VAR CEOs See More M&A Madness Ahead

Look for record consolidation in the fast-changing Solution Provider 500 field.

That was the message from CEOs and top executives at some of the country’s best and brightest technology services companies at the two-day CRN SP500 event this week in Charlotte, N.C.

"It's an earth-shaker," said Joe Vaught, CEO of PCPCDirect, an SP500 power that has seen the shifting market put a number of his competitors out of business in the Houston area. "I think we'll see consolidation affecting anywhere from 20 [percent] to 50 percent of the [SP500] players this year."

He sees the shake-out today as similar to the consolidation that took place in the wake of the dot-com meltdown in 2001.

[Related: Perficient Expands Its Oracle EBS Expertise With Nascent Buyout ]

Vaught said the secret to succes is making the move to the next technology turn of the crank. He said he is prospering as a result of reinventing his business to focus on high-performance computing solutions.

In a sign of rising merger and acquisition activity, SP500 company Perficient this month acquired Nascent Systems in a move that will expand its expertise in Oracle E-Business Suite applications and grow its annual revenue to nearly $340 million. Perficient, No. 94 on the list in 2011, has made a half-dozen acquisitions in recent years, including PointBridge Solutions in February and JCB Partners and Exervio Management Consulting in 2011.

"I don't think it is over yet," said one top executive of the merger and acquisition madness in the SP500 field. "All the major vendors are looking for the right companies to do business with right now. It is not how big you are, but how smart you are are and are you making the right investments. You can be a $700 million VAR or a $3 billion VAR, but it still comes down to have you made the right investments."

The right investments, SP500 CEOs said, are centered around fast-growing markets such as cloud computing services, BYOD and video solutions.

One top SP500 executive, who did not want to be identified, said his company's sales will be down an estimated 10 percent this year because it missed out on the BYOD opportunity. SP500 companies that are prospering made big bets on tablet and data center markets, he said.

"You have to be in the iPad market today," said the executive. "The tablet market is very strong."

The economic turmoil in Europe is also forcing consolidation in the market, said the executive. "No one wants to spend money," he said. "I'm worried."

NEXT: SP500 Needs To Sell More Cloud Computing Services

Ken Thoreson, a 30-year technology services veteran and president of Acumen Management Group Ltd., a Vonore, Tenn., firm that consults with SP500 companies, said the record consolidation is a result of the cloud computing revolution.

"The cloud is forcing consolidation," said Thoreson. "I absolutely believe M&A will continue at a record pace here for the next 18 months because of the need to be more efficient. Smaller partners are going to have a bigger challenge unless they verticalize or get into the cloud and maintain their profitability."

To be successful in the cloud computing era, Thoreson said, solution providers must sell a higher percentage of services to their customers. "You have to increase the wallet share of IT services for your customer base," he said. "Instead of only selling one or two application solutions to that customer, you have to sell them six to eight. You have to be the cloud utility provider."

Solution providers also need to be more effective in their sales and delivery model, said Thoreson. "Instead of a seven-step sales process, they are going to need to move to a two- or three-step sales process," he said.

CIOs on a CIO Insight panel at the SP500 event said they are adopting cloud computing services at a brisk pace and are looking for help from solution providers.

Niel Nickolaisen, CIO for Western Governors University, Salt Lake City, said he is now moving 24 legacy applications to Salesforce.com. That will put as many as 10 servers out of commission, said Nickolaisen. "That is hardware I will not be using anymore," he said. "I would be surprised if we buy much hardware in the data center over the next five years. I just don't see a reason for it."

On the other hand, CIOs are facing an almost insatiable demand for technology services, said Nickolaisen. "I don't have the staff, budget or time to meet all of that demand," he said. "I have to find somebody else to come up with the table stakes so I can work on the innovative stuff, the stuff that that is going to give us a competitive advantage."