Whether yours is a small, midsize or large IT services firm, and whether you sell products, provide services or a combination of both, you’ve undoubtedly felt some seismic shifts in the past few years as competitors and collaborators rapidly buy, sell and merge.
Why is this happening now?
For one, IT services are maturing and becoming commoditized. Continued growth requires management acumen and capital, and often, having one is dependent on the other. Maturation also brings opportunities to apply economies of scale to the business.
As a result, strategic buyers within the industry, as well as institutional investors, have applied their knowledge to IT services, resulting in a rapid scaling of the sector.
In addition, we see two market paradigms converging. Legacy VARs and systems integrators have historically led their sales and business development with products from partners, such as Cisco, or Dell, and today most still derive 60 percent to 70 percent or more of revenues from product sales.
However, these firms are having a hard time transforming themselves into managed services providers because of the very different business model and company culture required.
At the other end of the spectrum are thousands of companies with strong service cultures generating revenues of $5 million or less from services and recurring work. These companies typically lack sales expertise and manufacturer relationships; as a result, they tend not to participate on the front end of major new technology rollouts (products and services) at potential or existing clients.
These VARs and MSPs have natural chemistry.
Meanwhile, new players have entered the IT space in recent years, attracted by a growing market with higher margins than their original businesses. Think distributors, such as Insight and Arrow; printer and camera manufacturers, like Ricoh, Konika and Xerox; and even electronics manufacturers moving into technology. And, with the latest cloud-related developments, IT services firms that have played at the application layer are becoming interested in infrastructure managed services firms, where they can apply their more mature organizational structures.
An additional consolidation driver will be MSPs and systems integrators adding application-layer capabilities. This is especially true for companies focused on vertical markets, such as financial services, K-12, health care or government, where firms are vertically integrating with the goal of offering complete solutions from infrastructure to applications — and where the cloud is the linking factor.
In addition, in previous cycles, companies largely grew organically or via acquisitions based, to a large extent, on geography. Most firms started locally and used acquisitions to logically build out territories. Recently, however, we see buyers focusing more on skill sets, cultural fit and synergies, resulting in multiple acquisitions, even of smaller companies, that are geographically separated from the buyer.
Succeeding in this fast-moving environment requires that firms understand the M&A market, its dynamics and the opportunities. But make no mistake: Consolidation will continue, whether entrepreneurs understand their long-term options or not.