Some might assume that the industry is moving toward a consolidated group of comprehensive “one-stop” ICT companies with diversified portfolios. In three categories out of four, however, the results suggest otherwise: Companies with higher levels of coherence, applying the same capabilities to all their offerings, have higher levels of growth and profitability than do more diversified companies. The exception, at least to date, is IT service providers; that may change as their category converges and matures. (See Exhibit 6.)
Commentators often overlook a company’s geographic profile — especially its ability to sell and deliver products and services in the industry’s top markets. But this capability is critical to the success of any ICT company with global aspirations. That’s especially evident in the five most highly developed ICT markets — the U.S., the U.K., Japan, Germany, and France. These countries saw combined sales of $1.2 trillion in 2011, more than 60 percent of total global sales of ICT services. Being proficient in sales and delivery in these markets certifies the ability of ICT players to satisfy the needs of the largest corporations. And these markets offer a source of revenue and a profit pool that is too big to be ignored.
The offshore IT service providers are pushing hard to establish a foothold in these markets, which have not necessarily been their natural operating environment in the past. Tata Consultancy Services already has more than 600 employees in Germany alone. We expect to see more aggressive investment and acquisition activities by these companies, which will increasingly compete (or form strategic partnerships) with regional IT service providers.
The go-to-market footprint score also takes into account the ability to manage production facilities around the world, drawing on inexpensive labor, as well as “follow the sun” delivery (where a project is handed off daily from one time zone to the next, thus providing 24-hour scheduling). This type of global production is particularly challenging for many telecom operators. They are bound to their local markets by their existing infrastructure investments, which severely limits the efficiencies they can gain in other locations, and by the inherent complexity of combining offshore and onshore operations. Telecom companies also face more regulatory restrictions than the other sectors. This explains a striking correlation in the data for telecom operators: The more offshore activity they engage in, the less profitable they are.
The opposite is true for IT service providers. The more their operations move offshore, the higher their profitability. Regional IT service providers may feel some disadvantage; they lack the capabilities and capital to break into emerging markets. But the offshore providers are already familiar with many emerging markets, and they have been able to realize savings from lower workforce costs. Global providers also do well on this score; they have established successful production facilities (and the requisite talent practices to staff them) around the globe. Companies such as IBM, with delivery centers worldwide, and Capgemini, whose workforce is distributed among 40 countries, are significantly more profitable than those whose production takes place primarily in high-wage countries. (We saw little or no correlation effect with the other two groups, presumably because hardware and infrastructure companies, and their software and Internet counterparts, have more flexible geographic and labor requirements.)
For a digitization provider, the prospects for growth are as important as current-day financial performance. The growth potential score is heavily weighted by each company’s ability to innovate: to maintain an active pipeline of new ideas and bring them to market successfully.
The most visible ICT 50 innovation leaders are found in two of the four sectors: software and Internet companies, and hardware and infrastructure companies. These companies typically spend a considerable portion of their revenues on research and development, and even those that spend well below their group average, most notably Apple, tend to spend their innovation dollars wisely. In addition to investing in its traditional devices and components business, Fujitsu spends almost half of its $2.8 billion R&D budget on IT products, solutions, and services. And Xerox has invested considerable funds in its Computing and Information Services Laboratory, where it investigates scalable computing for business process solutions and big data analytics.