Mergers and acquisitions in the MSP landscape are growing in number and popularity. As partnering between service providers becomes not just de rigueur but essential in many cases, a growing number of players are taking the notion one step further and actively seeking peers to buy up and merge their business with.
One such player is MSP and CSP AllCloud, an AWS and Salesforce partner looking to grow its market in 2019, specifically in North America.
The MSP has practices on the ground in North America for its Salesforce customers as well as in Israel and Europe. But this year's "core focus" is North America, according to CEO Eran Gil, who said that the firm is looking at both the Salesforce and AWS ecosystems for partners that could be a good fit for its acquisition plans.
"We have a pretty strategic focus right now on our AWS practice in North America since we don't operate a [physical] practice there yet, so we're looking to acquire first and foremost a partner in that ecosystem and then in addition, or in parallel, work on an acquisition of [another] Salesforce [partner]."
Gil said the MSP is already in conversations with a few potential firms and "we're constantly talking to partners in those ecosystems".
This would follow an acquisition made in July 2018 of US Salesforce partner Figur8, which gave AllCloud an established Salesforce practice spanning New York, San Francisco, Toronto and Vancouver. The practice gives AllCloud 50 team members in the US which have come from the acquisition and organic growth since then.
With such acquisitions come challenges, of course. Like any business, MSPs have their own cultures, and this doesn't just refer to local culture. Whether the merger is with a player from a different country or two blocks over, culture will be an issue that must be managed, Gil pointed out. Merging companies will have to consider how to align their core values and company ethos.
A key consideration here is, of course, people.
Gil notes: "You want to make sure that you have the right people at the helm and that they are looking at the long-term versus the short-term opportunity as it pertains to your company acquiring them. You also want to make sure that you provide incentive for the leaders and other employees to remain as part of your company."
Other factors to consider in consolidation among MSPs include processes and systems. Processes, in particular, are a "critical factor" of success for MSPs, Gil said. "The world of the MSP is process oriented, and if the right processes exist, you are likely to extract the greatest accretive enterprise value from the business. You want to make sure that you understand that there are processes in place and what they are."
A key question for an acquiring MSPs to ask is whether the target's processes align with yours, and if so, how, according to Gil.
Another factor AllCloud considers when making an acquisition is the systems of the target MSP. Gill notes that most small to midsize MSPs will have "some but not an ideal set of systems" that they run their business on.
"MSPs thrive on having the right systems in place to enable such matters as automation in their service delivery. Also, when thinking of integration - which is the greatest challenge of an acquisition - you want to make sure you are either able to migrate or integrate the acquired company's environment with yours."
Gil said that on an organic basis the MSP is looking to grow revenue approximately 42 percent year over year in 2019, and on an inorganic basis, the expectation is 60 percent revenue growth. Staffing sizes are also expected to increase in 2019, with Gil anticipating a 50 percent growth in staff, taking the MSP to 300 employees over the next 12 months.
Outside of M&A, MSPs in the cloud space find themselves dealing with market saturation, Gil said. This stems from two key sources: the first being traditional MSPs whose customers expect them to be able to service them on the cloud. This, however, is not a simple switch in direction for an MSP, which means the growing number of MSPs offering ‘cloud services' may be filling out the MSP space, but may not be offering the level of service necessary for a successful cloud migration.
"The type of skills required of an MSP to support folks on the cloud or with cloud vendors is different," Gil said. "The pace at which the technology advances is absolutely astronomical, which means it takes a not only more skilled, but far more diverse managed service body to serve your customers."
The other source of saturation, or perhaps distortion, stems from the fact that "essentially you can find a lot of folks that are far less skilled [than their peers]", Gil said.
"Even though they may have been ‘born in the cloud', their understanding of what a complete picture of managed services is, and how to serve a client in the best manner [is lacking]. They really aren't building the skills that are required to serve a client well," the MSP noted. "We find a lot of unsuccessful enablement in the cloud by MSPs that we come in to assist with correcting."
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