Complimentary 60-minute webinar held on Wednesday, November 7, 2018 | 11 a.m. PST, 1 p.m. CST, 2 p.m. EST
Infrastructure is the backbone of every digital transformation, enabling all the technologies that power the digital era. The success of your enterprise’s business strategy will increasingly depend on next-generation infrastructure advances that cost effectively deliver new capabilities and free up IT talent.
In this fact-based, example-rich session, we will share insights we have gathered from research with more than 100 enterprises across 10 industries about which infrastructure practices and capabilities produce superior outcomes – business, operational, and cost. You will learn how these insights translate into actionable steps enterprises can take to increase the business value enabled by next-generation infrastructure.
Questions we’ll address:
What are the driving factors behind the infrastructure strategies of companies on successful digital transformation journeys?
What are some examples of how business strategy is directly impacted by infrastructure strategy?
How are enterprises addressing the funding challenges of transforming their infrastructure to the next generation?
Who should attend, and why?
Enterprises: CIOs, CTOs, CDOs, and VPs of IT from all industries who are wrestling with developing and executing infrastructure strategies that drive business value in their digital transformations.
Presenters Cecilia R. Edwards Partner
As corporate technology leaders pursue their digital transformation strategies, many are looking to IT service providers as potential partners in those change efforts. However, a one-size-fits-all approach to outsourcing providers is not likely to serve CIOs well in meeting innovation goals. In fact, bigger doesn’t necessarily mean better in the digital change era.
“Traditionally, size was a good proxy for capability, especially when technology was viewed fundamentally as an enabler of efficiency,” says Jimit Arora, partner in Everest Group’s IT Services practice. “Companies had rules about not wanting to work with companies below a certain size or scale threshold citing governance or risk capabilities.” However, as rapidly advancing technology capabilities have emerged as key enablers of business differentiation and growth, CIOs are finding that they instead need different types of IT services providers to meet all of their needs.
The biggest mistake a company can make in digital transformation is starting the transformation journey without first getting the necessary commitment and support. Senior leaders and business stakeholders must commit to rethink and change organizational boundaries, policies, processes, talent and organizational structure as necessary to achieve the strategic intent or vision.
If they’re not committed to doing that, the digital transformation effort will fail.
Unfortunately, many companies get only lip service from leaders rather than long-term commitment to change. Company leaders can have a great meeting and talk about the need for change and a digital environment to create new competitive positioning, but not get real commitment to change.
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.
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.
Last week, General Electric (GE) replaced CEO John Flannery (after just 13 months in the top seat) with former Danaher chief Lawrence Culp, in response to Flannery’s slower-than-expected turnaround efforts.
GE has been a lynchpin of the American economic narrative, having pioneered the light bulb and the jet engine. During its vast and distinguished history, it has survived the Great Depression, the dot-com bubble, and the 2008 financial crisis. It was one of the original components of the Dow Jones Industrial Average, and had the longest continuous presence on the index before being removed from the index in June 2018. GE’s shares recently nosedived to fall below the $100 billion market cap threshold, effectively wiping out US$500 billion in value since its peak market cap of ~US$600 billion in August 2000. For such as iconic enterprise, the fall could not have been more dramatic.
How Did We Get Here?
While much of the market commentary has tried to blame GE’s decline on everything from short-sighted leadership (even under the legendary Jack Welch), expensive (and often inexplicable) M&A deals, and poor cash deployment, the truth is that it has suffered from a not-so-uncommon problem… lack of a future-proof digital operating model.
The company has struggled to reorient its portfolio in time, something for which Welch, Immelt, and Flannery were criticized. It has witnessed sluggish growth, despite divesting what it perceives are “non-core” businesses. Over the years, it overpaid for assets in “legacy” businesses – a typical sign of hubris – e.g., its US$9.5 billion acquisition of Alstom, which represented a doubling down on fossil fuels.
A combination of these short-sighted decisions has led to sluggish growth in emerging areas, such as healthcare. Its healthcare unit is now looking to spin out into a separate and independent company by 2019, despite being an important profit center with US$3.4 billion, or 18 percent in profit, in 2017. Essentially, it accounted for 16 percent of GE’s sales, but ~50 percent of its operating profit in 2017, which is a prime example of the misplaced bets GE has made over the years.
This not to say that GE has failed invest in upping its digital game. It has positioned itself as an industrial leader of the digital revolution, with major bets in software players and the Predix industrial IoT platform.
Digital is still a US$4 billion business for GE, but its aspirations seem dramatically cut short. Former CEO Jeff Immelt established the GE Digital business in 2015 as a part of a grand vision to transform the conglomerate into a “digital industrial” company. And yes, invested US$4 billion into the unit. After Immelt’s resignation last year, Flannery has scaled back these ambitions to focus on what it considered the “core” businesses. As of July 2018, GE was reportedly looking to hive off its digital assets, including Predix.
But is GE Alone?
Not really. Our recent research on the evolving digital services market reveals that three in four enterprises have failed to realize sustained returns on their digital investments. Leading enterprise executives singled out the operating model – or lack thereof – as the most important crucial determinant of success in this journey. Amongst various issues, 69 percent of enterprises consider organization structure a barrier while scaling up their digital initiatives.
Enterprises that do not meaningfully reimagine their operating models cannot sustain digital transformation initiatives. Most organizations take a half measure by just focusing on digital strategy. If the enterprise operating model is not aligned with the digital strategy and business model, the desired returns from a transformation initiative cannot be achieved.
A Future-Proof Digital Operating Model
Enterprises need to focus on five key areas to evolve their digital operating model and sustain transformation initiatives:
Organization structure: Leaner organizational structure aligned with the business model and digital strategy
Organizational culture: Ownership-driven culture with focus toward experimentation to reduce the fear of change
Communication channels: Decision-making aided by 360° communication involving internal and external stakeholders
Technology: Broader scope of technology adoption involving the entire value chain
Governance: Portfolio-based technology investments with aggregate business benefits such as ROI.
Adding F.I.R.E. to Scale
To achieve digital-first success, enterprises should embrace a F.I.R.E. operating model framework that defines a blueprint to scale up their digital initiatives:
Fluid organizational structure: Simplifying the organizational structure and its processes in selected pockets of the organization that require agility
Innovative system and culture: Redefining existing processes needs a culture that is driven by innovation and experimentation
Responsive workplace: Creating a workplace aided by intelligent automation and collaboration practices can act as a foundation for any transformation project
Experience-centricity: Moving beyond customer-centricity to focus on the experience of the ecosystem.
Enterprises need to stop looking at digital transformation as an end-goal in and of itself. Rather, it’s a means to an end. When undertaken for short-term incentives and playing buzz word bingo, digital initiatives are more often than not doomed for suboptimal returns if not outright failure. Enterprises need to define the objective functions, and work backwards to establish a resilient and nimble operating model in order to stay relevant and thrive.
Infosys appears to have just concluded one of its best quarters in a long time, and coming as it does after the previous relatively good three months, it indicates that the company is getting its positive rhythm back under CEO Salil Parekh.
Peter Bendor-Samuel, CEO of IT advisory Everest Group,said Infosys’s improved performance is due to two factors — the first, a favourable economic environment in which digital transformation is unlocking large amounts of capital for IT projects, and the second, improved execution from Infosys.
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.
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.
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.