TheSupe87 - Fotolia
As MSPs acquire their way to scale, they may need to assemble a post-merger integration team to harmonize their expanding businesses.
Inorganic growth has become a major focus for service providers looking to boost their portfolios and expand their regional or national coverage. For example, MSP platforms, riding a wave of private equity funding, have been busily acquiring add-on companies to extend their reach. Successful integration of acquired firms, however, is critical to get the most value out of those investments.
"[Integration is] a complicated process with an incredible amount of detail and a lot of moving parts," said Parker Kaback, president of Delta Vida, a consulting firm that assists MSPs with M&A integration.
A post-merger integration team can ensure a smooth transition. The team, which may also be called an integration management office (IMO) or have a company-specific label, typically oversees tasks such as acclimating new personnel, sorting out business process and rationalizing IT systems.
When does an MSP need an IMO?
An MSP acquiring a sole proprietorship, where the emphasis is on gaining new customers, can probably forgo an IMO. "If you are buying a one-person shop, picking up the business for contracts and not necessarily for talent or tools, you don't need a team," Kaback said.
In some cases, a single deal can justify an IMO. For example, establishing an M&A integration team would be advisable if an MSP acquired a $16 million to $18 million company with 60 to 70 employees, Kaback noted.
MSPs may also benefit from an IMO when they conduct a succession of acquisitions. Calligo, an MSP headquartered in Jersey, a British Crown protectorate in the Channel Islands, purchased 10 companies in just the last three years. To facilitate the post-merger integrations, the company launched a Strategic Projects Team. The Strategic Projects Team works alongside an internal projects team within Calligo's CTO office, which oversees the technology integration of a merger, noted Calligo CEO and Founder Julian Box.
Who leads the IMO and how is it structured?
An IMO should have a leader whose sole focus is to run the team, Kaback said. A service provider with strong internal candidates can promote from within, taking care to extract the individuals from their previous roles.
"It is absolutely a full-time gig, especially if you are doing multiple acquisitions per year," he said. "You really have to shed those previous job functions and responsibilities."
Hiring a team leader from outside the company guarantees an exclusive focus on integration, because that person will not have any previously entrenched roles at the company. An ideal IMO manager would have deep project management experience, M&A knowledge and an MSP industry background, Kaback said. Candidates with this specialized skill set are not easy to find, however.
Other integration team members come from a cross section of the company. Kaback recommended organizing an IMO around smaller teams that correspond to an MSP's departments or business units. A company's managed services division, professional services division, sales and marketing group, and finance department, for instance, would each have a specialized integration team.
The IMO manager might meet with the specialized teams weekly and hold a biweekly or monthly meeting with the entire group. "You want to keep the meetings about finance just with the finance leaders of that team," Kaback said. "The idea is to keep the individual meetings lean and focused."
The cross-team meetings, meanwhile, provide updates on all business integration activities, he said.
Representatives from the acquired company may also join the integration team. Calligo provided one example: "The Strategic Projects Team leads the integration, pulling resources from around the business as required and, crucially, with input and support at every stage from relevant teams or individuals from the acquired company," Box said.
The CTO office's internal projects team also involves the acquired company's staff in the technology integration process, Box noted.
The extent to which the acquiree becomes involved with the integration team varies, said J. Neely, managing director and global lead of M&A at Accenture Strategy. A transaction in which a large company acquires a much smaller firm might call for only light input from the seller. Combined buyer-seller integration teams become more prominent as deals get closer to a merger of equals, he added, speaking generally of mergers, not just MSP deals. Accenture in February 2021 published a report on how cloud computing can facilitate post-merger integration.
How does the IMO manage the process?
Kaback suggested each business unit or department team have a playbook, or project plan, to guide integration efforts.
The teams' individual playbooks can be divided into sections -- benefits and payroll for the HR department team's playbook, for example. Each section contains tasks and milestones. The benefits section, for instance, might list tasks such as understanding the acquired company's benefits plan and assessing how new employees would fare under the acquiring company's benefits plan. This insight helps the MSP determine if it should renew or upgrade its benefits plan, Kaback said.
The playbooks can define deadlines for task assignments and help MSPs measure quantitative and qualitative progress.
Playbooks also force teams to consider each integration step through the lens of a given acquisition, Kaback noted. For example, the process of harmonizing sales compensation will look different in every merger. Using a sales integration playbook, an MSP might discover a minor variance between its compensation plan and that of the acquired company -- for example, a difference in the sales commission percentage.
Alternatively, the MSP could find itself with plans based on vastly different compensation methods. In that case, the MSP would want to create a common model.
Those are just a few of the tasks MSPs face during post-merger integration.
Delta Vida has compiled a template containing 2,400 discrete M&A integration items, Kaback noted. He said an IMO needs some type of project management software to track task completion, such as Microsoft Project, ConnectWise Manage or Smartsheet.
How does the IMO handle technology integration?
Technology integration is often the most time-consuming component of an M&A integration. At Calligo, integrating the business operations of an acquired company takes 90 to 120 days, while technology rationalization takes four to six months, Box said.
Parker KabackPresident, Delta Vida
A key task of the integration team is to decide on the sequence of technical integration. Addressing every system simultaneously is typically unfeasible. "It's hard to do all of the major systems all in parallel," Accenture's Neely said. "You just run out of tech folks."
Integration often starts with communications and collaboration platforms such as Office 365, Kaback said. Next, MSPs move on to line-of-business applications such as professional services automation, remote monitoring and management, CRM, and financial systems.
"[Core business apps] are normally the biggest challenge in the integration," Kaback said. "All come with varying degrees of difficulty that can be directly related to how similar or dissimilar the two MSPs are."
MSPs will also look to consolidate vendor tools to achieve cost savings. Using one tool for off-site backup, for example, cuts licensing fees and increases the user base, enabling MSPs to negotiate more favorable pricing, Kaback said.
Kaback recommended MSPs keep technology integration within the IMO's purview. When service providers assign the work to their existing IT staff, they risk reducing the focus on customer services and billable revenue, he said.
MSPs, however, can also outsource their technology integration work, said Kaback, whose company offers that service. He said MSPs can offload labor-intensive tasks such as Office 365 integration, as they don't require the outsourcing firm to have an intimate knowledge of the MSP or its processes.