Builders of the Digital Ecosystem: The 2013 Booz & Company Global ICT 50 Study
Olaf Acker, Hans Geerdes, Florian Gröne, and Germar Schröder

In its second year, this study analyzes the top companies in the digitization ecosystem, describing which are prospering and which are not, and providing some guidance about why. Dividing them into four sectors—hardware, software, IT services, and telecom—we consider the factors that determine their influence: financial performance, portfolio strength, go-to-market footprint, and innovation and branding, as well as their strategic directions.



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Research Report

Olaf Acker Hans Geerdes Florian Gröne Germar Schröder

Builders of the Digital Ecosystem The 2013 Booz & Company Global ICT 50 Study

Contact Information Beijing Sarah Butler Partner +61-2-9321-1920 [email protected] Dubai David Tusa Partner +971-4-390-0583 [email protected] Düsseldorf/Stockholm Dr. Roman Friedrich Partner +49-211-3890-165 [email protected] Frankfurt Dr. Germar Schröder Principal +49-69-97167-426 [email protected] Frankfurt/Dubai Olaf Acker Partner +49-69-97167-453 [email protected] Houston Henning Hagen Principal +1-713-650-4165 [email protected] London Richard Bhanap Partner +44-20-7393-3519 [email protected] Los Angeles Dan Priest Senior Executive Advisor +1-424-294-3800 [email protected] Mumbai Suvojoy Sengupta Partner +91-124-499-8700 [email protected] New York Christopher Vollmer Partner +1-212-551-6794 [email protected] Dr. Florian Gröne Principal +1-212-551-6458 [email protected] Paris Pierre Péladeau Partner +33-1-44-34-3074 [email protected] San Francisco Kenny Kurtzman Partner +1-713-650-4175 [email protected] São Paulo Ivan de Souza Senior Partner +55-11-5501-6368 [email protected] Sydney Steven Hall Principal +61-2-9321-2835 [email protected] Tokyo Toshiya Imai Partner +81-3-6757-8600 [email protected]

Also contributing to this Research Report were Booz & Company senior associate Raj Muppalla and associate Robert Kopka, and contributing writer Edward H. Baker.

Booz & Company

EXECUTIVE SUMMARY

Businesses around the world are looking to gain an edge in the race to digitize—to seamlessly incorporate new computing, communications, and collaboration technologies; to streamline their operations; and to connect more closely with customers, suppliers, and partners. To do so, they must look to the continually evolving ecosystem of hardware, software, IT services, and telecom companies. These sectors provide the products and services that make digitization possible. The goal of the second annual Booz & Company Global Information, Communications, and Technology 50 study is to analyze the top companies in the digitization ecosystem, to detect which ones are prospering and which are not, and to provide some guidance about why. As we did last year, we divided them into four sectors—hardware, software, IT services, and telecom—and then looked at them across four critical criteria: financial performance, portfolio strength, go-to-market footprint, and innovation and branding. The additional year of data gave us a closer look into how companies in each sector are trending, for better or worse. This year, we added a new perspective on the strategic direction of these companies. Every company in every industry has its own market value proposition: a way to play that represents the way it chooses to create value in the market, ideally matched with its strongest capabilities. Companies’ ways to play can be grouped according to the basic foundational approach they take. By classifying each of the ICT 50 as one or more of these “puretones,” we were able to determine which value propositions seem most advantaged in the market—for now.

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THE DIGITAL IMPERATIVE

In just the past few years, the way in which many people live and work has changed dramatically. Smartphones have given more than a billion people around the world access to the Web, and many of them routinely use social media, mobile commerce, and location services. Big data technologies track, assemble, and analyze millions of clicks on the Web and movements in the physical world. Pervasive networks of sensors constantly monitor everything from the weather to the body temperatures of hospital patients. Companies can track every stage of their supply chains, from the purchase of basic materials to the delivery of the final product. People (and governments) are seeking a balance among four seemingly contradictory imperatives: privacy, efficiency, crime prevention, and convenience. Broadband, ubiquitous connectivity, cloud computing, social networking, digital fabrication, and “the Internet of things”— all are coming together to transform

