Cloud Migration Fuels Dealmaking in Hyperscale Cloud Partner Ecosystems Financial sponsors and strategic buyers from multiple industries are aggressively looking to expand their services capabilities in massive, high-growth cloud ecosystems such as , Azure, and

Google Cloud Platform.

The ongoing migration by companies of Gartner, Inc.”* This report will focus on Industry Commentary all sizes from on-premises technology service providers in the IaaS ecosystem. to cloud-based solutions has created a The market for IaaS, dominated by Raphael Grunschlag massive and growing need for AWS, Azure, and GCP, reached +44 20 7868 4501 companies that can facilitate transitions approximately $50 billion in 2018 and [email protected] to Amazon Web Services (AWS), is expected to grow at a compound , and Cloud annual rate of 28.2% from 2017 to Platform (GCP). 2022, according to Technavio. The Michael Amez market for cloud migration services is +1 312 364 8453 “The worldwide public cloud services expected to reach $6.9 billion by 2022, [email protected] market is projected to grow 17.5% in representing a 22.6% compound 2019 to total $214.3 billion, up from annual growth rate from 2018, $182.4 billion in 2018, according to Oliver Parker according to Technavio. +44 20 7868 4424 [email protected] Accelerating Growth for Cloud Migration Services Mike McCourt The growth rate for cloud migration services, a subset of the larger cloud +1 312 364 8920 market, is expected to remain exceptionally high through at least 2022. This [email protected] reflects the fact that we are still in the early stages of the overall migration to the cloud, particularly in heavily regulated industries such as healthcare and banking. Market in Focus: Global Cloud Infrasctructure Services Market ($ in billions)

$126.4 $103.9 $83.5 $65.7 $49.9

2018 2019 2020 2021 2022 Source: Technavio

*Gartner Press Release, “Gartner Forecasts Worldwide Public Cloud Revenue to Grow 17.5 Percent in 2019,” April 2, 2019. https://www.gartner.com/en/newsroom/ press-releases/2019-04-02-gartner-forecasts-worldwide-public-cloud-revenue-to-g

The demand for IaaS and related companies since 2015. In this report acquisition of REAN Cloud, are buying services is almost certain to accelerate we examine the trends that are into the partner ecosystems to meet because we are still in the early stages shaping the dealmaking landscape for the current and future needs of clients. of the overall migration to the public firms that provide services related to REAN Cloud, which William Blair cloud. Large, heavily regulated hyperscale cloud platforms. advised on the transaction, addresses industries, such as healthcare and a gap in Hitachi’s capabilities for banking, are just beginning to get Interest From All Corners of the helping companies leverage the cloud. comfortable with the idea of moving Buyer Universe Almost every large IT services their sensitive data to the cloud. But These macro tailwinds have led to these comfort levels will grow, company has shown an interest in broad-based acquirer interest in the AWS and/or Azure premier partners. representing a huge expansion of the hyperscale cloud partner ecosystem. total addressable market for cloud Scaling up their capabilities internally Financial sponsors initiated the in these areas to fully meet demand is services. According to a 2019 report current consolidation wave, which by McAfee, the number of files with challenging for global IT services firms started in 2016 when William Blair given the shortage of qualified sensitive data shared in the cloud advised Logicworks, a partner for increased 53% from 2018. professionals, so these companies are AWS and Azure, on its acquisition by looking to buy into the partner The size, growth rate, and adoption Pamplona Capital Management. ecosystem to augment internal hiring curve of hyperscale cloud platforms Blackstone’s acquisition of Cloudreach efforts. Strategic interest has also been have resulted in robust ecosystems of was another notable acquisition by a driven from additional segments of partners that help companies develop financial sponsor. In parallel with the technology landscape, including roadmaps for transitioning to the acquisitions, numerous growth equity telecom companies, hosting providers, cloud, migrate and/or develop the investments have been made to scale and value-added resellers/ application, and then manage and teams and grow businesses; notable distributors as the growth of public optimize the environment once the examples include Pamlico Capital’s cloud ripples through and disrupts transition is complete. As the demand investment in 10th Magnitude, multiple business models. for these services grows, customers Sunstone Partners’ investment in will require fewer vendors to provide Onica, and Columbia Capital’s Assessing the Business Models: a broader array of services, fueling the investment in 2nd Watch and Contino. Professional Services vs. need for consolidation and While financial sponsors remain very Managed Services increased scale. active in the space, strategic buyers The partner ecosystem for hyperscale This trend has led to a flurry of from several segments have recently cloud providers is broad and diverse. acquisitions as cloud services intensified their efforts to expand There are nearly 100 Premier providers position themselves to their capabilities related to hyperscale Consulting Partners for AWS alone, capitalize on the growing demand for cloud platforms. Diversified industrial plus thousands of additional their capabilities. William Blair has players, such as HP Enterprise, with its consulting and technology partners. completed 12 transactions on behalf 2017 acquisition of Cloud Technology The universe of cloud service of next-generation cloud services Partners, and Hitachi, with its 2018 providers can be divided into two

