The rise of Amazon Web Services and other clouds have caused trouble for traditional IT consulting giants — and presented huge opportunity to a new breed of smaller rivals

• Legacy IT consulting giants are showing signs of struggle, while a new breed focused on cloud are growing.
• Digital transformation and cloud migration were already taking place, but COVID sped up the pace.
• Old-guard consultants are buying cloud consultants or launching multi-billion dollar cloud projects.
• Visit the Business section of Insider for more stories.

The COVID-19 shutdown threw every business into chaos and no one was spared. One of the clear beneficiaries, however, was the cloud services industry, as work from home spurred demand for remotely-accessible applications and services.

Coming out on the short end of the stick were the old-school services providers as the move from on-premises IT services to the cloud, accelerated by the COVID-19 quarantine, manifested in layoffs at multiple big players. But, even as those more legacy-focused players show signs of struggle, a new breed of cloud-focused consulting firm is slowly but steadily rising.

There have been new eras in the past where a massive tech change spawned new types of companies. The dawn of client/server computing in the mid-90s and the rise of the Internet not long thereafter spawned all kinds of startups dedicated to those new industries, and the cloud is no different. The historical pattern is some companies emerge and become significant players while others fall on the wayside or get acquired. A similar pattern is playing out with the consultancies as we shift from concentrated IT on-premises to migrating as much as possible to the cloud.

Last summer, IBM Global Services was hit with cuts in five states across multiple divisions. While the exact number was not revealed, estimates from ex-IBM employees on TheLayoff.com puts the reduction at anywhere from 5,000 to 20,000. Then in October, IBM announced a still-pending spin-off of its Managed Infrastructure Services unit into a separately traded public company, currently known under the tentative name NewCo. 

Around the same time, consulting giant Deloitte held an internal all-hands call, led by CEO Dan Helfrich, who announced a 5% global staff reduction, or 25,000 workers worldwide.

DXC Technology, the $6.5 billion consultancy born out of the merger of Computer Sciences Corp. and HP Enterprise’s consulting business (the former EDS), said it would eliminate 4,500 positions in a bid to eliminate about $700 million in expenses on an annualized basis. 

In the DXC case we had some clarity: CEO Mike Salvino said in an earnings call with Wall Street analysts that the drop in revenue was not caused by cloud trends but due to poor performance by the company and a need to streamline operations. “As a result, we lost roughly $1 billion of revenue in FY ’20, and expect to lose a similar amount in FY ’21,” he said.

There are also a number of major cloud initiatives going on in the traditional IT consulting world. In September, Accenture said it was committed to spend $3 billion over the next three years to help businesses quickly build cloud-first infrastructures and to accelerate digital transformation programs in a project called Accenture Cloud First. Earlier this month it announced a multi-million dollar expansion of its partnership with VMware to help organizations adopt a ‘cloud first’ strategy.

Another announcement came from IBM in January, where it announced it would invest $1 billion in expanding its partner ecosystem to focus on hybrid cloud and artificial intelligence (AI). The $1 billion is meant to add hundreds of new partnerships with global system integrators and elevate the role of partners, with a focus on IBM Garage hybrid cloud services.

The message seems to be that all the excitement in the consulting world is with the cloud, while old guard, on-premises IT is old hat.

Meet the new boss

With work-from-home policies being extended, and in some cases made permanent, a lot fewer people will be going into offices, which means a consultancy heavily invested in on-prem work is going to lose out, while cloud-centric companies are getting more and more business. 

“There’s been a tug-of-war trend changing the dynamics of large services companies as enterprises change from traditional infrastructure to the cloud, and more traditional application management to DevOps types of models,” said Bill Martorelli, principal analyst serving infrastructure & operations at Forrester Research.

John Granger, senior vice president of cloud application innovation and COO of IBM Global Business Services, said in the past few years, clients have shown less appetite for the large, multi-year engagements. Instead, they’ve shown more interest in moving quickly with minimum viable product (MVP) approaches that start small with proof-of-concepts and then scale. 