how people work, play, communicate, socialize, and do business. This is the current wave of digitization. At the forefront of the wave is a select group of companies that supply the goods and services on which digitization is based. Our name for the most influential of them is the Information, Communications, and Technology 50. Though these companies have traditionally fallen into four sectors—hardware and infrastructure, software and Internet, IT services, and telecommunications—the boundaries that historically divided those sectors continue to blur. Hardware companies now compete strongly in IT services, while global IT services and Internet players are gaining a footing in telecom, and telecom operators are moving into IT services and the Internet. As the sectors converge, the most successful companies are those that can stake out a distinctive role or territory where no one else can compete with them easily. Every business leader in every industry has an interest in tracking the ICT 50. Companies rely on these suppliers for their digital infrastructure, and for the software, communications technologies, and knowledge required to use it effectively. Decision

makers must be able to identify the suppliers that can best help them build the capabilities needed to give them a clear digital competitive advantage. Last year, Booz & Company published its first annual global ICT 50 study, an analysis of the leading companies providing the technologies and services that are enabling the ongoing revolution in digitization. That study looked at the top 50 companies in the hardware and infrastructure, software and Internet, IT services, and telecom sectors. We evaluated them in terms of four criteria: financial performance, portfolio strength, go-to-market footprint, and innovation and branding. This year, we are repeating the study, intending to gain a more comprehensive understanding of the current state of the technology supplier ecosystem and how it is changing over time. A new section of the study covers the strategic value propositions that appear to be outperforming others. The overarching goal is the same as it was last year: to provide both suppliers and their customers with the insights they need to make informed decisions about how to succeed as the digitization revolution moves forward.

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THE HIGH-LEVEL VIEW

Sector Definitions This year, we divided the ICT 50 into the same four sectors we used last year. Clearly, some companies—notably large ones like Apple, Hewlett-Packard, and IBM—make money in more than one sector, so we grouped them according to the sector in which they get their greatest sources of revenue. Hardware and infrastructure: This sector, which includes Apple, Cisco Systems, Dell, HP , and Xerox, focuses on producing the hardware— including PCs, smartphones, routers, and telecom networking equipment—on which digitization ultimately depends. Many of these companies are now looking for greater differentiation by diversifying into other businesses, most notably software and services. Software and Internet: This sector, including companies like Google, Microsoft, Oracle, and SAP , has long specialized in the software on which both companies and consumers depend, as well as the Internetand cloud-based services that are driving digitization. Yet several of these companies are moving into adjacent markets, particularly hardware. A notable addition to the group this year is Amazon, which is benefiting from its push into services, including cloud computing. IT services: The firms in this sector provide companies with critical services, including network hosting, managing computer applications such as databases and ERP systems, and integrating hardware and software. The sector is made up of three subgroups. The global companies, including Accenture, CSC, and IBM, are the largest, and continue to lead the sector. The regional service providers, such as Atos, Steria, and Tieto, continue to struggle to increase scale and market share. The third subsector consists of the offshore IT service providers based in India, including HCL, Infosys, and Wipro. This group continues to grow more strongly than either of the other subsectors. Telecom: These companies offer a wide variety of communications services, including fixed and mobile voice and broadband, and—more commonly—television.

As we did last year, we determined this year’s overall list of the top 50 companies in the ICT industries based on a combination of their revenues and market capitalization the previous year. Then we divided them into the four component sectors—hardware and infrastructure, software and Internet, IT services, and telecommunications (see “Sector Definitions”). The ranking of the top 50 companies is determined by their overall combined scores on four key criteria: • Financial performance: Which companies can best sustain the growth and profitability needed to make the investments that will help them win the digitization race? • Portfolio strength: Which companies possess the strongest mix of business-to-business products and services—a combination of individual product and service strength and differentiation, breadth, and integration—given the demands of digitization? • Go-to-market footprint: Which companies have established the strongest production, delivery,

Rankings are based on financial performance, portfolio strength, go-to-market footprint, and innovation and branding.