Business Models of Cloud Services Providers The partner ecosystem for hyperscale cloud platforms comprises two primary types of business models: professional services and managed services. While managed services companies historically have commanded higher M&A multiples, the gap is narrowing—or disappearing.

Professional Services Managed Services Cloud journey focus  Plan & Design  Run & Operate  Build & Migrate  Optimize  Optimize  Scale Revenue model  One-off or reoccurring project-based work  Contractually recurring  Fixed-free or time and materials based  Flat fee and/or % of hyperscale cloud usage  Potential for large-scale, multiyear mass migration work  Often includes “cloud pass-through” or “managed public cloud” revenue – typically recognized “net” Typical client base  Varied – from largest enterprises globally to SMBs  Most relevant for midsize enterprises and smaller  Large enterprises increasingly showing interest IP enablement  Software-based IP to enable rapid, secure, and compliant mass migrations  24x7 NOC / SOC support  Substantial people- and process-based IP  Real-time, automated threat detection and remediation

Best-in-class  Significant reoccurring project-based work within a client  Highly automated, low-touch technology platform characteristics (land-and-expand) potentially leading to multiple years of work  Exceptionally low or net negative churn (expansion from client base  Highly skilled / credentialed delivery team exceeds any churn)  Fixed-fee engagements generating higher margin  Elevated gross margin profile

main types of business models: optimization efforts often are of talent in more developed countries. professional services and multiyear engagements that require High-end professional services firms managed services. “reoccurring” services—leading to a with extensive client-facing steady and growing revenue stream. engagements, however, have been reluctant to pursue this model. tend to focus on the earlier stages of a client’sProfessional cloud services‒centric migration journey, firms Solving the Scale Challenge Internal training academies – One of providing one-off or reoccurring During an M&A process involving a the most effective ways companies are project-based work related to the plan hyperscale cloud partner, one of the addressing the shortage of cloud- and design, build and migrate, and most important aspects of the due specific talent is by creating internal optimize phases. Their client bases diligence is assessing the provider’s training “academies” or “universities.” include companies of all sizes—from ability to aggressively scale to support This model allows companies to small- and medium-sized businesses drastically higher numbers of attract younger or otherwise less (SMBs) to global enterprises. customers and increasingly experienced professionals and upskill complex engagements. them to meet client needs.

the other hand, focus on running, Through our sell-side engagements, Increased managed services mix – operating,Managed services‒centric and optimizing cloudfirms, on we have identified four distinct ways Technology-enabled managed services environments after the migration has that hyperscale cloud partners can and automation have enabled occurred. Managed service offerings successfully address the scale partners to scale their number of can range from proactive monitoring question and, as a result, increase customers while fractional resource and management of the cloud their valuations: optimization has limited the need for environment to automated security Intellectual property – Many high- additional employees. and compliance reporting—often growth providers use proprietary supported by a 24/7 network software and/or processes to enhance Analyzing the Role of operations center (NOC) or security efficiency, automate functions, and Intellectual Property operations center (SOC). Historically, more fully leverage their cost of As noted above, intellectual property their target clients tend to be medium- goods sold. (IP) plays a vital role in a cloud service sized enterprises and smaller provider’s ability to scale and, thus, its companies with less sophisticated Effective use of off-shore attractiveness as an acquisition target. internal IT teams that are likely to resources – Expanding operations in In several recent sell-side outsource specific functions, although lower-cost countries can mitigate transactions, William Blair’s clients large enterprises are increasingly concerns about the cost profile of were able to enhance their valuation looking to managed services providers additional resources and the shortage to manage cloud environments.

