Cloud ISVs

Prepare for a flood in 2021…of capital and M&A in professional services

In a year that started out like this one, with a global pandemic increasing in strength and riots at the U.S. Capitol (and we’re only on Day 12), it seems only natural to start my first blog of the year with a reference to a flood. Luckily, what I’m talking about is a surge of a different kind.

We believe 2021 may finally be the year professional services (especially in the cloud space) gets its due from the investment community and strategic acquirers. Professional services firms in the cloud space are being acquired at a rate we haven’t seen since the early days, despite the efforts of many companies to conserve their cash reserves in a down economy. We believe this is just the beginning of a flood of capital investment in people and people-based businesses, especially those that have the expertise for what’s to come.

Here’s why.

 

The Cloud Just Got More Important

The year 2020 highlighted many things for business leaders — the value of empathetic leadership, the importance of diversity, the delicate balance of real-time inventory, and that remote work is possible and even preferable. It also proved to business leaders the real value of their cloud computing investments.

When COVID-19 reached pandemic status in March and the world closed up shop, nearly everything moved online — meetings, commerce, learning, entertainment, banking, events, dining “out”, socializing, even tourism. With little to no notice, millions of employees were sent home with just their laptops. More than 9 months later, most of these employees remain working from home (possibly for good), yet work continues to get done. Cloud-powered tools and systems like Zoom, Slack, Okta, Box, Twilio, Google Docs, Microsoft Teams, Salesforce, ServiceNow (and hundreds of other apps) have kept employees productive, customers engaged and the economy running.

 

2020 proved to business leaders the real value of their cloud computing investments.

 

COVID flipped a switch when it comes to how work and business gets done, and that light is going to stay on and increase in intensity over the next few years. The term digital transformation is so overused I hate to even put it here, but 2020 highlighted that fact that businesses needed to rethink and redesign a good number of their processes and do it fast. Some businesses adapted quickly and some didn’t, but even those who reacted quickly need to sustain, fortify and expand those efforts. To systematize and optimize the new processes they put in place. And that takes more than technology. It takes people.

 

Cloud Success = Professional Services

Redesigning systems and processes, especially in complex enterprise environments, doesn’t happen overnight and it’s not easy. Companies need strategic thinking, specialized skills and domain expertise, and unfortunately the people who have this expertise are becoming harder and nearly impossible to keep.

The IT skills gap isn’t a new problem but COVID has exacerbated it. The cloud providers get this. It’s why Amazon recently announced an ambitious plan to train 29 million people to work in cloud computing by 2025. It’s the reason Salesforce invests millions in its Trailhead learning platform every year, and continues to introduce workforce development programs as a big part of its corporate strategy.

 

The IT skills gap isn’t a new problem but COVID has exacerbated it…It’s also why major professional services firms continue to grow in a down economy.

 

It’s also why major professional services firms continue to grow in a down economy. Accenture’s Q1 FY21 results were up 4%, with “strong double digit” growth in cloud services. Annual FY2020 revenue for Deloitte’s Consulting Division increased more than 7%. Even the small and mid-sized professional services firms that we spend a lot of time with are growing in double, and in many cases triple, digits.

This demand for cloud and digital talent is also driving a significant amount of M&A volume in cloud services.

 

The M&A Race for Talent

Dozens of acquisitions in the cloud professional services space have gone down over the last few months, including three yesterday alone — IBM’s acquisition of Salesforce consultancy 7Summits and Cognizant’s acquisitions of Australian analytics firm,Servian, and ServiceNow consultancy, Linium. In the last 12 months, Cognizant has made 11 acquisitions and invested what many estimate to be a $1.4B in cloud, data, AI and digital services.

 

In the last 12 months, Cognizant has made 11 acquisitions and invested what some estimate to be $1.4B in cloud, data, AI and digital services.

 

IBM has also been extremely acquisitive lately as its new leadership looks to refocus on hybrid cloud computing and AI, and build up its iX business unit to compete with Deloitte Digital, Avanade and Accenture. The acquisition of 7Summits, which is estimated to be ~$175M, approaching a 3.5x multiple on revenue, is just the latest. In late 2020, IBM announced plans to acquire SAP consulting partner TruQua for its hybrid cloud and financial workflow expertise, Instana for its AI-powered automation capabilities, and Nordcloud for its cloud-native tools, methodologies and talent.

And then there is all the activity in the Salesforce space, including Salesforce’s own $570M acquisition of Acumen.

But it’s important to note these acquisitions aren’t just about adding more consultants to the roster, it’s about gaining a competitive advantage from the specialized expertise, approach and assets these next-generation firms bring. All of which are needed to meet the evolving needs and escalating demands of customers.

 

These acquisitions aren’t just about adding more consultants to the roster, it’s about gaining a competitive advantage from the specialized expertise, approach and assets these next-generation firms bring.

 

Here are four attributes that we believe will become even more in-demand in PS firms over the coming year — by customers, software providers looking to build their ecosystem, and by other firms looking to acquire.

 

Hybrid & Multi-Cloud Expertise: Whereas earlier cloud waves required firms to specialize and go deep on certain platforms, next generation firms have to work across clouds and in hybrid enterprise environments. This is an imperative for inter-enterprise business requirements like multi-modal e-commerce and real time supply chains. DevOps expertise is a must and full stack knowledge is essential. Talent within teams that can support infrastructure and data layer providers like AWS, Hashi, Twilio, Snowflake and Datadog, will be as important as the application layer skill sets.

