Over the past year we have seen global systems integrators (SIs) – Accenture, IBM, Deloitte, Fujitsu, Capgemini and others – make many acquisitions, particularly in the public cloud, AI, cybersecurity and data space. Much of the growth in spending over the past few years have been driven by these categories: in 2020 if a software company was purely or mainly SaaS, they are likely to have witnessed strong growth. If they were on-premises software, they were lucky not to see declining revenues. While it is normal for the larger SIs and consultants to play catch up through acquisition, it is becoming harder for them to gain traction in these new areas.
Technology Shifts Drive Market Fragmentation
With every technology-driven business change new SIs, consultants, and managed services providers emerge. It happened with the move to big ERP systems, the move towards Business Intelligence, the emergence of SaaS etc. But I think we are now seeing something different. More than just the smaller players going after opportunities earlier, I believe we are seeing a changing buying behaviour from tech and business buyers – a greater willingness for larger enterprises to give their most important, business-critical strategies and implementations to smaller, less established players.
And I am not suggesting that the larger SIs are not performing well. Many are growing at 10-25% YoY – but at the same time, many are also growing at a slower rate than the markets they play in. The Ecosystm RNx for global IT services and consulting providers shows that the global providers continue to power ahead. But they need to adapt to changing market conditions.
New Cloud/AI Partners Winning Consulting and Implementation Deals
We have seen a new community of partners emerge with tech changes, such as the hyperscale cloud platforms and AI/machine learning tools. Traditionally, these companies would be good at one thing – and would learn slowly. For example, in the SAP ERP growth period, the projects were large and long. A single, mid-sized SI might only be working with 2-3 clients at a time. Therefore, the IP that they collected was limited – and they would find themselves with focused or niche skills. The large SIs had done many large, long projects across the globe and had much best-practice IP to call upon, giving them a broader and deeper knowledge of the technology and industries. Smaller providers had limited IP and industry experience.
But in this cloud and AI era, specialist providers work on hundreds of smaller projects with dozens or hundreds of clients. With the technology constantly evolving, the skills are constantly improving. While the global SIs are working on many cloud and AI engagements, they are often part of longer engagements – giving the consultants and tech teams less exposure to the new and evolving cloud platforms.
In a world where technology is changing at pace, the traditional global SI practice of “learning from peers across the globe” doesn’t happen at the pace the market requires. By the time your peers in the business have completed a project, documented it, and shared learnings, the market has moved on and technology has changed. Today it is easier and faster to learn directly from the tech vendors and cloud platform providers and their training partners. The network effect of knowledge in a team on the opposite side of the globe for a global SI is less valuable to clients. Often the smaller and mid-sized SIs have a deeper, broader knowledge of the technology platforms and toolsets than the larger providers – giving them a competitive advantage. For example, if you want the actual experience of moving SAP to Azure, or Oracle to AWS – you’ll often find the smaller providers have more experience. And this continues to play out. In many markets in the world, the top 5-10 SIs for cloud, AI and cybersecurity has a high proportion of local specialist providers.
Tech Buyers No Longer Look for Culturally Aligned Partners
Tech buyers themselves are changing too. In years gone by, the smaller tech partners would tell us that they felt they were included in bids to drive down the price from the global SIs. But today the story is different. Smaller partners are admired for their agility and innovation. Large enterprise customers will choose small providers because the small SI is NOT like them. In the past, they chose the global SI because they were just like them!
Because of this, the large SIs are mopping up their smaller competitors across the globe. Accenture has acquired 40 companies in the past 10-11 months, IBM has acquired over 10, Atos and Cognizant have also acquired many companies in the past 12 months. They are doing this for the skills as much as for the clients, along with getting a foothold in a new market or strengthening their position in geography. The challenge will be to hang on to the clients, culture, and the IP of the acquired business. Often these smaller competitors are growing at a significant pace – and the biggest risk is that the acquiring company takes their eyes off the prize.
Global SIs Still Own the Industry Play
Despite these challenges, one of the areas that the global SIs will continue to dominate is the industry play. I have discussed how as technologies mature, industry plays become more relevant.
Smaller and mid-sized SIs and consultants find it hard to create deep pools of expertise across multiple industries. While some may have a deep focus on a single or two industries, only the large players have broad and deep geography and industry experience. This puts many of the acquisitions into context – the global SIs will take these acquisitions and use that deep and broad technical and business knowledge and add it to their industry knowledge to create a more compelling offering.
Their challenge will still be one of cultural alignment. As discussed, many companies seek out tech partners who represent what they want to be, not what they are. The ability for the Global SIs to retain the culture, agility and innovation of the acquired business will determine their ability to continue to see similar or improved levels of growth from the acquired business. Using their IP in the context of industries will be the key to their ongoing success.
Hitachi announced their plans to acquire US based software development company GlobalLogic for an estimated USD 9.6 billion, including debt repayment. The transaction is expected to close by end of July, after which GlobalLogic will function under Hitachi’s Global Digital Holdings.
