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Demand for digitization to support European economies drives IT services vendor investment

Dramatic need to shift to contactless payments

Prior to the pandemic, demand for digitization services and deals in the European financial, public and retail verticals grew at a generous rate. Europe-focused vendors covered by TBR, including Accenture (NYSE: ACN), Atos (Nasdaq: ATOS), Capgemini, Deloitte and T-Systems, consistently expanded services and contracts surrounding related capabilities, such as cloud, blockchain and automation, feeding these healthy verticals. However, vendors and clients faced numerous challenges as the pandemic hit, such as the need to shift to remote work environments and the need for digital, e-commerce and contactless solutions. In 1H20 most vendors focused on client retention and headcount management, rather than entertaining expansionary strategies. Europe, which felt the impacts of the pandemic in its early months, was among the first to experience a need for digital alternatives, evidenced by accelerated demand for digital infrastructure, banking and payment solutions, benefiting IT service vendors and the struggling European economy.

As consumers faced pressures to go cashless, demand for contactless payment alternatives increased dramatically. While the financial and public sectors had been prioritized in 2020, as they typically make up a large percentage of IT service vendors’ revenues, the retail vertical contracted drastically as lockdowns and supply chain challenges impacted inventory levels. So, while tailoring contracts and generating solutions to attract clients in the financial and public sectors was imperative in the thick of the lockdowns, addressing challenges in retail will complement vendors’ efforts in other verticals as well. From an influx of credit card and debit card usage to increased demand for Apple Pay and other tap-to-pay capabilities, retail clients of IT service vendors were transitioning their client-facing solutions to meet the demand to go digital.

For example, in 4Q20 Atos announced it will use the Atos Codex Internet of Things solution to develop and run nutrition company Goli’s cashless and contactless vending machines, which will be deployed in numerous environments such as shopping malls and airports. The solution also leverages cloud technology to connect cashless payment alternatives and digital wallets to the network. Additionally, Atos holds shares in Worldline, a payment and transaction services company that offers a strong digital payments and contactless solutions portfolio, along with a collaborative partner network. In December Worldline partnered with P3 Financial Group to bolster the real-time digital commerce and e-payments ecosystem in much of Europe.

Other vendors have taken similar action; T-Systems Hungary drove real-time payments on a single platform for ACI Worldwide (Nasdaq: SCIW) in September, strengthening regional initiatives to meet expectations for safer and more secure vertical operations, and Capgemini partnered with SharpEnd and The Drum to develop CornerShop, a retail innovation store that is helping brands, retailers and shoppers utilize technologies to transform their shopping and customer engagements in preparation for the post-pandemic world. Further detail and analysis on the store are available in TBR’s 4Q20 Capgemini report.

Previous investments in emerging tech like blockchain paved the way

Going back about 10 years, digitization drew consumer attention in the mid-2000s, when in-house cloud computing caught fire and distributed ledger technologies emerged. Leveraging blockchain, cryptocurrency entered the market as a private payment alternative that offered greater security and cut out banks altogether. Bitcoin, arguably the poster child of cryptocurrency, quickly became an investment tool for many users, though its position as a go-to currency in the black market and, more importantly, its price volatility made its use an unpopular choice for the average consumer.

Changing regulations related to IT technologies, such as blockchain and digital assets, have challenged Europe-centric vendors despite the opportunity to capitalize as consumer preference shifts to digital. IT services vendors covered by TBR will likely face new contract and deployment challenges in the region, alongside pre-existing obstacles related to the COVID-19 pandemic. TBR believes a greater focus on digital and contactless payments, e-commerce, and digital banking and currencies from vendors will be an important aspect of economic regrowth in Europe and lead to adjustments in financial, public and retail verticals to better complement one another.

With Nuance, Microsoft buys into healthcare and more

Microsoft announced its second largest acquisition in company history on April 12 with its intent to purchase Nuance Communications for $19.7 billion. Nuance’s presence in the healthcare vertical was touted as driving the move, but TBR believes much deeper and broader strategies were behind Microsoft’s decision.

Buying Nuance gives Microsoft an opportunity, but not a guarantee, to sustain growth

The announced acquisition of Nuance is the culmination of multiple elements of Microsoft’s recent performance, strategy and growth plans. On performance, Microsoft has benefitted from the COVID-19 pandemic perhaps more than any other technology vendor. Technology demands of businesses and consumers reacting to the pandemic boosted nearly all of Microsoft’s sprawling businesses, aside from an initial downturn in advertising spend that negativly impacted the LinkedIn business. From a strategy perspective, industry specialization has been a growing focus for Microsoft over the past five years, which is a shift in its mostly horizontal technology approach throughout its long history. Healthcare has been a frequent focus, but so too have retail, manufacturing and financial services specialization.

