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Webinar Digital Market Index - Market Size, Forecast and Key Happenings

December 2017

Jamie Snowdon Phil Fersht Ollie O’Donoghue Chief Data Officer, HfS Research Chief Executive Officer & Chief Analyst Research Director [email protected] [email protected] [email protected]

• The financial health of the IT Services industry

• How and why providers are embracing digital

• Is the decline in headcount levelling off?

• Wrap-up and questions

Phil Fersht Jamie Snowdon Ollie O’Donoghue CEO and Chief Analyst Chief Data Officer Senior Research Analyst HfS Research HfS Research HfS Research [email protected] [email protected] [email protected]

30 HfS India 1000000 HfS Blueprint Opens 25 is Launched Introduces RPA to 800000 20 Boston US Industry HQ Opens 600000 15

400000 Annual Site Visits

Number of Employees 10

5 200000

0 0 2010 2011 2012 2013 2014 2015 2016 2017

Employees Site Visitors

New York – March 7-8 2018 Cambridge UK – July 3 2018 Bangalore – September 18 2018 Boston – November 2018 For more info about HfS FORA Summmits, please email [email protected]

The shift toward digital/online/virtual experiences and away from physical/face-face engagements 15% 12% 27%

Making more predictive decisions based on rapidly Data explosion, digital 15% 11% 26% accessible real-time data across the organization disruption and increasing consumerism are the three Combating the threat of potentially disruptive digital main challenges that competitors 13% 12% 25% enterprise face in today’s business environment

Micro targeting customers / hyper personalization and customization of products to customer requirements 14% 10% 24%

Building relationships with external ecosystem and industry partners to drive innovation and growth 7% 11% 18%

Driving out costs through process automation 8% 8% 16%

Rank 1 Rank 2 Source: HfS Research, November, 2017 Sample: Enterprise Buyers = 460 Source: HfS Research “Real Time Enterprise 2017” Sample: Enterprise © 2017 HfS Research Ltd. Buyers = 460 Proprietary │Page 8 Unstructured data plagues enterprises Can you estimate the proportion of structured v unstructured data in your organization?

Only 22% of 40% organizations have more than half their data structured 29%

20%

9% 0% 2%

0% / 100% 10% / 90% 25% / 75% 50% / 50% 75% / 25% 100% / 0%

customer experiences Which of the following statements most closely resembles your current organizational leadership’s view on your 'Digital Transformation' strategy? a) “It’s about INVESTING IN "NEW IT" (e.g., get technologies deployed like mobile platform, a cloud platform, infrastructure, etc.) “It’s about INVESTING IN "NEW IT" 35% b) “It’s about CREATING NEW CUSTOMER EXPERIENCES” (e.g., having the coolest use of innovative new technologies like social, “It’s about CREATING NEW CUSTOMER mobile, interactive, etc.) EXPERIENCES” 32%

c) “It’s about CREATING NEW REVENUE STREAMS” (e.g., commercial leverage of “It’s about ALIGNING / HARMONIZING BUSINESS OPERATIONS to customer needs” 20% digital channels, such as mobile, interactive tech, social media, etc.) “It’s about CREATING NEW REVENUE d) “It’s about ALIGNING / HARMONIZING STREAMS” 13% BUSINESS OPERATIONS to customer needs” (i.e., all organizational touchpoints, processes, systems and technologies are We don't have a vision for digital transformation 1% driven by the customer experience strategy, from front office to back office)

e) “We don’t have a digital vision” Source: HfS Research, “Journey to the OneOffice, November 2017” © 2017 HfS Research Ltd. Proprietary │Page 10 Sample: n=395 Enterprise Buyers Digital disruption is rampant: 29% have already seen their top 2 competitors change in just past three years Are your top 2 competitors the same now as in 2014? Do you believe that they (your competitors) will be the same in 2020?

