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Deconstructing COVID-19’s impact on IT services and manufacturing

For IT services vendors working with manufacturers, resiliency, business continuity, security and digitalization spark new revenue growth

During 2020 the COVID-19 pandemic negatively affected IT services vendors’ revenue growth in industrial solutions, manufacturing and automotive due to country lockdowns across the globe that caused major supply chain and production disruptions. Enterprises in the sector weathered the worst of the pandemic at the beginning of 2020 and made the necessary run-the-business changes to improve operational efficiency and reduce costs. As such, IT services vendors evolved their relationships and are now working with clients to ensure their IT and workforces are modernized, secure and digitally enabled and their operations are resilient.

Uncertainty around the pandemic can continue to create disruptions like the supply chain challenges faced at the onset of the crisis. IT services vendors are capitalizing on their advise-build-run expertise to support clients during challenging times and capture growth opportunities, indicated by the revenue growth acceleration that began in 4Q20. Vendors are investing in digital twins to enhance their supply chain, digital sales and marketing as well as in AI and machine learning capabilities to offset pressure.

According to TBR’s special report Digital twins, innovation and Godzilla: 3 IT services trends for the rest of 2021, published in April, digital twins are becoming more synonymous within the supply chain of manufacturing firms as they present a hedge against unique macroeconomic factors, such as the pandemic. Larger technology vendors are finding partnerships, bringing cloud-enabled analytics to shipping, and opening opportunities for IT services vendors and consultancies. These openings allow for interoperability across supply chains, orchestration of technologies and data, and change management.

With COVID-19 disrupting global supply chains and forcing participants to seek alternative channels to either reduce transaction costs enabled by blockchain or transform IT infrastructure by migrating applications to cloud to offset technical debt and diminish financials pressure, some vendors have had the opportunity to gain a prime position. Six of the top 10 revenue leaders in industrial solutions, manufacturing and automotive accelerated revenue growth year-to-year in 1Q21 compared to 1Q20.

Accenture is gaining traction with manufacturing clients by helping them improve operational technology security and discrete manufacturing processes to optimize efficiencies. Accenture is also investing in developing, integrating and connecting smart devices that help Accenture drive Industry X-centric sales and extensions into C&SI services around analytics and AI. SAP implementation opportunities enabling agile IT infrastructure through SAP Business Suite 4 HANA and improving customer experience through SAP Fiori, illustrated by the deal expansions with Siemens Gamesa Renewable Energy and Johnson Controls, helped Infosys grow vertical sales 7.4% on an annual basis in 1Q21.

Acquisitions contribute to IT services vendors’ expansion in engineering and R&D services

The acquisition of Altran in April 2020 expanded Capgemini’s capabilities and revenues in the sector. On Jan. 1 the company established Capgemini Engineering, a new global business line and brand. Capgemini Engineering includes 52,000 engineers and scientists and provides R&D and engineering capabilities in three domains: product and systems engineering, digital and software engineering, and industrial operations.

In March Cognizant announced plans to acquire ESG Mobility, a Germany-based provider of engineering R&D servicers for autonomous and electric vehicles. The acquisition will provide Cognizant with advanced technologies to complement its existing automotive capabilities, giving the company an opportunity to upsell existing clients that are targeting growth in autonomous or connected vehicles.

Recent acquisitions, such as Eximius Design and International TechneGroup Incorporated, bolstered Wipro’s capabilities around digital engineering services and product lifecycle management, which will strengthen the company’s ability to provide client-specific outcomes in areas like industrial manufacturing, a vertical that cloud platforms are targeting for growth given the IaaS opportunity related to IoT data.

DXC’s acquisition of Luxoft in 2019 continues to enable DXC to move up the value chain as it expanded the company’s presence in Europe, deepened its expertise within the manufacturing industry and added high-value digital engineering capabilities. During 1Q21 DXC Luxoft launched a joint venture, ALLUTO, with LG around vehicle customer experience and will focus on the commercialization of digital automotive technologies, such as in-vehicle entertainment and infotainment as well as ride-hailing systems.

