Channel Transformation to Drive Acquisition Wave

By Michael Vizard
channel M&As

As the way organizations consume IT continues to evolve, a subtle change in how solution providers are perceived and valued is expected to drive a channel transformation that will bring about a new wave of mergers and acquisitions (M&As).

The main impetus behind this budding channel trend is that end customers are increasingly tying the IT services they consume to specific business outcomes. Instead of paying for a technology service, business leaders are insisting that IT solution providers address a business process in its entirety, rather than simply delivering, for example, an isolated managed IT service.

As a result, control over IT spending is now often evenly split between internal IT organizations and the line of business (LOB). That is driving solution providers to seek deeper relationships with the executives that manage those business units.

The need to accomplish that goal is one of the primary reasons NTT Data agreed to acquire Dell Services, formerly Perot Systems. The business process outsourcing services provided by Dell Services will be a natural complement to the IT services that already exist in an NTT Data portfolio that includes solution providers, such as Dimension Data, said Tanvir Khan, vice president and global head for Dell Business Process Outsourcing.

"Our focus has always been on outsourcing the entire business process," Khan said. "We think there's actually very little overlap between us and the rest of the technical services that NTT Data currently provides."

Along similar lines, Hewlett Packard Enterprise (HPE) announced this week that it is spinning out its Enterprise Services Division. The group will then become part of a new entity being created by the merger of that unit and CSC. The HPE Enterprise Services Group within HPE historically focused mainly on business process outsourcing projects.

Also looking to bolster its presence with LOB executives is IBM, which plans to acquire Bluewolf Group, an IT service provider specializing in CRM applications delivered as a service by Salesforce. Bluewolf will become part of an Interactive Experience (iX) practice within IBM Global Business Services that focuses on helping users develop customer experiences.

"IBM iX functions as a digital agency," said Matt Candy, vice president and European Leader for iX at IBM. "We think Salesforce is one of the top technology platforms being used to drive new customer engagement experiences.

In these three cases, the driving force behind the channel trend toward mergers is an ability to deliver IT solutions that are tied to a specific business outcome. The deals involve solution providers with deep ties to LOB executives.  

Mergers and acquisitions in the IT services arena have been robust in recent quarters. A recent report from PwC said M&As in the IT services space generated $17.3 billion in deal volume in the first quarter. "IT Services deals continued their bull run in the kickoff to 2016 with 5 transactions over $1 billion," the report read.

Channel Transformation: Stronger Ties to LOB Execs

How extensive is this channel transformation? It's only a matter of time before this merger activity plays out across the channel, with solution providers that have relationships with LOB executives being the most sought after.

In fact, Stacy Nethercoat, vice president of TDCloud for the Americas at Tech Data, noted that this change in the way IT is being acquired is part of a much larger shift to consumption economics, in which there is a tight relationship between the available budget and the actual use of a service that is being enabled in the IT sector by the rise of cloud computing.

"Consumption economics by definition is outcome-based," Nethercoat said. "That means there needs to be more reliance on services."

In a similar vein, Nimesh Dave, executive vice president of Ingram Micro, warned solution providers at the recent Ingram Micro Cloud Summit that if they don't pay attention to how these business and technology trends are evolving, it won't be too long before they will get disrupted from their business model. The ultimate goal should be for partners to bask in the channel transition—to take advantage of the disruption in the market to expand the scope of their reach, Dave said.

 "We want to help partners do more with more," Dave said. "We are moving into a services economy."

Michael O'Neil, principal analyst for the boutique research firm InsightaaS, added that solution providers really have no choice at this point when it comes to focusing more on LOB executives.

Channel Transformation: Impact on MSPs

MSPs may be hit hard in the channel transformation.

"All the MSPs are getting squeezed on margin," O'Neil said. "And thanks to the cloud, there's also a decline in actual product spending."

That doesn't necessarily mean that solution providers should focus on LOB executives to the exclusion of IT professionals. However, it does mean that as more IT projects are funded directly by the LOB rather than the internal IT organization, solution providers need to expand their relationships within their customer base.

In fact, Matthew Preschern, chief marketing officer for HCL Americas, said the solution provider now has a decidedly bi-modal approach to IT, in which legacy systems are managed are differently from new, emerging applications.

"A lot of our customers are on a digital business journey," Preschern said. "But in a lot of other instances, the CIO is still the decision-maker."

But as relevant as the internal IT organization might still be in many instances, solution providers that still focus only on traditional managed IT services will continue to see the valuation of their company decline as competition across the category becomes increasingly intense, said Tommy Wald, president of channel consulting firm TW Tech Ventures.

"The unfortunate truth is that most MSPs are still selling into IT," Wald said. "It's going be a bloodbath."

The best way to avoid falling victim, Wald said, is to make the services being provided more valuable to the business as whole. Otherwise, he added, the future of solution providers in the channel will look very bleak indeed.

Michael Vizard has been covering IT issues in the enterprise for more than 25 years as an editor and columnist for publications such as InfoWorld, eWEEK, Baseline, CRN, ComputerWorld and Digital Review.

This article was originally published on 2016-05-24