03 Jan Adjacency Strategies in M&A
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Before beginning an M&A process, consider an adjacency growth strategy. We define adjacency strategies as taking what you do best and expanding into an adjacent opportunity that’s one degree of separation from where you are.
Check out our blog post on The Adjacency Growth Strategy: https://www.revenuerocket.com/adjacency-growth-strategy/
Transcript:
Mike Harvath 00:04
Hello and welcome to this week Shoot the Moon podcast. broadcasting live in direct from revenue rocket world headquarters in Wilmington, Minnesota. As you know if you’re a regular listener to the podcast revenue rocket is the world’s premier growth strategy and m&a advisor for IT services companies. With me today on today’s podcast, I’m pleased to have my partner’s Matt Lockhart and Ryan Barnett. Welcome, gentlemen.
Matt Lockhart 00:32
Hey, Mike, great to be here.
Ryan Barnett 00:37
Thanks for having us on. Mike. It sounds like and looks like there might be a little dust outside your office. So what’s going on?
Mike Harvath 00:45
Yeah, little dust. So we are expanding here revenue rocket. I’m happy to report we got walls being torn down bunch of new offices being added new boardroom that I think is big enough to hide a bowling alley. And I don’t know it’s gonna be big or exciting, the big build out done in the space for 15 years, and it’s time to knock them all out. So exciting time. Today, we are talking about adjacency strategy and m&a now, right, Ryan?
Ryan Barnett 01:19
Yes. One of the things that we look for our way as the premier growth strategy Consultants is helping companies examine the services that they’re in, and the offerings that they have for the markets that are in. And when you start to factor in a merger or an acquisition into the mix. There’s a few different schools of thought when it comes to the strategy. And I’d say you can, there’s two big ones. One is do you kind of keep doing what you’re doing? And buy something to increase scale and mass? Or do you do something bit different and focus on a company that’s in the adjacent markets or adjacent technology or adjacent geography? So today, we’re talking about kind of what why that splits might be interesting and what things to consider and, and why it matters for m&a. So, Mike, maybe we just want to start out with what are some high level trends that you think of here and just get us rolling?
Mike Harvath 02:22
Yeah, for sure, you know, what’s interesting about adjacency strategies is, you know, and just trying to define them is essentially finding a additional offering to your respective market that may not be core to your business today. So, you know, one example that for me and as service providers is, you know, we have a client who in the past, was focused on the legal market, and managed services space. And they ended up acquiring, we helped them acquire some marketing service provider and marketing companies that also focused on the legal market, with the, with the concept that there could be some cross sell and upsell across those companies into their respective customer bases. That thesis proved out to be accurate. And as a matter of fact, this client was successful in buying a couple of different companies that provided adjacency opportunities like this, and certainly has contributed to their growth, quite materially. So it’s really an expansion of services to the same or similar market is probably a more traditional adjacency strategy. But there certainly could be some opportunities where it does address different and complementary markets, as well. So just to kind of sum it up, it’s Hey, can we get together to get to a place together, that we can’t get apart? Because we can cross sell each other’s customer base to their respective services?
Ryan Barnett 03:54
Yeah, Matt, do you have any examples of where you where you’ve seen this happen? Or some companies that we’ve worked with gone through this?
Matt Lockhart 04:03
Yeah, well, you brought up MSPs right. And and we’ve helped a couple of MSP providers bring cybersecurity and advanced their cybersecurity capability through an m&a strategy. You know, there’s just so many different examples. Right. I mean, so for nationally, you know, sort of North American based and Stoli North American sort of capabilities, looking at an acquisition elsewhere, right, I put it into the adjacency bucket because you’re expanding on your core to be able to deliver more and and more scaled services through an extension in that way. Kind of backing up a little bit. If you look at the level of pace of change, you know, within our sector, technologically, it is very, very difficult to keep up with it. And if you don’t have the opportunities to demonstrate to your customers that you are keeping up with that rate of change? Well, they’re going to be looking elsewhere. And I think that an adjacency m&a strategy is one means not the only means, but one very strategic means of keeping up with that rate of change, so that you don’t give your customers any reason to go elsewhere. Right, but ya know, think, think cloud migration. And then, you know, building upon that with data and AI, right, think application development, and building upon that left in the cycle with product management capabilities, or right of the cycle, you know, with support and maintenance capabilities. And these are, you know, hard things to grow organically, it takes that it takes time. And you know, looking at that m&a strategy as a means to decrease that time to change is, you know, something that we see done, you know, very successfully.
Ryan Barnett 06:09
So, if we take the current offerings, that you’ve got a new look similar to that, and that could have a definition of something like a geography. So if you’re offering custom application development in North America today, you may be a delivery in a different market, such as Latin America.