The 1Q21 IT Services Vendor Benchmark, which published on June 30, extends the analysis above to include how pairing technology and engineering skills and low-cost presence positions India-centric vendors for growth in manufacturing in the coming quarters and further adoption of technology partners’ solutions to advance Industrial IoT initiatives.

Note: This blog has been adapted from TBR’s 1Q21 IT Services Vendor Benchmark, which provides a quarterly assessment of leading IT services vendors’ performances and an assessment of their strategies. A newly launched Industry Views section within the benchmark provides analysis that focuses on one industry sector. In 1Q21 TBR began with a deep dive on the industrial solutions, manufacturing and automotive sector. Every quarter we will alternate industry deep dives with geo deep dives.

Infosys and manufacturing: Technology prowess, low-cost presence and innovative offerings

Deal wins and investments in manufacturing suggest Infosys is anticipating a rebound in the vertical

With COVID-19 disrupting global supply chains and forcing participants to seek alternative channels to either reduce transaction costs by leveraging blockchain or transform IT infrastructure by migrating applications to cloud to offset technical debt and diminish financials pressure, some vendors have had the opportunity to gain a prime position. This includes Infosys, which has technology acumen and a low-cost presence and continues to go to market by industry vertical. During the first quarter of 2021, Infosys capitalized on these market dynamics, most prominently within the manufacturing vertical.

Infosys’ manufacturing sales declined significantly throughout 2020, with sales as a percentage of total revenue sliding 50 basis points to 9.5%, on average, in 2020 compared to 2019. However, in 1Q21 the company experienced strong momentum, illustrated by several deal wins, including with Siemens Gamesa Renewable Energy for SAP Business Suite 4 HANA (S/4HANA) implementation and with Johnson Controls to modernize the company’s smart global warranty solutions using the S/4HANA-ready SAP Fiori platform. Additionally, Infosys tested new ways to interact with clients to maintain trust and stickiness. The company also deployed Infosys Meridian, a collaboration platform that enables virtual events, including a four-day dealer engagement forum for Toyota Material Handling North America, which has been a client since 2018.

As COVID-19 continues to impede high-touch consulting opportunities and as auto shows — the main channel for the automotive community to interact — have essentially ground to a halt, testing innovative ways to interact with clients will benefit Infosys, provided the company captures feedback and applies lessons learned. Further, Infosys added $1 million to its 2016 investment of $1.6 million in the drone startup ideaForge as Infosys tries to diversify its manufacturing addressable market. Lastly, Infosys partnered with FourKites, gaining access to real-time tracking and visibility solutions and bolstering its supply chain capabilities, a necessary move as the company seeks to generate ongoing revenue growth in the manufacturing vertical.

Publishing in June, TBR’s latest IT Services Vendor Benchmark will include special detailed analysis of the changing ways IT services vendors are addressing new demands and digital transformations within the manufacturing sector.

Digital twins, innovation and Godzilla: 3 IT services trends for the rest of 2021

Digital twins, supply chains and IoT fuel near-term opportunities

Increasingly in 2021, IT services vendors and consultancies will expand their offerings around digital twin solutions, reacting to both the maturation of the technology enabling digital twins and the heightened awareness, brought on by the pandemic, of the value of digital twins, particularly in the manufacturing space. Vendors that have acquired manufacturing sector expertise or can build on legacy capabilities around product engineering services should be best positioned to expand within existing clients and grow market share.

As digital twins become part of the supply chain, consultancies will likely use IoT-enabled solutions to mitigate some of the challenges brought forward in the pandemic, when manufacturers over-rotated on supply chain optimization without sufficient consideration for broad-based ecosystem risk. As technology vendors, such as Microsoft (Nasdaq: MSFT), strike new partnerships to bring cloud-enabled analytics to shipping, opportunities for IT services vendors and consultancies will expand for interoperability across supply chains, orchestration of technologies and data, and change management. This will be especially true as manufacturing clients with legacy machinery look to move to the cloud following the pandemic-induced stampede by all industries to cloud.

