IT and tech enabled services M&A recap: First half of 2020

Contributors: Andrew Schaefer, Sid Nair, Devon MacMurray

Remote working is having both short- and long-term effects on IT managed service providers (MSPs). It’s generating demand for managed services, but MSPs may need to offer new services to meet customer needs.

As the economic impact of the COVID-19 pandemic has persisted through Q2 2020, there has been a lot of debate on when and how employees will return to work. While Phase 2 and 3 plans are now underway in most parts of Canada, companies are increasingly considering a calibrated return-to-office protocol for their employees.

During the first few weeks of the pandemic, IT teams and MSPs focused on supporting a large number of employees in working remotely using virtual private networks (VPNs). Now that employees have spent so much of their time working from home, organizations need to prepare for and cope with this new reality for the long term. Moreover, employees spending time between home and office creates several challenges and opportunities for MSPs.

Shift to cloud computing and web hosting

Enterprise expenditures to hosting and cloud services is expected to further increase, given an increased need to facilitate remote working. Organizations will be required to scale down their IT teams given the economic environment and will prefer more flexibility through a managed services arrangement.

At a time when the transition to a digital workplace is uncertain and enterprises are inclined to conserve as much cash as possible, the managed services approach holds an increased appeal. MSPs are well positioned to aid this transition through their expertise and their ability to absorb these capital costs, either directly or through their cloud vendor.

Increased enterprise mobility

Over the last few years, the demand for enterprise-wide mobility has seen a spike, with remote workers using their own devices or mobile devices to obtain access to enterprise applications and data. The pandemic has posed significant challenges to enterprises of all sizes to maintain a secure connection while ensuring that employees gained access to these applications to work efficiently and collaborate seamlessly.

MSPs have a significant role to play in the integration and management of these devices for these enterprises, given the need to communicate and collaborate in a remote working environment through a myriad of devices.

Cybersecurity concerns

The remote nature of work and the use of personal devices with fewer security-related restrictions is expected to increase demand for cybersecurity assistance from MSPs. This presents an opportunity for MSPs that can help companies mitigate risks around cybersecurity.

Other opportunities for MSPs related to remote working include password management, security as a service and data recovery as a service. Companies are increasingly collaborating with their MSPs to secure endpoints, especially cloud-based VPNs and tools to maximize the security of their network, applications and data.

Seamless access to cloud and on-premise applications

With the proliferation of a distributed IT environment, MSPs may have an advantage over in-house IT teams to manage digital workplaces. Providing access to cloud applications through an internet connection helps reduce costs while improving latency of these cloud applications.

Providing a stable user experience while using cloud-based applications or an on-premise, legacy application is an integral aspect of the digital workplace and an area where the expertise of the MSP is needed.

SMB focus

MSPs have the opportunity to expand their customer base as more small and medium-sized businesses (SMBs) are facing the realities of managing a remote workforce and are turning to MSPs for the first time. While SMBs may represent a growth area for MSPs, these companies will have unique needs compared to large corporations, and MSPs must develop the ability to profitably serve this type of company. MSPs looking to develop a competency in new services or gain the ability to effectively serve SMBs may look at smaller add-on acquisitions to quickly allow them to be able to offer these services to their customers.

Increased visibility and management

With the spread of cloud-based and on-premise applications, customers, especially SMBs, found it impossible to understand the health of their IT managed services footprint across locations, infrastructure and applications. Post pandemic, given increased sensitivities around costs, customers will be asking for more tools and analytics to manage costs and predict their usage trends. As the MSP footprint increases, we expect customers to demand a unified platform that enables them to efficiently manage performance and cost.

Near-term challenges

While MSPs were attractively positioned to succeed and provide a unique value proposition to their customers during challenging economic times, the pandemic provides them with an opportunity to become the epicentre of an enterprise’s digital workplace. However, these MSPs will need to be agile to address immediate needs around cybersecurity, compliance and innovation while dealing with pricing and increased days sales outstanding as they help clients during these times of uncertainty.

Implications for M&A

Despite the pandemic, most indicators point towards an increase in managed services expenditures and the demand for MSPs. The steady recurring revenues for MSPs are expected to be an attractive feature for private equity investors as the investment sentiment stabilizes over the second half of the year.

We also expect smaller MSPs, struggling to serve their clients either due to the lack of capabilities or resources or facing customer churn, to be consolidated by players who have access to funding sources. The ability to drive sustainable growth and retain customers will be important for investors in this space. MSPs would be looking to weave in a wide range of managed service offerings and increase customer share of wallet — we expect acquisitions of niche, focused MSPs to be relevant in this context.