Lunch with CEOs, Chairs and Investors of Private Equity backed IT Services

A December lunch hosted by the Odgers Interim Technology Practice offered insights into the trading conditions of the dynamic and fragmented IT services market. Our guestlist was comprised of industry leading CEOs, CFOs, Chairs and investors of PE backed IT services companies. The discussion covered business performance, M&A activity, and the evolving role of AI, highlighting the complexity of the IT services landscape and providing a framework for future trends.

Business performance

The discussion opened with an assessment of business performance in 2024. Odgers conducted a survey with 300 PE backed IT services businesses in the UK and in Europe, providing external insights for the roundtable. While nearly 30% of surveyed companies reported results roughly in line with budget, over 70% fell short of their targets. The narrative was framed by flat or modest growth, with resilience noted in verticals like government and financial services.

Organic growth seemed key to stable success, with a robust sales engine as a core asset. One member highlighted two important paths for organic growth: vertical dominance or a strong long term software partnership, both underpinned by long serving customer centric relationships. This contrasted with some of the challenges of a buy and build model in the space; where integration is complex due to the people focused nature of IT services. The conventional inorganic growth model in this market can pose challenges, particularly if integration isn’t managed successfully, often impacting both customer and employee experience. However, the advantages of acquiring a new product set or a new region through M&A are clear if those challenges can be overcome.

M&A activity

The conversation then shifted to the evolving M&A landscape, where dealmaking in both 2023 and 2024 had been below expectations, with many PE firms sitting on dry powder and extending hold periods to 5-10 years. Participants highlighted a significant shift in the due diligence process, with buyers now demanding unprecedented data granularity, emphasising the importance of the "data cube" in transactions. This data must be established well before conversations begin; one participant noted that it could well improve the operational running of businesses. It’s become so integral to the discussion that PE houses will even invest outside of their traditional verticals due to the strength of a company’s data cube.

This heightened scrutiny against the backdrop of an inflation gripped economy has led to a rise in failed sale processes, participants attributed this to unrealistic growth expectations, particularly in the wake of the pandemic, as well as the challenge of integrating disparate IT systems and data. One PE investor noted failed processes due to inflated results and inconsistent data, highlighting challenges on both sides. In a fragile trading year, we found many businesses had delayed processes, hoping to exit in a more stable market.

Impact of GenAI on IT Services

The discussion pivoted to the impact of generative AI on IT Services companies, which participants viewed as a double-edged sword. The technology holds promise for improving operational efficiency and will likely improve customer demand, but the ability to monetise these gains has not yet been straightforward. AI had proven to be a distraction for many IT Services companies, creating inertia with clients who were delaying big IT investment decisions as they grapple with the technology.

The survey showed most view GenAI as a net positive for the industry now, with 93% believing it will be a net positive in three years. The debate on whether this benefits service partners or end users continues as AI integrates into operations. The evolving state of technology must remain a focus for IT service partners, the differentiator will reside in knowing your sector and customer - when to wrap the changing technology and when to wait; Human experience a most important barometer on when to adopt this and how.

The discussion highlighted the need for investment and R&D to determine when AI is productive or counterproductive. There was general agreement that large-scale AI adoptions are more challenging than achieving incremental gains and spot successes.

The burgeoning need for a robust data infrastructure took centre stage again to fully harness the benefits of AI, noting that the focus has shifted from compute power to data quality. In the medium to long term, GenAI will prove to be a demand tailwind for IT Services companies, given the large-scale tech modernisation required to realise the value of GenAI tools.

Looking ahead

The group expressed cautious optimism about the market's trajectory, with several participants predicting a surge in M&A activity in the second half of 2025 as private equity firms face mounting pressure to deploy capital and generate liquidity for their investors. This sentiment matched our survey findings, with AI a net positive for the industry and greater certainty going into 2025, we’ll look to Q1/2 next year to set the tone.

The Odgers Interim Technology Practice hosts an annual Technology PE event, which will take place in May next year, as well as a follow-up to this IT Services session towards the end of 2025.

If you are interested in attending any of our events, please do reach out to Victoria.Haynes@odgers.com.