative approach to engaging with clients. Launched in June, we believe Logicalis’ AI-enabled Digital Service Platform (DSP) will be the center node of Logicalis’ solutions and services ecosystem, similar to how iTunes has helped Apple (Nasdaq: AAPL) build a community of die-hard brand followers.”  

Logicalis is on the right path to achieving its managed services goals, but like many of its peers, it needs to partner better and differently than it has in the past, especially as buyer expectations around managing partner ecosystems also evolve. Meanwhile, expanding its global footprint, similar to opening an engineering center in Portugal to house about 200 employees in support of the Agile, Transform, Scale framework, will continue to bolster Logicalis’ resource bench for building and delivering solutions at scale as clients seek support around migrating and transforming operations. Chanter noted that the new Portugal facility will “help transform clients quickly and help Logicalis transform.” TBR notes this dual-track approach has proved successful for other IT services vendors undergoing their own digital transformations.  

As inflation rears, will it throw off SaaS and ITO operating models

Who today has experienced a long-term economic inflationary period?

Inflation is very much in the U.S. news as it reaches 40-year highs. This means a person has to be near the end of their professional careers to have experienced the previous inflationary period. One of the authors dimly recalls his economics professors trying to parse what, at the time, was called stagflation, which impacted the United States in the 1970s. Oil price shocks drove up prices, while unemployment remained high. Inflation previously had been explained as too many dollars chasing too few goods and was generally assigned to economies overheating because of very low unemployment rates.

Today economists seek to assess economic fundamentals to predict whether this inflationary spike will be temporary or persistent. Factors suggesting a short-term spike revolve around the well-publicized supply chain disruptions coupled with record savings levels during the pandemic when discretionary spending on things like travel and restaurant meals was greatly hindered and retail spending shifted from in-store shopping to e-commerce.

On the other hand, some economists point to persistent government deficits due to pumping money into the economy. Given various regulatory and economic uncertainties, that money has been sitting on the sidelines. Further stock market run-ups in valuation have been attributed to investor money seeking higher returns that can be achieved in traditional savings and bond ownership because of low interest rates on these conservative investment instruments.

Partisans will selectively mention these factors to explain away or criticize the current economic climate. Businesses, on the other hand, have a recently dormant financial risk rearing its ugly head that can dramatically impact long-term financial forecasting.

So what are the technology company business models where inflation has near term impact?

Transaction-based businesses in  the IT industry will be able to follow traditional methods of passing costs on to the customer. But, for those business units working from Anything as a Service (XaaS) subscription models, ITO contracts and infrastructure managed service agreements, the near-term impact could be more acute.

Cloud-enabled SaaS models are a relatively new phenomenon as Industry 4.0 gains momentum. Proponents of these business models also assert that legacy business model metrics and analysis do not apply given the majority of selling expenses are recognized in the first fiscal quarter of multiyear agreements while the revenue is then recognized ratably over the contract term. As such, the financial spokespeople for these business models lean heavily on relatively new business metrics — annual recurring revenue (ARR), net dollar revenue retention and lifetime customer value — that chart a forecast course for when operating profits will materialize.

ITO contracts have had a somewhat longer evolution, starting as multiyear deals where vendors could reap greater profits as operating costs declined due to the increased automation of the overall monitoring and maintenance. These contracts then moved to shorter-term durations and, more recently, have stipulated cost decreases over time such that any operating costs savings created by the vendor are passed along, or at least shared with, the customer. The ITO market has likewise seen a shift or rebranding of these customer offers into infrastructure managed services to pivot the contract model to be more in line with SaaS constructs.

When inflation was last a top-of-mind economic consideration, most IT was on premises and operated by company personnel. TBR seriously doubts strategic scenario planning for these new subscription consumption models prior to perhaps late 2020 anticipated the current inflationary levels and their potential operating impact.

What is the immediate inflationary risk to XaaS and ITO business models?

SaaS models take several years to generate profit in what is variously described as the flywheel effect or the force multiplier effect. Increased labor and utility costs beyond forecast and tethered to long-term contracts will add several percentage points of operating costs to these models. In this sense, the newer the SaaS operating model the less risk it will have to cost structure as it has less renewed revenue. TBR expects the more mature the SaaS model, and greater amount of accrued or committed revenue, the more adverse the bottom-line operating impact.

