Sourcing, Cloud & Xaas the Trendsredefining Enterprise IT

Sourcing, Cloud & XaaS The trends redefining Enterprise IT

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Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Indian Heritage Providers have been driving market consolidation…

The trends defining enterprise IT | Sourcing, Cloud and XaaS Indian heritage Providers lead on margin, with all Big-5 providers but Tata Consulting Services achieving > 20% margin. 2016 Service Rev. ($bn) Op. Margin (KPMG Estimate)

With the integration of HP-E outsourcing 47,5 (Services) 13% services, DXC Technology (née CSC) will become the worlds #3 provider, 33,5 bn 15% managed in revenues. 26 bn (incl. HP-E) 5%

23,5 bn 2%

12,5 bn 23%

17,5 bn 5%

14 bn 16%

Sources: KPMG Research, HfS Research & KPMG, Select "State of Operations and Other Outsourcing 2017„ (16) (14) (12) (10) (8) (4,4) (6,5) N=454 Enterprise Buyers (Revenue)

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View … ‘Cloud’ firms are accelerating that consolidation.

The trends defining enterprise IT | Sourcing, Cloud and XaaS Amazon is the leader in IaaS, with about 40 percent market share. Microsoft is a clear second, followed by Google and IBM.

Together these players account for approximately For Comparison 65 percent of the IaaS market today. With the 2016 Rev. ($bn) decline of on-premises data centers, they could account for almost half of all IT infrastructure 47,5 (Services) provisioning by 2020.

If that is the case, only companies with 33,5 bn significant capital-investment capabilities could compete with them. One potential candidate would be Alibaba, which has recently 26 bn experienced triple-digit year-over-year cloud- related revenue growth, driven largely by cloud adoption in China. 23,5 bn

12,5 bn 2016 Rev. ($bn) Margin (KPMG Estimate)

17,5 bn > 12 (IaaS) Ca. 45%

14 bn > 4 (IaaS) Ca. 45%

Sources: KPMG Research, HfS Research & KPMG, Select "State of Operations and Other > 2 (IaaS) Ca. 35% Outsourcing 2017„ (16) (14) N=454 Enterprise Buyers (Revenue)

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Opensourceandthehardware shifttoAsiaincreasethepressure.

The trends defining enterprise IT | Sourcing, Cloud and XaaS

Approximately 65 percent of companies increased Asian original-equipment manufacturers (OEMs) have their use of open-source software from 2015 to 2016. been making inroads in the IT infrastructure market dominated by US-based providers. Consider three examples in the server market: Consider two examples in the server market: . Major IT providers now rely on programs such as Apache . Huawei plans to shore up its position in the server market by Spark, Kubernetes, and Kubernets commercial cousin Redhat spending about $1 billion of its annual $9 billion R&D budget OpenShift. on equipment for data centers. . Moreover, Airbnb, Airbus, eBay, Intel, KPMG and and . Lenovo acquired IBM’s x86 server business in 2014, helping Qualcomm are among the many large companies using to expand its footprint in large enterprises globally. TensorFlow, Google’s open-source library of machine-learning code. An equally important shift involves Asian ODMs, . Facebook’s Open Compute Project, which aims to make which have also increased their share of the hardware hardware more efficient, flexible, and scalable, has helped market as white-box systems become more popular. extend the open-source movement into the data centers of companies that are participating members, such as AT&T, Taiwan-based Quanta Computer’s cloud-computing revenue from Deutsche Telekom, and Goldman Sachs. server, storage, switch, and IoT devices has been strong. Several Asian ODMs now provide servers to some of the top global hyperscale cloud providers, including Amazon, Facebook, and Google, all of which are investing heavily in expanding their data-center infrastructure. Initiatives such as Facebook’s Open Compute Project are accelerating with this shift, since they allow members to obtain plans and designs for servers, storage, and networking. Some Asian ODMs are also offering off-the-shelf products based on open-source designs. If current trends continue, Asian ODMs may increase their revenue share of the hardware market two- or Sources: KPMG Research, McKinsey, Black Duck, North threefold by 2020. Bridge HfS Research & KPMG, "State of Operations and Outsourcing 2017„ N=454 Enterprise Buyers

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Market Zoom-out: Mid 2017 Provider Performance Overview

