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As ASEAN embraces managed services, expect channel M&A to rise

As ASEAN embraces managed services, expect channel M&A to rise

Partners must decide whether to evolve or exit as market transition begins

Credit: Dreamstime

As the shift to managed services gains momentum in Southeast Asia, mergers and acquisition (M&A) activity is expected to heighten in a channel challenged by significant business model changes.

Now in 2020, more so than before, partners are acknowledging the need to embrace recurring revenue sooner rather than later, amid plans to evolve from traditional value-added resellers into managed service providers (MSPs).

Acknowledgement is not action however, with the process expected to test the business credentials of an ASEAN market more accustomed to reselling than recurring. As one partner told Channel Asia, "they know the word MSP, that's about it".

Such a shift - which is expected to be slow, and at times painful - will place many partners at a crossroads; commit to change or exit before eventual decline.

The very foundation of the technology ecosystem in ASEAN comprises predominantly of business owners, owners running tier-2 and tier-3 partners who have dedicated decades to building up in-market resellers, whether in Singapore, Malaysia or Indonesia.

Following 20-30 years of blood, sweat and tears - working around-the-clock with only enthusiasm as a companion - most channel entrepreneurs in Southeast Asia must now take another deep breath and essentially ‘go again’ in the pursuit of future growth.

Granted, most entrepreneurs have faced adversity before, market change isn’t new and vendors have a funny habit of proclaiming the end of the world every 12 months.

What’s the vendor line again? “Change or die”. Well, it’s hard for partners to listen to executives offering advice from the safety of a multinational corporation, having no experience in starting a business themselves.

Crossroads

On a more serious note, the market is moving and customers are embracing subscription models at pace, forcing partners into action. While no transactional provider will vanish overnight - given reselling still offers a lucrative source of income if approached correctly - the longevity of a business failing to transition towards managed services will come under question.

Therefore, the ASEAN channel returns back to that crossroads again.

For those excited by the challenge, expect active M&A searching as part of plans to either combine forces with fellow competitors, or to acquire a business already humming through managed services. Other key considerations will include how to build out new product lines, retrain or replace sales teams and maintain traditional income while new revenue sources kick into gear.

On the flip side, expect the owners demotivated by yet another round of significant business upheaval to place the ‘For Sale’ sign in the reception and prepare to exit.

This isn’t a young channel, most C-level executives operating at partner-level have many years of experience to draw on, and the motivation to scale even more business hurdles will no doubt be waning.

But this isn’t just reserved to the tier-2 and tier-3 traditional channel. NTT holds public aspirations to become the leading MSP in Asia Pacific - will acquisition boost such an ambition?

Likewise at Logicalis in Asia, recognition exists that customers are changing buying habits.

“We’re seeing a degree of acceptance from customers, backed by an openness to subscription models and managed services,” said Chong-Win Lee, CEO of Asia at Logicalis, when speaking during a Channel Asia Roundtable discussion in 2018.

Channel Asia is not suggesting that NTT or Logicalis Asia are embarking on M&A in ASEAN, but as the market comes together in the pursuit of one overarching goal - recurring revenue - something has got to give.

To some degree, Southeast Asia in 2020 mirrors market trends 4-5 years ago in Australia and New Zealand, as well as more international markets such as the UK and US.

Speaking to sister publication ARN in 2016, then as CEO Logicalis Australia, Basil Reilly labelled the entire transition period as the ‘Valley of Death’, as the Cisco-focused integrator negotiated the deep waters of recurring revenue.

More akin to a start-up, in reference to the difficulty of covering the negative cash flow in the early stages of a business, the concept is a perfect illustration of where most partners in Southeast Asia sit today.

The process of acquiring Thomas Duryea Consulting - a Melbourne-based cloud and data centre services specialist - in December 2015 followed 24 months of searching for Logicalis Australia, shifting through 18 potential acquisition targets in the process.

“Early in the process my boss said, and no truer word has been said, that you will find more reasons not to acquire a company, than you will to acquire one,” said Reilly at the time, who is now running national sales for DXC.

Business type

According to ConnectWise predictions, channel partners are gearing up for an era of ownership change as the channel edges towards an all-out M&A frenzy.

Specifically, 70 per cent of MSPs are expected to explore buying, selling and merging options within the next 3-5 years with industry consolidation on the horizon.

Alerting the Southeast Asian market to a keynote speech during IT Nation Connect in March 2019, the channel is made up of four types of partner business, with each standing to dictate the terms on which an owner can negotiate an exit strategy.

With increased M&A activity expected, the DNA of a business will impact the value placed on it by outside investors.

Partner businesses can be defined as servitude; lifestyle; growth or hyper-growth businesses, each carrying pros and cons for the entrepreneur steering the ship.

“You must figure out which kind of company you want to run,” advised Arlin Sorensen, vice president of peer groups at ConnectWise, when speaking at IT Nation Connect in Australia. “They all work but you can’t be jumping back and forth, you have to be clear to your team what you are trying to accomplish and what the end game is.”

As Sorensen explained, the first one is servitude.

“This is a company in which the entrepreneur lives to work, that’s all they think about,” he said. "They get up in the morning, go and do their job and tomorrow, they do it all over again.

“But that’s not going to carry a lot of value in the marketplace because people aren’t looking to buy those kind of companies. All the customer relationships are with that individual entrepreneur so you have to move beyond that.”

Second up is lifestyle companies, in which the entrepreneur works to live.

“They build their business in a way that funds the lifestyle that they want to have,” Sorensen added. “While most people think lifestyle businesses aren’t successful, when done right, they can in fact be a very successful model.

“The key in a lifestyle business is that you have to put the money away as you earn it because at the end, it’s not going to have a lot of value in the marketplace because it’s tied to the entrepreneur.”

Delving deeper, Sorensen outlined growth businesses as those that aspire to “go up to the right” on a consistent basis, with plans in place to increase revenues and profitability.

“These are the types of companies that people really want to buy,” Sorensen explained. “Because there’s a good probability that they will produce a return on investment.

“The fourth is a hyper-growth company, in which people trade their time for a period to try and rapidly get from point A to point B, knowing that they are going to sell the business at that point. But that either works really well or it becomes a big failure, there’s not a lot of in-between with this one.”

In assessing key priorities in 2020, the onus is now on partners in Southeast Asia to firstly self-identify and then crucially, assess whether they have the stomach to carry on the fight.


Tags Managed ServicesM&AMSP

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