Recent news concerning service providers’ intent to either split into separate units, as in Atos/Eviden, or combine forces, such as in the case of NTT DATA’s and NTT Ltd.’s new operating structure effective April 1 as NTT DATA, Inc., reminds us that boundaries of service providers are in flux. This is due to a variety of motivations, including the hope to unlock value in high-leverage service opportunities unencumbered by legacy businesses such as infrastructure management or even tax/audit consulting. A long list of historical examples come to mind:
- Dell divested much of its services to NTT Data in 2016. This added to its portfolio of acquired application capabilities and increased its North American presence.
- HPE spun off some of its services and software during 2017, with software going to Micro Focus and services going to the newly formed DXC. What remained was its HPE Pointnext services. DXC has struggled since to achieve growth and profitability.
- IBM Global Technology Services spun off to become Kyndryl, while IBM Global Business Services rebranded to IBM Consulting. Although not an immediate hit, since the transaction in 2021, the fortunes of both companies have improved.
- Most recently: Atos is attempting to separate slow-growing, low-margin infrastructure services from more dynamic applications, data, and security services, for which growth has been stronger. Although the historical Atos is likely to be backstopped by the French government, preventing a total meltdown, Eviden nevertheless remains still hitched to its debt-laden sister company and not fully separate as intended.
- Last year, EY announced that its plan to separate its tax, audit, and consulting businesses was canceled due to objections from partners.
All of this is occurring against a backdrop of a coming hurricane of generative AI that promises to redefine service delivery in many key segments, including applications modernization.
Combining forces for the purpose of scale offers limited benefit to customers, as DXC’s experience reminds us. Separating infrastructure services from applications services is something of an unnatural act in the era of cloud that encourages convergence. There are also other barriers: Atos’ plan has struggled with a host of economic, regulatory, and leadership issues, delaying its planned split. Yet combining different users organizationally does not necessarily mean effective service integration, as long-time customers of IBM have learned. For its part, the newly formed NTT DATA, Inc.’s plan should help the firm increase its competitiveness, especially for global companies, through its new capacity as a single source of infra, apps, and network services.
What should customers do about it? In evaluating these transitions, watch for the following:
- Splitting off can mean backfilling for things that are left behind. Dividing low-margin services from higher margin services sounds great in theory, but infrastructure-centric providers cannot thrive on infrastructure services alone. For example, Kyndryl has been obliged to ramp up its advisory and applications capabilities, which were left primary in IBM, to help build margin momentum (see my 2020 blog, IBM Spins Off Its Managed Infrastructure Services Business). Be ready to compensate with other partners for help with these “left-behinds.”
- Combining service offerings has to be more than skin-deep. Large service providers are typically composed of separate service lines despite the trend toward shared resource models. Just reporting to a single executive doesn’t mean services have been truly integrated. Working with large service providers can be just as challenging as working with independent suppliers.
- Unlocking economic value sounds great, but what about the customers? Typically, these transitions are championed by Wall Street, other investors and executive management given the prospect for new value for these financial stakeholders. Customers should want their service partners to thrive, for the sake of better personnel, career paths and willingness to be flexible, but there has to be tangible value for the customer also.
- Continuity of service is king. Either new combinations or divestitures, change brings the prospect for disruption. Try to secure ongoing participation of those service delivery personnel that you know and trust. But this cuts both ways. It is also an opportunity to change for the better if current staff are not cutting it.
