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Consolidation Ripples Through the Channel


AS THE PACE OF CONSOLIDATION

has picked up in the carrier market, so too has it accelerated in the agent market. The formation of X4 Communications from three master agencies in spring 2004 kicked off the string of transactions. The next pairings of note were Association Resource Group (ARG) and Paladin Solutions Group in spring 2005, and Intelisys Communications Inc. and Resource Communications LLC later that year. PartnerTELs combination with Telesis Management Corp. followed quickly in January 2006; and CCLD Inc. and Biggar & Associates, formed Partner Management Group, in September.

If you look at post-divestiture telecom, its going through the same kind of maturations many industries go through. Thats the view Geoff Shepstone, president of master agency Telecom Brokerage Inc. (TBI), expressed during a panel discussion at the Fall 2006 Channel Partners Conference & Expo, and it is a perspective shared by his colleagues in the industry. The general consensus among channel executives is agency mergers will continue for many of the same reasons as those among carriers. Channel partners must increase margins, and sources say coming together to centralize operations and expand footprints, product portfolios and skill sets accomplishes that aim.


Dana Topping, president of Resource Communications (center) with Rick Dellar (right) and Rick Sheldon (left), co-founders of Intelisys

Analyst Steve Hilton, director of global business communication strategies for Yankee Group Research Inc., says his firm expects the M&A momentum among partners to pick up. One reason he says is that partners are realizing that SMBs have broad technology needs. Serving an SMB with only one piece of their technology puzzle is similar to a restaurant only serving appetizers [and] no main courses, he says. The appetizer-only restaurant might appeal to a small segment of people, but will have a hard time growing. Partners realize the need to serve SMBs more complete technology needs, and doing so requires additional skills that can be obtained through acquisition and mergers.

Indeed. Greg Praske, CEO of ARG, tells PHONE+ that by coming together with Paladin, ARG was able to bring PBX consulting expertise in house and to diversify into the managed services business.

Similarly, with its merger with Resource, Intelisys gained a focus on managed services, software and other value-added products, says co-founder Rick Dellar.

Extending skill sets is not limited to product. Praske says it was even more important to add depth to our management team as we planned for our next stage of growth.


PartnerTELs Steve Gareleck and Telesis Dan Bommer

Steve Braverman, president of X4 Communications, tells a similar story. Bravermans partners Steve Snure and D.J. Fioretti had skills in operations/technology and finance/contracts, respectively, that enabled Braverman to focus more on his strength, which is sales. We were able to divide up the responsibilities instead of doing everything ourselves as we had been doing when we were on our own, he says. This was critical to being able to grow the business, he adds.

CCLD and Biggar & Associates also note complementary competencies in joining together to form Partner Management Group, one of BellSouth Corp.s largest master agencies. Biggar & Associates was very good at back office and CCLD was very good at pre-sales, says Todd Zittrouer, vice president of sales for Partner Management Group.

Zittrouer says the combination allows Partner Management Group to increase its margins while reducing redundant functions.

The ability to reduce costs and put more resources into services like telecom expense management was a byproduct of PartnerTELs merger with Telesis, says Steve Gareleck, president and co-founder of PartnerTEL. If youre a master agent and you dont have any value-add for the customer, … youre making it very difficult to play in the telecom industry, he says.

Creating value and scale are driving partner consolidation, particularly among master agencies. In order to sustain a master agency program, you have to have higher commissions, but in order to get them, you have to prove you are bigger, says Braverman. To do that, you have to develop a large downline and also the back office to support them. That takes financial strength. We have hundreds of thousands of dollars invested in it, Braverman says.

As more and more carriers re-engineer their partner programs to fit the two-tier model, Braverman suspects this has been driving and will continue to drive more and more master agencies to merge in an effort to achieve the size and wherewithal carriers increasingly are seeking from their partners.

Carriers, such as Qwest Communications International Inc., Excel Communications Inc., XO Communications Inc. and Verizon Communications Inc. among others have indicated they are pushing more of their smaller partners underneath larger master agencies that can shoulder the channel management burden and expense.

This change in perspective also is fueling a parallel trend toward franchising models, consortia and partnering models among agents. In little more than three years master agency KeaneTel has reached top-tier commission levels with its contracted carriers using a franchise model, says KeaneTel President Peter Keane.

