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Pushing tin

Tell us about the reasoning behind your acquisition of BCA IT and what it adds to Leading Solutions.
We looked very closely at what was happening in the Australian market, which is following overseas trends. We have seen consolidation from a vendor perspective and we are seeing the same thing within the dealer channel. The market has got to a point where you need to have economies of scale or operate within a specific vertical. If you go back five years in the Australian market there were a lot of mid-sized players, but margins are now so tight that this tier has been forced to make a decision about whether to move up or across to a vertical. I talk to a lot of my counterparts and they feel very much the same. In the last year-and-a-half we have seen a lot of that consolidation. The reality is that we will see more. We have moved up in terms of volume and are now starting to move across into verticals.

Has BCA brought anything to Leading apart from scale?
Yes. Once we decided there was a need to grow we were looking for a company that would add more than just volume. One of the things we looked at was customer base because Leading Solutions has traditionally been very strong in the university space, private schools, SMB and local government. We wanted to find a company that was complementary. BCA was very strong with TAFEs and the top 300-400 corporate companies. When we compared the top 20 customers from both companies there was no overlap. That's how nice the fit was.

Leading and BCA were about the same size so the acquisition effectively doubled our revenues. I believe the reseller market is divided into five segments - education, government, utilities, corporate and SMB. There are times when the corporate market is slow and others when education dies down so splitting across those segments is important and BCA offered breadth. If one segment falls out, there are others we are strong in.

BCA also added break/fix facilities to conduct warranty repairs that Leading didn't have. It had some major clients in that space like ANZ Bank. Leading had reached a size where not having those facilities was starting to cause some hindrance.

What has been the most difficult aspect of the merger?
There are issues every day in running a business but they have never escalated. Merging the systems was probably the biggest because the Leading systems were much more powerful in terms of sales and marketing but couldn't do any of the break/fix stuff. That was a whole new addition to our systems. The BCA systems are still running but as modules are created they are flicked across. It will be about three months before we completely switch off the BCA systems. You keep hearing about mergers and acquisitions in this industry that are disastrous because the cultures haven't integrated, volumes have dropped or customers are unhappy. I won't mention names but there are companies out there experiencing a great deal of pain at the moment. We now feel like one organisation.

How were the cultures different?
Leading Solutions was very much a family culture whereas BCA was far more corporate. We still have that family approach now but with a bit more of a business feel. You only have to look at the staff because we have lost very few people. It's been single digit.

Economies of scale would surely be one of the biggest reasons for bringing the two companies together. There must have been some reduction in headcount.
There were significant reductions in certain roles but both organizations had very good people that were committed and worked hard. Those people are valuable so we transferred them to other areas. I think we made two redundancies and they were BCA directors.

How many staff do you have now?
About 240. We have lost eight people in seven months but that is normal.

How were the sales numbers for the financial year?
If you took the two businesses from last year and added them together, one plus one should equal two but we ended up with 22 per cent growth. We ended the year at about $180 million.

You mentioned earlier that you were looking to build vertical expertise now that your volume issues have been addressed. Which ones are you focusing on?
We have split our business into three segments - the infrastructure business, which is the traditional tin products we push; professional services, where we have created quite a sophisticated pre-sales team to focus on specialisations like VoIP and virtualisation; and software services, where we either write software from scratch for organisations or supply CRM and ERP systems. You will see us continue to acquire businesses to drive further down that path. We are very strong in the car rental space, the fashion industry and also have a major bookstore application.

So can we expect to see you acquiring ISVs?
No. Acquisitions are more likely to be in the ERP space where we have Microsoft Dynamics and are also a Scala partner. That's where we are putting a lot of focus and looking for acquisitions to fuel momentum.

But would hardware still account for the lion's share of your business today?
Definitely from a sales revenue perspective but not necessarily if you look at profitability. The infrastructure business accounts for 40-45 per cent of our profits today so the majority is coming from professional services and software.

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How do you see that split changing over the next couple of years?
I think the ratio is about right because there are opportunities in all three and want to grow them all. We are now the largest privately owned IT [reseller] company [in Australia] and probably third or fourth overall. Our objective is to be number one by volume.

Who do you see as your biggest competitors?
It depends which market segment you are talking about. From a size perspective it is obviously companies such as Commander but I don't think any of the top five or six players has our combination of infrastructure, professional services and software services. Size and being privately owned are key differentiators.

One of the first things I did [following the acquisition] was visit BCA's top 30 customers and I have been back recently to check on our progress. You have to understand there is going to be a bit of fear there because BCA had been around longer than Leading Solutions and we didn't play in the same space so they wouldn't have heard of us. We asked a lot of questions about why they dealt with BCA and when we went back it was really positive because they said those values hadn't changed. We haven't lost one customer. The most positive feedback was that people cared about their customers and that comes from both organisations being privately owned because senior management is never far away. That makes you more accountable and it isn't the case with some of our competitors.

What are your goals for the year ahead?
We have made a major investment in Victoria and NSW facilities during the past six months to help our people deliver an even higher level of service. We have a very aggressive growth plan and aim to be a $300 million business within three years. That means we need to find another $120 million from natural growth and continued acquisition. We are currently in the process of acquiring again.

Everybody is up for sale at the moment aren't they?
Yes, except for us. We have invested too much in the past 12 months.

Why is everybody up for sale when the market is so buoyant?
I'm not sure what the answer is but maybe the industry has been through such a difficult time in the past 2-3 years that people have had enough and think it is a good time to get out. I think it is a good time to get in because the future is strong if you have the right things in place. If you went back 10 years you could do an OK job and succeed but today that isn't enough. It comes back to economies of scale.

When you talk about acquisitions, are you looking across all three Leading Solutions business units?
Yes but the focus is on software services and our infrastructure business. On the infrastructure side we are a major player in the states where we operate but are not in Perth, Adelaide or Canberra. It would be good to get a foothold in those markets. Perth is booming at the moment so that would be a hard one to get into but challenges are good.

There has been some consolidation in the local reseller channel during the past couple of years but probably a bit less than I expected. As somebody out there trying to acquire businesses, what is your perception?
The problem is that some people have unrealistic expectations based on emotion rather than business sense. A lot of companies out there have started from scratch so there is emotional attachment that can make negotiations difficult when it comes to money, conditions or how it has to happen. We are no different - I'm attached to the Leading Solutions name - but there's a market multiplier for what businesses are worth and you just have to take the emotion out of it.

Would you expect to see consolidation accelerate in the next couple of years?
Yes. As time continues, people are going to make less money unless they can achieve economies of scale and the pain points will become stronger. The challenge for some resellers is that most of their business comes out of one state and that is not a healthy long-term strategy. I think the number of tier-two resellers will diminish but there is an opportunity for some to step up to tier-one status. There are some gaps.

So do you think a lot of these tier two resellers are talking to each other about possible mergers?
I think they should be if they want to have a long-term future.

Do you see a long-term future in just selling hardware?
I have always had a different belief to a lot of other people. About four years ago everybody was saying there's no money in tin so get into the professional services space. I think there is a middle ground. You need to have both because the two co-exist. I have seen a lot of people get rid of their tin business and grow their professional services but then realise a lot of it had been driven from the tin. So I don't see a future for having just one or the other. Professional services alone has a better chance of survival but there's a good blend where those units drive each other and customers want somebody to own the whole thing.