Top Four Trends Associated with Private Equity’s Consolidation of the Tech Service & Support Industry
By Johnny Walker, Top Gun Technology
The balance of 2022, 2023 and 2024 will experience hyper-focus on short-term gains by private equity firms. The insatiable appetite of private equity firms within the information technology sector places all corporations at increased risk of business-critical outages, extended downtime, non-compliance with manufacturer license agreements, diminished value creation from technology service providers and limited improvement from technology manufacturers, YoY budget increases, or worse yet, a complete loss of value associated with your corporation’s brand.
“Private equity reached new heights in 2021 as the average deal size pushed past the $1 billion mark for the first time ever”
March 07, 2022, Bain & Company
If left unchecked, the ripple effects on CXOs are extreme, and unfortunately, most CXOs are entirely unaware of the long-term dangers across their entire organization, procurement, data center operations, business unit management, application development, marketing, finance, human resources and legal.
As a 25-year veteran of the information technology industry and a self-proclaimed data nerd, I was reading an interesting research paper, published by The University of Berkley (May 18, 2021 “Consolidation Accelerated, Competition Undermined, and Patients at Risk”), and could not help, but draw an immediate correlation between the declining value and outcomes within healthcare and the declining value, outcomes and long-term implications within the information technology sector, and specifically on hardware maintenance and support.
The objective is focused on exposing the Top Four, concerns that will cripple corporations within the United States, Canada and Europe, and what CXOs, Procurement Officers, Procurement practitioners, IT Managers, Business Unit Managers, Data Center Managers and Operations practitioners can do today to optimize spend, create value for your employer and safeguard the longevity of the corporations you have built.
- The Private Equity Business Model is Incompatible: Within Information Technology, this means placing profits, (not maximizing investments or optimizing costs) ahead of value creation for the client and consumer. Beyond extinguishing value creation, the long-term impact is a direct assault on useful processes; procedures; enhancements to product and service development; rendering prior investments in software, applications and people valueless. Extending the impact to my area of expertise, the impact on the information technology maintenance industry means limited development of new services, and an emphasis on creating restrictive strategies to force an increase in the spending from existing consumers, reducing service outcomes, further restricting client choice, anti-competitive pricing, and the loss of trust between a corporation and the employees.
- Prioritize EBITDA over the Quality-of-Service Outcomes: For the healthcare industry, placing EBITDA ahead of outcomes essentially results in the rationing of healthcare. In the information technology maintenance sector, the impact is equally as problematic, when short-term EBITDA gains are the sole focus. Consequently, existing costs are reduced to “do more with less,” inventories are scaled back, projects are delayed, human capital costs increase, maintenance costs increase, urgent needs are not met, access to critical and advanced levels of engineering decreases, internal and external CSAT scores reduce, job security decreases and employee satisfaction decreases. One of the largest technology manufacturers in the world positions reductions/changes to their quality of service in a unique fashion, “…Our support services are backed with a wide range of data-driven services…. we continue to expand and modernize our core support offerings to help our customers realize business outcomes… we look forward to building on our 94% customer satisfaction rating.”
- Consolidation Undermines Competition: Eight private equity firms have acquired seventeen of the top information technology maintenance organizations across the industry and the largest shareholders of IBM, Hewlett-Packard and Cisco are spread across four institutional investors. The benefit to corporations which rely on fair competition among their suppliers is non-existent. To demonstrate this point, as an executive who worked within the quagmire of the private equity world, I recall a situation when the largest financial services provider in the United States had released a request for proposal to the manufacturers and Value-Added Resellers of the manufacturers, to determine if there was a financial benefit in awarding their technology spend to fewer providers. The irony of the situation is my employer at the time (who controlled the third-party maintenance marketplace) received requests to partner on the request for proposal from every potential bidder – there were no market choices.
