Atos Event Crystallizes Digital Transformation for Providers

Bruce Guptill, Charlie Burns, Jan Erik Aase Research Alerts

What is Happening?

Several ISG analysts and advisors participated in the Atos Analyst & Advisor 2017 Global Conference in Boston. The event was a comprehensive update on Atos’ business direction, portfolio and offering strategy, acquisition direction, and technology viewpoints. Clients of ISG Insights can look forward to a Briefing Note within the next week summarizing our take on all of this, followed by a series of deep-dives into specific segments of Atos’ service lines.

For this Research Alert, we want to focus on two larger-picture aspects that this event helped to crystallize for us: how providers’ digital strategies are shaped (and limited) by core ecosystems of customers and partners, and the intensity of the challenges that providers face while repositioning, reinventing, and improving themselves in order to enable and foster transformation for clients and partners.

Why is This Happening?

Presentations by and discussions with Atos leaders at the event shed some additional light on how IT providers in general are positioning themselves for the nascent digital opportunity, i.e., articulating digital-first direction and strategy that resonates within the existing customer and partner base; establishing offering foundations that utilize key existing technologies, offerings and partnerships as building blocks; and planning/announcing/executing acquisitions that layer on top of, or extend the footprint of, the foundation.

In Atos’ case, the company articulated a solid business strategy that leverages its existing capabilities into a Digital Transformation Platform – also referred to as a ”digital transformation factory” by company leaders during the event. The platform rests on four pillars consisting of or built from established Atos business: its Canopy Orchestrated Hybrid Cloud services; SAP HANA by Atos; the Atos Digital Workplace (including its year-old Unify acquisition); and Atos Codex data management and analytics – all supplemented with expanding cybersecurity and digital payment offerings. Each of these “pillars” in turn builds on and with Atos’ broader services mix.

What Atos has already in place is well-suited for enabling and delivering digital transformation capabilities. It is also shaped by what the company has and does right now, and what its customers and partners are capable of taking advantage of. Its portfolio, like most providers’, has developed and evolved on pace with the business IT changes being experienced by leading-edge clients, and company leadership has been strong and prescient enough to recognize the direction, rethink its strategy, reposition (and expand) the offering portfolio, and re-invent itself as needed overall.

But a substantial amount of work remains to be done. Atos leadership made it clear how enabling digital transformation for its enterprise clients requires ongoing and repeated rethinking and reinvention, down to developing more and better ways of finding, hiring, and retaining the right human talent in its own global workforce.

Net Impact

The reality of the digital transformation business for traditional providers was made clear when Atos reviewed its publicly-reported revenues. On one hand, in a market that has been largely challenging for most traditional IT service providers, the company looks to be healthy and growing. Among other statistics shared in presentations this week, Atos reported €11.7B revenue for FY2016 with an operating margin of 9.4%, along with a 5-year CAGR of over 15% through 2016.

On the other hand, while it is has been both reinventing itself and pushing hard to profit from digital transformation services, Atos leaders reported that only about 13% of current revenue actually comes from such offerings. We take that number at face value, given the difficulties in separating out digital-related business from traditional.

Given where they are today, Atos has set itself a substantial growth target for digital business: from 13% of revenue today to at least 40% by YE2019. As with many IT providers, Atos plans for some of that to come via acquisitions of digital-related providers, from infrastructure-related to transaction and digital payment-related capabilities (a la its Worldline acquisition). But the majority is expected to come through continual and recurring reinvention and adaptation/innovation of its existing service lines and partners.

This comes with significant challenges. Atos must invest effectively in innovation in how it does business and how its offerings can be applied and adapted, including in ways that are not currently envisioned. The company has earmarked an average of €300M annually for R&D spending, or about 2.5% of revenue. The most innovative established IT firms (e.g., Intel, Google, Microsoft, Amazon) spend more than 10% annually on R&D; innovative disruptors and digitally-native firms such as Facebook tend to spend as much as 20% annually. While €300M is not a small amount, 2.5% of revenue is relatively low for a company that must develop and improve multiple means of re-inventing and innovating across multiple lines of business.