Managed services offerings often are supported by some element of Four Proven Ways to Scale Cloud Services intellectual property, often patent- With any cloud services company that is an acquisition target, the company’s protected; as a result, they usually ability to scale and handle increased customer volumes is the leading focus of have higher gross margins and the diligence efforts. We have identified four distinct ways that cloud services operating leverage than professional firms can successfully scale. services providers, whose most valuable assets are their people. These Model Description characteristics historically have Intellectual Property Proprietary tools that increase automation, resulted in managed services eliminating/reducing the need for increased headcount, providers commanding higher M&A driving down costs valuations than professional services providers. Offshore Moving headcount (and costs) offshore where the cost of labor is lower, allowing for lower COGS and SG&A, even though We have observed, however, that the headcount may be higher valuation gap is narrowing—and in some cases disappearing. This is being driven by the fact that large University Established, from the ground up, training program for new enterprises have shown a reluctance hires to ensure excellent delivery and advisory skills to enter long-term contracts for managed services that their in-house IT teams should be able to handle. Managed Services Recurring managed services revenue allowing for a land-and- Another factor causing the valuation Mix of Efficiency expand model and confidence in revenue growth – attractive gap to narrow is that while LTV/ CAC typically professional services contracts are project-based, cloud migration and

because they had internally developed how they staff their teams and IP that was heavily scrutinized by manage client engagements, such as global strategic acquirers during the templates, code repositories, and diligence process. reusable tooling. The IP being developed and used by Despite all of the talk about the cloud, next-generation cloud services it is worth repeating that the overall providers can generally be classified migration of companies’ IT as software-based or people-centric. infrastructure to the public cloud Software-based IP often is used to across industries is still in the early facilitate cloud migrations and to run phase. The scale of cloud adoption and optimize the cloud environment should increase as healthcare, once the migration has occurred. banking, and other heavily regulated REAN Cloud’s Infrastructure-as-Code industries become more comfortable offering automates many processes with cloud environments—and as and drastically accelerates cloud cloud security approaches advance to adoption—reducing transformation the levels needed for enterprises with timelines from years to months. highly sensitive data. Logicworks’ Pulse platform integrates intelligence across cloud tools and To learn more about these and other systems, monitors costs, and alerts trends that are shaping the clients to potential security risks. dealmaking environment for cloud services providers, please do not Cloud services companies that have hesitate to contact us. limited opportunities for technology enablement must answer the question of how they can scale beyond simply adding more people. The fastest- growing firms are doing this through IP that focuses on people and processes, rather than software. In addition to the aforementioned academy model that enables upskilling of new hires, companies are achieving operating leverage through innovative, efficient approaches to

Recent Acquisition Activity 2016 – YTD 2019 Ecosystem Date Company Acquired Acquirer Amazon Web Oct-16 Logicworks Pamplona Capital “William Blair” is a trade name for William Blair & Services (AWS) Management Company, L.L.C., William Blair Investment Management, LLC and William Blair International, Ltd. Feb-17 CloudReach Blackstone William Blair & Company, L.L.C. and William Blair Investment Management, LLC are each a Delaware Sep-17 Cloud Technology Partners Hewlett Packard Enterprise company and regulated by the Securities and Exchange Commission. William Blair & Company, L.L.C. is also Aug-18 TriNimbus Onica (Sunstone Partners) regulated by The Financial Industry Regulatory Authority and other principal exchanges. William Blair Aug-18 Relus Cloud Cloudreach (Blackstone) International, Ltd is authorized and regulated by the Financial Conduct Authority (“FCA”) in the United Oct-18 Mission (Stratalux / Great Hill Partners Kingdom. William Blair only offers products and Reliam / G2 Tech Group) services where it is permitted to do so. Some of these products and services are only offered to persons or Oct-18 REAN Cloud Hitachi institutions situated in the and are not offered to persons or institutions outside the United Nov-18 Stelligent Mphasis States. This material has been approved for distribution in the United Kingdom by William Blair Microsoft Azure Oct-16 10th Magnitude Pamlico Capital International, Ltd. Regulated by the Financial Conduct Authority (FCA), and is directed only at, and is only Mar-19 SADA (Microsoft Core BTS (Tailwind) made available to, persons falling within COB 3.5 and Business Unit) 3.6 of the FCA Handbook (being “Eligible Counterparties” and Professional Clients). This Google Cloud Mar-18 Cloud Technology Solutions NorthEdge Capital Document is not to be distributed or passed on at any Platform (GCP) “Retail Clients.” No persons other than persons to Apr-19 Cirruseo Accenture whom this document is directed should rely on it or its contents or use it as the basis to make an investment decision.