What I look for in an IT managed services business

Mark Nunny is an investor in BGF’s Milton Keynes office. He has invested in businesses such as TIG, an IT managed service provider that supports mid-market companies in transitioning to the cloud. Here’s what he looks for in an IT managed service provider.

1. Board-level engagement

There are two types of managed service provider: those that provide the basic services like hosting and a helpdesk, and those that actively engage with a company’s senior management on strategic issues such as data analytics, cybersecurity and the modern workplace. I want to invest in the second type. If a company gets involved in board-level strategy discussions, it embeds itself in its customer’s business for the long term.

2. Loyal staff

Retaining staff is a huge challenge in the industry. Demand for IT services has shot up during the pandemic, talented staff are highly sought after, and workers have become more assertive about the conditions they want, such as home working. I look for businesses that have a strong corporate culture, keep an eye on anonymous reviews on Glassdoor, and conduct exit interviews with leavers to understand how to improve staff retention. Low employee churn is a key indicator.

3. Loyal customers

Having an IT managed service provider is a bit like having a current account with a bank. Usually, customers only leave if something goes wrong. I therefore look for businesses with a very low rate of customer churn. A business has a problem if more than 10% of its customers leave within a year – stripping out exceptional events, I look for an underlying churn rate of around 5%.

4. Effective sales team

IT service providers typically base their business model on service agreements, which generate predictable, recurring revenue. This means these companies are usually good at forecasting future cashflow. What’s less common is to have a good understanding of their sales pipeline. I look for a well-organised sales department with access to accurate data and an effective ability to convert targets into sales.

5. They offer professional services

As mentioned, recurring revenues are the norm in the industry; however, it’s now recognised that one-off projects, addressing issues such as cloud computing, which are ever more complex, are a good way for growth-focused IT businesses to augment their recurring revenue and embed the relationship. I look for companies that make roughly a quarter to a third of their revenues from one-off professional services projects and consulting.

6. They get paid on time

In IT services, customers typically pay in advance, so if a provider isn’t billing and receiving the bulk of its income by the start of each quarter, I’d want to know why. Managed service providers ought to be able to convert every pound of profit into cash, which is why I look for businesses that have an effective pricing model and a disciplined finance team who aren’t afraid to chase up unpaid invoices.

Which BGF investments have you made that are a great example of the kind of businesses you look for?

We invested in TIG Data Intelligence, led by CEO Des Lekerman (above), to fund a ‘buy and build’ acquisition strategy. The business has been successful at acquiring other managed services providers and integrating their best bits into the group. Customer churn is low and there’s a good balance between one-off projects and recurring revenue. Crucially, the business is involved in its clients’ strategy discussions at board-level, using all available tools to help customers get the best out of their IT.

Looking ahead, are there any sectors that you are really excited about investing in?

Companies using artificial intelligence and machine learning in a disruptive way. We have just invested in Cambridge-based Techspert, led by founders Graham Mills and Dave Holden-White (above), whose technology crawls the web to ingest semi-structured data such as patent applications and academic journals, using it to identify experts in a range of sectors and specialisms. If you need to talk to someone about antibodies in Africa, the platform can find the right person instantly. Businesses like this need a big upfront cash investment, but in the long run I expect them to be disruptive.

Parts of this article appeared in ‘How can fast-growth IT businesses secure investment?’, published by IDG Connect