The ITO market, on the other hand, has shown persistent declines, resulting in consolidations and divestments to profitably manage eroding streams traditional ITO vendors seek to convert into managed services agreements. The inflation impact on costing will amplify the need to infuse these business practices with more automated capabilities or increased low-cost (typically offshore) labor as offsets. Still, the operating profit declines in this space will likely worsen unless vendors seek to negotiate incremental cost increases that customers may or may not be willing to accept based on their own issues with cost containment.

What go-forward tactics are in the technology vendor toolbox to mitigate inflationary impact?

Inflation is not new, but the operating models prevalent now were not around when we last experienced it. Business strategists still have a blend of initiatives they can embrace to preserve their operating models and their customer relationships:

  1. Market education: Transparent declarations on the cost impacts to the vendor business and any suggestions of sharing the burden with customers can preserve customer loyalty.
  2. Customer research in existing brand perception. The XaaS Pricing team has a very good blog outlining the Van Westendorp Price Sensitivity Meter and its applicability setting B2B SaaS pricing strategy. That research methodology can assist vendors in level setting where they stand with customers on the value perception and give pricing strategists a line of sight into how much room they have within their brand perception for implementing price increases.
  3. New contract language for price increases: The historic quiet period on inflation, coupled with the innate reality within technology of “faster, better, cheaper,” has customers expecting price reductions for IT that will require true customer education around inflation as an offset to those prevailing market expectations. This will not help with the inflationary impacts on the existing contracts that must be honored, but can establish a new go-forward pricing model that can take into account a business risk largely dormant for the better part of 40 years.

Inflation as a business risk will persist for the foreseeable future. TBR will be assessing it closely as public companies report their earnings and release their financial filing documents.

Know your consultancy: EY’s FinCrime practice and the future of compliance

Be the frictionless provider of FinCrime services

Ron Giammarco, leader of EY Global FinCrime Managed Services, described EY’s foundational principles for the financial crime practice in both technology and business model terms, noting that the firm has been committed to making every new offering cloud-native, but still deployable on premises. EY’s FinCrime practice, which was established 20 years ago, generates $1 billion in annual revenue, and there are over 30 clients on the firm’s FinCrime technology platform. To further its business, EY is determined to own the technology ecosystem, including all the intellectual property within the practice and every aspect of the relationship with clients.

In Giammarco’s view, EY should provide “frictionless” experiences for clients using its different platforms and solutions, with EY smoothing out any underlying technology or partnering issues. To offer those platforms, Giammarco noted, the firm has decided to acquire and partner as much as possible, building assets internally only when needed. In TBR’s view, these foundational principles reflect a shift in EY’s approach to technology and the firm’s overall ecosystem.

Embracing the business model shift and the substantial financial investment needed to be a technology company — at least to the degree EY is now — requires reorienting around the current competitive and partnership landscape, not the more siloed and opaque environment of several years ago, when digital transformation emerged as a challenge to the traditional consulting business model. Among the significant changes, Microsoft (Nasdaq: MSFT) and SAS now list EY’s offerings within their own services catalogs, and EY expects those partners to not only provide technology support but also engage in sales efforts and the onboarding of new clients.

EY’s differentiation: Expertise, discipline and global standards

Within this changed competitive and partnering environment, EY has been challenged to differentiate from peers, an effort TBR has tracked across Strategy and Transactions, Blockchain and other EY practices. For Nic Bastable, leader of EY Global Financial Crime Managed Services Delivery, the firm’s uniqueness has coalesced around three main characteristics. First, EY has developed deep domain expertise, which continues to evolve. Bastable explained that every FinCrime interaction, even through a managed services arrangement, has eventually led to an analyst helping a bank make a financial crime risk decision, which has involved more than just following simple procedures.

EY has invested in its professionals, building career tracks for FinCrime analysts and providing ongoing training, which led the firm to have, in Bastable’s opinion, differentiated expertise. Second, within the complex environment of helping banks make decisions about risk, EY has exhibited tight operational controls — essential at the global scale of EY’s services and to meet clients’ needs. Third, over years of providing FinCrime services, EY has created a global standard operating model, distilling best practices from dozens of engagements, by thousands of professionals, across more than a million events. Underlying all this, according to Bastable, EY brought automation and efficiency to the firm’s operations and delivery, further differentiating the value of EY’s services.