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and sales presence in the top markets for ICT, both developed and developing? • Innovation and branding: Which companies have the two factors needed today for expansion in this industry: prowess in innovation, and the brand recognition required to attract new customers and talent? Overall, the list has changed in several ways since last year (see Exhibit 1, page 5). Among the telecom operators, for instance, China Mobile made the list for the first time—no surprise, given that this state-owned enterprise is already the largest telecom operator in the world in terms of consumer connections, and that it is now directing its attention to boosting its B2B offerings, developing, for instance, a cloud computing service for small and medium-sized businesses in partnership with SAP. The hardware and infrastructure group saw four new additions this

year, but the IT services group lost five. Notable additions to the list included Amazon, based primarily on a sharp increase in revenues from its cloud computing offerings, and two Japanese hardware companies, Ricoh and Toshiba, as they expand their portfolios into IT services. The rankings of the top 20 companies in the ICT industries have also changed considerably (see Exhibit 2, page 5 ). Amazon made its debut in the ICT 50 at 13th place, while Google rose from number 32 to number eight. Several hardware players, notably Samsung, moved into the top 20 this year too, as did many IT services companies. Indeed, two offshore players— TCS and Cognizant—entered the top 20 list for the first time. We’ve also included a “watch list” of companies we view as likely to enter (or reenter, in the case of Yahoo) the ICT 50 soon (see “Up-and-Comers”).

Up-and-Comers Three Chinese hardware manufacturers—Huawei Technologies, Lenovo, and ZTE—as well as Salesforce.com and a resurgent Yahoo, just missed making the cut. These five companies are growing revenues rapidly, but their margins are not yet keeping pace. That’s because several of them are sacrificing profitability to invest heavily in market share growth. Yahoo, after its widely publicized shift in top leadership, is reevaluating its growth options and may rebound as an ICT 50 player next year (see Exhibit A).
Exhibit A Five Companies Whose Growth Puts Them on the Verge of the Global ICT 50

• Huawei Technologies • Lenovo • Salesforce.com • Yahoo • ZTE

Source: Booz & Company

Notable additions to the list this year are Amazon and two Japanese hardware companies, Ricoh and Toshiba.

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aölkdfölk 32.8% 30.1%

Exhibit 1 The 2013 Global ICT 50

TABLE

A4 forma - width fo - width fo Hardware & Infrastructure Alcatel-Lucent Apple Cisco Systems Dell Ericsson Fujitsu Hitachi Hewlett-Packard NEC Samsung Xerox BlackBerry EMC Ricoh Toshiba Software & Internet Adobe Convergys Google Intuit Microsoft Oracle SAP Amazon Amdocs Symantec Yahoo IT Services Accenture (global) Atos (regional) Capgemini (global) Cognizant (offshore) CSC (global) HCL (offshore) IBM (global) Indra (regional) Infosys (offshore) IT Holdings (regional) Steria (regional) TCS (offshore) Tieto (regional) Wipro (offshore) EDB ErgoGroup (regional) Nomura Research (regional) Capita CGI First Data Logica Unisys Telecom AT&T BT Deutsche Telekom France Télécom KDDI KPN NTT Telefónica Verizon Vodafone China Mobile

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Exhibit 2 The Top 20 Global ICT Companies, 2012 vs. 2013

TAB

Company IBM Oracle Microsoft SAP Cisco Systems Apple Hewlett-Packard Google Accenture Samsung TCS Infosys Amazon Adobe Atos Ericsson Fujitsu HCL Cognizant Dell

Ranking 2013 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Ranking 2012 3 2 1 7 5 6 4 32 9 36 24 14 New 20 31 12 26 13 28 15

Change

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Source: Booz & Company analysis

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FINANCIAL PERFORMANCE

Revenues for this year’s global ICT 50 totaled US$2.07 trillion, a slight increase—3 percent—over last year’s total of $2.01 trillion, and total earnings, at $320 billion before interest and taxes, remained relatively stable at 15 percent of revenue. Exhibit 3 (see page 7) makes clear the situation: Revenues increased in almost every sector over the past five years, but improvements in margins did not keep up and in several cases declined. A closer look at the individual sectors suggests what’s happening. • Hardware and infrastructure was the only sector that continued to both increase revenues and improve profit margins this year, although its growth slowed somewhat. Overall, the sector is marked by extremes of success: The strongest companies, such as Apple, Cisco Systems, EMC, Samsung, and Xerox, have taken

advantage of convergence to expand into services plays, including cloud computing and “experience-based” products. But other members of the sector, including Alcatel-Lucent, Dell, Fujitsu, NEC, and Toshiba, have struggled to stay relevant as their portfolios have become increasingly commoditized and complex. Some of the most successful companies, like Apple and Samsung, have done particularly well by putting together digital ecosystems combining hardware and devices with a tightly integrated suite of associated services. • Software and Internet companies grew revenues strongly again this year as they, too, moved into services and cloud computing. Because both businesses are less profitable, their margins, though still high, continued to decline. Moreover, the sector overall continued to mature and its markets became increasingly saturated. Digital went mainstream, competition increased, and M&A activity—even though it is timeconsuming and expensive—was on the rise. • Growth among the IT services players slowed, and margins were flat

