Inflection point in PSA - M&A and advanced tech are defining the future

Profile picture for user brianssommer By Brian Sommer January 3, 2022
Summary:
The future of the PSA sector starts here...

tipping point

The recent combination of MavenLink and Kimble closes out 2021 as a year of big deals and big changes in the Professional Services Automation (PSA) space. These deals suggest an inflection point in the PSA, PPM (Project Portfolio Management) and related spaces.

In a market that was full of niche solutions and small application suites, we will soon see large, multi-disciplinary software suites emerge. And these new super-suites will have implications for software buyers as well as the big and small vendors in the space.

These deals are notable as:

  • They are significant.
  • They suggest market consolidation.
  • Valuations appear to be large.
  • Private equity firms are clearly interested in this space.
  • Scale is driving some of the potential deal synergies.
  • Leadership changes are occurring.
  • Customers may experience some changes in account management.
  • PSA competition is permanently changed with:
    • Several firms now in the 500-1000 employee size.
    • Companies that are more global in scope.
    • Product lines that are larger and will soon to be more integrated.

Let’s look at a couple of these transactions…

The MavenLink/Kimble marriage

A few weeks ago, LA-based PSA vendor MavenLink, with help from investor Accel-KKR, merged with fellow PSA vendor Kimble. Mavenlink is built on the OpenStack platform. Kimble was built on the Force.com platform - as are FinancialForce apps - and has tight integration with CRM vendor Salesforce and ERP vendor Intacct.

It’s an interesting match-up and the two firms will operate somewhat independently for a time. The different architectures, similarities in some of the applications, etc. suggest that sharing of advanced technologies (e.g., MavenLink’s ML-based resource management technology with the Kimble product line) will allow both firms to add more advanced technology to both product lines fast and inexpensively.

This deal closed in early December. Details of the transaction were not announced but given the frothy nature of the market, it likely generated solid exit returns for some early investors of both firms.  One of the interesting aspects of this deal concerns FinancialForce. According to channel e2e:

The combined Mavenlink-Kimble business is expected to take aim at FinancialForce, another PSA software provider that runs on the Salesforce.com cloud platform. Various professional services firms — including IT consulting companies — leverage the PSA software tools. Some MSPs have also adopted the Mavenlink, Kimble and FinancialForce tools, though the software offerings generally don’t have major followings in the MSP-SMB sector.

The new firm will have about 600 total employees This makes it similar in size to FinancialForce (who has 700+ employees) but with a key difference. The combined firm will be exclusively focused on PSA where FinancialForce, as its name suggests, has PSA and financial applications. FinancialForce has some 1,400 customers with users in 50 or so countries.

Kimble brings a more global footprint to the combined firm. It is based in London and has many customers in the UK and continental Europe. MavenLink has a strong presence in North America. Both firms, according to new CEO Michael Speranza have been growing 20-40% year-on-year.  Interestingly, the two companies each have offices in Boston and Salt Lake City.

Accel-KKR became a very big investor in Kimble in early 2018. According to a recent press release on the merger:

Existing Kimble and Mavenlink investors, including Carrick Capital Partners and Goldman Sachs, will continue to be investors.

I did a call with MavenLink’s founder Ray Grainger recently. Grainger will now be the Executive Chairman of the combined firms. Across our conversation, he mentioned:

  • The new company’s scale should allow it to reach Rule of 40 compliance in 2022.
  • He really liked Kimble’s CPQ functionality (i.e., Configure-Price-Quote) and this may get replicated into the MavenLink product line. (Kimble calls this Estimate-to-Proposal). (Note: Zimit has been a CPQ leader in this area and was recently acquired by Workday. Workday also has PSA functionality.)
  • He believes that Kimble’s collaboration capabilities could be solid additions to the MavenLink PSA software.
  • Going the other way, he and I both discussed how MavenLink’s smart resource management tools would be a good add for Kimble’s product line.

Grainger and I also discussed whether an earlier big PSA merger in 2021, the Planview/Changepoint/Clarizen deal (see below), was a driving force for this deal. He added that this subject did come up and that further consolidation in the space is possible. Why? Consolidation will help vendors scale and scale more quickly than via purely organic growth means.

Grainger said he liked how Kimble’s leaders come from professional services backgrounds. I suspected he would notice this as he and I also have PS backgrounds with each of us completing long leadership stints with Accenture.

For more on this deal, see this link.

The Planview/Changepoint/Clarizen deal

At the beginning of 2021, Austin based firm Planview finalized its acquisitions of Changepoint and Clarizen.

Like the MavenLink deal, this deal had private equity participation. According to a Planview press release:

The close of the transactions closely follows Planview’s acquisition in December 2020 by TPG Capital and TA Associates, whose investment has focused on accelerating Planview’s growth and vision for Agile and PPM for Enterprises. Clarizen and Changepoint are the company’s largest acquisitions to date and represent an important first step in Planview’s growth strategy for 2021.

Planview has been a major player in the PPM (project portfolio management) and NPD (new product development) sectors. The software also possesses work management functionality, too. Their NPD functionality caught my attention several years ago (that and their Austin, Texas location). Changepoint has a lot of portfolio management functionality, too. Clarizen is a global leader in enterprise Collaborative Work Management.

