Author: Peter Bendor-Samuel

Services Prediction: More Mega Deals Coming | Sherpas in Blue Shirts

An interesting trend is developing in the services industry, reversing the trend we’ve seen for the past five years. I predict that this year, and for the next few years, we will see a modest rise in mega deals – deals with $500,000,000 or more in Total Contract Value (TCV). Where are those deals coming from?

At Everest Group, we watch services transactions closely. Over the last five years, the industry experienced a big move away from mega deals, preferring smaller and smaller transactions. This was then exacerbated by digital rotation where customers were interested in digital pilots – which are small deals. But this year we note a renewal of interest – in some specific situations – for large deals.

Here’s my take on three forces driving mega deals now.

Force #1: IP-Plus-Services Model

One force driving mega deals is where the service provider wraps services around the intellectual property (IP) platform the provider owns. TCS’s book of business of large deals is a good example of this. TCS has an IP platform around insurance and mega deals tied to that platform. The $2 billion-plus TCS transaction with Transamerica earlier this year is a good example. What makes the deal so large? The customer is modernizing its IT by jettisoning its legacy technology and transferring it to TCS for modernization through the TCS platform.

As the services industry pivots to digital models, IP ownership plays an increasingly important role. Automating work diminishes the importance of labor arbitrage, and the profit pool reconfigures around IP owners. The nature of the IP-plus-services model allows mega deals to happen. I expect more of this kind of deal to happen at TCS as well as at providers like Cognizant, which has a similar platform in the pharmaceutical healthcare space with TriZetto. Both TCS and Cognizant are using their investments in IP platforms to differentiate their offerings and capture large contracts.

Where service providers own important IP platforms, I see those as the basis for some very large deals.

Force #2: Leveraging the Balance Sheet

Another source for large deals is providers leveraging their balance sheet to finance a customer’s large-scale IT modernization. HCL and Wipro are good examples of providers using this approach to create very large deals. They use their balance sheets to fund expensive IT modernization deals, including taking over a customer’s legacy assets. This strategy accelerates a service provider’s growth, and I expect to see more mega deals using this strategy.

Force #3: Digital Transformation Programs

This year, we’ve seen digital transformation move out of the pilot phase into full-blown transformation programs. The amount of money customers spend on these transformations is staggering, often hundreds of millions of dollars. The large availability of enterprise funding for transformation is likely to encourage larger deals.

The net result of these three forces? I believe we will see a modest increase in mega deals, and in certain areas, larger deals for the remainder of this year and next year.

I’m not claiming the entire services market is moving to mega deals. In fact, two size-diminishing secular trends that were well underway continue: (1) decomposing the legacy, multi-tower deals to single towers and bidding those out (2) the move from managed services to systems integration and digital work. These trends will continue to create a fabric of smaller transactions.

However, some large deals are emerging. I believe the three forces I described are working against the well-established trends for smaller deals we saw during the last five years.

How To Purchase Services For Digital Transformation | Sherpas in Blue Shirts

Disruptive technologies enable dramatic new ways of doing work and delivering value to customers. Understandably, companies are rushing to implement disruptive technologies to change their business so that they can better serve their customers, employees, partners with new value and lower their total cost of ownership. Achieving this goal necessitates assembling a digital platform. However, few companies have the resources to build and maintain a platform alone, so they need to contract with third-party service providers. Here’s the problem: the classic procurement approach for third-party services doesn’t work with digital transformation.

Read more in my blog on Forbes

How a CIO Turned Critical Challenges into Benefits that Drove Change and Success in Digital Transformation | Sherpas in Blue Shirts

In meetings with companies undertaking digital transformation or IT modernization, I often hear executives talking about advice they’ve received from their consultants and advisors on how to plan and manage these initiatives. I consistently hear different versions of three points. “We must have a detailed road map of our transformation journey.” “We will need to replace most of our existing talent.” “We’ll need mountains of money.” Sound familiar? Consultants and systems integrators (SIs) consistently preach these practices, warning companies that their transformation won’t play out the way they hope unless they follow this advice. But compare that advice with the real-life experience of CIO Toby Buckalew.

Read more in my blog on CIO

Learn more about our digital transformation analyses

How to Drive Alignment with Your Service Provider in Implementing Digital Technologies | Sherpas in Blue Shirts

Companies are on the horns of a dilemma. They signed long-term, managed service contracts for IT or business processes, which took advantage of the savings from labor arbitrage. But now they find that there is significant potential to leverage the new suite of digital technologies that promise improved performance and lower cost. The problem is that that their incumbent service providers often actively resist implementing these technologies, using delaying and obviation tactics, refusing to pass on the savings and/or demanding additional work or other concessions in return for complying. Now that I’ve identified this major issue that many companies face today, let’s look at how they handle this non-alignment situation.

Read more in my blog on CIO

Does Your Change Management Plan Cut it in the Digital Age? | Sherpas in Blue Shirts

Traditional change management practices weren’t built for digital transformation. Here’s how to rethink two key aspects of your approach

IT modernization and digital transformation focus on changing a business and creating new value. But investing in new technologies and changing processes do not change a business; they just give a company the ability to change the business. Unfortunately, traditional change-management techniques are not adequate to address the level of change in IT modernization and digital transformation.

Traditional change-management techniques may help a company implement digital technologies, but they won’t enable driving the necessary change to realize the full benefits of the technologies. How can your company determine if its change management plan is effective?