or declining. But differences among the three subsectors remained. The offshore players remained in the strongest financial position, with the highest margins and strong revenue growth. Nonetheless, growth in Asia and the Middle East proved challenging for them, which is why they continued to push aggressively into Europe. The performance of the global firms was mixed; margins remained adequate, but revenue growth lagged—no big surprise, given how large most of them already were. And as in the previous year, the regional players remained in the weakest, most vulnerable position. (Five of them fell off this year’s list of the global ICT 50 altogether.) Profits of the sector as a whole reflected economies of scale and the ability to arbitrage labor costs, and it will remain difficult to change the sector’s economics in the next few years (see Exhibit 4, page 7). • Telecom operators’ revenues have remained stagnant, but their margins have stabilized. To make up for the loss of revenue from fixed lines and voice services, they are pursuing new avenues of growth.

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Exhibit 3 Sector and Subsector Revenues and Margins

TAB

Normalized Revenue (2008=US$100) 190 180 170 160 150 140 130 120 110 100 90 2008 2009 2010 2011 2012

5-Year CAGR Watchlist 17% IT Services Offshore 15% Software & Internet 14% Hardware & Infrastructure 6% IT Services Regional 5% IT Services Global 1% Telecom 1%

EBIT Margin (%) 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 6 4 16 16 13 25 22

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Guideline Hardware and infrastructure companies Global IT service providers Regional IT service providers Offshore IT service providers Software and Internet companies Telecom operators Watchlist

11.0 milli

aölkdfölka 32.8% 30.1%

Note: Financial data not adjusted for M&A. Source: Bloomberg; Booz & Company analysis

Exhibit 4 Financial Performance of the IT Service Providers

CORRELATION OF SCORES WITH FINANCIAL PERFORMANCE BY SECTOR AND SUBSECTOR

TABLE H

REVENUE GROWTH VS. PROFITABILITY, 2010–12 2010–12 Revenue CAGR 35% 30% 25% 20% 15% 10% 5% 0 -5% 0% Capgemini IT Holdings Evry CSC 5% 10% 15% 20% 25% Tieto Steria Atos Accenture Wipro Indra Nomura Research IBM Global players with mixed performance: Focus on big outsourcing/service deals and innovation push 30% 35% 40% 45% Many regional players under pressure, especially if limited to “classical” portfolio HCL Cognizant Infosys TCS Aggressive growth of offshore players with strong profitability

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2012 EBIT Global Regional Offshore

Note: In general, not adjusted for M&A. Exceptions: Atos CAGR represents organic revenue growth, excluding effect of SIS acquisition in 2011. Evry CAGR represents organic revenue growth, excluding effect of EDB ErgoGroup merger in 2011. Source: Bloomberg; Booz & Company analysis

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Revenue Growth vs. Profitability, 2010–12 2010–12 Revenue CAGR 35% HCL TCSa with broad portfolios can provide services, companies try to attract playersas with strong profitability one-stop shop to clients and generate a broader set of customers. Yet as the Cognizant strong long-term relationships with sectors converge, virtually all of the them, while also benefiting fromInfosys ICT 50 companies have quite strong 20% greater revenues. Differentiation and portfolios, as suggested by their 15% excellence in products and services, overall high scores (see Exhibit 5). Accenture as judged by industry analysts, is Wipro 10% also a plus, especially given the Correlations between portfolio Capgemini Indra Tieto The second key criterion for ranking increasing demand for offerings that strength and financial performance, IT 5% Holdings Nomura Research the ICT 50 is the relative strength of can really push digitization. And however, offer a different view of the IBM Steria Global players with mixed performance: 0 each company’s product and service coherent portfolios, in which differsituation. Thoughdeals overall portfolio Focus on big outsourcing/service Atos Evry innovation push is a clear virtue, companies CSC its sector. portfolio offerings within ent services are well integratedand and strength -5% Relative portfolio strength is detercan build on one another, also give with portfolios that are broad but 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% mined by several factors: expertise, companies a distinct advantage in not differentiating can easily become Global Regional Offshore differentiation, strategic ambition, the marketplace. incoherent. Such companies suffer and the ability to execute, as judged financially because they don’t have by independent industry analysts. In The only one of the sectors and a strategy or capabilities system that this context, portfolio breadth can subsectors that has strengthened its fits all their products and services, also be a positive, since companies portfolio considerably is regional IT so they cannot compete easily with 30% under pressure, PORTFOLIO especially if limited to “classical” portfolio 25% STRENGTH Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = = Many regional players Aggressive growth of offshore

