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.
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.