The trends defining enterprise IT | Sourcing, Cloud and XaaS

Mid 2017 Provider Financial Performance This chart shows the full range of growth rates of the 30% main service providers we track. If we broke out Microsoft’s cloud services business and Alphabet’s (Google) they’d be some company for AWS on the 25% Infosys Syntel extreme right – but this chart is only possible where the provider AWS gives revenue growth and margin for its business or services TCS 20% business unit. HCL Technologies NTT DATA has had a boost in services revenue – as the revenue Wipro Cognizant 15% Hexaware from Dell Services adds to their growth. CGI Tech Mahindra Luxoft WNS growth was boosted by the acquisitions of HealthHelp and IBM GTS Genpact Capgemini Accenture WNS Denali. 10% Mindtree

Operating Margin (%) IBM GBS Tieto EXL Atos Conduent 5% NTT DATA DXC Fujitsu (Services) 0%

Unisys -5% -20% -10% 0% 10% 20% 30% 40% 50% Revenue Growth (%)

Sources: KPMG Research, HfS Research & KPMG, "State of Operations and Outsourcing 2017„ N=454 Enterprise Buyers

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Market Zoom-in: Mid 2017 Provider Performance Overview

The trends defining enterprise IT | Sourcing, Cloud and XaaS

Mid 2017 Provider Financial Performance This chart shows a selection of the largest providers’ 30% operating margin and revenue growth for the closest financial period to Mid 2017. This version of the chart zooms into the -10% to +20% growth 25% Infosys band so the positioning within the main group can be seen in Syntel more detail. TCS 20% Mid 2017 continued to be a better quarter for many of the main HCL Technologies players – but we still see some of the traditional on-shore firms Wipro Cognizant struggle to get any revenue growth – with IBM’s services 15% continue to facing challenges. CGI Hexaware Tech Mahindra IBM GTS Genpact Mid 2017 didn’t bring much relief and although there were Capgemini continued signs of better performance to come. We still see an 10% Accenture Operating Margin (%) Mindtree adjustment in growth rates for most of the leading offshore firms IBM GBS Tieto EXL Atos – stabilising around the 5% YoY, with Cognizant and HCL – who Conduent managed do better through more acquisition lead growth. 5% DXC Fujitsu (Services) 0%

Unisys -5% -10% -5% 0% 5% 10% 15% 20% Revenue Growth (%)

Sources: KPMG Research, HfS Research & KPMG, "State of Operations and Outsourcing 2017„ N=454 Enterprise Buyers

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Market Zoom: 2016 Annual Revenue & Growth

The trends defining enterprise IT | Sourcing, Cloud and XaaS

60,0 60,0% 55,1% 50,0 2016 Growth 50,0% 47,5 40,0 40,0% 33,4 30,0 30,0% 23,3 20,0 20,0% 18,2 17,3 14,3 13,5 13,0 12,5 12,2 10,0 8,6% 9,7% 10,1 9,8 9,9% 10,0% 7,1% 6,7% 7,6 7,5 7,5 6,7 6,1% 4,5% 5,2% 5,4% 4,2 1,6% 9,5% 2,6 2,5 0,0 -1,2% 0,0% -3,4% -5,0% -3,7% -4,9% -6,6% Growth (%) -10,0 -10,0% Services Revenue ($b)

-20,0 -20,0% -25,7% -30,0 -30,0%

This chart shows a selection of the largest providers’ revenue and revenue growth for calendar year 2016. This is based on raw services revenues from the providers publicly stated quarterly revenues – for the period as close to January 2016 to December 2016. As we Sources: KPMG Research, move forward we will be changing our list of suppliers to reflect recent acquisitions and divestments; for example we will include HfS Research & KPMG, Conduit services and DXC Technology (the name for CSC and HP Services) as soon a public figures become available. "State of Operations and Outsourcing 2017„ N=454 Enterprise Buyers

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Public cloud goes mainstream, and mission critical.

The trends defining enterprise IT | Sourcing, Cloud and XaaS

While companies have been moving their KPMG’s leading clients workloads to have drastically reduced outsourcing provider or even eliminated their and public cloud private data centers,

datacenters for years,   moving their operations there has recently been to the cloud. a sea change at large enterprises. In fact, cloud providers are expected to account for about 80 % of Mission Critical Mission Mission Critical Mission shipped server and   storage capacity by 2018.

