In-Depth

Consolidation in the Microsoft Channel

As the IT industry matures, mergers and acquisitions dominate the channel landscape.

The last year has been action-packed with consolidation in the Microsoft channel, from large global systems integrators to midsize partners to specialized boutiques.

Evidence is necessarily anecdotal. Not even Microsoft partner executives, with their keen eye into what is arguably the largest channel in the IT industry, have a good macro view of the level at which consolidation is occurring.

Despite several years of recession, the number of companies registered in the Microsoft Partner Network (MPN) has stayed relatively steady at around 400,000. "Today there's about 430,000 partners," Julie Bennani, general manager of the MPN, said in a November interview coinciding with the network's formal launch.

Granted, Microsoft regularly claims an unofficial pool of about 640,000 partners worldwide, so that overall pool could be shrinking as the official number of formal partners stays steady. In specific areas, meanwhile, Microsoft partner executives do see some consolidation.

As director of Microsoft Dynamics Partner Strategy, Jeff Edwards has helped oversee and explain the programmatic efforts within the new MPN to encourage Dynamics partners to increase their revenues by staffing up and getting specialized. He says there's clearly consolidation occurring among the 5,000 or so partner firms selling Dynamics solutions for Microsoft.

"Currently, with the economy, there's already a consolidation going on in the channel. To an extent, the solutions themselves are becoming a bit more sophisticated in terms of integration with SharePoint, integration with SQL," Edwards says. Part of the consolidation is happening because small size is becoming an impediment in the business applications market, he adds. "We find that our more profitable partners are the ones that actually have more than 50 people."

Another area where heavy consolidation is visible has been with Microsoft National Systems Integrators (NSIs), the exclusive tier of U.S. partners that get special benefits. The list of NSIs was once as high as 70, but recently has hovered around 36. The biggest reason for the reduction is more stringent requirements for attaining the NSI status, but in the last year, there has also been a lot of merger and acquisition (M&A) activity among this class of Microsoft partners.

While reasons for Microsoft partner consolidations are as varied as the companies involved, a few broad trends have emerged in high-profile recent deals.

SharePoint Experience Is Attractive
The number of deals in which Microsoft SharePoint expertise played a role testifies to the momentum of the Microsoft collaboration platform. Meanwhile, many of those deals have a unified communications (UC) component as well.

One of the first big deals of 2010 centered on SharePoint, with the acquisition by Aspect Software Inc. of St. Louis-based Quilogy Inc. Aspect is a Microsoft-focused UC and collaboration services company with more than 1,600 employees and based in Chelmsford, Mass. Quilogy, a Microsoft NSI, had specialized practices in SharePoint and Dynamics CRM. The merger combined the services areas and brought 90 percent of Quilogy's 250 employees to Aspect.

It was the SharePoint expertise in particular that Aspect officials highlighted in explaining the deal. "Quilogy's expertise in Microsoft SharePoint and the broader collaboration space, coupled with Aspect's global unified communications leadership and strategic equity alliance with Microsoft, are a formidable combination in the enterprise technology market," Aspect CEO Jim Foy said at the time.

Fast-forward a year, and SharePoint and UC are major factors in a three-way merger that took effect last month. The Avtex acquisition of Inetium and Convergent was formalized on Jan. 1, 2011, with the three Minneapolis companies going forward under the name Avtex Solutions LLC. (See "1 2 3 of a Kind," our story covering this merger, in the January issue of Redmond Channel Partner magazine.)

The former Avtex was an applications and systems integrator specializing in contact centers and UC, while Inetium was a former Microsoft NSI specializing in SharePoint, Dynamics CRM and .NET technologies. Convergent dealt in Microsoft UC solutions, with membership on the Microsoft UC Partner Advisory Council.

"We find that our more profitable partners are the ones that actually have more than 50 people."

Jeff Edwards, Director, Microsoft Dynamics Partner Strategy

Consolidation in the Dynamics Channel
Both the Aspect-Quilogy M&A and the Avtex-Inetium-Convergent deal also had Microsoft Dynamics components.

In addition to the growth bar Microsoft's Edwards mentions, he also says Microsoft expects fewer companies to meet the higher and more employee-training-intensive requirements for Gold and even Silver competencies in CRM or ERP. Those requirements, which went into effect in November, could drive a wave of consolidations among smaller players such as one that occurred in Chicago early in 2010.

Sikich Inc., an Aurora, Ill.-based public accounting and consulting firm with about 350 employees, acquired two Chicago-based Dynamics partner companies, Hal Weinberger Consulting (HWC) and MAS Consulting Inc.

"I ... feel strongly that the clients of all three firms will be better served with the increase in the available resources and services, such as expanding our Microsoft Dynamics SL practice and the introduction of telephony services," Jeff Rudolph, partner in charge of technology for Sikich, said at the time.

