ScanSource Launching Agent Subsidiary, Eying M&A Targets
ScanSource is looking to build a "NewCo" that will transact as an agent through Intelisys.
![ScanSource's Intelisys Eyes Acquisitions via new subsidiary ScanSource's Intelisys Eyes Acquisitions via new subsidiary](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/blt5dda4173c4774d10/656e677a138ff0040a747e8a/M&A.jpg?width=700&auto=webp&quality=80&disable=upscale)
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NewCo would represent a significant change by Intelisys in giving its agent partners a liquidity option to exit their business. Intelisys over the years has stayed away from buying partner books of business and even positioned its stance as a differentiator. However, Baur said entrance of private equity investors into the agency and TSD space have changed that equation.
"We've seen agents say they want to take some chips off the table or sell their business," he said. "And our answer in the past was, 'That's not something we do.' We've never created that program in the ScanSource model for 30 years."
However, such capital programs have become more commonplace at TSDs. AppDirect, for example, has been giving large investments to technology advisors who choose to enter exclusive relationships with the TSD/marketplace. Other TSDs have moved out of simply providing loans and into purchasing actual parts of their agents' customer bases.
And partners had continued to ask Intelisys about options for an exit, Baur said.
"I think it's because over the years we have created trust with our partners," he said. "... We have a longer track record than anyone else investing in this channel."
Baur said he doesn't expect to shift Intelisys employees over to NewCo. Instead, he said ScanSource is exploring acquisition targets that will give the subsidiary a management team and a platform.
"We've got to have a company that knows how to deal with end users, and that's not something we're proficient at as a TSD and never claimed to be," he said.
Baur said ScanSource is targeting digital tools NewCo can leverage to gain more insights and control into managing end user contracts; in other words, a technology expense management (TEM) play, Baur said.
And why would it be necessary to add an in-house TEM motion? Baur said the next evolution of TSDs and agents need to reduce the friction partners experience managing contracts between suppliers and end users. Baur said NewCo will either build such a platform or buy one.
"We're going to have to invest money to develop a TEM-like tool to allow agents to manage their contracts with their end users much more easily than today. It's very hard to renew a contract and upsell a contract," he said.
This week's Channel Partners Conference & Expo had been buzzing with rumors of ScanSource's initiative. Partners speaking on background with Channel Futures said they worried that the ScanSource subsidiary would compete with them. They expressed hope, moreover, that NewCo wouldn' leverage any agents' customer information from the Intelisys database.
Baur said he has fielded questions about channel conflict since making the announcement. He stressed that Intelisys and NewCo will operate as distinct subsidiaries with separate teams.
"Every company in our ecosystem, except the TSDs, historically had channel conflict. Many of the agents have subagents, so they're used to the channel conflict situation. But it wasn't in the ScanSource DNA to ever even imagine that we would have to think about the question of channel conflict," he said. "Now the answer is: Our TSD business and our NewCo are going to be separate. There'll be separate management, and they'll both report into ScanSource."
The entrance of private equity into the technology advisor channel has created large partner businesses that combine books of business from multiple agencies – colloquially known as superagents.
Baur said these groups by and large have only functioned as roll-ups of residual revenue. He echoed concerns from some of the channel's most prominent suppliers that agent M&A is not driving the amount of new logos to help justify suppliers' channel investment.
"I don't believe any of those companies today have really created a new agency model of the future – yet. We believe the agency model of the future needs to include a higher value proposition to the end user, and we haven't seen that," Baur said.
He said NewCo will service the books of business that come its way from agent exits. Moreover, he said NewCo – equipped with a TEM motion – will upsell and cross-sell in customer accounts "like no other agent can."
"We think that's a huge benefit to the suppliers to protect their installed base, but also to that [exiting] agent. Because that agent can now go find new business if they want to," he said.
Baur said ScanSource believes strongly in the tech services distributor (TSD) model Intelisys runs. He added that his team is looking for confirmation from suppliers and partners that they similarly are bought into the model.
Part of buying in means understanding the expenses that go into providing the services traditionally associated with a TSD, Baur said.
"Our job historically was to recruit new partners, educate them and teach them. We've got to make sure everybody understands that costs money. There's an investment. And we believe that some of the new players in this market are not investing at the same rate that others are," Baur said.
The call for buy-in comes at a time when TSD leaders are publicly broaching the topic of share-shift. In that trend, TSDs compete with each other to offer the highest commission pass-through to an agent that is close to finalizing a deal with a customer. In some cases, the partners shopping the deal already leveraged resources from a particular deal. And vendor rules of engagement allow such shopping to occur.
"If I use Intelisys engineers and I use Intelisys education from an Intelisys MasterClass, then shouldn't a deal that I write using those tools and resources go to that TSD?" Symplicity Communications president and CEO Catherine Behrenbrinker said.
Symplicity, for example, recently closed a massive UCaaS deal with a lengthy sales cycle stretching out to 13 months. Behrenbrinker credited Intelisys resources for supporting the deal and said her team was committed to sticking with Intelisys through the close of the deal.
"How do TSDs provide the resources, tools, marketing and support to help me have a better business if they don't get that protection from the agent in the end?" she said.