Exhibit 5 Relative Portfolio Strength

TABLE HEADINGS

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Global IT Service Providers

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Hardware & Infrastructure Companies

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Software & Internet Companies

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Telecom Operators

1.6

Regional IT Service Providers

1.4

Source: Booz & Company analysis

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more focused companies that do. We see some evidence of this among the ICT 50, where companies with relatively narrower portfolios have grown faster overall than those with broader ones, although the former Global IT Service Providers don’t typically boast the total revenues of the latter. Offshore IT Service Providers
Hardware & Infrastructure Companies

gional IT Service Providers

We also looked at the relative financial performance of companies with “conventional” portfolios—typically Software & Internet Companies including standard products and services such as hosting, data center Telecom Operators services, and managed applications—and those with leading-edge “next-generation” portfolios. The

analysis shows that conventional portfolios allow companies in the hardware and infrastructure sectors and regional IT services subsector to increase revenues more than conventional portfolios do in any of the other sectors. Despite their overall mediocre results, for example, increased portfolio strength among the regional IT services companies is positively correlated with improved revenue growth, though not with better margins. These companies Global Regional Offshore can grow revenues by adding more offerings, and if they don’t, they risk being trapped in offerings that are essentially commodity services.

Increased profitability is correlated with strong conventional portfolios only among the software companies and the global IT services providers. On the other hand, next-generation portfolios, which include the new products and services driving the move to digitization, are for the most part not yet strongly correlated with growth or profitability. The exceptions can be found among the hardware and software companies, many of which are succeeding by building more fully coherent ecosystems incorporating next-generation products and services (see Exhibit 6).

Guidel Hardware and infrastructure companies Global IT service providers Regional IT service providers Offshore IT service providers Software and Internet companies Telecom operators

11.0 m

aölkdfö

Exhibit 6 Conventional and Next-Generation Portfolios Compared

32.8%

30.1%

CORRELATION OF SCORES WITH FINANCIAL PERFORMANCE BY SECTOR AND SUBSECTOR Conventional Portfolio
Portfolio completeness and growth are positively correlated for regional IT service providers and hardware players, but negatively correlated overall

TABL

Next-Generation Portfolio 2010–12 Revenue CAGR
Software & Internet IT Services Regional Hardware & Infrastructure Telecom IT Services Global IT Services Offshore Next-generation plays not successfully “grounded” for telecom operators and service providers. In general there is no large financial impact—yet

2010–12 Revenue CAGR

Revenue Growth

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IT Services Regional Software & Internet Hardware & Infrastructure IT Services Global Telecom IT Services Offshore

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2012 EBIT Margin

IT Services Global Telecom Hardware & Infrastructure IT Services Regional IT Services Offshore

Global service providers and software players can grow profitably through portfolio strength

2012 EBIT Margin

Profitability

Software & Internet IT Services Global Hardware & Infrastructure Telecom IT Services Regional

Portfolio Strength

Portfolio Strength

IT Services Offshore

Note: Where trend lines are missing (telecom in upper right, IT services offshore in lower right), no correlation could be found. Source: Booz & Company analysis

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Global IT Service Providers

IT Service Providers

players in some of the sectors to take software players have extended their GO-TO-MARKET Global IT service providers Offshore IT service providers Telecom operators advantage has been limited for a variety production efforts to new regions in nternet Companies FOOTPRINT Global Regional Offshore of reasons, some of them self-imposed search of engineering talent and lower (see Exhibit 7). The dominant players in both the developed and BRIC markets remain the global IT services companies; the fact that they are the only group with a truly global production model, including both production and sales, has enabled them to succeed in their efforts throughout the world. The regional players continue to focus primarily on the developed markets, in part because their efforts to extend production into newer markets continue to lag. The