Using a different approach, more than a dozen agencies have organized as the Agent Alliance to achieve scale required for premium carrier agreements and, now, are exploring the idea of a common back-office platform.

Braverman says X4 has not joined the alliance but is forming strategic relationships with other master agencies, which he could not disclose, to enter into and fulfill carrier contracts. Strategic alliances are picking up lately and accelerating, he says, noting that the practice is becoming more common.

It also is one that can lead to mergers. UteleSys, Communications Industries and Telelink Communications had long swapped business with each other before joining as X4. And, Intelisys and Resource had been working for together for eight years before they made it official.

Alongside these other modes of achieving scale, mergers and acquisitions are likely to continue. Zittrouer says Partner Management Group, for one, is actively pursuing other partners and acquisitions.

Im getting more inquiries for people trying to buy TBI than I ever have before, TBIs Shepstone says. And theyre not just business brokers fishing to find a business that they could then go and try and sell.

One catch when it comes to mergers among master agents is carriers could put the kibosh on proposed deals. PartnerTELs Gareleck explains providers do not want to run two separate contracts or commissioning structures when their agents come together. So, agencies considering merging have to get their carriers blessing before they can move forward. ARGs Praske says even though his company has not encountered that obstacle, it does have a clause protecting itself from any unreasonable demands from a carrier. There are some steps you can take to protect yourself legally, he says. Still, he notes there has not been enough merger activity in the indirect channel for such problems to have come to light. The only [basis] Ive heard of is if some of the principals in the business werent going to be involved anymore and [the carrier] didnt feel that the new business would be able to uphold its end of the bargain, he says.

SMB Annual Technology and Communications Spending

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While vendor review may smack of paranoia, it may be grounded in the growing strength of the channel. Frankly speaking, these partners do own the customers [despite not owning the LOA]. Thats the fear of service providers and vendors alike, says analyst Hilton. The stronger the partners get, the more ownership they feel in their SMB customers. Its a double-edged sword for the service provider and vendor community. Service providers and vendors want the partners to sell deeply and broadly into their SMB customers, but service providers and vendors still want to occupy the top-of-mind position with the SMBs.

The strength of the channel described aptly by ARGs Praske as the one constant for customers throughout carrier consolidation also makes agency businesses attractive to buyers.

For Shepstone, master agents and third-party marketing are becoming wellestablished in the industry. Youre seeing more and more organizations who think theres validity in the alternate channel, [the] network sales model, and so they want to get into it. They want to buy TBI for the same reasons why Id want to hold on to it because alternate channel … is the place to be in telecommunications sales right now.


Words of Wisdom …

Master agency execs who have taken their companies through the merger process know a thing or two about what brings the deal together. Here are some points to consider if youre eyeing a joint union …

Pros

Scale.

  • Support for agents, especially in the back office. It could be positive to the agent because it enables the master agent to develop tools faster to support the agents, says TBIs Shepstone.
  • One centralized agreement. You dont have two commitments to the carriers, says Partner Management Groups Zittrouer. Its easier to meet those commitments.
  • Cons

    Integrating people. One might think amalgamating the different technologies would pose the greatest difficulty, but no. When it comes to doing back-office integration or meshing new personalities, the latter is hardest, no question, says ARGs Praske. The technical sides easy.

  • Potential for losing focus. You have to be very disciplined in order to try to continue to grow your company, says Intelisys Dellar.
  • Time to value. With anything you start, it takes two years before you really see the impact, says X4s Braverman.
  • Links
    Association Resource Group www.myarg.com
    AT&T Inc. www.att.com
    BellSouth Corp. www.bellsouth.com
    Covad Communications Group www.covad.com
    Excel Communications Inc. www.excel.com
    Intelisys Communications Inc. www.intelisyscorp.com
    Partner Management Group www.ccld.net
    PartnerTEL www.partnertel.com
    Qwest Communications International Inc. www.qwest.com
    Telecom Brokerage Inc. www.tbicom.com
    Verizon Communications Inc. www.verizon.com
    X4 Communications www.x4communications.com
    XO Communications Inc. www.xo.com
    Yankee Group Research Inc. www.yankeegroup.com

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