In a much larger Dynamics transaction a few months later, mega-systems integrator and Microsoft specialist Avanade Inc. acquired the Microsoft Dynamics CRM assets and federal practice of Ascentium Corp. The deal brought about 90 Ascentium employees in Baltimore and Bellevue, Wash., to Avanade, which is based in Seattle and has about 9,700 employees worldwide.

Managed Services Provider Rollups
Consolidation is happening among managed services providers (MSPs), as well. In October, Little Rock, Ark.-based MSP ClearPointe, with its unique Microsoft Systems Center-based network operations center, acquired the San Diego-based MSP company Do IT Smarter in October. The deal marked ClearPointe's third acquisition in a year, following the October 2009 purchase of TechWatch in Dallas and the January 2010 acquisition of Savant Technologies.

In a statement announcing the most recent deal, ClearPointe CEO Jeff Johnson said that because Do IT Smarter is a channel-only company, it will help ClearPointe broaden service offerings to both value-added resellers and midsize businesses. "[Do IT Smarter] became a successful Master Managed Services Provider by developing a unique service platform, offered through their network of partners located across the U.S. and Canada," Johnson said. The Do IT Smarter network of more than 150 services provider partners will continue to operate under that brand in 40 markets.

Geographic Expansion
Another company with deep roots in the MSP market and active in M&A this year was Harlan, Iowa-based Heartland Technology Solutions (HTS), which acquired Computers, Networks, Solutions Inc. (CNS) of St. Joseph, Mo. But in this case, the acquisition highlighted another recurring consolidation driver: geographic expansion. HTS, the 25-year-old Midwestern IT firm started by peer-to-peer pioneer Arlin Sorensen, picked up its seventh location and a base of operations in northwest Missouri with the CNS purchase.

Rocky Hill, Conn.-based Tallan Inc. made a similar expansion into an adjacent market in August with the purchase of twentysix New York Inc. While Tallan is a professional services firm specializing in custom application development, business intelligence (BI) and systems integration, Manhattan-based twentysix New York was a data management firm specializing in BI and custom .NET applications. The merger paired two Gold Certified Partner companies and gives Tallan the opportunity to expand into the lucrative New York market.

Modest deals abounded in 2010 in the Microsoft channel as small practices joined larger firms to allow for growth, or in anticipation of the specialization requirements of the formal launch of the MPN. While many of these deals occurred beneath the radar, one example that came to the surface was Minneapolis-based RBA Consulting's expansion into Denver via the acquisition of a local Microsoft solutions practice and its customer base.

There was geographic expansion activity at the larger end of the market, too. In January, Phoenix-based distributor Avnet Inc. expanded in Australia by completing the acquisition of Australian value-added distributor itX Group Ltd. in an $80 million deal.

Business Expansion
M&As, chosen wisely and executed well, are one of the fastest ways to build business in existing geographies. Avnet has been active for that reason, as well, making one of the biggest channel deals of 2010 with the acquisition of rival distributor Bell Micro in a $631 million deal completed in July.

Another business expansion deal in 2010 involving one-time Microsoft NSI Burntsand Inc. saw Burntsand acquired by Open Text Corp. The deal combined enterprise content-management market players.

A late-2010 deal combined two Microsoft NSIs -- St. Louis-based Perficient Inc. and Costa Mesa, Calif.-based speakTECH. With the $15 million deal, Perficient gained what CEO Jeffrey Davis called "proven sales and delivery teams, an attractive services mix and an impressive client roster and bill rates." Perficient expects speakTECH's approximately $16 million in annual revenues to increase Perficient's current annualized revenues to nearly $230 million. The addition of speakTECH adds about 120 employees to Perficient, bringing the combined company to about 1,400 consulting, technology, sales and support professionals in North America. Perficient also has offshore locations in Eastern Europe, India and China.

One of the biggest systems integrator M&A deals of 2010 came in the closing weeks of the year when Atos Origin S.A. and Siemens AG announced plans to form a global strategic partnership to create what the companies call a "European IT champion."

Under the terms of the deal, Atos Origin, a repeat winner of Microsoft Partner Awards, is to acquire Siemens IT Solutions and Services for about 850 million euros, while Siemens gets a 15 percent stake in Atos Origins for at least five years. The transaction creates an IT services company with about 78,500 employees worldwide and pro forma 2010 revenues of about 8.7 billion euros. The new company will focus on managed services, cloud computing services and a broad variety of systems integration solutions.

More Deals to Come
Whether some of the specific reasons for high-profile deals in the Microsoft channel in 2010 -- SharePoint or Dynamics expertise and MPN specialization pressures -- continue to drive new deals or not, observers see consolidation continuing in 2011.

The underlying forces of a maturing IT industry, along with the constant allure of geographic and business expansion, should continue to entice executives like Davis of Perficient, who provided a concise preview of 2011 in discussing the SpeakTECH acquisition. Said Davis: "We're looking forward to pursuing additional acquisition opportunities in 2011.