29% No 37%

Yes Yes 63% 71%

Source: HfS Research, “Journey to the OneOffice 2017” Sample: n=395 Enterprise Buyers

© 2017 HfS Research Ltd. Proprietary │Page 12 Majority of enterprises are deer in headlights waiting to get flattened by digitally-savvy competitors How much damage (revenue loss, customer churn, higher customer acquisition costs, lower margins) are digitally native competitors inflicting on your business?

Only 22% fear In the next 2-3 years Now notable damage to their business in the next 2-3 years

35% 31% 29% 22% 20% 15% 15% 16% 7% 8%

Existential damage Significant damage Some damage Limited damage No damage

Damage Declines

Source: HfS Research, “Journey to the OneOffice, November 2017” © 2017 HfS Research Ltd. Proprietary │Page 13 Sample: n=395 Enterprise Buyers Organizational culture holds back half of enterprises in achieving progress with digital business models How significantly is your firm’s culture holding back progress when it comes to making real investments in digital business models? Recognition of organizational challenges helps to conquer the challenges. 51% of the highest 35% performing enterprises see their cultures as holding them back in the digital transformation journey

21%

15% 15% 14%

Promotes and fosters Does not hold back Neutral Somewhat Highly significantly digital significantly

Source: HfS Research, “Journey to the OneOffice, November 2017” © 2017 HfS Research Ltd. Proprietary │Page 14 Sample: n=395 Enterprise Buyers “Traditional Outsourcing” is a commodity. Partnerships are the new norm for services How would you best describe your current primary service provider in relation to your digital transformation journey?

Source: HfS Research, “Journey to the OneOffice, November 2017” Sample: n=395 Enterprise Buyers

Jamie Snowdon has primary responsibility for overseeing the development of HfS’ Quarterly Market Index, in addition to managing and developing the firm’s data-centric products and services. He works across the HfS analyst teams to define evolving services markets and create market size estimates and forecasts. He also manages HfS’ quantitative survey and benchmark data.

Jamie has over seventeen years experience in the IT and Business Services industry. In that time he has worked in a variety of roles including sales, marketing, consulting and as an industry analyst. Jamie’s analyst career has largely been spent conducting data analysis including market size/forecast models, quantitative/qualitative survey analysis and competitive analysis.

Prior to HfS, Jamie worked for UK-based analyst firm Nelson-Hall as a Research Director, conducting vendor and market analysis within the IT and Business Services community. Prior to Nelson-Hall, Jamie spent seven years at IDC, where he was the European consulting director for IDC’s services group, managing all of their bespoke research. Jamie specialised in delivering custom market forecast models and forecasting tools tailored to his client’s individual needs. In addition, Jamie ran IDC’s European outsourcing research, covering both IT and business process outsourcing. Jamie has wide industry knowledge covering IT consulting, enterprise applications, IT & business process outsourcing, desktop & network services, equipment maintenance, and business continuity.

Earlier in his analyst career, Jamie spent four and a half years at the IT services research specialist INPUT in a mixture of marketing and analysis roles. He left as the UK operations manager having spent two years as a customer services industry analyst. Jamie completed his graduate training at one of the UK’s leading electronic and IT distribution companies.

Jamie’s passion is learning; he holds university degrees in general science (computing), law and has a post graduate diploma in legal practice. He lives in Twickenham, London, with his wife and two daughters. His other loves include cycling, reading trashy sci-fi, cool technology, and the perfect pint.

Ollie O’Donoghue is Research Director, IT Services.

With over five years experience in the IT services industry – as both a practitioner and a research analyst – Ollie understands the impact IT services have in the modern business environment.

Before joining HfS, Ollie was the Head of Research and an Industry Analyst for an ITSM Practice committed to providing IT Service and Support Organisations with the resources to deliver greater business value. There he developed a comprehensive research portfolio for the industry. He has researched and presented on a multitude of topics including automation, innovative support models, and real-time analytics. In 2017, Ollie was named second on a list of IT and ITSM experts to watch.

