Exit Isn’t Always the Best Strategy

Solution providers are enamored with the idea of exit strategies. Some are even encouraged to think that selling out is their best and only option. But truth be told, the channel needs more innovators and builders than those looking to cash out.

By Larry Walsh

For years, we’ve heard the ceaseless drumbeat of channel consolidation. The evidence is always a conveyor belt of solution provider mergers and acquisitions. This has even prompted some vendors and distributors to encourage the notion that every solution provider needs an exit strategy as part of its maturation plan and ultimate objective.

First, channel consolidation is a myth based in reality.

Second, encouraging partners to plan their exit strategies isn’t the best tactic for anyone in the IT value chain.

To say channel consolidation is a “myth based in reality” is to say it’s somewhat like a movie that’s based on “actual events” or “a true story.” Everyone takes liberties in describing what’s actually happening.

Here’s the reality: Channel M&A activity represents less than 1 percent of the total channel population annually. Even if there were 1,000 M&A events annually, it would take decades for the total channel to contract by 25 percent. While some blockbuster deals get done – such as the merger of Accuvant and FishNet Security or the acquisition of BlueWater Communications by Presidio– the number of deals doesn’t prove that the channel is consolidating at a faster-than-normal rate.

[ctt tweet=”Channel M&A activity represents less than 1% of the total channel population annually.” coverup=”53mCx”]

The channel is shrinking, though, through attrition. Research by The 2112 Group shows conclusively that the number of new companies entering the channel each year is down by two-thirds from a decade ago. Translation: Whereas it used to be that, for every one company exiting the channel, two or three would take its place, today there’s only one new entry for every two departures. In other words, the channel has a birth-rate problem, not a death-rate dilemma.

Even if the channel is consolidating, is that something vendors and distributors should be encouraging? Should “exiting” be the goal of a solution provider? And are all solution provider “entrepreneurs”?

Let’s take the last question first. Not all solution providers are entrepreneurs, but they could be.

Vendors are constantly telling 2112 that they’re looking for “the right partners,” those that will invest in their products and align their strategies, commit to delivering results, and generate more sales than they cost in support. They want partners that can help them make their quarterly and annual goals, not just deliver periodic and opportunistic deals.

In fact, most solution providers – somewhere around 95 percent – are opportunistic businesses. They generate enough business for their owners to get a steady paycheck, but they’re not innovating and growing. According to 2112’s research, as many as 60 percent of solution providers don’t have strategic plans, sales goals, formal business structures, or key managerial resources. And those that claim to have plans often fall short of what’s adequate to properly grow a business or don’t have enough discipline to follow their own road map.

[ctt tweet=”95% of solution providers are opportunistic businesses but they are not innovating or growing.” coverup=”P16iv”]

Given that, it makes sense for vendors to tell partners to embrace their inner entrepreneur and set their sights on increasing the value of their businesses. If solution providers focus on building the valuation of their companies by increasing productivity and sales, the result will be greater returns on vendors’ channel investments. But making a cash-out the end goal is problematic. It doesn’t produce sustainability or consistency. Everything is about money, not excellence or innovation. When the sole pursuit is fortune, nothing fortunate happens.

Instead, vendors should encourage partners to strive for greatness by building businesses that survive the test of time – businesses that transcend market and technology trends, foster innovation to uncover opportunities and find solutions to challenges, and deliver value to everyone in the technology go-to-market chain. Vendors tell 2112 they want partners that can deliver today and tomorrow. But a channel constantly shifting in ownership is more disruptive than productive. Companies that have endured over time are often the best ones to address the dynamic and diverse needs of vendors (sell side) and customers (buy side).

As business author Jim Collins said in his book Built to Last, “Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one.” The channel needs more companies of vision, not those dreaming of the day they can cash out. At 2112, we can tell a lot about a solution provider simply by asking a few questions: “Why did you start the company?” “Where do you want your business to be in five years?” “How is your company going to change the world?”

Typically, anyone who’s building their business to sell for a quick profit or fixed on cashing out can’t answer those questions, especially the last one. Without vision, there’s no innovation or dynamic transformation. Solution providers just interested in fast money will identify themselves; they’ll be the ones with their hands out, complaining about slim margins. Solution providers that want to innovate and succeed will be the ones looking to create value independent of vendor margins.

If there’s an exception, it’s on the buy side of the M&A equation. Money is the fuel that powers the engine of innovation and viability. Successful solution providers can gain resources, talent, and market share through acquisitions. But even here, the goal isn’t building a bigger valuation; it’s creating more value through the accretion of resources that better serve the market.

What the channel needs is more solution providers with vision. Those are the partners that leverage vendor technology to make the world a better place for their business customers and, ultimately, their customers’ customers. Vendors need to embrace the tools, resources, and enablement approaches that reward investments and commitment.

Larry Walsh, The 2112 GroupLarry Walsh is the founder, CEO and chief analyst of The 2112 Group. Follow him on social media channels: Twitter, Facebook, LinkedIn.