The first step in determining change management effectiveness is understanding that your company is changing its business model. The traditional mindset that change-management tactics will drive success in transformation initiatives understates the immense amount of change and the nature of the change that is required. Managing business model change is far more comprehensive than typical transformation initiatives.

Read more in my blog at The Enterprisers Project

Digital Transformation Reveals Limitations Of Software Packages And SaaS | Sherpas in Blue Shirts

Most large enterprises were on a journey for the past 30 years where a higher and higher proportion of the core systems driving the enterprises was software packages or software as a service. Traditional wisdom for companies was “don’t build – buy.” Then, again, as companies undertook digital transformation journeys, the prevailing belief was that the best way to do digital transformation is to get there as fast as possible by buying (not building) many components, using third-party software and SaaS products. Now, two disruptive forces are starting to shift the balance between build vs. buy in the IT world.

Read more in my blog on Forbes

Learn more about our digital transformation analyses

Novartis Succeeds in Managing IT Modernization Journey with Two-Team Approach | Sherpas in Blue Shirts

Many companies find they need to undertake IT modernization to support later digital transformation to create new competitive advantage. They recognize that IT and shared service groups must modernize so they can respond more effectively and quickly to the business needs. However, it’s a mistake to approach IT modernization with the same approach as traditional transformations. The changes to people/talent, processes, policies and philosophies are cross-functional and cross-departmental and cut deeper into the organization than many companies anticipate. Despite these hurdles, Novartis achieved great success in its multi-year IT modernization journey. I spoke with Scott Mason, Head of IT Operations at Novartis, about the company’s keys to success in IT modernization.

In 2011, Novartis faced a challenge of infrastructure instability and cost explosion. It’s a global healthcare company and recognized it needed to modernize its operations to prepare the infrastructure as the backbone for the company’s agile, digital business world. “We recognized that the modern technology landscape is about building the backbone operating model and competencies that prepare your platform for digital. That’s the foundation – without it, nothing can happen,” said Mason.

Read more in my blog on CIO

Are Companies Making Progress In Digital Transformation? | Sherpas in Blue Shirts

The term “digital transformation” is now ubiquitous. Nearly every company’s leaders and board of directors see the potential of digital transformation to create new value and improve their competitive positioning. They are investing in building out capabilities to transform their business. Unfortunately, some companies build digital capabilities but don’t generate value that changes their competitive position. So, are businesses really making progress in these investments? Where are we in efforts to succeed at digital transformation? Here’s my view and what I believe must happen next.

Read more in my blog on Forbes

Learn more about our digital transformation analyses

Important Lesson For Companies Undertaking Digital Transformation | Sherpas in Blue Shirts

By its nature, digital transformation is difficult as it’s fraught with the complexities and magnitude of change. The reason so many digital journeys don’t succeed is because the company fails to implement the operating model necessary to make the digital platform work. By operating model, I mean organizational changes, policy and process changes, talent model changes and the go-to-market changes.

Why do companies often fail to implement the operating model that’s necessary for the digital platform they build? Simply stated, they take a fractured approach to the digital journey. Although the executives say the operating model is changing, they don’t build a common vision that allows it to happen.

Read more in my blog on Forbes

Related: Learn more about our digital transformation analyses

Big Increase in IT Services Spending in Financial Services | Sherpas in Blue Shirts

At the beginning of 2018, we forecasted a bump in discretionary IT services spending in Financial Services. And we predicted banks would spend heavily on technology. But we didn’t forecast as big a bump as is occurring, and the banks are spending more heavily than we anticipated. Why is it important to understand what’s happening here?

Who would be the beneficiaries of that spend? That’s why this spending trend is important.

At the beginning of the year, we said the beneficiaries would be primarily Fintech companies, in-house services, and non-incumbent service providers. However, given the amount of spending we see coming down through the pipeline, we don’t think the fintechs, in-house services and challenger service providers will be able to absorb the spend.

IT Services: Growth Trends in the Financial Services Vertical

Deep Dive Equity Research and Everest Group’s July 31 report, “IT Services: Growth Trends in the Financial Services Vertical,” reveals that the BFSI spend – particularly in banking – is poised to increase dramatically. In fact, we see a 15% increase planned for 2018 at just the top four US banks:

  • JP Morgan indicates it will increase its IT spending by $1.4 billion in 2018.
  • Citigroup plans to spend around $8.0 billion on IT in 2018, or about 20% of the bank’s expense budget, which is an increase over its 2017 spend.
  • Wells Fargo plans a significant spending uptick in technology transformation and data management in 2018.
  • Bank of America plans an incremental $500 million technology investment due to tax-reform benefits.

Initially, we believed that the incumbent technology service providers would not be the beneficiaries of the increased spend. But we now believe there will be a shortage in supply that the fintechs and new-age service providers will not be able to satisfy. We believe the only way to satisfy this shortage is if the incumbent legacy technology service providers of technology – which have been largely left on the sidelines to date – participate.

Yes, the underlying secular forces that we noted at the beginning of the year as growth obstacles for the legacy service providers (revenue compression, a strong DIY movement or insourcing and suboptimal sales model for digital projects) still hinder legacy providers’ growth. But we believe that the enormity of the spend that is coming through the pipeline will create a rising tide that the fintechs and new-age technology service providers will not be able to absorb.

Consequently, we’re upping our forecast for banking spend in 2018 and strongly believe the legacy service providers will be meaningful beneficiaries of this spend.

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