Mergers and acquisitions (M&As) are becoming more prevalent across the IT services industry. This trend is being seen on both the vendor and customer sides of the market. So, why are so many IT service providers making the leap to acquire or be acquired? What are the benefits? And are there any other options?
The current climate for M&A within the managed services provider (MSP) community is driven by a combination of maturity of the market and healthy profit margins compared to other business models. This is encouraging MSPs who are looking for revenue growth and regional expansion to make that leap through acquisition rather than organic growth.
In addition, as technology continues to converge, many IT service providers are adding complementary services, such as communications and security. These specialized areas are frequently easier to acquire than to build—there are companies out there that already have a skilled workforce, tested product offering, and established customer base. The other factor fueling M&As is the age of business owners in the market. More than at any other time, we have owners of technology-focused companies who are getting ready to retire. This means there is a greater supply of those companies looking to sell than ever.
But what if acquisition is not an option for you yet? Are there other options?
While still technically a merger, partnerships can be created without any financial transaction taking place. Each partner receives a percentage ownership of the new entity, equivalent to the value they bring to the partnership. This creates a new business based on the strengths of the two original businesses. This is often seen when two businesses with different services or expertise join forces to form a one-stop shop for their respective customer bases. It is a model that has been common between traditional IT businesses and telecom businesses, especially when getting into VOIP.
The Joint Venture
A similar relationship can be accomplished through joint ventures. Joint ventures are informal and therefore are easier to start and to stop. The typical joint venture involves little more than marketing to each other’s customers and cross promoting your services. These can be short-term or long-term, but are usually not much more than handshake agreements.
The third option is subcontracting. Some IT service providers are highly focused experts in a specific technology, application, or vertical. Many times, it makes sense to employ these resources on a subcontract basis to expand your capabilities without having to hire a specialist full-time. A prime example of this type of relationship is an MSP and a low-voltage cable installer.
Making your new venture a success
If you do decide to combine efforts with another company, there are some key factors that can help increase your chances of success. First, make sure you have a plan for how the new acquisition or partnership is going to work and communicate that to all employees, vendors, and customers.
As I have said many times before, setting expectations goes a long way at the beginning of any relationship or initiative. Culture fit is also a big contributor to success, it cannot always be a perfect fit, but it should be evaluated, and differences solved for whenever a combination of two disparate teams is going to take place.
Another source of friction when merging two companies is the tool sets and back office infrastructure. From the obvious accounting and CRM applications used to run the day-to-day to the line of business applications used in the actual delivery of services. If those systems are the same, there we will be much less work involved in transitioning data, employees, and customers to the systems that will be used going forward.
The last factor in a smooth transition is minimizing customer disruption. Customers do not care that you are making a change unless it disturbs the status quo for them, especially in a negative way. Take care to lessen the impact on customers and to continue delivering the services as close to the same way you have been. If possible, make any customer-facing changes last, after you have successfully integrated your internal processes and culture.
With mergers and acquisitions becoming commonplace in our industry you owe it to yourself and your business to be prepared should the opportunity arise for you to either acquire or be acquired. In addition, part of your business development plan should always include looking out for beneficial partnerships, even if they are not formal mergers.
Eric Anthony is principal of customer experience at SolarWinds MSP. Before joining SolarWinds, Eric ran his own MSP business for over six years.
You can follow Eric on Twitter at @EricAnthonyMSP