frastructure Companies

Hardware and infrastructure companies

Regional IT service providers

Software and Internet companies

m Operators

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The capacity of companies in the ICT industries to increase growth and profitability is typically constrained or boosted by how and where they operate. New markets, most notably the BRIC countries—Brazil, Russia, India, and China—are beginning to reach critical mass thanks to their rapid GDP growth, yet the ability of many of the

labor costs, but their marketing efforts continue to focus on clients with large IT budgets in mature markets. More asset-driven businesses, like hardware, have moved a considerable amount of production to developing markets, and are beginning to increase their sales presence there as well, but their production models aren’t so closely linked to how and where they go to market. Finally, the telecom operators remain confined for the most part to their home markets by the nature and limitations of their network infrastructures.

Guidelines: 11.0 million aölkdfölka 32.8% 30.1% = = = =

TABLE HEADINGS

Exhibit 7 Different Sectors Have Very Different Go-to-Market and Production Footprints
0 (weakest) 1 2 3
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Hardware & Infrastructure IT Services Offshore Software & Internet IT Services Regional
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1.4 1.4 1.1 0.6 0.5

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Global Production
1.7 1.6 Source: Booz & Company analysis

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also ranked among the top 10 most innovative companies and the list of innovative companies in the 2012 top brands was IBM; Accenture shows Booz & Company Global Innovation up at number 43 on the top brands 1000 study (see Exhibit 8). This list. The regional firms in particular group is dominated by software and have been struggling to maintain the Internet firms, which typically spend a growth and margins necessary to keep very large percentage of their revenue investing in R&D. Global IT Service Providers on R&D. Four of these companies are listed among Interbrand’s list of Finally, the telecom operators Offshore IT Service Providers To sustain their growth, ICT the top 10 global brands in 2012, continued to spend very little money companies must not only keep suggesting that a reputation for selling on next-generation innovation in ware & Infrastructure Companies exploring additional attractive Hardware andgreat products matters as much in IT a service 2012, with very little growth in companies infrastructure companies Regional providers Software and Internet markets, but also keep innovating business-to-business context as it does investments since 2011. This Global IT service providers Offshore IT service their providers Telecom operators in more consumer-oriented industries. is also not a surprise, given the huge ware & Internet Companies new products and services, and Global Regional Offshore building out their brands globally. investments they are still making— Innovation, of course, is key, and most In innovation and branding, the IT and will have to keep making—to Telecom Operators companies in the ICT industries are services companies don’t fare as well build out high-speed mobile and fiber (or have been) adept at it. It comes as as companies in the other sectors. The networks in hopes of keeping up with IT Service Providers no surprise that six of the companies only services company that appeared the explosion of data traffic on their that scored highest in this regard on both our list of the top 10 most networks.

INNOVATION AND BRANDING

Guidelines: 11.0 million aölkdfölka 32.8%

Exhibit 8 Several ICT 50 Companies Are among the Most Innovative Companies and Top Brands Globally

30.1%

TABLE HEA Most Innovative Companies, 2012 Global Rank 1 2 3 4 5 6 7 8 9 10 Apple Google 3M Samsung GE Microsoft Toyota Procter & Gamble IBM Amazon Most Valuable Global Brands, 2012 Global Rank 2 3 4 5 14 15 18 25 43 49 59 78 97 Apple IBM Google Microsoft Cisco Systems Hewlett-Packard Oracle SAP Accenture Dell Xerox Adobe Yahoo

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Source: Interbrand study of top global brands 2012; Booz & Company analysis

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WAYS TO PLAY

As every company in every sector of the ICT 50 tries to distinguish itself from its competitors, it is increasingly important to distinguish them not just by the sectors they occupy, but by the strategies they follow—especially given the degree to which the sectors are converging. A successful long-term strategy requires not just that companies follow a distinctive value proposition, or “way to play” in the market, but also that their way to play is in close alignment with their most important capabilities, the products and services they offer, and the markets in which they operate.