 

Integrated Offerings for Accelerated Transformation. Note, accelerated transformation not digital transformation. Digital transformation might be as overused as unprecedented and the new-normal these days. Customers want partners who can help them in ways beyond just implementation and integration. True transformation requires a blend of strategy, design, delivery, ongoing change management, optimization and maintenance, and it doesn’t (or shouldn’t) happen all at once. It’s an iterative process. The firms that offer an integrated portfolio that crosses these different disciplines, that can deliver those services seamlessly and quickly, are a lot more attractive to customers who want a long-term partner. COVID forced everyone to move much faster and proved transformation can happen in months not years. Customers need partners who understand that and continue to meet that standard going forward.

 

A Globally Diverse and Enabled Virtualized Workforce. The workforce looks and operates very differently than it did a decade ago (or even a year ago). Customers are much more open to remote work and now expect, and can have access, to diversity in their consulting partner teams. The partners who have built effective workforce models in these areas will have a leg up in recruiting and retaining top talent. Firms built from the ground up that embrace remote working and truly invest in collaboration technologies, policies and processes will outrun and outperform those saddled with significant commercial real estate and old school collaboration approaches.

 

IP Driven Industry Solutions. The verticalization of the cloud continues, and customers are looking to partners who have proven expertise in their industry and who can bring reusable, productized IP to hit the ground running. This is especially important when it comes to AI/Machine Learning, automation, data and integrated commerce.

 

As the next wave of cloud adoption takes hold, we believe these are the characteristics of the services firms who will lead this wave. Because 2021 is shaping up to be the year for cloud talent to scale to new heights and move in new directions.

A quest to prove, once again, that services businesses don’t suck

October marks the four year anniversary of Wipro’s acquisition of Appirio — an incredibly emotional day for me personally.

On that day I was so proud of what our team had built and excited to see where the journey would lead. Over the next 2+ years, I spent my time integrating Appirio into Wipro to help smooth the transition and to infuse elements of the Appirio culture into Wipro’s broader organization as the company’s first ever Global Culture Officer. In the years following, I joined various boards, started a few small businesses I’m passionate about, supported a number of amazing non-profits, and joined GGV Capital as a Venture Partner where I got the opportunity to work with an incredible group of founders and entrepreneurs.

About a year ago, after grazing across all these endeavors and enjoying the slower pace of ‘life on the lake’, I found I was craving more. I wanted to build something again. I wanted to have an outsized impact on an industry I cared about and a team I helped put together. The gravitational pull from friends, advisors, recruiters kept pushing me towards running a software business. While my history and track record has largely been in professional services, the software landscape was attractive. It was new, it was different, there were tons of opportunities, and as most investors will tell you, the exit economics tend to be a lot more favorable in software (provided you pick the right horse of course!).

Which got me thinking. Why does the professional services space get so short changed? While software is eating the world, it’s people who must build, deploy and use that software!

Why is the prevailing thought by VCs and PE firms that services sucks?! Sure, services businesses can be hard. Sure, people are harder to predict than 1s and 0s. Sure, services firms might not see the same kind of multiples as a software business. However, that doesn’t make them a bad investment. Just different. Appirio is a great example of how a services firm can still provide a great ROI for investors, and there are far more Appirios out there than you might think.

My gut, my personal fun factor, kept bringing me back to services. The question then became what should I do in the services space. Should I build another Appirio on the back of newer cloud technologies? Should I join an Appirio like firm as a COO, President? Should I invest in and combine a set of cloud services companies and join their board?

I knew I wanted to build something again, but through my VC and board experiences, I also realized how much I love helping others build as well.

Luckily, Jeff Richards and the GGV team allowed me to offroad a bit from traditional software themes while I was at the firm, and I had the opportunity to study the emerging cloud landscape. I saw the value and demand for third-wave cloud companies like HashiCorp, Twilio, Okta, Atlassian, Datadog, Snowflake, Splunk, Slack, as well as the ecosystems (or honestly, lack thereof) that supported them. We mapped out the ecosystem landscape of ~20 ISVs along with their roughly 7,500 services partners, and the opportunity slowly presented itself.

There is not a single new Appirio to be built here, but rather an opportunity to create a firm that can help scale dozens of firms across these ecosystems. An opportunity not just to deploy capital, but to provide thoughtful advice and guidance based on my own failures and successes. An opportunity to provide insight into the patterns, playbooks and best practices that can help a services company scale well past that $10M, to $100M and beyond, while connecting founders with industry experts who can provide the strategic and executional help they need.

This is why I’m so excited to introduce Tercera, our new company that is focused 100% on identifying and building the next generation of cloud professional service providers. Tercera, Spanish for third, will specialize in the third wave of cloud computing — specifically, the ISVs and their service partners who are providing the data, automation, enablement and security layer that is so critical for digital transformation.

We’re building Tercera to be a different kind of firm. Part growth equity, part advisory, part industry network. Our goal is to combine the best of these worlds to help founders gracefully scale and achieve outsized outcomes.

As of 10-15-20, Tercera has officially begun its soft launch phase. We’re already in the process of building out our team and our “neighborhood” of experts, have met with more than 40 firms across our target ecosystems. Stay tuned for our formal launch in the coming quarters, along with announcements on these first investments.

In the meantime, if you’re a third-wave professional services firm who thinks we might be a good partner for you, or an advisor who wants to join our quest, hit me up on our website or on LinkedIn.

Onward, again!