Before becoming an analyst, Ollie worked as an IT service professional in a large public sector organization. It was here that Ollie’s passion for the industry developed.

He graduated from the University of Kent with a Bachelor’s in History. He is also a certified Service Desk Manager with higher mastery. Among his eclectic collection of professional certifications, he has four advanced diplomas in ornamental aquatic fish care. He claims these landed him his first IT job as a member of the interview panel was an avid fishkeeper.

In his spare time, Ollie reads up on History, Geography, and Economics and spends an unfortunate amount of time playing strategy games on his computer. Ollie is partial to wheat beer and, in the right circumstances, Irish whiskey.

20.0% Average 18.0% Weighted average 16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017

Source: HfS analysis of individual company financials (adjusted for acquisitions over half the revenue of original company) The graph shows the average and weighted average revenue growth of these tracked providers, which represent 75 of the largest IT and business service companies.

Other IT Services IT Services Markets: Declining Professional Services Demand for Infrastructure Management IT Infrastructure Services Impacted Management Overall IT Application Services Market Growth Development & Rates Management

Industry Specific BPO

BPO Customer Care BPO Markets: F&A BPO Continues to Grow at a HRO faster rate

F&A BPO

Source: HfS Research 2017 -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

Other IT Services

Professional Services

IT Infrastructure Management IT Services

Application Development & Markets Management

Industry Specific BPO

Customer Care BPO BPO Markets HRO

F&A BPO

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

Source: HfS Research 2017

M&A and Major contracts n M&A Activity ⎻ DXC: Tribridge, Logicalis SMC n Significant deals (July, August, September, October) ⎻ Sopra Steria: Galitt ⎼ BT: US General Services Administration (15-Year, ⎻ IBM: Cloudigo, Vivant $2,500M, Infrastructure Outsourcing) ⎻ Accenture: Altima, IBB Consulting, VERAX, Wire Stone, ⎼ Accenture: Towergate (7-Year, $50M, Cloud); Concrete Solutions, Phase One, Search Technologies, Unilever (5-Year, $50M, Digital) Brand Learning, LabAnswer, Clearhead, Interpid, ⎼ Atos: UK Ministry of Defense (5-Year, $500M, SolutionsIQ Infrastructure Outsourcing) ⎻ CGI: Summa Technologies, Affecto ⎼ Leidos : US Department of Veterans Affairs (5- ⎻ Capgemini: Lyons Consulting Group Year, $6,800M, HRO); US Department of ⎻ Genpact: TandemSeven Homeland Security (5-Year, $684M, Multi-ITO) ⎻ HPE: Cloud Technology Partner ⎼ IBM: US Army (3-Year, $135M, Cloud); UK ⎻ Cognizant: Zone Department for Environment, Food & Rural Affairs ⎻ Deloitte: JKVine (2-Year, $135M, Multi-ITO) ⎻ Teradata: StackIQ ⎼ CGI: US Department of State (5-Year, $900M, BPO) ⎻ Atos: Breakaway Group, Pursuit Healthcare Advisors, ⎼ Indra: Subway Stations -Thessaloniki (5-Year, Healthcare Provider Consulting $500M, Multi-ITO) ⎻ Wipro: Cooper ⎻ Tieto: Avega

© 2017 HfS Research Proprietary │Page 25 M&A Activity YTD (to October 2017) Jan to Oct 2017 M&A Activities by Suppliers Primary Drivers of Jan to Oct 2017 M&A Activities (based on # of acquisitions) (based on # of acquisitions)

Accenture 26 Marketing Capgemini 4 ADM

Atos 4 Horizontal IBM GS 4 or Functional Cognizant 4 -Focused Industry Genpact 4 Focused