Key marker for TBR as 2021 unfolds: The number of IT services vendors’ and consultancies’ SAP-specific engagements in the manufacturing sector

Notable recent vendor activities:

  • As cloud becomes Accenture’s (NYSE: ACN) de facto technology driving services opportunities, the company is also building relationships with local leaders to create alternatives to widely adopted supply chain channels that COVID-19 highly disrupted. For example, the purchases of REPL Group and GRA will bolster Accenture’s supply chain consulting and operations capabilities across the U.K. and Australia. At the same time, Accenture collaborated with data intelligence vendor Ripjar to jointly support Royal Dutch Shell’s efforts to enhance its supply chain screening capabilities.
  • In 1Q21 Tata Consultancy Services (TCS) launched the Autoscape Autonomous Vehicle (AV) Solutions suite, which provides data services and tools to accelerate AV development for OEMs, startups and other players in the AV ecosystem. Establishing itself as an innovative partner in spaces such as AV development and leveraging deep domain expertise help TCS pursue high-value business advisory services.
  • Enterprises in the manufacturing sector weathered the worst of the pandemic at the beginning of 2020 and made the necessary run-the-business operational changes to improve operational efficiency and reduce costs. As such, Atos (Nasdaq: ATOS) evolved its relationships and is currently working with clients to ensure their IT environments and workforce processes are modernized, secure and digitally enabled, and their operations are resilient. Atos is offering the benefits of cloud infrastructures through the Atos OneCloud portfolio initiative aimed at modernizing clients’ applications and improving business processes through industry-specialized cloud solutions and acquisitions, such as that of Maven Wave, which added cloud and technology consulting capabilities, notably around Google Cloud, and Miner & Kasch, which added AI and machine learning capabilities.

For additional information, see TBR’s upcoming IT Services Vendor Benchmark in June, which will contain a special section on manufacturing, as well as TBR’s quarterly reports on the vendors mentioned above.

Give me innovation, not transformation — or maybe the other way around

As dramatic operational fluctuations stemming from the pandemic — with companies scrambling to first ensure employee safety and well-being, then secure productivity and push for a return to growth — begin to level off and move into more normal cadences and reliably predictable financial performances, enterprises forced to be resilient and innovative in 2020 have begun expecting increased innovation and transformation from their IT services vendors. Run-the-business and cost-cutting engagements, paired with cloud adoption, drove revenues through the second half of 2020; innovative strategies to take advantage of a massively disrupted market and transformation to take advantage of the cloud will drive revenues through 2021.

After a year of risk and worry and a period focused on optimization and stabilization, enterprises have returned to pilot projects aimed at internal disruption and capturing new market opportunities. This trend increases consultancies’ stickiness with clients in the short term, while opening those consultancies to risks of losing market share as more technology-centric IT services vendors use cloud and an entry to IT transformation. In the words of one IT services vendor senior executive, “Innovation is strategy; transformation is a repeatable framework. Get the expensive consultants for innovation and the cheaper offshore-centric services vendor for transformation.”

Every quarter, TBR’s Professional Services and Digital Transformation teams consider trends across the IT services industry, expected impacts on leading vendors, and opportunities for further competitive differentiation and separation. We then fold these trends into our ongoing research and examine how each vendor responds, often through speaking directly with the vendors to assess their positioning against these trends and expected opportunities.

Can Gelsinger restore the rule of Moore’s Law?

On Jan. 13 news broke that Intel CEO Bob Swan will retire and be replaced by Intel alum and current VMware CEO Pat Gelsinger, effective Feb. 15. Although Intel is facing challenges and has suffered setbacks in the last few years, it would be an exaggeration to say the company is in trouble. It dominates PC and server CPUs market share and extracts much greater profits from those devices than do their manufacturers.

Despite share gains by AMD, Intel’s hegemony over the x86 instruction set and its related silicon will assure continued profits for many years, as any transition in such critical components is slow and careful. Swan came to the corner office when Intel was struggling with issues that have persisted, and, in some cases, intensified. Some of these challenges have been self-inflicted from an inside-out perspective, while others have been outside-in threats that internal deficiencies have compounded. Notwithstanding, a growing number of activist investors have been pressuring Intel’s board for leadership change.

