Adapting to Client Demands: M&A and Growth in the Evolving IT Services Sector
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Changing client demand, commoditisation, and labour shortages have all been important developments in the IT services sector. Clients now ask for a more diverse array of services from their IT providers. Simply managing digital workspaces is a thing of the past.
Customers also demand data and cyber security and the management of IT infrastructure, for example. This changing client demand means that larger companies actively engage in M&A to try to become a one-stop shop for their clients and a partner that helps customers with everything IT-related. This adds value for both the IT service provider and their clients. For smaller IT service providers, however, diverging client demand means that they need more manpower to accommodate their customers. To do so, they actively engage in M&A to meet the minimum viable scale.
Rob Verbeek, founder and CEO of Arcus IT, has seen this development up close in recent years. While he believes there will always be room for smaller companies in the market, he does see that client demand has forced smaller companies to grow.
Labour shortages remain a key challenge
Finding good staff is the main challenge currently facing the IT services sector. The share of Dutch IT service entrepreneurs that believe the labour shortage is the biggest impediment to growth is currently at 42%. This is slightly down from the peak of 46% in the third quarter of 2022, but still very high. The labour shortage further incentivises M&A as it allows companies to obtain skilled IT workers. Arcus IT and Accent Automatisering merged in 2022, naming the scarcity of talented IT employees as an important driver for the transaction.
42% of entrepreneurs sees labor shortage as drag on growth
M&A activity in the Dutch IT services sector has increased across the board. Engagement from companies of all sizes has risen – but medium-sized companies increased their M&A involvement at a faster pace than their smaller counterparts. Larger companies (of more than 250 employees) tripled their acquisitions from 10 in 2017, and to 30 in 2022. Medium-sized companies (50 to 250 employees) more than doubled their involvement in M&A activity, from 25 in 2017 to 60 in 2022. M&A participation from larger companies has increased by 157% in total over the last six years.
Large and medium size companies more than doubled their M&A involvement
