IT Services: Digital Transformation Driving M&A

Learn more about the Harris Williams professionals featured in this article.

Key Takeaways

• Companies of all sizes and industries continue to face significant pressure to modernize IT infrastructure, transform employee and customer experience, and embrace modern digital solutions.

• The market for digital transformation-related services is large and growing, with a 13% estimated CAGR between 2020 and 2025.

• Recent Harris Williams clients exemplify the opportunity and what investors should consider when entering the space.

Digital transformation has become essential to helping companies manage cost, contain technology sprawl, improve productivity, and enhance the customer experience. For many, those imperatives are being addressed through substantial investment in product development, network infrastructure, security, and cloud solutions. Within the broad IT services landscape, digital transformation is a large, growing, and highly addressable subsector focused on helping organizations modernize IT infrastructure and navigate complexity across devices, locations, and cloud environments.

Here, senior bankers from the Harris Williams Technology Group and Business Services Group share their perspectives on why digital transformation is an area ripe for M&A, how two recent clients exemplify the opportunity, and what investors should consider when entering the space.

A Transformational Opportunity

The market for digital transformation-related services is large and growing, with a 13% estimated CAGR between 2020 and 2025.1 Several enduring tailwinds drive growth: Modernization of technology infrastructure, digitizing support functions, operational efficiency, increased emphasis on aligning technology with business strategies, and shortage of technology talent are only a sample.

Derek Lewis points out that when companies migrate into newer ecosystems, they do not always have sufficient talent or capability to manage their new IT environment, so they turn to service providers for ongoing support. That could be a provider that helps to keep the environment secure, or one to help manage data, or to serve other needs.

Lewis adds that enterprise technology spending is not a one-time investment. Technology is constantly changing, which requires companies to make significant investments at least every few years. “All of the players around the ecosystem support, in some way, the ability for companies to get the most out of their technology investments. There is a multi-decade runway that will continue to support growth.”

Priyanka Naithani believes that the ubiquity of digital transformation is a significant appeal to investors. “Digital transformation impacts companies of all sizes across industries and geographies,” she says. “It also impacts every key decision-maker within the organization.”

Traditionally, the CTO or CIO has made technology investment decisions. Now, however, the leaders of every function and line of business have more decision-making responsibilities. “From a consulting perspective, it’s an attractive value proposition to either support these multiple buyers individually, or to help drive a digital strategy across the organization,” says Naithani.

“There are many ways for investors to participate in this space,” says Thierry Monjauze. “If you are a pure tech investor, ecosystem-specific players can be very attractive. These businesses focus less on the overall digital strategy and more on how to help a company optimize its existing technology. If you are more of a traditional services or consulting investor, there are several avenues to participate on the digital strategy side.”

Investing in the Core of Advancement

Digital transformation is at the heart of nearly every company’s ongoing pursuit of greater sophistication, creating strong demand for a host of related services. As the companies profiled here demonstrate, best-in-class providers have carved out a niche in which they can stand out within this vast market.

Such specialization could be alignment to an ecosystem player, industry, or business function, or excelling at solving a specific challenge that clients face as they transform their operations. Each knows its end market and technology solutions extremely well, along with the pain points that customers are trying to alleviate through digital transformation.

“Large global players can help their clients from end-to-end, but it’s nearly impossible for them to do everything well,” says Lewis. “That leaves an opportunity for smaller niche players to really carve out a differentiated space in the market. Often, strategic buyers are looking to fill holes with deep expertise they may not have.”

A second attribute to consider is customer centricity. “Leading digital transformation providers have a level of customer intimacy built, in part, through customer proximity,” notes Naithani. “We are beginning to see a refocus in the mix of offshore, nearshore, and onshore teams servicing the client, with a greater number of resources being closer to the customers they are supporting.”

Technology is constantly evolving, and companies’ technology infrastructures are continually becoming more complex. The large addressable market for digital transformation services offers many ways to differentiate and, therefore, an ever-growing number of opportunities for investors.

1. Gartner, Forecast Analysis, Digital Business Consulting Services