In TBR’s view, while each of the core elements of EY’s FinCrime practice does not separate the firm from specialists or niche services providers, the combination, particularly with global reach and substantial scale, gives the firm a compelling story. Overall, EY’s FinCrime practice does not depend on setting itself apart from peers, especially as professional services firms rarely differentiate from one another; instead, EY succeeds through solidifying trust by offering domain depth and delivering.

Complexity and trust: EY’s evolving approach to risk

Internal risk professionals may have the best internal intelligence

Setting the stage for changes at EY and in the broader market, Frank Leenders, EY’s Digital & Innovation lead based in the Netherlands, explained that the firm helps clients “reframe the future” and focus on “trusted transformation,” which comes through six different lenses: Investor Trust, Organizational Trust, Third-party Trust, Customer Trust, Technology Trust and Regulatory Trust. Leenders added that the COVID-19 pandemic helped expose in greater detail how clients think about risk and trust and how different lines of defense can become sources of organizational intelligence.

Risk-oriented functions within clients’ organizations brought forward insights using data analytics and provided timely analysis on strengths and weaknesses, as revealed by internal responses to operational challenges created by the pandemic (and echoed by EY’s own Megatrends pandemic-related survey findings). While many clients’ digital agendas had been accelerating over the past four years, 2020 became an inflection point in understanding how using data and technology for timely insights related to risk could show not only what could go wrong but also how clients could improve their operations and enhance overall risk management. In short, internal audit and risk professionals likely have the best intelligence and insight into their own organizations — skills that are critical to running the business and optimizing opportunities during a prolonged crisis.

After walking through details on EY Resilience Edge — an AI-powered emerging risk modeling and scenario planner developed with IBM Watson and IBM Research — the EY partners described the EY VIA (Virtual Internal Audit) platform, a tool for end-to-end digitalization of the internal audit process and activities, including continuously ingesting data and developing analytics on clients’ ERP environments. EY uses the platform, which includes risk monitoring and what EY has named its Flexible Audit Response Model, not only as a tool for delivering on its internal audit engagements but also as a stand-alone Software as a Service offering. In addition to the technology tools and bespoke configurations, EY has the opportunity to provide change management consulting as clients adopt new tools and processes.

Regulatory Trust as the gateway to trusted complexity

Shifting to Regulatory Trust, which EY defines as managing “the regulatory burden with innovative frameworks that make compliance an enabler, allowing organizations to pursue sustainable pathways,” Federico Guerreri, EY’s Global Financial Services Risk leader, noted that stakeholders and customers have increased pressures around understanding and evaluating an enterprise’s full ecosystem, including suppliers, particularly as the end of the COVID-19 pandemic is in sight. For EY, “compliance and conduct” have become “the most important offerings” as clients in highly regulated sectors, including financial services and energy and utilities, recognize new risks associated with ecosystem partners’ behaviors and the regulators’ view of those risks.

For EY, this leads to “working from the future back to transform compliance” and infusing technology to create “continuous, dynamic monitoring.” Guerreri specifically pointed out that EY’s clients see the potential risk impacts of new regulations as a board-level issue, further raising the profile of risk professionals as well as the need for EY’s services and solutions centered on compliance.

Building on that point, Amy Gennarini, EY’s America’s FSO Risk Technology leader, said the organizations most successfully addressing risk have explicitly tied together regulatory obligations and business attributes. By integrating and making complex linkages across an entire organization, a business can enable faster and more comprehensive transformation. For TBR, this insight stands out as critical to understanding how EY sees the future of risk, trust and digital transformation: Complex linkages help identify risks and facilitate transformations. Complexity, usually a byword for making things too complicated, can be hugely beneficial for enterprises, if managed properly.