Presentations and discussions at the event also helped to frame another critical need for IT providers like Atos: staffing. One of the greatest challenges that providers face as they gin up for digital business is a lack of qualified staff, especially in engineering, development, and associated management. Atos, for example, has about 100,000 engineers already on staff, and is hiring between 10,000 and 15,000 more per year just to keep pace with current business needs. Given that digital transformation requires an increasingly broad mix of traditional IT skills and new knowledge and expertise, providers (including Atos) are challenged to find more and better talent, quickly, with high rates of hiring and retention.

This is an area that requires not only provider business rethinking and reinvention, but also application and innovation of traditional and digital-first technologies and services. The cobbler must not only shoe his own children, but find and adopt more who can help him design and build new types of shoes. Atos is addressing this similarly to the ways that other providers are, including internal “university” training programs, using advanced analytics to develop and manage predictive hiring and retention programs, and fostering “digital communities” internally and with partners, utilizing Cloud-based knowledge sharing/collaboration platform capabilities.

Finally, one more consistent message was delivered by Atos leadership throughout the two days: Digital transformation, for Atos, its clients, and it partners, is an ongoing thing. It requires more than a one-time investment or a specific set or type of acquisitions. We see and hear similar messages from most traditional IT providers, and we see them working to balance the substantial investments required in balancing and managing simultaneous reinvention and extension of traditional business.

Interestingly, we do not hear much about this from Cloud-native/digital-native providers. For them, continual reinvention is part of their organizational, cultural, and technological DNA.

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Insights at the Outsourcing World Summit – Digital Change, Uncertainty, and Speed

Bruce Guptill, Todd Lavieri Research Alerts

What is Happening?

ISG Americas president Todd Lavieri used his keynote presentation at the IAOP Outsourcing World Summit (OWS17) to highlight not only the changing state of outsourcing, but also its critical effects on user enterprise and IT provider digital transformation. His net message: There is more change underway than meets the eye, creating confusion and opportunity for enterprises and providers.

Lavieri used data and insights from the 57th Quarterly ISG Index (4Q16) to identify and reinforce three key factors shaping digital transformation trends as we move into and through 2017: Change, uncertainty, and speed. The key change is the shift in outsourcing away from traditional IT toward more “as-a-service” capabilities. This is not only reshaping providers’ business strategies and models, due in large part to user enterprises looking for rapid deployment of advanced capabilities as they pursue transformation initiatives. The uncertainty comes from enterprises’ often still-nascent digital transformation plans and initiatives, and the resulting provider-side uncertainty about which capabilities will be most valued – and therefore should be invested in. Finally, the speed aspect reflects the accelerating pace of digital business technology adoption, adaptation, and innovation, which spurs similar acceleration of even more digital business initiatives and expectation.

The results: As Lavieri highlighted in his talk, 65% of enterprise clients feel disrupted, and express substantial uncertainty about what to do, where to go, and how to do it. We see IT providers expressing similar uncertainty – even while leaders position themselves to create opportunity from the chaos.

Why is it Happening?

Digital business transformation implies new processes and new outcomes, enabled by new ways of using information technologies. It is a series of fundamental changes that may be approached incrementally or as “big bang” projects. In either case, we are seeing more and more enterprise business and IT leaders impatient for change. They fear not being able to find and take advantage of new opportunities; they worry about falling behind competitors. They seek ever-improving means of trialing new capabilities and either succeeding or “failing fast” with reduced risk to the business. They push for more rapid adoption of digital business capabilities.

Meanwhile, digital transformation is still early enough in most firms’ agendas to lack cohesive, coordinating strategy and management. And we are seeing absorption of more digital business transformation plans, initiatives, and spending into ongoing business organizations and operations. On the plus side, this implies that more and more, “digital business” is more and more becoming just “business.” On the negative side, this suggests that digital plans and initiatives may be being spread more widely, away from centralized, coordinating governance.

On the provider end of the spectrum, developing and delivering new technologies for new services that enable new enterprise-side capabilities – often for clients that do not yet know their long-term needs – is very different than providing mature services to knowledgeable clients was just 5 to 10 years ago. As noted above, enterprise clients are really still becoming aware of what can be done, and taking early steps toward translating that into longer-term business planning and strategy. And enterprise investments in “as-a-service” IT are helping to provide most of the growth in outsourcing business today, but the applications of these capabilities are far more likely to be point- or group-solution types with dynamic demand and utilization than more traditional, steady-state, division- and enterprise-wide IT services outsourcing. Couple this rapidly-evolving new IT consumption model with mid-term uncertainty about digital transformation, and the enterprise-side uncertainty quickly translates into provider-side uncertainty.

