Key Trends in the IT Services Landscape

Investment Banking, Professional Services

September 2020 — By Tyler Lamer & Jonathan Hollis


We recently announced the acquisition of Pragmatic Works Consulting (PWC) by 3Cloud, a leading Microsoft Azure services firm. Harbor View Advisors served as the exclusive financial advisor to PWC, helping guide the management team to a successful outcome – you can read more about our role in the transaction here. In our time spent with PWC, we gleaned some key insights about the current IT services landscape.

Key IT Services Industry Insights

1. Strong Macro Trends: Continue Growth and Transformation

The IT services space has sustained the momentum of the last few years, even in the face of recent market downturns. This is primarily due to the large perceived cost of falling behind and losing out on the efficiency and productivity gains that the latest technologies enable. To keep pace with competition, companies are fighting to preserve, if not prioritize, their IT-related project budgets. But there are also several other considerations for evolving and deploying the latest IT systems, including:

  • Big data and the associated demand for reliable data dashboards
  • Increased regulatory and compliance oversight
  • Growing enterprise security threats
  • An increasingly remote or self-determined workforce (a trend sent into overdrive in 2020)

Narrowing the focus within IT services, one company particularly capitalizing on IT growth and transformation is Microsoft, a strongly-positioned and prominent player in the sector given its historical relationship with corporate end users. Over the past few years, Microsoft has seen demonstrable growth across most of its enterprise platforms, especially in the realm of cloud applications. Microsoft continues to take cloud-computing market share from AWS and remains well ahead of other competitors (Google Cloud, Alibaba Cloud, etc.). This in turn has created significant need for Microsoft partner consulting and implementation guidance, driving business for services and advisory firms across the Microsoft network spectrum.

2. Hungry Buyers

The trends detailed above present a very attractive strategic environment for all buyer types. So it should come as no surprise then that, within the Microsoft ecosystem, both strategic and financial buyers are maneuvering to put dollars to work. Strategic buyers see synergy opportunities and consolidation potential that would catalyze attacking new customer segments. Similarly, financial buyers are aggressively establishing a foothold in the space. Some active financial buyers currently have no presence in the sector – but they have formulated a smart investment thesis and have new operating partners on the hunt for the right platform acquisition.

3. Services that Solve

There remains clear valuation stratification in the market between IT staffing, IT staff augmentation, and IT project consulting. Increasingly complex corporate demands are driving the need for comprehensive end-to-end IT solutions. Often due to lack of internal specialization and resources, companies can get stuck at the outset trying to scope the right solutions for their own problems and projects. Companies can also get hung up at the next stage – trying to implement these solutions – and incur major cost overruns.

Premium valuations are being assigned to companies that can swiftly step into a customer case, assess and design a solution roadmap, and execute all along the chain of need – almost completely offloading the customer’s work and taking unnecessary anxiety out of the equation.

4. Premium Valuation Drivers

Traditional customer dynamics continue to impact valuations in the IT services space. Some of the key metrics that consistently come under scrutiny are:

  • Customer diversification
  • Customer tenure
  • Consultant assignment duration
  • Bill rates
  • Recurring customer spend
  • Number of resources devoted to a particular customer (or “stickiness”)

Additionally, in the COVID-19 business environment, stable end markets have become an even greater point of emphasis. Optimally, and under normal circumstances, the customer revenue portfolio is well-balanced between high-growth, expanding sectors and more mature, steadier areas of the market. However, customers sitting in industries seen as almost recession-proof, with limited market volatility exposure, are giving investors a greater degree of comfort in recent deals.

Optimize Your M&A Strategy

If you’re considering a potential strategic alternative for your company – connect with us at Harbor View. Our mission is to be a thoughtful and trusted advisor – and a genuine process partner. With our investment banking services, we help companies get the results they deserve, guiding them step-by-step through all stages of a transaction. 

 

 

DISCLAIMER: This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.