Microsoft's Dynamics portfolio has become an all-you-can-eat SI buffet for consultancies

Market for related services driving an M&A feeding frenzy

Analysis As Microsoft takes down the virtual bunting from its online Ignite jamboree, it's time to reflect that, whatever the tech news from the Redmond software factory, it is only one piece of the puzzle for users in need of a successful project.

Effective service partners and systems integrators (SIs) can be equally important as technology, and here the market has been, well, dynamic.

The recent acquisition of UK SI Quantiq, which specialises in Microsoft Dynamics business applications, by global Microsoft partner Avanade, majority-owned by $50bn-revenue Accenture, is just the tip of the iceberg.

The market for services in Microsoft applications has seen a string of M&As in the last five years. EY, a global $40bn-revenue technology and business consultancy with around 300,000 employees, acquired Pythagoras, with about 118 staff, and Seaton Partners, which employs 39, this year.

HSO, a $219m-revenue Microsoft partner employing 900 people, bought US-based AKA Enterprise Solutions last year. Also last year, Austria-headquartered BE-terna bought Pipol, a Dynamics partner based in Denmark which in turn works with a global network of other partners it says provides around 4,500 consultants worldwide.

In 2019, Hitachi Solutions America, the US wing of the $3bn-revenue Japanese business employing around 12,700 people, bought Capax Global, a US Dynamics partner with around 200 employees across and $53m revenue.

Linkfresh, a UK-based ERP solutions company focused on the food industry was acquired by Aptean, a US-based partner with around £200m revenue, in the same year. Going further back, DXC Technology bought independent SIs Sable37 and eBECS in 2018, while KPMG – the $29bn-revenue global consultancy – acquired Crimson Wing for around $30m back in 2014.

From a UK perspective, eight years ago no one had more than 5 per cent of the market.

That is no longer the case, one insider estimated. The drivers for the consolidation comes in several forms. The big global consultancies are taking an interest in technology outside the big two application vendors – Oracle and SAP – because Microsoft has invested heavily in Dynamics, increasing the popularity of its products and scale of implementations.

According to Forrester, Microsoft Dynamics 365 will be a $9bn business by 2025 after achieving year-on-year growth of around 40 per cent. Current trends indicate that Microsoft's software-as-a-service subscription revenue from Dynamics 365 will grow to $4.9bn by 2023 and $7.7bn by 2025.

Andy Gillett, general manager for Avanade UK & Ireland, said: "Dynamics is sort of working its way up in terms of the scale of clients. As you get an increased scale, often they will have an international footprint. When you look at Quantiq, they have got clients that they're supporting in non-UK geographies, which is obviously slightly outside of their core of their business. The ability for us to leverage our global footprint and support its clients is very helpful."

Customers with international implementations are looking for partners with the commensurate reach, and while the big consultancies have it, they don't have the skills in Dynamics – hence the acquisitions.

Although it may not be considered a Tier 1 ERP system, Dynamics is still getting into big accounts as an addition to core enterprise applications, said Bernd Weidenmueller, Avanade's European head of business application solutions. "There is a wave of SAP ECC 6 customers looking at end-of-life scenarios and their plans to move to the cloud. And as part of that, we see a number of them questioning the historic approach of a wall-to-wall ERP package and trying to get to a decision on how they can be more agile for different workloads.

"In many cases, that might mean continuing to use SAP for financials and move that to S/4 HANA, but then doing individual decisions for different lines of businesses for supply chain, services, retail and so on and trying to make that decision based on selecting a core platform for data and then having surrounding business applications.

"I don't see a big wave of enterprise customers completely stepping away from SAP, but just making different cuts to the architecture to decouple something which used to be very monolithic."

Meanwhile, Microsoft has a range of offers around its Dynamics enterprise apps – Azure cloud infrastructure, the Teams collaboration environment, and the Power BI and low-code platform. That not only puts Microsoft in a relatively unique position, but it also plays into the hands of SIs who can help out on a range of Microsoft products, not just Dynamics, said Forrester principal analyst Leslie Joseph.

"Microsoft changed its salesperson compensation model to move away from that whole lattice of products and services to just really focus on cloud consumption. Today it is in a unique position of being the one company that has the entire range. It's got business applications, collaboration and productivity. It's got data and BI, AI, and it's got cloud," he said.

Microsoft service partners were responding by buying up SIs with expertise in areas where they might be lacking, such as the Dynamics application portfolio, and looking to bundle that with areas where they are already strong, such as Azure, Team, and PowerBI as part of a "digital transformation" meal-deal, Joseph said.

Jesper Vang, managing director of Danish Microsoft partner Pipol, agreed that Microsoft's investment across the stack made it a different proposition from rival application vendors.

"It is quite evident that Microsoft has understood that development and has really invested in the business and the technology suite that they offer to companies. Microsoft Azure consumption has just rocketed. They have invested in creating not only a business application, but as a business platform for companies to use when digitalising their processes."

Meanwhile, international businesses which run their core finance or ERP on Oracle or SAP might look to Dynamics to deploy in satellite operations which cannot justify such a large-scale implementation, he added.

All this takes place against a backdrop of accelerating demand for services supporting what we are forced to call digital transformation.

"The market is crazy right now, in a positive sense," said Avanade's Weidenmueller. "COVID, in our view, has accelerated that because customers have begun to recognise which parts of the enterprise are not digital right now and which need to change and adapt quicker."

Another result of this demand is a dearth of skill for which M&As are a solution, albeit in the short term.

Avanade's Gillett said: "Everyone is operating in a market that's growing very fast and skills are relatively scarce. There's a limit to how fast everybody can grow organically. Whenever you see that market dynamic, there's always a degree of consolidation that occurs."

But with a finite pool of talent, there is only so far you can go with getting people on board via recruitment and acquisition. "We're also bringing in bright graduates and putting them through some intensive training to add capability into the market," Gillett added.

With such demand for the meal-deal of Microsoft products in a market emerging from COVID lockdowns, acquisitions also offer a means for partners to get hold of much-needed skills. That might not increase the skills available to the market as a whole, but it also takes time to train individuals and give them the opportunity to acquire experience. The most recent string of acquisitions is unlikely to be at an end. ®