Stagnant growth spurs IT service providers towards M&A

Enterprise service providers are struggling to grow beyond their established customer base as they scale in size, which is spurring them towards mergers and acquisitions (M&A).

According to research firm GlobalData, this difficulty, described as a “voltage drop”, has been amplified by the current “super-competitive environment”.

As a result, the firm’s senior analyst, Robert Pritchard, claimed this will in turn drive further consolidation.

“The challenge that enterprise ICT service provides are facing is evident across tech segments: new products and services create traction, but more often than not the size of the customer base stays the same after initial growth,” he said. “Progress becomes incremental rather than radical.”

In order to avoid the voltage drop, GlobalData offered three suggestions for service providers to generate growth: new products, services and reach; complementary partnerships; and acquisitions.

“The problem with acquisitions is that they are difficult,” Pritchard said. “Integration of infrastructure, systems, processes, organisations, cultures and management are a challenge.

“However, if executed well, they can improve both top and bottom lines. With a number of recent acquisitions and combinations both within individual countries and across borders, we expect more of the same as service providers look to overcome the voltage drop phenomenon.”

Service providers can also avoid voltage drop by entirely replacing one type of system with another — a move that may not be widely accepted by clients.

 “Already incumbent service providers gain a significant advantage by serving highly sophisticated multinational, enterprise and government customers whose technologies, systems and processes are already part of their operational DNA,” Pritchard said.

“The challenges of ‘rip and replace’ are too much of a risk to these more complex customers’ day-to-day operations. As a result, service provider revenue growth tends to be incremental and driven by exogenous events such as M&As, changes in regulations and fundamental industry/technology evolution – but these are relatively rare.

“When it comes to the small and medium-sized business (SMB) segment, customer churn is far more of a factor in the market, but the voltage drop also applies. Many SMB providers reach a base of customers that flatlines after a while–with players tending to win new business at the same rate as they lose existing business.”

GlobalData’s analysis into the voltage drop phenomenon comes months after research released by the firm in January this year found that 38,000 M&A deals were made in 2021, which were worth US$3.8 trillion in total.