• Brian M. Snow

Managed Services Providers (MSP): Market consolidation and rapid move to the cloud is changing the l

Managed services and the providers of those services, traditionally referred to as “MSP” have emerged as a critical provider to add value in the competitive landscape of IT and the channel partners and distribution channels that capture the growing outsourced trends in technology. Historically, the operational management for companies IT infrastructure, i.e. servers, storage, power, physical security continues to be the core role for the MSP. However it is the integration and growing autonomous capabilities beyond these traditional service offering, including a rapid shift to cloud computing that create the optimal path for service revenue growth.

Companies who offer an integrated and virtual managed services, wrapping security, storage, disaster recovery, application services (API’s) and cloud will lead the race to capture the part of the value chain with exceedingly higher margins. As clients look to further outsource IT operational capacity to otherwise reduce risk, cost and the complexity of their IT infrastructure—MSP’s that are well positioned in both the SME and Middle Market will be viewed by their clients as an indispensable partner with incredible embedded recurring revenue that become hard to extract.

“The demand for managed services has never been higher, but service providers must keep an eye on emerging trends to avoid significant revenue drops caused by changes in the market,” said JD Helms, president of CloudJumper.

The best-positioned MSP’s serve strategic geographic/regional markets and vertical industries such as life science/biotech, technology, manufacturing with demands for high automation, rapid provisioning and services that address complex enterprise needs, while retaining high-touch delivery. Vertical markets that have a complex regulatory environment such as aerospace, healthcare and non-profits due in part to donor reporting requirements, are additional growth areas that MSP’s would be wise to target.

MSP’s that are keen on growth and have the ability to adapt their business model will need to ensure that their growth is well planned with a strategy focused on internal development, M&A and additional investments to scale their service platforms, hire new talent and pay for sales and marketing activities that will be needed to attain the requisite growth.

2018 Trends from 451 Research's latest study

  • The global market for managed services and hosting will rise significantly to more than $179bn by 2021, driven by strong growth across all cloud, application and managed services sectors.

  • Cloud has become a key delivery mechanism and consumption model for almost all services, but on-premises, operational management will still be an important part of all hosted offerings for the foreseeable future. Being able to capture revenue for outsourced-on-site staffing and infrastructure represent ancillary revenue categories that are highly synergistic.

  • The IT distribution channel is making a comeback as it adapts to changing service management requirements, and stands to gain from its transactional experience and ecosystem relationships in a multi-cloud world.

  • Gartner's recent revisions to its Global IT Spending research, total spending in 2018 will reach a staggering $3.7 trillion and will reach $4.2 trillion by 2021.

Source: Gartner ICT Report; 451 Research: Cloud and Managed Services Market Monitor, November 2017

Rise of Security-as-a-Service

The development of multi-cloud security management will be predicated by the speed with which organizations are adopting cloud services – often outpacing the hiring and development of cloud security expertise. MSP’s should be ahead of this curve by investing in security automation where gross margins reach 70-80% levels, rivaling software margins. This can be done with significant investment through the development of a single platform, or by taking an asset lite approach and selecting channel partners with managed security offerings. Although managed security services represents only a small portion ($17B in 2018) of the global ICT, the category is growing at 16.8% CAGR through 2021.

For those offering connectivity, the key aspects of service delivery – “high availability, low latency and edge delivery – will become differentiating factors” states Matt Thoene, global SVP of the Uptime Institute, the industries leading data center certification organization.

Winning Strategies

  • Multi-Cloud Security Management will emerge as a critical enterprise task. Providers that can deliver cross-cloud identity and access management; companies with extensive API expertise; those with an extensive partner network to deliver integrated, holistic security services

  • Cloud Service Integration will herald the rise of the "Mega- Hoster".

Hosting firms that are able to integrate; providers that offer local language capabilities at no extra cost

  • XaaS will extend operational management opportunities for providers that can enable service automation; vendors that can offer service bundles

Source: 451 Research: 2018 Trends in Hosting & Cloud Managed Services, December 2017

M&A Activity

In 2017, over 150 unique transactions were executed in the MSP sector with strategic MSPs, IT service providers and private equity being the most active in the market. Private equity firms — which have backed many local, regional, national strategic MSP buyers and even global acquisitions can be overlooked because an M&A deal involves an MSP buyer that’s quietly backed by PE dollars.

In addition to the usual MSP and IT service provider targets, we’re seeing buyers increasingly scoop up partners that have private/managed cloud practices — as well as those that focus on such platforms as ServiceNow, Microsoft Dynamics, SalesForce and other popular API suites. A growing number of security-focused M&A deals — with global IT consulting firms such as Deloitte tucking in security-centric businesses into their organizations.

Strategic buyers come with a variety of strategies, this is evidenced by the company All Covered, a division of Konica Minolta Solutions the office printer services behemoth which has done over three dozen acquisitions since 2010. Global trends among office equipment VARs, such as Konica known for their printer and copier type businesses, are attempting to buy their way into the MSP market with a fury.

Private equity firms continue to acquire MSPs across all sizes of transactions. Smaller financial sponsors like the AJP Group LLC, a private equity firm in Raleigh, N.C. who has backed an acquisition strategy to focus on SME size targets with less than $5M in annual revenue. While large bracket private equity groups like ABRY Partners based in Boston have backed the buy out of NexusTek of Denver to recapitalize its business in a bid to dominate the western regional markets. These regional strategies are becoming a common theme.

ABRY Partners is a familiar private equity name in the MSP sector; the PE firm acquired Breakthrough Technology Group (BTG) earlier this month, and ABRY also owns a stake in Rackspace.

Relevant deals in 2017:

  • BV Investment Partners acquiring majority control of Apps Associates, an IT services firm with AWS, Oracle, SalesForce and NetSuite expertise.

  • Vista Equity Partners acquiring Datto, and then merging portfolio company Autotask into Datto.

  • ABRY Partners based in Boston have backed the buy out of NexusTek

  • Marlin Equity Partners acquiring AppRiver, an Office 365 partner that extends security solutions to MSPs.

  • Apax Partners acquiring ThoughtWorks, an IT consultancy with more than 4,500 employees in 15 countries.

It should be noted that valuations remain historically high. The median EV/EBITDA multiple of about 13.6 has stayed well above the historical average of 12.0 and close to the ten-year high of 13.7 in 2007

Strategic Acquisitions NOT Roll Ups

Many MSP’s that have grown by any measure have relied on strategic acquisitions and mergers to achieve significant results. This strategy is very different from a “roll up” as it relies on relationships with other MSP operators, market patience; self generated “organic” growth, and a thoughtful process for on-going integration. Growth purely through acquisition is an expense alternative to organic growth.

A strategic acquisition strategy should emphasize the growth of a MSP with a core focus on these areas:

  1. Geographic diversification

  2. New service capabilities

  3. Expanding existing service/market verticals

Acquisitions of high-tech targets have become an instrument of choice for buyers in all sectors looking to boost innovation, streamline operations and processes, shape customer journeys, and personalize products, services, and experiences, especially in the MSP market. BCG, a global consultancy group, noted that ICT tech deals represented almost 30% of the total $2.5 trillion of completed M&A transactions in 2017.

BCG: 2017 Mergers & Acquisitions (M&A) Report - The Technology Takeover

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