Private Equity Creating Chaos in the Channel, Says Partner
… find some additional way to add value to the customer.
“The two-person shop – the agent broker quoting machine – they’re done,” he said. “I don’t think they’re going to make it. I don’t think they can make it. You have to have a value chain. You better be a value added partner.”
PE Intentions?
Partners are still getting to the bottom of what exactly private equity wants from them. Many partners told Channel Futures that they anticipate private equity “to buy it at 6X and sell it at 8.” Getting a return on investment is a no-brainer. But what else do these buyers value about the partners they’re pursuing?
One aspect is for certain; the end customer looms large for private equity. The customer-facing consultants that the industry has come to know as “agents” retain deep, established with their clients, and private equity wants to get in front of those customers.
That’s why even a mom-and-pop shop that’s stuck in legacy services still attracts buyers. David Wright, founder and CEO of Disruptive Innovations, said the companies doing rollups highly value customers that haven’t transitioned to the as-a-service model.
“The more base of old telco business these organizations acquire, the more opportunity there is to bring them into cloud services and convert old telephony to UCaaS,” Wright said. “Basically it lays the foundation where yes, you have that revenue, but you also have an inroad into this book of customers that you can upsell.”
However, these small firms do more than just possess a book of business.
“The ma-and-pa guys are the masters of relationships,” Dyson said. “And when they leave, does the client leave with them eventually?”
Dyson also shared a strange detail. When he has shared with potential investors that Eclipse makes half of its revenue through consulting, service and project fees, the investors tell him they aren’t interested in that side of his business.
“That’s weird, because now you’re telling me that the agent base is worth a lot more than I thought it was or I’ve been told it was,’ he said. “And how are you telling me the most valuable part of my business has no value to you? You’re not a strategic buyer.”
Unionize?
Christopher Scott, principal owner of Portland, Oregon-based StratoNet, has voiced his concerns around consolidation in the solutions brokerage (formerly known as master agent) space. Consider that brokerage consolidation came after a series of mergers among carriers that left customers with fewer choices. He and other partners said that they see the vendors looking to narrow their number of partners. And consolidation does just that. Scott suggested that the next four to six years might see a winnowing of large partners down to …
The roll-up trains have left the station, and many are on an express route, and no longer stopping at every station. Trains (plural) because the routes are all different, the passengers are all different, and yet all the destinations are the same, the customers doorstep, or more appropriately, their desktop. As I have long predicted and previously written about; PE’s and VC’s are not interested in technology solutions brokerage (formally “Master Agent”) revenue or EBITDA however, it is a means to and end or what they really want.
Of course, they’ll always be short-sighted rollups (package and flip) in any industry, but ultimately most of these investors want to be much closer to the end-user. Just like emerging fiber locators and carrier quoting platforms endgame is not to marry Carriers to Channel Partners, although it is a required a first step to their primary goal; the end-user’s desktop. So, while the insurance industry as described in this well written article above is one example, for me, it’s more like a hybrid of insurance, travel, and retail commerce with a dash of Google thrown in.
Just like Allstate has Esurance, along with other examples across other industries, I predict the largest technology suppliers will build their own versions of “One-Stop” shops as well. Comcast and Spectrum are well down the path to building on-net off-net aggregation divisions to deliver no-line-left-behind solutions, like CLEC and ISP aggregators. AT&T is quieter about it, but I predict they too will jump in, as will other top of the food chain network and technology suppliers. I don’t believe they’ll be quite the same roll-up of these new web centric sourcing and procurement like there has been in travel. I.e. Expedia and Priceline own all the travel brands now, but conversely, early entrants, particularly those not owned and operated by the big suppliers, will see epic wins and epic fails along the way.
Some giants like AT&T, Verizon, or Comcast or CDW, (just a few examples) may decide to wait and see, like Microsoft often does. Sit back, let others trip, allow the end-user experience to mature, work out the bugs, wait for the regulatory climate to settle, and then jump in with a new ICON in 365, and shazam!
Right now, it’s like a friendly game of musical chairs, everyone having fun, making money, and supportive of one another because no one is truly ready to take any chairs away at this point. Everybody still needs Everybody, directs, Channel Partners, on-line portals, etc., but things will change. it will, at some point get serious or more Squib Games like to draw a comparison. Clearly more than a single winner, but certainly many fewer over the next several years and a fight to the death.
Furthermore, this is not just about technology, it’s about all things sourcing and procurement. I follow another interesting company, The Procurement Foundry, which has their sights (for now) on all things “Enterprise Customers Sourcing & Procurement from Technology and HR to Uniforms and Power and much-much more.
This is not doom and gloom. None of this has stopped me from recently starting my own Technology Advisor Agency, I believe I can adapt accordingly, however even as I do so, I still keep one foot firmly planted in another passion of mine, performing M&A due-diligence in the technology space. Finding hair on contracts, concerning revenue/customer analytics, supplier and process synergies, and cost reductions to name a few. It’s still about whale hunting, closing big deals, lowering costs, and improving profits. I just have a real passion for onions. Peeling them back that is.
Exciting times, so hang on for the ride and don’t be one left without a seat.