Up in the cloud

Thursday May 23, 2024

Understanding the deals landscape in the cloud consultancy and managed services sector

Businesses are increasingly adopting the cloud to benefit from flexibility, attractive economics, improved collaboration and access to modern technology solutions, which are all factors that are expected to continue to drive significant growth in the UK’s cloud services market – currently valued at an estimated £7.5 billion*.

In order to realise the benefits from the cloud, businesses need to work with strategic partners with the latest skills who can help unlock and create value ranging from assisting with the migration from legacy systems, to implementing the latest cloud solutions, and then providing continued support and management.

Many corporates may be at different stages of the cloud journey, starting with a migration to the cloud, through to harnessing the power of latest tools such as data analytics, and most recently artificial intelligence (“AI”). Nonetheless, the complexity of the modern cloud technology landscape requires corporates to find a strategic digital transformation and managed services partner to manage and support them on the journey, which is continually evolving. Add in the potential threat of a cyber breach and it is pivotal to have a strategic partner who can secure the cloud environment as well.

All signs point towards the sector’s growth continuing in the years to come, presenting an exciting opportunity for inward investment and M&A activity alike.

Charting success and Maximizing potential
The past few years have seen large swathes of UK industry adversely impacted by uncertain economic conditions driven by a cocktail of high inflation, high interest rates and political instability. Whereas this has deterred investment activity across many sectors, cloud consultancy and managed service providers have largely been able to continue to thrive during these turbulent times.

Managed service providers have been able to support their clients’ digital transformation processes through the provision of the design, implementation and management of cloud technology solutions. These have delivered operational efficiencies, improved internal collaboration, enhanced customer experiences and improved decision making – all attractive propositions for businesses looking to achieve organic growth and improve profitability.

Deal landscape
These developments have contributed to an active M&A market for investors and private equity houses, with the sector’s strong fundamentals, market resilience, potential to deliver high recurring and reoccurring revenue streams and strong growth potential representing an attractive proposition. The investment activity in the sector has been consistently strong, both through investment in new private equity backed platforms and wider acquisitions.

Strategic buyers, whether corporate, or private equity backed strategic trade buyers, are actively seeking acquisitions to bolster their proposition and accelerate growth. Quality versus quantity has been an increasing theme over the past couple of years where acquirers have a specific M&A road map where certain acquisition criteria must be met – e.g. enhance the existing offering; bring new skills; strengthen customer relationships; improve tech vendor relationships; or add sector expertise – with added scale from an acquisition being a secondary priority.

The benefits of properly integrated M&A have been proven, with most corporates having completed M&A historically that benefits the end-client. This in turn presents advantages for the acquiring corporate – such as enhancing end-user operations and an improved experience, while allowing the managed service provider to grow revenues, improve client retention and increase its differentiation.

Digital transformation remains high on the agenda for businesses in all sectors, and in many cases, we’re seeing managed service providers use M&A to bolster their consultancy skills to position themselves as partners for future growth, rather than simply an infrastructure management provider.

Summary
The cloud consultancy and managed service sector is in a constant state of evolution with plenty of runway with future technology enhancements underpinning this potential. AI is one of the latest innovations, and whilst in its early days, cloud consultancy and MSPs are working with their clients to tangibly realise the benefits of AI. One thing for certain, is that cloud technology innovation will continue to driver future growth for the UK – meaning M&A in the space is unlikely to slow any time soon as cloud consultancy and MSPs use acquisitions to secure the relevant expertise.

* https://www.ofcom.org.uk/__data/assets/pdf_file/0027/269127/Cloud-services-market-study-final-report.pdf