Much like many IT companies, solution providers don’t command as much of a premium as they once did should the owner of the company decide the time has come to sell.
But the valuation of solution providers, which has been compressed for an extended period of time, is finally starting to recover, according to Brian Alexander, a securities analyst with investment firm Raymond James.
Speaking at the Ingram Micro Cloud Summit 2014 conference this week, Alexander said investors now have more confidence that the advent of cloud computing should wind up being “net additive” to the profits of solution providers that generate a significant amount of recurring services revenue. In fact, investors now have more confidence in the benefits of the cloud for IT services companies than they do IT vendors, largely because it’s not clear which of these will emerge most triumphant as cloud computing continues to evolve, he said.
As cloud computing becomes more complex, it’s apparent that customers are going to need to integrate a wide variety of cloud services with existing on-premise applications for years to come. Of course, not all solution providers have a services capability or, for the matter, the right mix of services in their portfolios.
Tiffani Bova, an industry analyst for Gartner, noted that solution providers that generate a lot of services revenue from hardware are not going to be nearly as successful as solution providers that generate services revenues from applications. For solution providers to be successful, they will need to develop significant application development and customization capabilities, she said.
That may require a significant realignment in priorities. Instead of tying capital up in a data center, most solution providers would be better off leveraging infrastructure-as-a-service (IaaS) platforms in the cloud that provide compute services for pennies per gigabyte.
Longer term, solution providers will also have to develop business consulting practices in order maintain their positions as trusted advisors, said Tommy Wald, president of TW Tech Ventures, which provides management consulting services to solution providers. In the age of the cloud, it’s now easy to get IT services from almost anywhere, which Wald said makes geography less relevant in terms of defining the competitive landscape for any given solution provider.
As competition gets more intense across the channel, many smaller firms will have to evolve or fade away. For those that evolve, the key to success will be a rich mix of services that they develop or access via the cloud that both owners and prospective investors can bank on to provide a profitable return on their capital for years to come.
Michael Vizard has been covering IT issues in the enterprise for 25 years as an editor and columnist for publications such as InfoWorld, eWEEK, Baseline, CRN, ComputerWorld and Digital Review.