All told, the combined firm will have about 1000 employees, several thousand customers and, according to Planview, over 1.3 million users. The mix of functionality will make Planview more competitive with ITSM firms like ServiceNow, project management vendors, work management, workforce management and other disciplines.

This deal brings several different people-based/project-based automation needs together. According to Planview:

As a result of the transaction, Planview, Clarizen and Changepoint customers will benefit from being part of a premier community of PMOs, PPM, and Professional Services Automation (PSA) practitioners. The expanded portfolio of solutions will provide customers the tools and resources to better strategically plan and deliver on their most important initiatives. The combination will be transformative for the industry and has received strong feedback from customers to date.

The big picture

The new project and PSA software markets don’t resemble those of years past. In the late 1990’s/early 2000’s, a number of firms popped up with solutions for professional services firms (e.g., architects, engineers, contractors, consultants, lawyers, etc.). These software firms usually filled a niche such as project management, time and expense tracking, project accounting, etc. One solution really exploded for a few years: professional services automation (PSA). PSA suites usually included functionality for resource management, time tracking, client billing, reporting and more.

PSA apps were almost all internet or cloud-based from the beginning. The space suffered during the dot-com bubble of 2000 and again during the great recession of 2008 as demand for project work took some hits. I suspect the space also suffered from lower adoption rates because:

  • Many service professionals are adept at running even huge projects on spreadsheets. The need for a PSA didn’t always get the support and capital it should have received in many firms.
  • Some service firms (e.g., systems integrators) have a Cobbler’s Children problem. They’ll happily implement software for a client but can find a million reasons not to do so for themselves.

But M&A did occur from time to time.  NetSuite bought one of those early PSA vendors (OpenAir). Oracle bought project management vendor Primavera. And several ERP vendors developed solutions for ‘people-based industries’ or ‘service organizations’ with some components originating from smaller tuck-in deals.

The space, though, never really saw the number and volume of M&A deals that we see in other sectors like human resources software. It’s often a quiet place.

The presence of private equity in the space means we’ll likely see a lot more M&A activity. Some deals will be rollups of similar firms. Rollups work when economies of scale can be had and margins can be enhanced. Tuck-in deals will occur when a vendor in one space (e.g., PPM or ERP) wants additional capabilities in a related space.

In the near term, what’s shaping up will be a bifurcated market where there are PSA and/or service like applications bolted onto and sold by ERP vendors and another market of pure project/people focused solutions. The most successful players in either space will be those that:

  • Really take advantage of advanced technologies like machine learning (ML), chatbots, smart analytics, etc. and do so quickly
  • Quickly develop all-new applications in the white space around ERP, traditional PPM/PSA and other apps
  • Tightly integrate these applications to the other solutions customers have or will need. The number of applications that must come together is lengthy and may include CRM, HR, Benefits, global Payroll, Financial applications, Cost Accounting, Project Accounting, Travel & Expense reimbursements, and more.

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Potential customer/user concerns

Since the late 1990’s, a number of PSA/PPM/etc. software company founders have left their firms. Some executives retired. Some were no longer needed as their company was acquired by a larger company. Some were let go by new owners.

Founders are often different from professional managers. The former is often focused on building a company that they’ll want to run and grow for decades. Founders are all about continuity. Professional managers are beholden to the investor or private equity firm that had them installed. They are all about an exit or liquidity event that will happen in 5-7 years’ timeframe. Liquidity events can cause uncomfortable changes to the customer/vendor relationship and some of those can smart.

When there is a material change of control, things change. The combined software company may have new leaders, raise prices (to help pay for the deal), change or eliminate a number of functions (e.g., sales or account management), shift development to a low-cost country, etc. In a few cases, it can mean that a product or entire product line can get killed off. With any of these changes, users can experience account management, pricing, support, product, contractual and/or other changes.

But when firms undergo inorganic growth, a customer’s strategic importance to the vendor often gets diminished. It’s one thing when your firm was a Top 10 account of a software firm. But once that vendor gets acquired by a much larger firm, your importance falls and now you get the attention of a company that’s ranked #4205 out of over 5,000 customers.

My take

When it comes to considering the future of this space, believe it or not, we’re still in the early days of figuring out what people and services-based firms need from an automation and transformation basis. Many solutions only support a few market segments (e.g., legal) while not others (e.g., management consultants). A combined PSA/PPM with financial accounting software is still a rarity (although integration with popular financial applications is common).

Some service segments (e.g., atomic power plant maintenance staff) need specialized functionality to capture and monitor a person’s training and certifications. Some segments need powerful estimating tools. And, almost all segments need smart tools to better match people to projects based on a number of different filters. There are many, many more of these to consider as ‘services’ is actually a multifaceted space and not something that a simple, one-segment solution can solve.

And, this is before we look to the all-new capabilities that advanced technologies can bring to the fore.

For right now, though, let’s remember that 2021’s deals:

  • Are creating larger vendors who should be able to use their scale to create larger and more powerful solutions
  • Are being backed by deep-pocket investor firms who can help these firms expand globally and functionally
  • Presage more deals to come with tuck-in, rollup and IP-based transactions
  • Mean small, standalone service automation vendors will be at a competitive disadvantage against the new larger firms
  • Suggest that many ERP vendors will need to amp-up their service offerings especially since many of those are merely light-duty bolt-on solutions

One thing is for sure, the leaderboard will be in flux and so, too, will the solutions for sale. These will be interesting times for sure.