Mike Harvath 06:31
Yeah, I think what’s interesting about that, Ryan, is that, in the most simplest terms, you’re talking about expanding the addressable market, for the services that you offer, and whether that’s an adjacency by service line offering or adjacency, by geography, they both apply it sort of the litmus test as, Hey, are we going to be able to expand the addressable market across both companies, and that’s a bi directional thing, where you bring to the party, I use this term a lot, but you go to a place together, that you can’t really go apart, or that it’s more difficult to go apart. And that creates a great business case for doing the deal. And adjacencies, oftentimes, it’s just such a glaring opportunity. Because when you think about cross selling up, so across the respective customer bases, each customer base, you would hope those companies have, you know, trusted advisor status with their customers. And when they can bring those additional services from the other company to their clients, where they have a trusted advisor relationship, the sale was quite easy. And they bring a mature capability to them, you know, if there’s a need, they certainly shouldn’t be in a position to make that cross sell and upsell happen without a tremendous amount of effort.
Ryan Barnett 07:57
If you take this in the lens of our methodology, the SAP methodology, so you’re specializing, you’re typically putting that specialty into a target market or vertical market and your product iser offering does the adjacent see what approaches change? If you’re taking that vertical market approach,how does that factor start to factor in with the adjacency strategy? Let’s say you’re doing one thing, maybe it’s been really great and digital transformation, or let’s say, ERP implementation, and you’re very good at for manufacturers? How does the adjacency strategy work within that capability? Or that line of thinking?
Mike Harvath 08:40
Well, could certainly be two ways. One is, you know, like the example I painted before where, you know, it’s the same vertical market, but different services. Okay, so that that’s sort of a logical one. But it certainly could be same services, different markets, right, different vertical markets, or different geographies where, you know, maybe you do digital transformation expertly for manufacturers, and then you combine with a firm that does digital transformation, professional services firms. And because you also have different geographies, you get some some reach on scale, and you get to be able to focus more effectively with more capability into the respective markets. So certainly, we’ve seen those opportunities, it becomes more like a geography expansion in that case, but it also becomes a market expansion. And I think as firms get to be large, larger, you know, it becomes they have the ability to effectively market into more than just one vertical market, they certainly can market into multiple verticals. And we see firms, you know, very large firms that, you know, do that pretty well, you know multibillion dollar firms that may target 678 markets effectively. So there is a growth paradigm where at some point, you got to be able to reach into multi market and certainly an adjacency strategy around m&a can help you do that.
Matt Lockhart 10:01
You know, one other thing to consider specific to that going deeper within that vertical market approach is the concept of customer centricity, where as you are focusing on that particular vertical, whatever it may be, being able to truly understand and have the people in the skills that grow your expertise within that vertical and being able to sort of raise up the maturity model within that vertical and thinking about an adjacency strategy, as in connection with really just getting deeper with your customer, and being able to advise and guide your customer, a, you’re gonna raise up the value equation, B, you’re gonna be awfully sticky. And the result of it, you should be doing more business, and you should be doing it at a greater profit throughput.
Ryan Barnett 11:05
I think that’s a really great place for both end, the more we can do for the customer in the market that you’re an expert at, the more opportunities you’re going to have. And that leads to an unfair share of market share and growth, is you’re doing something that no one else can do. And the growth compound itself. And an acquisition is a great way to do this is oftentimes very hard to build out adjacency type work because of the training because of the sales efforts, because of all the other things that it’s essentially almost growing a new business. So using this as a method and acquiring the talent, and an expertise can be a much faster path to growth. If you guys don’t mind me switching subjects a little bit here, I am curious, we’ve been using the word adjacency. Which if I pull out the dictionary, you know, it’s something close or near to I’m not hearing you say, go into a different market through acquisitions. And I’m wondering if that’s perhaps just a subtlety that I’m picking up upon? Or? Or if there’s more to it? Maybe let’s start with Mike, when you look at defining markets, do you typically want to stay near something you know, or do you go kind of left field and do something completely different? So I mean, it’s still in IT services?
