You Can't Ignore M&A As A Key Driver To Remaining Competitive

By Kenneth Verrone, CTO Sourcepass

MSPs In A State Of Transformation

The MSP space, along with many others, is confronted with key challenges, such as limited IT services offered by most MSPs generally caused by lack of resources and the cost to broaden portfolios. Even today most MSPs are unable to leverage AI or multi-modal, omni-channel tools to improve user management and generate improved customer returns. However, the real catalyst for the widespread business transformation we are seeing now has been the result of the COVID-19 pandemic. Spiceworks Zeff Davis (SWZD)’s State of IT Report^[1] notes that 70% of businesses plan long-term IT changes, along with 80% of businesses expecting their technology spend to stay the same or increase due to shifts in customer behavior and increased digitization of services. Cloud and managed services remain a growing priority as hardware spending declines. COVID has accelerated the technology roadmap for most companies and new and cutting-edge experiences are moving at a superfast pace, putting additional pressure on IT Service providers. These factors cement M&A as a critical element in MSPs’ plans for strategic, robust future growth and to meet the rising challenges of the industry.

Why M&A Should Be Top Of Mind For MSPs This Year And Beyond

Simply put, even if M&A isn’t a key priority for your business at the moment, rest assured that it is for your competition. The combination of market saturation and increased customer expectations to procure ‘best-in-class services are the key drivers of the shifts being seen in the IT space at the moment. As IT impacts all areas of organizational dynamics, from product management to customer experience and now to employee experience, the quest for excellence in IT services is a critical strategic priority, along with inorganic growth. Now and in the months ahead, this will be a key necessary step to take to position your organization for continued growth and success.

So, why is this happening now?

• The market is continuing to heat up, and small and midsized businesses are increasing their technology spending despite entering into the post-pandemic era. This increased focus on technology investment means more money is flowing into the SMB space as a whole – to the point where private equity firms are looking to acquire software companies and the MSP channel due to the anticipated opportunity that is expected to come.
• Running and growing an MSP has become more complex as customers demand an increasingly broader set of solutions and increased customization. This requires increased investment in tools, technology, and training and a laser focus on matching the right skills to needs as the labor market continues to be tight.
• The competitive landscape across the MSP market is changing. Scale is a major competitive advantage as complexities in cybersecurity increase along with rising customer demand, and as MSPs, staying on top of these increasing evolutions is key to remaining competitive.
• An increased focus on security. SMBs are at greater risk than in years past, and the drive to protect and safeguard systems and assets is resulting in increased insurance costs for MSPs in the event of security breaches.

Key M&A Considerations

The increased complexity of the MSP space, caused by a combination of cybersecurity challenges and innovations, expansions in cloud offerings, increased demand for specialized talent, and rising customer demand creates an M&A environment with a high barrier to entry.

Digital transformation, M&A as a part of that, starts as a cultural shift rooted in the necessity of embracing technology and innovation shifts to enhance overall customer value and experience. To do this successfully, it is important to receive buy-in from your employees and customers to build loyalty and belief in your organizations’ offerings that make their lives easier. It’s also wise to keep track of several key KPIs to maximize your readiness for M&A activities and be perceived as ‘mature’ in the industry. These include:

• Assess your organizations’ current value;
• Identify potential acquisition targets that align with your strategic goals;
• Keep tabs on the market;
• Maintain an up-to-date SWOT analysis for your business based on your most recent valuation metrics, so you know where you stand; and
• Continually assess the ‘health’ of your revenue-per-seat as compared to your competitors.

Remember, M&A is a mindset, and a journey - not a one-and-done activity. MSPs that are ready for M&A activity should continue to maintain a roster of potential M&A targets that align with their business goals.

A Growth Mindset Is Key To Long-Term Viability

As in any successful digital transformation effort, remember that it’s a long-term initiative, not a single box to be checked off. Keeping your finger on the pulse of your customers’ needs and the changing market landscape is key to success, along with placing a focus on growth and profitability, and being mindful of cultural impacts associated with transformation shifts. M&A activity is an essential strategy to remaining competitive and successful in an increasingly complex landscape. The SMB market is primed for robust future growth, and investing in the additional tools and talent to give your customers the solutions they are asking for will pay off exponentially down the road as your organization’s footprint expands.

About The Author

Kenneth Verrone is the CTO of Sourcepass. For more information on Sourcepass, please visit www.sourcepass.com.