Net Impact

In evolutionary theory, it’s not the strongest species that survive, but those that adapt the best and most rapidly to their environments. In a business IT environment rife with uncertainty, change, and speed, enterprises and providers both need to enable adaptability in order to survive and prosper. Three key actions to do this are as follows:

1. Understand that “change” really means “improvement.” Digital is not about raw change; it is about improvement. And as there are always too many opportunities for improving business and IT, look for the most valuable business improvements feasible. A first place to look is where current systems most inhibit the improvement of business and IT operations.

2. Reduce and manage the uncertainty. Identifying and implementing changes that improve the ability of the firm to do business will significantly reduce uncertainty about what to do, how to do it, and when. This simple, first organizational step enables vision and planning based on a path of measurable, incremental improvements that lead to strategic transformation.

3. Adjust your speed accordingly. It’s easier to travel faster (and farther) on a long journey when you are not distracted by constantly repairing and fueling the vehicle. Improving operational efficiency is like improving fuel efficiency. Your vision down the road is much improved, and you can avoid more traffic problems and accidents, when you do not have to constantly monitor dashboard gauges and lights for problems. In short, you can go faster with fewer stops and reach your digital destination with more resources and ability.

Simplifying the change+uncertainty+speed problem in this way also enables enterprise IT and business leaders to better identify the most valuable IT providers and capabilities. As improvements occur over time, the mix of suitable providers and capabilities (and solutions) will change. Insights and guidance such as those in our 2016 i3 and 2017 Market Lens reports, our ongoing Automation Index and Cloud Comparison Index research, and associated research and briefing notes, will help to identify and manage these changes as they emerge and evolve.

Providers need to understand these changes because there is great opportunity in helping client enterprises understand and scope possible improvements. We see surging uptake of such services among user enterprises, and this will accelerate and grow through the next 24 months at least. Providers also need to understand their own need for speed. Enterprise-side IT business changes are occurring quarterly, or even faster. Awareness of client enterprise business change – and the flexibility to adapt to that change and its accelerating pace – will be key to the ability of IT providers to compete.

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Harnessing the Power of Disruption – IAOP State-of-the-Industry Survey

Jan Erik Aase Research Alerts

What is Happening?

Results from the latest IAOP State of the Industry survey, co-presented by ISG at the Outsourcing World Summit (OWS17) in San Antonio, TX last week, indicate that enterprises and providers alike are awash in uncertainty driven by disruption in technology and in business. And both the choice of dealing with, or managing, disruption.

The survey and the Summit centered on themes directly impacted by or have disruption at their core: Outsourcing Market Trends, Enabling the Digital Economy, Influences of New Business Models, The Rise of Robotics, and Impacts of Various Populist Elections. Key highlights include the following:

  • The traditional outsourcing market is getting upended by the dramatic increase in IaaS and SaaS contracts, mostly led by the US market – but EMEA and APAC are showing signs of following suit.
  • The success of digital innovation and transformation is demanding increased engagement from service providers.
  • Enterprise clients are hungry to be “uberize” but are reliant on service providers to bring industry expertise and solutions to change their existing business models.
  • Automation brings threats of job losses but also hope of new key roles for employees and providers.
  • And finally, the geo-political environment has the greatest chance of disrupting the entire outsourcing eco-system that we’ve seen in the last 20 years. The anticipation of the unknown could be a bigger disruption than the actual policy changes.

Our conclusion: Disruption is needed to meet consumer demand, remain competitive and increase revenues. Avoiding disruption will not create stability and strengthen a firm’s position in the market, but will instead guarantee that they will lose market share and a segment of their customers.

Why is it Happening?