- Overburden Acquired Companies with Debt: As in business and in life, there is the responsible leverage of debt to achieve growth goals, and there is irresponsible leverage of debt as related to long-term success. As information technology corporate consolidation continues to increase, the debt acquired by the financial ownership increases at alarming rates. There is a long-standing debate about the use of debt, but there are no arguments on the impact heavy debt loads have on the quality of service and products. In the past five years, I have personally witnessed how the intentional increase of debt entirely decimated a handful of the strongest informational technology engineering firms on the planet. Not solely based on the debt load, but the decrease in value provided to their client base. The increase in debt, forced a decrease in cost (recall the lack of investments in research and development), which resulted in the reduction of employee headcount in the advanced engineering departments – limited advanced engineering equates to diminished value to the client base, which means reduced revenue against a mountain of debt.
The larger issue for the information technology services and products industry, circles around how to manage cost (containment and optimization) and the misalignment between supplier and consumer. As your organization demands YoY cost reductions, for the reasons impacting Healthcare and Information Technology, you’ll be facing a supplier community that can only provide the service or product at a lower price, by removing value creation, deliverables and increasing risks, as they face holding EBITDA contribution percentages flat. As quality is thrown out the window, how can we combat, and discern between true creators of value with suppliers who are struggling in a marketplace described in March 2022 (Bain & Company) as, “To drive returns during this high-wired time, it is critical that dealmakers fully understand the microeconomics of the sector, the value creation levers available to pull and the risks they’re underwriting,” and the value creation referenced is value to the limited partners and investors, not to the consumers of technology products and services.
There are clever marketers in information technology that spin value-creation to consumers by leveraging one of three specific strategies, all being worthy of red flags:
- The Software as a Value Creation Strategy: As private equity investments pivot to software, and the multiples on EBITDA increase, many service providers will approach your organization with an enhanced strategy, “our software,” “we’re optimizing what we do, how we do,” “with seamless integration between your COTS environment,” that claims their processes and platform allow for first-time maintenance remediation with limited or no interaction from advanced engineering promises – red flags need to fly.
- It was a Product, now It is a Service, Strategy: I found the following statement on a leading manufacture’s homepage, positioning their strategy: “Edge-to-cloud platform transforms IT into a service consumed on-demand,” which is essentially a repackaging of an old message, instead of dipping into CapEx, you can leverage OpEx. Translated, this message means, we’ll still charge you for the products, but this time we’ll place you in shared infrastructure (increased risk of data breaches), utilizing off-shore resources (country privacy issues), we’ll charge for the migration to the on-demand service (increasing the risk of business-critical outages), and we’ll charge you for what you consume (eventually at a higher cost to your corporation). Net-net, diminished value creation.
- The Services Led Value Creation Strategy: Unique strategy where the supplier claims to discover, design and develop technology and translate how to use their products to generate value. The catch is your organization is paying the technology manufacturer, or technology service provider, to translate the value of their products. Net-net, diminished value creation.
- The Customer Experience Strategy: The following statement loops across the home screen of another global service/product manufacturer, as related to the revelation that customer experience is the primary outcome, “Recognizing our commitment to providing an exceptional customer experience.” The inference is that they had to recognize their commitment, not continue, invest behind, but woke up one day, believing that a customer-centric model is somehow, a new strategy.
Reclaiming value when quality is being thrown out the window is difficult, especially when clients are not provided the metrics to measure any remaining value. My recommendations to reclaim the maximum amount of value from service providers are:
- Insist that your technology maintenance provider’s monthly audit reports clearly indicate:
- The serial numbers for spare systems/parts that the provider has in their inventory
- A correlation between the asset under contract and the serial number in their inventory
- Quantities of each spare system/part
- The ratio of assets to spares
- The precise location of the spare inventory supporting your infrastructure.
- Demand the number of service requests by part number and machine type
- Request the predicted number of failures to the actual number of failures
- Conduct L3 engineering validation reviews of the supplier that are providing mission-critical maintenance within your facilities.
The need to develop relationships with independent service providers and to demand licensing flexibility from the manufacturers to gain complete independence from restrictions placed on firmware, software and patching is immediate. As value continues to diminish as a result of institutional investors and private equity firms having investments in every industrial segment, your ability to safeguard your brand, business continuity and integrity is being gravely compromised.
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