Lastly, in growth, Microsoft has been searching for the next $10 billion plus growth business. Microsoft Office 365 and Azure are clearly carrying Microsoft’s financial performance to date, but new addressable markets are needed to carry corporate growth and profitability for the next decade. While Nuance itself cannot assume that burden, the capabilities Microsoft will acquire will make many of its core technologies relevant to a much wider audience and set of use cases. In this way, the purchase of Nuance is similar to that of LinkedIn, with the full value of the investment hinging on successfully leveraging the technology to benefit as many other business units as possible.

Healthcare is large and ripe for IT investment

Unsurprisingly, healthcare has a profound impact on modern society, with an industry size to reflect that. In the U.S. alone, healthcare spending was $3.8 trillion in 2019, representing 17.7% of total gross domestic product (GDP). Furthermore, healthcare spending increased by 4.6% in 2019, a rate far outpacing growth of the overall economy.

Those facts are only part of the reason healthcare is such an attractive market for IT companies. While many verticals have fully embraced technology-driven transformation over the past decade, healthcare has been much slower to change. While technology has fundamentally changed the retail experience and business model, healthcare’s core operations and customer experience have remained much the same. Delaying this maturity in part are the strict regulations, such as the Health Insurance Portability and Accountability Act (HIPAA), which healthcare entities in the U.S. must meet, creating substantial risk for any IT budget decision makers planning to modernize their environments with cloud, let alone pursue innovative technologies such as IoT to improve the care they provide to patients.

There are glimmers of promise that the healthcare vertical is ready to begin transformations driven by increased technology adoption. Part of the shift is a generational change in doctors and providers. The influence that doctors have within the healthcare industry is one of the attributes that makes the healthcare vertical unique. Generational change among the physician ranks is having an outsized impact on the acceptance of technology within healthcare, but that is only one of the factors pointing to an increase in technology adoption.

Outside of shifting perception, the impact of COVID-19 has forced hospitals and patients alike to embrace solutions that have been around for years but are now a necessity to maintaining the patient-doctor relationship and safety, such as telemedicine. And with all major cloud technology providers offering HIPAA compliance, along with an ecosystem of partners that can leverage those delivery platforms, the aforementioned regulatory requirements are now less of a barrier in slow technology adoption.

Capgemini’s CornerShop: Redefining physical retail shopping in the post-pandemic environment

Evolving the customer experience

In February Capgemini, in partnership with connected experience platform SharpEnd and global media platform The Drum announced the CornerShop. Physically located in London, the CornerShop is a retail innovation store designed to transform shopping and customer engagement post-pandemic. CornerShop works as a live testing environment for brands, retailers and shoppers to reimagine the shopping experience through new technologies.

Utilizing the management consulting and digital design capabilities of Capgemini Invent and insights from research and data analysis, Capgemini will enable retailers and brands to evolve the customer experience, improve in-store operations and help customers rediscover in-person shopping with new engagement options in physical stores. TBR sees CornerShop as closely aligned with Capgemini’s Inventive Shopping offering, which addresses customer-related challenges such as new ways to engage, shop and build loyalty.

Partnering for post-pandemic retail

Overall, Capgemini utilizes advisory and digital design capabilities — some of which came through acquisitions, such as that of Idean and Lyons Consulting Group in 2017 and LiquidHub in 2018 — and Salesforce Commerce Cloud capabilities to win deals.

Last November Capgemini announced the completion of a personalized and data-driven e-commerce initiative for the U.S. website of Italy-based sportswear manufacturer Fila. Capgemini provided digital marketing, e-commerce, experience design, application integration and support services, improving the client’s ability to support online sales after the onset of the pandemic and closure of physical stores. The website, built on Salesforce Commerce Cloud, also uses Salesforce Service Cloud and MuleSoft to integrate the digital ecosystem. In July 2020 Capgemini completed the implementation of a new business-to-business face mask program for Gap Inc. Capgemini created a website in less than five weeks and a solution enabled by Salesforce Commerce Cloud to help Gap quickly add nonmedical cloth face masks to its online store offerings.

Expanding its industry-specific solutions by selecting priority industries for its portfolio development, such as consumer goods and retail, improves Capgemini’s ability to address pandemic-driven challenges specific to each business and industry segment. Consumer goods and retail, which accounted for 12% of revenue in 2020 and declined 0.1% year-to-year in constant currency, is on a path to recovery from the negative effects of the pandemic. Revenue in the segment declined 5.5% year-to-year in 2Q20 and 2.4% year-to-year in constant currency in 3Q20 but increased 4.3% year-to-year in 4Q20, indicating the challenges tied to store closures, supply chain interruptions and social distancing are easing up. Transforming the shopping experience through the CornerShop will help Capgemini increase activities with retail clients as they gradually ramp up sales and open physical locations as the pandemic abates.

TBR’s coverage of Capgemini includes quarterly detailed reports on the company’s financial performance and strategies related to go-to-market, resources, alliances and acquisitions. Capgemini is also covered in TBR’s quarterly IT Services Vendor Benchmark and semiannual Management Consulting Benchmark, and the company is featured frequently in our monthly Digital Transformation reports. 

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.