“Dealing with” vs. “managing” disruption is an important distinction. The response to this year’s survey was unique in that there was a record number of incomplete and abandoned surveys, and all were connected to the section on disruption. ISG and IAOP have speculated that this is symptomatic of what we are seeing in the market. Most clients admit that they don’t know what they will do, nor how they will react to many of the disruptions in their industries and in technology. They are being disrupted in multiple ways and are overwhelmed. This aligns with the top four disruptions that were identified by enterprise clients, service providers, and advisors in the survey, as shown in Figure 1.

Disruptions

Figure 1: Top Four Disruptions for Enterprises, Providers, and Advisors Source: 2017 IAOP State of the Industry survey.

Those enterprise clients who responded to the survey confirm that the impact of new government policies, different market demands, and changing consumer behavior is driving disruption. This in turn disrupts enterprise expectations and dependencies on service providers and third-party advisors. The need is no longer for “lift and shift” or “shift left” types of engagement. There are few if any within most enterprise client environments who have experience in dealing with the current level of business and technology disruption. So it isn’t surprising that, according to the survey results, the greatest dependency by enterprise clients on service providers is around both business and technology expertise and associated solutions.

Expectations

Figure 2: “What are your disruption-related expectations for your service providers?” Source: 2017 IAOP State of the Industry survey.

Additionally, 89% of enterprise clients indicate that their top dependencies for third-party advisors is “Bring the Right Vendors,” and 84% said “Identify the Solutions that Drive Disruption.” This confirms the dilemma facing enterprise clients: how to manage disruption while also creating their own disruptions. Both require key partnerships with service providers and advisors – and ISG is finding that enterprises are impatient for solutions. Todd Lavieri, ISG President Americas, speaking about client expectations said in his keynote speech at OWS17, “They want to move faster, but they are cautious of the impacts to their various business lines. They are looking for service providers and vendors to react to their changing requirements – and to bring insights and innovation every quarter and quality every day.”

Net Impact

These survey results align with the advice that ISG and many others are giving to enterprise clients and providers as they deal with and manage disruption. Three key themes that stood out in the survey results, and reiterated throughout OWS17 presentations and breakout sessions, can be translated to three key actions to manage disruption as follows:

1. Embrace new business models. The survey indicates that 78% of enterprise clients feel that the adoption of new business models will be the key to their success. An audience poll conducted with the 300 attendees of the OWS17 keynote presentation asked “Are providers providing technologies which enable the new business models?” An average of 47% of enterprise clients and advisors indicated that “Providers are behind where we want them to be,” while 21% of the providers in that same audience poll said “We are completely ready” and 59% said “We are preparing and building competencies.” It appears that enterprises seeking to “uberizing” their business or embrace other key business models will rely heavily on themselves for the near term at least.

2. Remain flexible to best practices in digitization efforts. In the survey results, 66% of service providers indicated that the expectations of their clients around various digital initiatives is more complex due to relationships that are more directive vs. collaborative. And in response to another audience poll question, “Which disruption is impacting your business the most,” 40% of enterprise clients, providers, and advisors agreed that it was Technology Driven Disruptions. With most companies relying heavily on providers for technology-centric solutions, a trusted collaboration with key providers is critical.

3. Proactively plan for geo-political business impacts. Clients are banking on advancements in automation that will enable them to reduce dependencies on offshore resources and replace them with automated processes. Both enterprise clients and service providers are exploring new in-sourced and nearshore options as well as deferring their sourcing decisions pending policy changes. In an online poll that was conducted during the keynote presentation, the audience was asked, “Do you believe that the current global political environment will impact your sourcing strategy?” 66% said Yes, 20% said No, and 14% said Not Sure. We believe that “Not Sure“ is typically the best answer. Proactively planning for various contingencies is always a good approach, with speculations left to others.

Enterprise clients need to be willing to “show their hand” if they also hope to learn from others. Where the disruption creates competitive advantages, it’s obvious why some clients are keeping quiet. But most clients are entering a new frontier and a collective and collaborative approach will be the most effective way to get everyone to a solid foundation. At that point natural selection will separate the wheat from the chaff.

Providers need to be more prescriptive in how they’ve seen the consumption of the various disruptive technologies and business models happening in key industries, different regions and around the world. The uncertainty of enterprise clients engenders disruption but awareness of best practices and case studies will greatly reduce elements of the disruption.

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