On Growth

For IT Services Partners, All Roads Lead to M&A

The industry doesn't need as many IT services firms as there are presently. The market knows this, the vendor companies know this, customers know this and you know this.

• By Mike Harvath
• October 05, 2016

Which are you? Are you the IT services executive looking to build your business in whole, or in part, by acquisitions? Or are you the executive looking to grow your business to sell to those who are buying? Sometime, now or in the future, you're going to be one or the other.

M&A is in the genes of the IT services organism. While M&A is an integral strategic component in all industries, it takes on added gravity in the IT services industry for a host of reasons. Among them:

The Growth Imperative
Growth is not a divine right. IT services can be an unkind industry for those executives without a forward-looking, ambitious growth imperative, because if you're not growing, you'll soon find yourself on the wrong side of prosperity. And M&A is a critical component to that growth. According to the Equiteq 2014 Buyers Research Report, 76 percent of IT executives are looking to M&A to grow, either mostly by acquisition (29 percent), or equally between organic and acquisitive strategies (47 percent).

The Innovation Mandate
IT is an industry fueled by a constant stream of new ideas, technologies, products and services, with no end in sight. In order to keep pace with the ever-changing innovations that define the industry, executives look to acquisitions to complement their offerings to be of service to their customers. The pace of change is relentless and obsolescence looms for those companies that are slow with the new technologies driving the market.

The Exit Phenomenon
Never in the recorded history of commerce has an industry been so populated with executives planning an exit strategy almost at the same time they open their doors for business as in the IT industry. It could be that the industry attracts entrepreneur types more comfortable with getting new ventures up and running than in managing them over time. Or it could be that executives see a quick path to riches in an industry that in just a generation has grown to more than $4 trillion in annual revenue. Or it could be any of a number of reasons that every IT business plan has an exit strategy component.

The Consolidation Inevitability
Consolidation is happening and its pace will only quicken over time. The industry doesn't need as many IT services companies as there are presently. The market knows this, the vendor companies know this, customers know this and you know this. It's just a matter of time before the market settles into a configuration of just the right number of companies serving just the right number of customers.

What does all this mean? If you're an IT services buyer, you need to grow to fund your acquisitions, which in turn enables you to be perceived as a vibrant company that commands the attention and interest of prospective customers; to be seen as an exciting, promising work place for attracting and retaining the acquisitive talent you just paid for; to fund the development of IP, which is getting to be a mandatory ingredient for successful companies; and to be seen by your vendor community as their go-to services partner.

If you're an IT services seller, you need to demonstrate growth to become highly attractive to the acquisitive set; to get the valuations you've worked so hard to create; to reward your investors; to secure a future for your employees; to retire in style; or to use this infusion of capital to go out and do it all over again. Truth be told, it's a good time to be a seller because the M&A market is strong and the valuations are attractive.

Growth, primarily the organic kind, is the common denominator for any executive looking to buy or sell. The robustness of your organic growth demonstrates you're doing the fundamentals right, it's the true measure of your company's value, and it's the best indicator of how well a company is positioned for the future.

If you're not growing, M&A will not likely be an option for you, either as buyers or sellers. It's just the way it is.

More Columns by Mike Harvath:

• 10 Steps to Becoming a 'Partner of the Future'
• 9 Signs You're a 'Partner of the Past'
• Archive