In late January, TBR spoke with leaders in EY’s risk consulting services practice about recent portfolio developments and expectations for 2021. Three critical elements stood out for TBR. First, the maturation of EY’s risk consulting services practice (which sits in the firm’s Business Consulting domain) provides the firm with a solid foundation to build new offerings and help clients with the transformational opportunities connected to risk, not simply the obligatory or compliance-related aspects of risk management. Second, the firm remains committed to making technology an enabler, through innovation and at scale, while keeping the fundamental consulting business model intact. Third, and most critically for understanding EY’s overall thinking on risk, the firm fully embraces the complexities that arise when applying technologies at scale to every component of a client’s organization and utilizes these complexities to build trust while addressing risk. In EY’s approach, complex linkages between data, technology platforms and internal business groups help identify risk and thus help clients’ transformations. In short, complexity can be good if handled well.

Rising cloud adoption and associated complexities present opportunities across service lines

Changes in general purchasing habits brought on by the COVID-19 pandemic have proved disruptive for many professional services vendors; however, the market is expected to rebound quickly as customers replace legacy IT systems with cloud solutions. As a result, managed cloud services is expected to be the fastest-growing subsegment of the cloud professional services market, especially as hybrid IT sprawl intensifies. However, some other submarkets, primarily application development and maintenance, will feel some pressure from automation, especially as adoption of cloud-native technologies rises and plays a role in suppressing labor-driven resources.

Deloitte’s Legal Business Services: A bridge for value creation

TBR perspective

For decades, the legal services market has been perceived as a lawyers-only type of club with a high barrier to entry, with admission requiring many years of school, tremendous amounts of debt and passing of a bar exam. While lawyers remain at the forefront of providing legal advice, law services, like most industries, have not been spared by the advent of disruptive technologies, which have enabled a new set of contenders to enter the space of alternative legal services. Technology-enabled legal services providers such as LegalZoom and Divorceify have begun to carve a niche in the business-to-customer space over the past several years; the Big Four firms are now trying to open the door even wider in the business-to-business world, with Deloitte, in particular, looking at the big picture and trying to establish a beachhead in what could be become the next frontier for technology-enabled managed services.

Deloitte’s launch of its Legal Business Services in the U.S. in July comes as the firm has been making unorthodox investments steadily for the past several years, with technology, in TBR’s view, at the center of diversifying its portfolio offerings and increasing client stickiness. Deloitte’s core consulting value proposition, which relies on the firm’s trust across the C-Suite buyer, will again be tested as enterprise buyers seek optimization of the last piece of the back office, the legal department. Utilizing management consulting and advisory services at the front end, enabled by the company’s Chief Legal Office program, Deloitte’s specialized expertise targets chief compliance, chief legal officers, and heads of legal operations who are grappling with everyday challenges including cost savings and customer experience.

As Deloitte evolves its brand to become a solutions partner, the firm’s investments in Legal Business Services not only add another tool in the consultant’s tool box but also could help the firm build a backup bridge to maintain access and relationships with clients seeking compliance advice. These steps taken now to expand business could be strategically critical to the overall firm in the future.      

In a recent discussion with Deloitte Discovery practice and Legal Business Services practice Lead Bryan Foster and Deloitte Tax LLP’s Legal Business Services Principal Mark Ross, Technology Business Research Inc. (TBR) gained deeper insights into the firm’s recently launched Legal Business Services practice in the U.S., which TBR believes could help Deloitte increase client stickiness and capture technology-enabled managed services opportunities.

IT services revenue retained its growth trajectory in 1Q20, but the negative effect from the pandemic will intensify in 2Q20

IT services trailing 12-month (TTM) revenue growth, at 1.5% in U.S. dollars (USD), was down 20 basis points sequentially and 170 basis points year-to-year in 1Q20 as the COVID-19 pandemic began to negatively affect vendors’ revenue growth during March. At every level of every organization, the pandemic forced massive changes in human resources management, pushing vendors to quickly reorganize service delivery to work-from-home models and proactively pursue similar activities with clients as they strive to keep operations running. While vendors are strengthening relationships with existing clients, the pandemic disrupted traditional sales motions, making attracting and landing new logos more difficult in an all-virtual environment, and challenging IT services vendors to develop novel ways to promote new offerings to clients. The pandemic substantially boosted demand for cloud and cybersecurity as all-remote working and delivery necessitated massive changes and brought in new risks.

TTM revenue and overall growth for vendors covered in 1Q20 IT Services Vendor Benchmark

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.