ISG Insights

Aricent Analyst Day Highlights a Bifurcation in the Transition to Digital

Alex Bakker Research Alerts

What is Happening?

Last week ISG attended an analyst day with engineering services firm Aricent and their subsidiary Frog Design. While much of the content was under NDA, relating to specific instances of their work for customers, there were some details that highlight an important bifurcation in the service provider market.

Aricent entered the service provider space differently than many of their peers. Initially they were called Hughes Software Systems, and focused heavily on hardware and software engineering and R&D around the telecom, satellite, and communications technology space. To this day, they maintain that business and invest significant amounts in R&D in that area. Over time, they leveraged this background to build out a software engineering, testing, and maintenance business. As part of their engineering and design focus, in 2005 Aricent acquired industrial design firm Frog Design, known for its early work in designing early Apple computers and peripherals.

Despite its heavy effort in R&D, Aricent has chosen not to market products directly but instead to focus on the development and licensing of frameworks. These frameworks tend to form the cornerstones of their engineering work, with significant efforts in modern days around LTE and 5G networks, as well as security frameworks for IoT Devices. Meanwhile, this effort is complemented by Frog Design, which specializes on a variety of tasks from Industrial and visual design to data analysis and digital strategy. As a result of this powerful combination, Aricent classifies 60% of its revenue currently as being “Digital” with internal estimates suggesting that number will climb to 80% next year.

The bifurcation I mentioned earlier is this: service providers that solve business business problems shift their revenue to higher-value digital work much faster than those focused on delivering IT value.

Why is it Happening?

This conclusion is perhaps unintuitive, especially when we consider that Aricent is heavily involved in many highly technical products such as custom System on Chip (SoC) design, as well as creating derivative silicon designs. Surely, designing computer chips is IT Centric? The answer is no.

The reality of those chip designs is that in the case of the chip-maker, chips are the business. This is a critical distinction, because Aricent is helping their customer add engineering leverage to creating products that are at the core of their business. The same goes with their efforts around smart lighting for a major consumer brand. The technical implementations are not IT details, they are product details.

It is in this context that Aricent now exists. It has been incredibly careful to focus its value proposition around solving problems that are technical in nature, but close to the business. Coupled with Frog Design, it has been especially able to capitalize on that trend by leveraging key creative talent that mingles well with its background in engineering. The combination of deep technical engineering in hardware and software, along with design capabilities really represents the future of how a service provider can support digital product delivery.

Market Impact

In this context, it is worth asking what the future of technology will be in the industry. On the one hand, the Digital Business Transformation is really two very different trends:

  1. Every company is a technology company. We’ve heard this phrase for years, but it is still worth thinking about what it means. I don’t think this means that every company delivering technology and hardware, instead, the technology a company consumes is just as important as any that it produces. There is a necessary component of technology in almost every product today, tying together digital and physical worlds, across technology platforms, and providing information to consumers. But, businesses are as much effected by what they buy or rent, as what they build. Excellent performers in these areas know what their competitive differentiation is, and more important, what their comparative advantage is.
  2. Running the business. On the IT front, there is still a lot of transformation work to be done. But, a large portion of IT is still concerned with “running the business” rather than “improving the business”. This is not a bad thing; businesses need to run. But, it means that Digital Transformation on the IT side of the house has to go about things differently, moving beyond labor arbitrage and upgrade cycles to run the business better. We see tools like Automation and AI being critical to delivering these improvements.

Maybe most important of all, though, is that companies rarely embark on either of these paths without help, and, with providers like Aricent, we are beginning to see indications that some service providers are specializing in helping with one or the other. For several years, we have heard the notion that businesses needed to split IT delivery into two speeds, the fast, to deliver innovation and focus on the product side of the organization, while the slower side would focus on “running the business”. This no longer represents the pace of change needed to continue the Digital Journey. Instead, both business and IT have technology components that need to be developed, managed, and supported and need to operate at the speed of innovation.

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