The inside-out challenge is to marry manufacturing scale and agility

Intel has enforced the rule of Moore’s Law on the industry for years. Faster, better, cheaper form factors have almost single handedly underpinned the digitization of business and the consumerization of IT throughout much of our daily lives. The inexorable march has seen the rapid rise and fall of business entities as proprietary minicomputer architectures gave way to the Microsoft Windows/Intel CPU, or Wintel, juggernaut that enjoyed a near virtual lock on the market. Intel built its share dominance on two core best practices: chip design and manufacturing.

Each new generation of CPUs requires both a thorough redesign and a massive technically challenging improvement in the chip manufacturing process. For decades, Intel has relied not only on its technical skills but also on its massive revenue to stay ahead of competitors. Other chip vendors rely on third-party chip factories, called foundries. Over the past three years, the main independent foundry, Taiwan Semiconductor Manufacturing Company (TMSC), has outperformed Intel, as has Samsung. The technology race in chip manufacturing is closely related to the thinness of the substrate. Intel has not yet produced its promised 7nm chip, and its current road map states it will not produce 5nm chips until 2023; whereas TMSC and Samsung produced 5nm chips in sample quantities in 2019.

Because of the delay in manufacturing technology, Intel has not been able to meet demand, resulting in PC vendor backlogs. These backlogs have been beneficial for PC vendors, reducing price competition and increasing margins. Intel margins are down, but not severely. The constrained supply made it easier for Intel’s main competitor in PC CPUs, AMD, to gain market share, but because of buyer conservatism and the long lead time necessary to design new PCs, the erosion has been small.

On the server side, Intel has to embrace a more agile manufacturing philosophy and a willingness to essentially become a contract manufacturer of third-party designs as the consolidated Wintel form factor gives way to multiple designs in what is commonly called accelerated computing. At the same time, market uniformity and scale are also giving way. Powerful, small, low-cost form factors are going to proliferate as digitization continues. Edge compute and various smart things will contribute to this shift, and the ability to run smaller manufacturing runs will become paramount.

Revamping Intel’s development process and pivoting to more agile manufacturing will be two core internal challenges confronting Gelsinger, but not the only ones. The outside-in pressures will mount as well.

Private 5G networks market will see strong growth as a broad range of industries and governments adopt the technology

The environment after COVID-19 will prompt enterprises and governments to take a hard look at how they can apply new technologies such as 5G to mitigate operational and safety risks. Leading enterprises in the U.S., Germany, Finland, South Korea and Japan will drive the first wave of private 5G network investment through 2021, giving way to broader adoption beginning in 2022 as key 3rd Generation Partnership Project (3GPP) standards are finalized, devices become available and the technology matures. The governments of these countries will also be key initial investors in 5G for civilian, first responder and, in the case of the U.S. and South Korea, military purposes. The Chinese government will also invest in private 5G networks.

Preliminary private 5G deployments are mostly exploratory in nature

Private 5G network spend in 2020 is primarily for exploratory purposes. The ecosystem is experimenting with different use cases, business models and value chain structures in a bid to test the technology and prove the business case as well as to formulate a plan on how best to go to market and which solutions to focus on commercializing.

One key feature of this exploration is ecosystem participants innovating in their own environments, such as RAN vendors applying their own 5G solutions in their factories and industrial companies coinnovating with their partners on pilots. This will help parse out reference cases that can prove the business case for 5G, and some of these pilots will result in commercial contracts.

TBR’s Private Cellular Networks Market Landscape deep dives into the market for private cellular networks, particularly as it pertains to 5G. This global report covers enterprises and governments that are investing in private cellular networks as well as all of the major vendors and some of the key disruptors (e.g., startups) that supply infrastructure in this space. The research includes key findings, key market developments, market size and forecast, regional trends, technology trends, vertical trends, use cases, and acquisitions and alliances that are occurring in the market. The report also provides lists of key companies in the private cellular networks ecosystem that play a role in the market.

COVID-19 catches manufacturing and retail verticals flat-footed, limiting IT and service investment

While manufacturing and retail companies are capitalizing on some opportunities during the COVID-19 pandemic, they are also experiencing significant negative short-term impacts. Making matters worse, most companies in these verticals lack the agility and IT infrastructure necessary to adjust in the current environment. The result will be a severe slowdown in these sectors, which will delay or halt many IT projects and service engagements that could have long-term business value.

