Cloud Technology Pushes IT Services Firms Into M&A Crosshairs

Brennan Libbey was asked by CRN’s IT Best of Breed, a thriving online community of professionals interested in emerging technology, for his thoughts on M&A trends within the IT Services sector.

In theory, a cloud is a seemingly simple, yet beautifully complex creation of nature. Warm air rises, expanding and cooling, limiting the amount of water vapor it’s able to hold. But as things expand, they inevitably change and become uncontrollable.

The IT services industry has been experiencing a similar change – seemingly simple, yet increasingly complex. Driven by the introduction of new technology – most notably cloud applications and on-demand infrastructure – IT services have moved from customised, complex software solutions developed on client infrastructure to highly configurable, cloud-based applications that live in remote data centres, making for easier customisation and integration.

Moreover, cloud technology has perpetuated a wave of new merger-and-acquisition activity across the technology and services sector. And it’s not going away soon.

Today, software applications require shorter implementation cycles and less ongoing maintenance than their predecessors. The merits of this new technological revolution are undeniable and include increased scalability, easier accessibility, faster upgrade cycles, lower operating risk, and easier integration among different applications. Additionally, cloud applications and on-demand infrastructure have shifted revenue models from up-front or project-based payments to recurring revenue payments for continuous products and services. That, in turn, is changing revenue models for IT service providers. Complex cloud environments require a new breed of application and infrastructure management and administration as uptime and performance of mission-critical applications are central to many clients’ businesses. Also, a managed services solution can provide a layer between the enterprise and the cloud, allowing for a more flexible balance between the scalability and uniformity of the cloud and the need for control and customisation at the enterprise level.

The future of computing and software lies in implementing and managing highly configurable infrastructure and applications that may reside in-house or in the cloud. As a result, M&A and investment activity in the IT services sector will remain robust as investors seek opportunities that capitalise on this new reality. Companies with specific areas of expertise around cloud applications — such as Workday, Hybris, Demandware and Salesforce — are of particular interest to acquirers seeking to mirror the growth of these dynamic companies in their services organisations.

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