Mike Harvath 12:28
Yeah, I, I think there needs to be a common thread, right, there needs to be a common thread that will be a relatively easy cross sell and upsell opportunity, one that the new companies market would have an appetite for your services, and vice versa. That’s why we call it adjacency. I think if it’s far afield, or a wildly different, you know, there is no common thread that either ties through a vertical or service offering or different geographies, that kind of thing. There’s not a common thread that’s complimentary. I think this can be very, very challenging. And we certainly had conversations with companies that wanted to, you know, they had sort of an open mandate, it said, Hey, we just want to go by IT services companies and try to pull them together, we don’t really care what they do. And, you know, because we really liked the sector abroad sector. And the challenge with that, as an integration is becomes very, or I should call, the potential benefits of adjacency just aren’t there. And it means you’re going to run these companies as silos, and they don’t pass the test, then of the one plus one equals three, that that’s a pretty important test for m&a, you gotta be able to say, are there things that each of you are going to bring to the deal that create a new entity that’s complementary that and help you go to a place that you can’t go without each other? And that generally only happens when there’s some sort of common thread to exploit through both businesses?
Matt Lockhart 14:04
You know, other things, I mean, you go too far afield, you potentially can increase the risk around culture, right? Because you’re maybe not thinking the same way in terms of how you deliver and what your value is to a customer. Having done this in my past life, let’s see, five, six time. The other thing to think about is your go to market, you know, capability, your sales team, your sales support team, your marketing team. And being a former sales guy myself, I am happy to say this that sometimes we’re not the brightest bulbs in the bunch, right? And you combine that with a northern Minnesota hockey player and boy, sometimes the complexity can get really, really difficult. And so if you go too far afield, your ability to go to your customers right? With your team with your go to market team becomes a real challenge. And yeah, the last thing that you want to do is confuse your customers. If you’re confused your sales team, you’re gonna confuse your customers. And so I think that’s one of the, you know, really key things that need to be looked at so that you can, you can continue to go fast.
Ryan Barnett 15:30
Great points, Matt and Mike, I’m curious, if you if you’re putting together an ideal prospect profile, if you’re taking upon an adjacency strategy? How flexible do you need to be in the markets that you’re going after? Seems like there’s got to be a bit of a bend if you’re looking to do something next to but not the same? The thoughts there?
Matt Lockhart 15:57
You know, in the digital world, and some of the three sort of potential adjacencies to a core offering within digital, you know, it’s sort of think about the cloud infrastructure migration that enables, you know, digital, well, that’s, that’s one another would be quality and risk mitigation via quality offering. Well, that, that’s to Okay, well, then you kind of move into the entire cycle of DevOps. Right? And there’s another, well, which of those most closely, sort of mirrors what is your core offering? Well, that may be a priority. But any of those would be complimentary, would expand your capability, would it demonstrate added value to your customers? And so there’s an opportunity where having a level of flexibility increases your chance of success? versus, you know, the only thing that I can do is add this thing on? Well, that can certainly,
Mike Harvath 17:04
I think you call it Matt, I mean, I think, certainly, I couldn’t have said it better myself. So you summed it up.
Ryan Barnett 17:14
Great points, guys. The other thing I would say is that sometimes an adjacency strategy can be taken by looking at different roles you may sell into a company, we’re, we’ve got an example that we’re working through now, where a digital transformation firm, who’s got some great back end work and does some custom application development, they do a lot of line of business work. And what they really love is to do more work within the marketing department. As they see the rise of marketing related apps and martec. And the need for integration and customer data platforms. Well, it makes sense for them to go outside of the world of digital transformation, and start looking at a provider of marketing automation services. Very fascinating way to understand that in able to put that cross sell, cross sell, and upsell that you’ve got opportunities to do that with different roles within the firm. All good stuff, guys, I think we’ve got this pretty well done, I would say, I want to put one note, if you’re a seller, if you’re considering selling your firm, you may not know where your buyer is coming from, because they may have an adjacency or even far afield strategy. So when you’re considering prospective suitors, they may come from anywhere. And you have to take the mind of if you were a buyer, you may want to expand your service. And it’s a good surprise for us. It’s sometimes when we look at selling a company, we look on the fringes of where a company may be. And and oftentimes we find success there as companies look to expand beyond what they’re currently doing. With that, Mike, Matt, any last parting thoughts? So we’ll start with Matt, for parting thoughts- Kick it back over to Mike.
Matt Lockhart 19:06
Ryan, that last point is key. If you’re looking at going to market, you know, what are the potential opportunities for buyers with your service and in an adjacency mindset, I think that that’s great. We really like this strategy. So if you’re considering and thinking about it, as I mentioned, I know Mike’s done it a bunch, I’ve done it a bunch, we’d love to chat with you. We’d be thrilled to hear sort of strategic goals and how an adjacency strategy could fit in. Obviously, we’re pretty excited and passionate about it. So let’s talk, Mike.
Mike Harvath 19:44
Absolutely, Matt, thanks so much. And with that, we’ll tie ribbon on it for this week’s Shoot the Moon podcast encourage you all to tune in next week with more relevant and exciting topics around m&a and growth strategy for IT services company. Thanks and make it a great week.