Behrenbrinker said it is good practice for agents to diversify their portfolios with multiple TSDs. However, she said she worries that TSDs are racing to zero as they try to court the same group of partners with high commission pass-through.
"At some point, are these TSDs going to pay us? Are they going to give us 105%? Where's that money coming from? It's ridiculous how much some of them are giving. I need Intelisys to be profitable, because they're committed to helping me be successful beyond just educating me. I need them to have the 50 engineers on their bench so that when I have an opportunity, I bring their engineers [into deals]," she said.
Behrenbrinker said ScanSource's formation of NewCo is a response to the challenges TSDs have faced with entrenching partner loyalty in a market where agents get rewarded for playing the free agent. Could ScanSource creating its very own subagents prompt other TSDs to deepen their loyalty programs?
Other questions remain. Will different vertical acquisitions occur in which a tech services distributor buys a technology advisor for the express purpose of creating a customer-facing organization? Which organizations would fit the profile for ScanSource's M&A search? And how will ScanSource invest in RPM Telco, the commissions management software that has undergirded much of the TSD market?
In any case, it's clear that ScanSource continues to shape the future of the agent/advisor channel. Eight years after their landmark entrance in to the space with the acquisition of Intelisys, Baur and ScanSource are making waves again.
Meantime, Intelisys at the Channel Partners Conference & Expo unveiled its Cisco Easy Button. ScanSource's agreement with Cisco allows Intelisys agents to leverage ScanSource's certifications and support for Cisco solutions. In other words, ScanSource will function as the referral VAR for agents.
Cisco has been selling its Webex UCaaS and CCaaS through Intelisys agents; however, no agreement has been in place for technology advisors to sell other parts of the Cisco portfolio, especially hardware.
Baur said the agreement represents a key move by Cisco to transact more through agents. And for agents, it's an opportunity to answer their clients' questions about hardware without having to change their own business model.
"One of the [top] questions [from] our top partners three years ago was, 'Can you provide Cisco products to us? But we don't want to do it the way the VARs do it; we need an easy button,'" Baur said.
ScanSource took home Distributor Partner of the Year honors from Cisco last year.
Meantime, Intelisys at the Channel Partners Conference & Expo unveiled its Cisco Easy Button. ScanSource's agreement with Cisco allows Intelisys agents to leverage ScanSource's certifications and support for Cisco solutions. In other words, ScanSource will function as the referral VAR for agents.
Cisco has been selling its Webex UCaaS and CCaaS through Intelisys agents; however, no agreement has been in place for technology advisors to sell other parts of the Cisco portfolio, especially hardware.
Baur said the agreement represents a key move by Cisco to transact more through agents. And for agents, it's an opportunity to answer their clients' questions about hardware without having to change their own business model.
"One of the [top] questions [from] our top partners three years ago was, 'Can you provide Cisco products to us? But we don't want to do it the way the VARs do it; we need an easy button,'" Baur said.
ScanSource took home Distributor Partner of the Year honors from Cisco last year.
CHANNEL PARTNERS CONFERENCE & EXPO — ScanSource plans to create a subsidiary company that will function as an agency alongside its tech services distributor (TSD) company, Intelisys.
ScanSource chairman and CEO Mike Baur confirmed the news in an interview with Channel Futures at the Channel Partners Conference & Expo in Las Vegas. He said ScanSource will create a customer-facing agency – dubbed "NewCo" for now – with a goal of driving more value to the supplier community Intelisys serves with its agency model.
Intelisys and NewCo will be separate subsidiaries, although NewCo will leverage Intelisys as its source for supplier contracts.
"We don't believe it should be under the distribution business. We think separating it – arm's length from the TSD – is the right approach," Baur said.
![Baur_Mike.jpg Baur_Mike.jpg](https://eu-images.contentstack.com/v3/assets/blt10e444bce2d36aa8/bltb1e18d2b4f8d5be2/654d2b32155cb8040a3040c1/Baur_Mike.jpg?width=700&auto=webp&quality=80&disable=upscale)
ScanSource's Mike Baur
Baur, whose company bought Intelisys eight years ago, entered into a period of re-evaluating the future of the Intelisys business six months ago, following the departure of several executives. The ScanSource C-suite in October vowed to pursue potential M&A that would advance the Intelisys business.
Baur in his interview with Channel Futures said the next generation of TSDs (formerly known as master agents) will give agents an option to sell part or all of their business. Moreover, he said, NewCo will be able to farm its customer base and land new logos more effectively than many of the large, private equity-backed agent organizations that have emerged in the last three years.
"When we all started as TSDs, our job was to recruit, educate, help grow and develop partners," Baur told Channel Futures. "There was one piece missing in that life cycle of a partner, and that was: What happens when they want to exit one day?"
Above: The Coffee with Craig and James podcast discusses the debate over ScanSource "NewCo."
The news of a potential vertical acquisition of an agency by a distributor sent shockwaves through the channel after Baur told Intelisys' top-performing sales partners late last month. Many partners say they are awaiting details of how their subagent relationship with Intelisys will change in the light of Intelisys' parent company, ScanSource, developing its own subagency.
Baur told Channel Futures that NewCo will have a management team that's separate from Intelisys. He added, however, that NewCo and Intelisys agents will need to navigate channel conflict in the future.
Read more comments from Baur and an Intelisys partner in the slideshow above.
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