Posted by London, UK: Enterprise ICT service providers are struggling to grow beyond their core customer base, according to GlobalData. It notes that this ‘voltage drop’ is responsible for driving recent merger and acquisition (M&A) activity.
“ICT service providers are hitting a ‘voltage drop’, which is effectively a ceiling whereby early customer momentum slows as scale grows,” says Robert Pritchard, Senior Analyst – GlobalData.
“They all want to grow market share, revenues and profitability, but in a super-competitive environment, this is a challenge that will drive further consolidation,” adds Pritchard.
“The challenge that enterprise ICT service provides are facing is evident across tech segments: new products and services create traction. But more often than not the size of the customer base stays the same after initial growth. Progress becomes incremental rather than radical,” points out Pritchard.
One aspect that causes the voltage drop phenomenon is the challenges that come with change and innovation.
Already incumbent service providers gain a significant advantage by serving highly sophisticated multinational, enterprise, and government customers whose technologies, systems and processes are already part of their operational DNA, according to Pritchard.
He stresses that the challenges of ‘rip and replace’ are too much of a risk to these more complex customers’ day-to-day operations.
As a result, service provider revenue growth tends to be incremental and driven by exogenous events such as M&As, changes in regulations, and fundamental industry/technology evolution – but these are relatively rare.
When it comes to the small and medium-sized business (SMB) segment, customer churn is far more of a factor in the market, but the voltage drop also applies, according to Pritchard.
“Many SMB providers reach a base of customers that flatlines after a while–with players tending to win new business at the same rate as they lose existing business,” says Pritchard.
As a result of the voltage drop, enterprise ICT service providers pursue three main growth strategies: incremental growth by the addition of new products, professional services, and reach; partnerships to complement the existing portfolio with adjacent offerings (such as cloud and security); and acquisitions.
In Pritchard’s view, the problem with acquisitions is that they are difficult. Integration of infrastructure, systems, processes, organisations, cultures, and management is a challenge. However, if executed well, they can improve both the top and bottom lines.
“With a number of recent acquisitions and combinations both within individual countries and across borders, we expect more of the same as service providers look to overcome the voltage drop phenomenon,” concludes Pritchard.