Wipro 3 Primary Drivers of HP Enterprise 3 Jan to Oct 2017 M&A CGI 2 Activities

WNS 2

DXC.Technology 2

DXC (HP+ CSC) 1

Xerox -> Conduent 1

Others 4 Others include CGI, Conduent, EXL, HCL Tech, Infosys, Mindtree, NTT Data, Tech Mahindra, Syntel, TCS, Tieto, Unisys

Accenture: Davies Consulting Accenture: First Annapolis Clearlink, a SYKES company: Portent Accenture: Focus Group Genpact: TandemSeven arvato: Ramyam Intelligence Lab Accenture: OCTO Tech Accenture: Clearhead HP Enterprise : Cloud Technology Partners (CTP) (Ramyam) Accenture: Seabury Group Accenture: Intrepid IBM GS: Cloudigo Accenture: Altitude CA Technologies: Veracode DXC.Technology: Tribridge Zalaris ASA: ROC Capgemini: Itelios Accenture: MediaHive Accenture: Solid-serVision Mastech Digital, Inc. : InfoTrellis Inc Cognizant: Brilliant Service Accenture: Monkeys & Maud Atos: ESM Teradata: StackIQ HP Enterprise : Cloud Cruiser Genpact: Rage Frameworks Genpact: BrightClaim Happiest Minds: Cupola Wipro: InfoServer TechMahindra: CJS Solutions Group Technology IBM GS: Vivant WNS: Denali Sourcing Services WNS: Healthhelp IBM GS: XCC Serco: BTP Systems LLC (‘BTP’) Xerox -> Conduent: Conduent Zensar: Keystone Logic Tieto: Avega Wipro: Cooper Jan Mar May July Sep

Feb Apr Jun Aug Oct

Accenture: Altima Accenture: SinnerSchrader AG Accenture: Arismore Accenture: LabAnswer Accenture: Brand Learning Accenture: IBB Consulting Accenture: Endgame Accenture: Genfour Accenture: Phase One Accenture: Search Technologies Adesso AG: Medgineering Accenture: InvestTech ADP: Global Cash Card Accenture: iDefense Security Accenture: Solutions IQ Capgemini: Lyons Consulting Capgemini: Tcube Intelligence Services Group Atos: Breakaway Group (A Conduent Company) Atento: Interfile Atos: Healthcare Provider Consulting (A Conduent Genpact: Fiserv Accenture: Kuntsmaan CGI: Affecto Plc Cognizant: TMG Health Company) HP Enterprise : Niara, Inc. Accenture: SinnerSchrader CGI: Summa Technologies, Inc. Atos: Pursuit Healthcare Advisors Infor: Birst IBM GS: Agile 3 Capgemini: Ciber Sopra Steria: Galitt Booz Allen Hamilton: Morphick Wipro: Drivestream DXC (HP+ CSC): DXC Cognizant: Zone CSRA: Praxis Engineering HCL Tech: Urban Fulfillment Services Deloitte: JKVine Infosys: Skytree DXC.Technology: Logicalis SMC First Data Corporation: BluePay

Accenture: Davies Consulting Accenture: First Annapolis Accenture: Clearhead Accenture: Focus Group DXC.Technology: Tribridge Accenture: OCTO Tech Mastech Digital, Inc.: InfoTrellis Inc Accenture: MediaHive Accenture: Seabury Group Teradata: StackIQ Clearlink, a SYKES company: Portent Accenture: Altitude Accenture: Monkeys & Maud Capgemini: Itelios Genpact: TandemSeven Accenture: Solid-serVision Genpact: BrightClaim Arvato: Ramyam Intelligence Lab Cognizant: Brilliant Service Happiest Minds: Cupola HP Enterprise : Cloud Technology Partners (CTP) Genpact: Rage Frameworks IBM GS: Cloudigo HP Enterprise : Cloud Cruiser Technology IBM GS: XCC Atos: ESM