For most successful companies— and the ICT 50 companies are no exception—their way to play is closely tied to their identity, and thus is unique. Nonetheless, ways to play can be classified in broad groups that we call “puretones”— generic archetypes that describe how companies create value for their customers. ICT companies tend to fall into one of six of these value propositions, including network and infrastructure platform players, consolidators, innovators, next-generation digitization players, solutions providers, and global sourcing value players (see “Six ICT Puretone Ways to Play,” page 14). Most of the ICT 50 companies operate in a way that involves more than one puretone. Microsoft, for example, is a network and infrastructure platform player—its

Windows and Office platforms are the basis of its profitability. But it is also a consolidator and a next-generation digitization player. It has always been a third-party consolidator, coordinating offerings from a variety of smaller firms and providing more value than they could do on their own. And in ventures like Skype and the Xbox, Microsoft is betting its future on its ability to innovate. This is a very diverse way to play, with a risk of incoherence, and it’s still not clear whether Microsoft can manage all this in the long run, even with its enormous platform advantage. This year’s analysis also suggests that the six ways to play are performing differently in the market—at least for now. To better understand which strategies are thriving, we grouped together the top five players for each puretone

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Global IT Service Providers

Offshore IT Service Providers

Hardware & Infrastructure Companies

archetype and then looked at their strategic value propositions outperof boosting performance? No. Global IT service providers Offshore IT service providers Telecom operators combined financial performance form when judged on the basis of Any company can succeed if it has Software & Internet Companies Global Offshore over the past five years. As Exhibit margins as well,Regional though as a group, assembled the right mix of capa9 shows, some puretone ways to companies in the consolidator bilities and a product and service Telecom Operators play have been more successful than puretone also continue to achieve portfolio that suits its chosen value others: The top three, ranked on healthy margins. But only the innoproposition strategy. The key is ional IT Service Providers the basis of revenue growth, are vators have continued to boost their to decide carefully, considering the innovators, the global sourcmargins over time. your existing capabilities and your ing value players, and the nextchosen market, how best your comgeneration digitization players. Does this mean companies should pany can create value—and then fill By and large, all three of these change their way to play in hopes in the gaps necessary to do so.

Hardware and infrastructure companies

Regional IT service providers

Software and Internet companies

Guidelin

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aölkdföl 32.8%

Exhibit 9 Revenues and Margins of the Top Companies in Each of the Six Puretone Ways to Play

30.1%

FINANCIAL PERFORMANCE OF 5 PLAYERS MOST CLOSELY ALIGNED WITH EACH PURETONE (REVENUE-WEIGHTED AVERAGE) Normalized Revenue (2008=US$100) 205 EBIT Margin (%) 28 26 24 22 Next-Generation Digitization Player Consolidator 20 18 16 Solutions Provider Network and Infrastructure Platform Player 2012 14 12 10 2008 2009 2010 2011 Solutions Provider Network and Infrastructure Platform Player 2012 Next-Generation Digitization Player Innovator Consolidator

TABLE

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Innovator Global Sourcing Value Player

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Six ICT Puretone Ways to Play Network and infrastructure platform player: These companies make their revenues from developing, maintaining, and managing a stable shared resource, through which other parties can connect their wares to customer needs. This group includes vendors like Alcatel-Lucent that provide the “plumbing” for the computing age, as well as telecom operators like France Télécom, hardware companies like Toshiba that offer enterprise computing solutions, and software companies that manage operating systems. France Télécom is an example of a company that is trying to diverge from this way to play: It plans to acquire Dailymotion, a video sharing portal, and to develop a secure end-to-end platform cloud gateway. The top three players in this group took in US$158 billion in revenues in 2013. Consolidator: These companies try to dominate one or several categories in their industry through acquisitions, with the goal of providing either value to consumers or access to a platform with products and services they would not otherwise be able to provide. And most of them boast a global sales and delivery footprint, giving the top three companies in the group combined revenues of $231 billion in 2013. Cisco Systems, for instance, uses this puretone to establish itself as a one-stop shop for networking solutions. Since 1993, it has acquired more than 120 companies of varying sizes and driven further consolidation through strategic partnerships with the likes of IBM and Symantec, while working to develop industry standards. Other companies in the group include Oracle, Microsoft, and Hewlett-Packard. Innovator: These companies rely on their expertise in pursuing innovation and developing their global brands to generate highly targeted portfolios of products and services, rather than trying to be