 Differentiating   Differentiating 

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Sourcing Strategies will be much more granular going forward.

With legacy Outsourcing The trends defining enterprise IT | Sourcing, Cloud and XaaS providers focusing their portfolios, they are less 10 years ago 5 years ago Today and going forward willing to accept a broad estate of services as a Single Tower Outsourcing Multi-Tower Outsourcing & Shoring Strategic out-tasking Procurement economies, Economies of scale, Blend of, ‚legacy‘ Outsourcing single provider. scalable labour labour arbitrage & automation cloud, XaaS and Robotics

Sustainable sourcing strategy will be more Captive oderOutsourced IT Service Desk complex, and will blend, Service Integration & Management ‚legacy‘ Outsourcing cloud, XaaS and EUC Cloud & Networks Robotics. Datacenter

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Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Everything-a-service’ consumption from software to hardware

The trends defining enterprise IT | Sourcing, Cloud and XaaS KPMG’s leading clients increasingly prefer IT Application Maintenance & Development 46% 36% 82% consumption-based pricing models: a trend IT and Network Infrastructure Support 45% 34% 79% that started with software and then moved into Procurement 32% 32% 64% hardware, and then generally to services. Supply Chain and Logistics 39% 30% 69%

This shift from Capex to Customer Service / Sales Support 33% 30% 63% Opex helps reduce risk, Industry-specific Process (i..e. Claims frees up capital, and 43% 28% 71% provides increased Processing) flexibility. Human Resources 38% 27% 65%

From 2015 through 2016, Finance and Accounting 38% 26% 64% revenues for infrastructure as a service Marketing 35% 25% 60% (IaaS) and platform as a service (PaaS) rose by 53 Sales 32% 23% 55% percent, making them the highest-growth segments in cloud and infrastructure. IT 46% 35% 81%

Sources: KPMG Research, Same Contract (FTE Based) Back 38% 29% 67% HfS Research & KPMG, "State of Operations and AAS (Volume/ output based) Outsourcing 2017„ Front 33% 26% 59% N=454 Enterprise Buyers

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View About KPMG Sourcing Advisory

The trends defining enterprise IT | Sourcing, Cloud and XaaS

Reputation

KPMG is the world’s largest and most comprehensive advisor on According the Intl Association of Outsourcing Professionals, KPMG Shared Services and Outsourcing. We have unparalleled has been one of the World’s Best Outsourcing Advisors for 10 years experience in advising organizations on how, where, and with whom in a row; and the Global Sourcing Association has just selected us to partner with, and offer market-leading data and sourcing the European 2016 Sourcing Advisor of the year. Finally, according management technology together with broad, global to Lünendonk, KPMG is one of the Germany‘s Top-3 Outsourcing transformational capabilities. Advisors. 2014 is Lünendonk‘s most current ranking.

Reducing Turnkey Getting the best Sustainable cost, achieving sourcing out of the market advantage transformation

We achieve digital transformation: being KPMG Law enables us to be a one With our consultative approach and We run multiple by-invitation client Digital Enterprise Strategy Consulting stop shop, including contracting. Deal collaborative reputation w/ providers platforms; these include a IT Leader means we provide a balanced Advisory allows us to divest legacy assets, we build the foundations for a Contracts & Commercials Roundtable perspective to digital and analogue including complete data centres. And HR sustainable partnership, engaging for the DAX-30, global Outsourcing abilities. And we achieve sustainable cost Consulting helps us to do people potential partners and get the best Provider Performance & Satisfaction reduction: our audit heritage means we transformation right. out of the market - rather than Surveys, and Global Business get the numbers right. standard ‘commodity answers’. Services Research. Who we work for

Digital Ecosystem Cloud Deepdive XaaS Deepdive Sourcing Deepdive Robotics Deepdive Industry Vertical View Your Contact at KPMG

Gernot Gutjahr Partner CIO & Sourcing Advisory T +49 174 3003-567 ggutjahr@kpmg.com

The Squaire Am Flughafen 60549 Frankfurt am Main

www.kpmg.de www.kpmg-institutes.com/institutes/shared-services-outsourcing-institute.html

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