Reading through SAP’s preliminary fourth quarter and full year 2015 results, what grabbed our attention was not so much the undoubted solid traction with cloud and S/4 HANA offerings, but that these achievements in topline growth (16% YoY) came with a considerable contraction of operating margin (5.3% YoY). This is neither a new fact nor are SAP’s competitors immune from this same phenomena. While we do not intend to stray into the realms of financial analysts or look for a fly in the ointment of SAP’s sales achievements this did get us thinking about the broader context of the transition to the As-a-Service Economy and its impact on the supply side.
HfS has written numerous pieces on the necessity to embrace revenue cannibalization to survive in the As-a-Service Economy. Thus far, in the context of sourcing and IT Services the discussion of the diluting impact on top and bottom line through the transition into the new paradigm, has been confined to infrastructure services through the acceleration in cloud service adoption. However, with the ascent of Intelligent Automation these discussions will become much more generic and pervasive.
As a result, in 2016 we expect that the acceleration of Intelligent Automation will increasingly become a topic in discussions with shareholders and financial analysts. We would go as far as to expect profit warnings being directly referred to the impact of automation. In return, this will further accelerate consolidation as providers with business models predicated on labor arbitrate will not be able to adapt quickly enough. Lastly, ISV automation juggernauts like BMC and CA will enter fray and disrupt the still nascent market through innovation and M&A.
By decoupling routine service delivery from labor arbitrage, Intelligent Automation will become a double edged sword for legacy providers. While continuing to go through the pain of having to extricate themselves from legacy contracts (and revenue models), automation provides an opportunity for these providers to mitigate the competitive disadvantages with the India heritage peer group. Though it is the tier 2 and 3 offshore provider who are most exposed to the secular shift in automation. Their business model is largely predicated on labor arbitrage and have limited opportunities to cross and upsell to buffer the effects of commoditization as well as automation. While consolidation is unavoidable as sourcing is all about global reach and scale, Intelligent Automation will act as a catalyst.
Unlike ISVs like SAP or Oracle who have come to embrace the shift to cloud, the automation juggernauts like BMC, CA or HP have thus far been absent from the discussions on Intelligent Automation. Presumably, one of the main reasons for that is the desire to ring-fence traditional license revenues. However, just as SAP and Oracle had to be pushed to embrace the cloud business model, we expect the automation juggernauts to respond with both innovation as well as M&A. In the end it doesn’t’ matter whether this will be by choice or by necessity. The financial results of both SAP and Oracle are an illustration for the bumpy road ahead for service and technology providers alike. The only certainty is that the competitive landscape in the evolving Intelligent Automation market in 2016 will change dramatically.
Service Provider : HPE, Oracle, SAP