Jan Mar May July Sep

Feb Apr Jun Aug Oct

Accenture: SinnerSchrader AG Accenture: Altima Accenture: LabAnswer Accenture: Brand Learning Accenture: Endgame Accenture: IBB Consulting Accenture: Phase One Accenture: Search Technologies Accenture: Arismore Atos: Breakaway Group (A Conduent Company) Accenture: InvestTech Capgemini: Lyons Consulting Accenture: Genfour Accenture: Solutions IQ Atos: Healthcare Provider Consulting (A Conduent HP Enterprise : Niara, Inc. Group Accenture: iDefense Security Infor: Birst Company) IBM GS: Agile 3 CGI: Affecto Plc Atos: Pursuit Healthcare Advisors Intelligence Services Wipro: Drivestream Accenture: Kuntsmaan CGI: Summa Technologies, Inc. Booz Allen Hamilton: Morphick Accenture: SinnerSchrader Sopra Steria: Galitt Cognizant: Netcentric Cognizant: Zone Infosys: Skytree DXC.Technology: Logicalis SMC IBM GS: Vivant Tieto: Avega Wipro: Cooper

Service providers contributions by percentage in the last one year 10% 11% 10% 8% 8% 5%

4% 4% 4%

0% IBM HCL Wipro TCS Accenture Atos Infosys

Digital revenues (Q3 2017) of some key service providers

Digital Revenue Q3 2017 ($M) Revenue % of Digital YoY Digital Growth % 8,000 70% 65% 60% 6,000 50% 50% 44% 40% 4,000 31% 5,100 30% 30% 24% 20% 20% 2,000 9% 12% 4,575 1,943 934 496 256 10% - 0% IBM Accenture Atos TCS Wipro Infosys

*Atos digital revenues includes – Infra & Data Management, Bigdata & Cybersecurity and Worldline (Mobility) © 2017 HfS Research Proprietary │Page 29 Crashing headcount begins to slow Numbers are still dropping, but not as steeply as at the start of the year

1200000 2.0% 1000000 1.5% 1.0% 800000 0.5% 600000 0.0% Headcount 400000 -0.5% -1.0% 200000 -1.5% 0 -2.0% Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 WITCH Vendors Employees Pure Play BPO Vendors(Conduent, EXL,WNS,Genpact) Employees WITCH Vendors QoQ Growth % Pure Play BPO Vendors(Conduent, EXL,WNS,Genpact) QoQ Growth %

16.0 4.0% 14.0 3.0% 12.0 2.0% 10.0 1.0% 8.0 0.0% 6.0 -1.0% 4.0 -2.0% 2.0 -3.0% 0.0 -4.0% Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Revenue per ($K) head Revenue WITCH Vendors Revenue(USD K) per employee Revenue per head $K

Pure Play BPO Vendors(Conduent, EXL,WNS,Genpact) Revenue(USD K) per employee Revenue per head $K WITCH Vendors Revenue(USD K) per employee Growth %

Pure Play BPO Vendors(Conduent, EXL,WNS,Genpact) Revenue(USD K) per employee Growth %

High Skilled Medium Skilled Low Skilled

10 9 8 7 6 5 4

Services Workers (Millions) 3 2 1 0 Low Skilled 2015 2016 2017 Medium Skilled 2018 2019 High Skilled 2020 2021 2022

© 2017 HfS Research Proprietary │Page 35 Wrap-up n The IT Services market is coming out of the financial wilderness and while some areas – particularly infrastructure management – are still in steep decline as as-a-service takes hold, overall revenues are boosted by pushes in application services and consulting. n Digital is helping shore up provider performance, contributing significant amounts of new engagements to provider accounts. Frantic merger and acquisition activity likely to continue as providers shore up digital offerings and spend their way out of the red. n Headcount reductions are slowing down, with many providers squeezing more revenue out of headcount - while reductions have slowed, there’s nothing to suggest we’re out of the woods yet as many providers look to be consolidating ready for the next asset squeeze.