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all things to all customers. The innovators group comprises a variety of top consumer-oriented companies, including Apple, Google, and Amazon; these three companies together reached $268 billion in 2013 revenues. Next-generation digitization player: This group includes traditional enterprise application software providers like SAP , Microsoft, and Cognizant that are moving quickly to provide customers with the most up-to-date products and services. Both SAP and Microsoft now offer cloud computing platforms that are forming the basis of their efforts to reposition themselves in a fast-digitizing world. The three strongest of these companies made $102 billion in revenues in 2013. Solutions provider: These companies, many of them global IT services players, have the implementation capabilities necessary to provide business services to their customers, carefully integrating and adapting their offerings depending on the needs of their clients, in any industry. Both Accenture and IBM, for example, develop IT solutions that remain relevant to their enterprise customers through a dual strategy of consolidating their wide industry expertise within “innovation centers” and their delivery capability within “delivery centers.” Hitachi and Fujitsu also participate in this puretone, whose top three companies boasted $165 billion in combined 2013 revenues. Global sourcing value player: These companies, primarily offshore IT services firms, leverage their low-cost workforces, sourced around the world, to sell high-quality business services in the largest global markets. Infosys, one of the most successful exponents of this puretone, gets 85 percent of its revenue from North America and Europe. Other examples include HCL and Wipro. The top three had combined revenues of $19 billion in 2013.

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THE ICT ECOSYSTEM

focused on solutions and infrastructure for the enterprise. This will likely leave the remaining pure-play hardware providers to pursue a commoditization strategy with little room for differentiation—success will depend on scale, operational excellence, and a relentless focus on costs. As to the IT service providers, the offshore players will need to expand their go-to-market and delivery footprint in mature markets, which will continue to account for more than 80 percent of global ICT spend for quite some time. That means they will have to use a greater share of high-cost labor in their production mix, and include more complex—and less profitable—outsourcing deals in their client portfolio. And because labor costs in their home markets are likely to rise as the middle class becomes more affluent, their cost advantage will begin to erode, and their growth rates and margins will converge with those of the global IT services firms. Still, if offshore players can maintain a long-term advantage based on their low-cost, lean, and standardized production model heritage as they expand, they should be able to keep their margins higher than those of their global services rivals. Meanwhile, the regional IT

The companies we analyzed in this study continue to move ahead in developing the products and services every business will need to succeed in the coming years. Companies in each sector continue to provide a relatively distinct set of offerings, yet they are all beginning to come together as the hardware, software, IT services, and telecom sectors converge. We expect that the hardware and software sectors will continue to evolve into a “battle of the ecosystems,” with players from both sides trying to build a suite of products and services grounded in an anchor platform they can control and monetize. This strategy is taking two forms: Companies like Apple, Google, and Samsung (with Microsoft playing catch-up) are combining mobile devices with cloud services focused on the end-user, while others, including Amazon, Microsoft, Oracle, Salesforce.com, and SAP, are building their own cloud services play

services subsector will see further consolidation, either within the sector or through acquisitions by offshore players looking for beachheads in new markets. But even the deal that created Atos/SBS is not big enough to propel the combined company into the IBM/Accenture league. And integrating what are essentially people businesses after a merger tends to be lengthy and messy. The telecom operators will continue to stagnate, bogged down by the huge costs of their perpetual reinvestment in next-generation networks and the constraints of their geographies. Furthermore, they face considerable cultural challenges in their efforts to move into sales of ICT solutions and to boost innovation. So they will likely continue to resell some IT services and partner with players with more advanced ICT offerings, but they are unlikely to develop the momentum to move into these sectors on their own anytime soon. Ultimately, companies that do not develop the range of products and services that businesses increasingly demand will struggle to remain competitive. Those that do so will benefit as digitization continues to transform every industry.

Companies in each sector continue to provide a relatively distinct set of offerings, yet they are beginning to come together as the sectors converge.

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About the Authors Olaf Acker is a partner with Booz & Company based in the firm’s Frankfurt and Dubai offices. He focuses on business technology strategy and operating model transformation programs for global companies in the telecommunications, media, and high-tech industries. Hans Geerdes is a senior associate with Booz & Company based in Berlin. He specializes in IT strategy and large-scale transformation, with a focus on the communications industry. Florian Gröne is a principal with Booz & Company based in New York. He works with communications, consumer, and media companies to reimagine digital customer experiences, products, and services, and to develop “digital first” organizational capabilities. Germar Schröder is a principal with Booz & Company based in Frankfurt. He focuses on communications clients and ICT service providers, and has led several initiatives for product development, go-to-market, and operating model design, specifically for the cloud.

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