GlobalLogic was founded in 2000, and the Canada Pension Plan Investment Board and Swiss investment firm Partners Group have 45% of ownership; with the remainder owned by the company’s management.
Hitachi’s Business Portfolio Expansion
The acquisition of GlobalLogic is a part of Hitachi’s move to focus and extend the range of Hitachi’s digital services business. As Hitachi aims to expand from electronics hardware to concentrate on digital services, they are looking to benefit from GlobalLogic’s range of expertise – from chips to cloud services. Silicon Valley-based GlobalLogic has a presence in 14 countries with more than 20,000 employees and 400 active clients in industries including telecommunications, healthcare, technology, finance and automotive. This will also expand Hitachi’s network outside Japan by providing them access to a global customer base and will boost their software and solutions platforms, including Hitachi IoT portfolio and data analytics.
The GlobalLogic deal follows another big acquisition of ABB’s power grid business by Hitachi in July 2020 to focus on clean energy and distributed energy frontiers. This makes Hitachi one of the largest global grid equipment and service providers in all regions.
Hitachi is also planning to divest parts of their portfolio such as Hitachi Metals, their chemical unit and their medical equipment business.
Ecosystm Comments
“Hitachi’s move to acquire GlobalLogic is very interesting and is in line with the growing trend of global Operation Technology (OT) vendors riding the wave of Industry 4.0 and ‘Product as a Service’ models – essentially, to move up the margin ladder with more digital services added on to their already established equipment business. Siemens, Schneider Electric, Panasonic, ABB, Hitachi and Johnson Controls are some of the prominent vendors who have taken pole positions in their respective industry domains, in this race to digitally transform their businesses and business models. Last year, Panasonic made a very similar move, taking a 20% equity stake in Blue Yonder, a leading supply chain software provider.
With rapid advancements in computing and communications (5G), it is now possible to converge the IT (Information Technology supporting enterprise information flows), the OT (Operational Technology – machine level control of the physical equipment), and the ET (Engineering Technology in the Product Design and Development space such as CAD, CAM, PDM etc.) domains. Three worlds that were separate till now. The convergence of these three worlds enables high impact use cases in automation, product, process, and business model innovation in almost all sectors, such as autonomous vehicles, energy efficient buildings, asset tracking and monitoring, and predictive and prescriptive maintenance. For the OT vendors therefore, it becomes critical to acquire IT and ET capabilities to become successful in the new cyber physical world. Most OT vendors are choosing to acquire these capabilities through strategic partnerships (such as Siemens with Atos and SAP; Panasonic with Blue Yonder) or acquisitions (such as Hitachi and GlobalLogic) rather than develop such capabilities organically in completely new domains.“
Last week industry leaders, SAP and Siemens, announced a partnership to bring together their respective expertise on creating integrated and enhanced solutions for product lifecycle management (PLM), supply chain, service and asset management, in a move that is expected to accelerate Industry 4.0 globally.
The partnership between SAP and Siemens aims to develop innovative business models to break silos between manufacturing, product development and service delivery teams to establish seamless customer-centric processes. It will provide users with real-time business information, customer insights and performance data over the entire product development cycle.
As the first step of this agreement, Siemens will offer SAP’s Intelligent Asset Management solution and Project and Portfolio Management applications and SAP will offer Siemens’ PLM suite Teamcenter software for product lifecycle collaboration and data management to manufacturers and business operators across the network – complementing each other’s solutions.
Ecosystm Principal Advisor, Kaushik Ghatak says, “The convergence of the Information Technology (IT) and the Operational Technology (OT) worlds is a must for companies to operate in the cyber physical world of Industry 4.0. Historically, these two worlds have operated in silos. This is a great partnership announcement aimed towards meeting the convergence goals by integrating the capabilities of Siemens (an OT leader), and SAP (an IT leader). Together they would be able to offer an exhaustive set of very valuable offerings in the Digital Supply Chain and Digital Manufacturing domain for customers worldwide.”
Ghatak says, “This is not the first such partnership for Siemens. A strategic alliance between Siemens and Atos has been in place since 2011. In 2018 the alliance was strengthened with plans to accelerate their joint business until 2020, with a focus on building innovative solutions by combining their capabilities. However, the difference this time is that SAP has very a deep and wide set of software offerings in the supply chain and manufacturing domains, which when stitched together with Siemens’ PLM solutions can provide true end-to-end digitalisation capabilities across the ‘Design, Source, Make, Deliver and Plan’ continuum of the value chain.”
Ecosystm Comments
Ghatak, however, cautions that while this is a great partnership announcement between two giants in their respective fields, they will need to collaborate actively on three key aspects for this partnership to deliver value for the customers.
- Product Development. Building-integrated solutions with heterogenous data models is not easy. It will require very open collaboration between their product development teams to identify the use cases and build solutions that can enable seamless information flow and actions across the different software modules owned by each.
- Go-to-market. Going to market jointly will need strong collaboration too. In terms of the agreement on customer account ownership, pricing, sharing of pre-sales resources and so on.
- Implementation. And, last but not the least, it will require collaboration to ramp up the implementation capabilities of the jointly developed solutions.