Service opportunities will take a hit due to the downturn in manufacturing and retail verticals

Early assessments predict the manufacturing and retail industries will be among the hardest hit by the economic fallout of COVID-19, for reasons related to supply chain disruption, government-mandated store closures, and inefficient operations for factories using a mostly remote workforce. TBR’s Management Consulting Benchmark includes industry revenue splits for the 13 covered companies, providing a view into which consultancies could be most exposed to clients’ economic struggles. Consulting, by its nature, loves chaos and uncertainty, but the clients themselves may struggle financially and delay or outright cancel plans to extend or transform their digital and IT environments. We cannot predict whether clients will need more or less from these consultancies, but we can understand their exposure. At the highest end, PwC and BearingPoint earned more than 27% of their management consulting revenues in 2019 from those two industries, with Europe-based BearingPoint the highest in the benchmark at 28%, in TBR estimates. At the lower end, Accenture (NYSE: ACN) was the only consultancy that saw revenues from those two industries at less than 10% of its 2019 total revenue (just under 9%), while EY came in at 15%. The remaining firms ranged from 22% to 26%, considerable exposure for two of only nine industries tracked in the benchmark. We can state with confidence that the consultancies that deployed automation internally, implemented asset-light strategies, and invested in remote delivery and robust remote employee structures will fare better than peers. From an organizational perspective, we will also likely see consultancies that have 20-plus distinct industry “specializations” consolidate into broader and more diverse verticals, spreading out the risk of any one practice suffering from another pandemic-like economic crash.

The IoT market continues to stabilize, with the overall market growing at a moderate accelerating CAGR of 24.8%

4Q18 Commercial Internet of Things Market Forecast infographic

TBR projects total commercial Internet of Things (IoT) market revenue will increase from $456.1 billion in 2019 to $1.4 trillion in 2024, a CAGR of 24.8%.

Topics covered in TBR’s Commercial IoT Market Forecast 2019-2024 include deeper examinations, such as trends, drivers and inhibitors of the seven technology segments we track (e.g., cloud services, IT services, ICT infrastructure, and connectivity), the 10 vertical groupings we cover (e.g., public sector, healthcare, manufacturing and logistics), and four geographies (i.e., APAC, EMEA, North America and Latin America).

In addition to a more in-depth examination of the aforementioned topics, we also delve into the rise of “bundles” and “packaged solutions,” and how vendor partnering is lowering cost of sales for IoT implementations.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

The IoT market continues to stabilize, with the overall market growing at a moderate accelerating CAGR of 24.8%

TBR projects total commercial Internet of Things (IoT) market revenue will increase from $456.1 billion in 2019 to $1.4 trillion in 2024, a CAGR of 24.8%.

It is important to remember that IoT is a technique for applying technology components, not a technology itself, which leads to certain drivers and inhibitors. Because it is a technique, IoT has an unlimited shelf life. Vendors that invest now and solidify their IoT go-to-market strategy will benefit in the long run. Methods for connecting equipment and solutioning may evolve, but the overarching technique is not going away. However, IoT growth is limited by the components and solutioning that compose the technique, including capabilities, standards and cost. This leads the numerous submarkets and sub-technologies of the IoT ecosystem to experience varied growth.

IoT revenue will accelerate as technological capabilities and standards mature and common solutions appear, culminating in lower cost and complexity.

Graph showing commercial iot market forecast alternative market performance scenarios 2019-2024

TBR believes an emerging growth accelerator is the fact that IoT offerings have evolved from the initial DIY stage to easily integrated components to component kits to, finally, almost complete solutions. At each point in this evolution, IoT becomes less expensive, less burdensome and less risky to customers, while still delivering business benefits. This greatly broadens the market, resulting in market growth and revenue growth for vendors that participate in this evolution.

However, customers remain concerned with the cost of IoT solutions, including the expense associated with transmitting, processing and storing data. The amount of data stored increases as IoT projects remain in operation, and a thoughtful data collection and storage policy is key to maintaining positive ROI.