15 Sep Eight factors that create value for IT services firms.
While attending the Microsoft Worldwide Partners Conference in Orlando in July I had the good fortune of meeting Darren Bibby, who is the Program Vice-President for IDC Channels and Alliances Research. I was pleased to hear from Darren that the company has some rather extensive research and insights into the IT services M&A market, much of which mirrors our own experience and counsel.
Among the relevant insights offered by IDC is an opinion piece Darren shared with me titled, Partner Valuation: Why Vendors Must Care, “a perspective on IT channel partner valuation as a tool to incent partners to adopt cloud solutions in their practice.” The premise is that, “IDC believes that one of the most compelling incentives for a partner is the dramatic increase in its valuation that may result from adding a proprietary cloud business. The dramatic increase in valuation that partners might achieve by adding a proprietary cloud business may be the best incentive vendors have to move partners to the cloud.” On this topic we are very much in agreement with IDC.
What intrigued me about this study, written by Pam Miller, Director, Partnering Research, was how IDC clearly articulated eight factors that create value for IT services firms. Pam writes:
The larger the growth rate, the greater the pool of prospective buyers and the higher the valuation.
Without cloud or other 3rd Platform solutions, a partner’s business may be shrinking. If a partner is solely focused on flat or declining traditional businesses, its pool of prospective buyers will be very limited or zero, leaving it with a very low valuation or even a liquidation.”
A larger company has a better chance of dominating a marketplace than a smaller company, which bodes well for its growth potential and the predictability of its future revenue stream.”
“What Is Hot Matters”
When a market or product category is hot, it typically has high revenue growth, which breeds more
interest from potential acquirers. More acquisition interest increases the value of companies that
participate in that hot market.”
“Cloud Participation Matters”
Cloud companies have higher multiples than other IT companies. Cloud participation also
increases the potential pool of buyers for a partner. All buyers want to invest in rapidly growing
markets, and cloud is hard to beat today.”
“Predictable Recurring Revenue Matters”
A primary reason that investors favor a cloud business model is recurring revenue. Recurring revenue,
which is part and parcel to a cloud business model, allows a company to begin a new financial period
with a base of revenue. The company is not starting from scratch as it is in the traditional one-off
Partners whose solutions have unique proprietary components receive higher valuations. IP enables
companies to more easily gain and retain customers. For IP to increase valuation, it must provide a
competitive advantage that increases investor confidence in future revenue and profit projections. A
reseller partner without IP and with limited specialized technology skill sets has a low value. Similarly,
horizontal skill sets that are common are not valuable. In contrast, verticalized or specialized
capabilities increase a partner’s value.”
“Competitive Position Matters”
The ability of a company to dominate a market adds value. Partners with unique defensible positions
that allow them to retain customers will be rewarded with better valuations. IP can provide competitive
advantage, but a unique process or approach can also create a competitive advantage. Even a small change to a manufacturing or customer service process can be positioned as a competitive advantage
Partners that are always adapting and changing with the market are rewarded with more predictable, sustainable growth and higher valuations. Partners that don’t keep up will face declining revenue and value.”
“Market Atmosphere Matters”
In a bull market like we are in today, investors are more aggressive, looking for big future wins. Cloud
companies fit the bill and are well represented in the momentum stocks and high flyers of Wall Street.
It is critical for partners to add cloud solutions not just for the sake of adding cloud but because the partner has a specific capability that will provide it a unique competitive advantage. This approach should produce a business with low churn and a growing customer base. In a nutshell, timing is important, but fundamentals are everything.”
Staying true to these eight factors will help you build your business and enhance the value of your company.