“It was a way to de-risk their IT investments,” he said. “One way we’ve responded that has resonated with clients is with the IBM Garage, a unique approach we’ve developed for co-creation, co-execution,  and scaling business transformation.”

The contrast to the likes of Accenture and DXC are pure-cloud players like 2nd Watch, Bespin Global, Claranet, Cloudreach, Onica, and ClearScale. Gartner estimates these upstarts account for 80% of the total public cloud managed service providers versus the old guard, but only 25% of total revenue in fiscal 2018 vs. 75% for classic, on-premises-oriented MSPs.

That means they are small in terms of revenue, but they are growing. For example, ClearScale, an integrator and AWS Premier Consulting Partner, recently announced it will record more than a 100% increase in revenue year-over-year in 2020, driven in no small part by the shift to the cloud that was already taking place and accelerated by the COVID-19 lockdown that forced workforces to shift from the cloud as they worked remotely.

Pavel Pragin, CEO of ClearScale, said he is finding smaller companies like his are actually able to execute very large complex projects often better than the large consulting companies because they are too bloated. 

“We recently did a very large project that was a 9,000 server migration that we got done in less than a year, which a lot of the big consulting companies wouldn’t even touch. Even if they did touch it, they probably take three times longer, and it would cost five times more than it would cost for us to do,” he said.

Pragin believes the old guard is too top-heavy, dependent on methodologies requiring many more people than necessary and too much outsourcing to India to compete in the faster-paced world we now find ourselves in.

He also notes that skill sets don’t necessarily port from one cloud provider to another and it’s important to specialize in one. In the case of ClearSpace, it focuses exclusively on AWS consulting projects.

“AWS has, I don’t know, about 500-plus services now. And Google has around 300, and Microsoft has 400, and they’re all different, the skill sets are different. And these big [consulting] companies tend to cover everything. So it’s very hard for them to be good, really good at anything. They’re going the generalist route,” he said.

“When you come to ClearScale, or similar companies, a lot of the time you’ll see they specialize in Google, or maybe they specialize in big data, or they specialize in application modernization, stuff like this. And what that enables them just to be much better at it and just be able to get things done better,” he continued.

The move to the cloud is only getting faster

Granger said the pandemic has accelerated paradigm shift of more companies moving their critical workloads to the cloud and most of its clients use multiple public cloud providers, on average six or more.

“Clients also see the tremendous potential to avoid vendor lock-in and capitalize on open innovation, so they can take advantage of all the opportunities to innovate anywhere, with anyone’s technology. Build once, run anywhere. That’s the beauty of the hybrid cloud platform and we will continue to drive adoption of this platform across our client base,” noting that IBM works with Azure, Amazon, and “other big cloud players who recognize the reality that clients will operate in a hybrid cloud world.

Pragin said in the last five or six years, the focus was more on startups and SMBs. But now enterprises are much more focused on moving to the cloud and moving past the early adopter phase.

“It’s kind of really heating up and we’re seeing much more demanded enterprise for the services that we provide, and our enterprise practices are really growing. So if an enterprise is running Oracle, and they’re having to pay huge license fees, they’re pretty much tired of it. And the only way for them to get out of this is to move to the cloud, to use cloud database services. And that, that requires modernizing their applications, and having very deep consulting in somebody’s really helping them do that. So they’re looking for help from companies like ours,” he said. 

Martorelli believes the future consultancy market will be composed of a mix of traditional companies that adapted well and mixed the new and old technologies more successfully and some smaller companies that have penetrated interesting functional niches.

He added that sometimes bigger companies have the advantage of incumbency and new ways of adapting. “Sometimes when big companies get rolling it becomes challenging for niche companies to keep up,” he said. “Accenture has a history of this. They came through previous incarnations pretty well. That’s not to say it’s without its rough patches, but that’s part of the deal.”

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