CRN Exclusive: TekLinks CEO On Claris Acquisition And How To Succeed In A Fast-Moving Cloud Market

On The Record

TekLinks CEO Jim Akerhielm, who has been instrumental in establishing the Birmingham, Ala., company as one of the top managed service providers in the country, spoke with CRN about the company's acquisition of Claris Networks, the fast-changing IT landscape and the potential for future acquisitions. Here is an excerpt from the discussion.

How significant is the Claris Networks acquisition for TekLinks?

For us, it is a tremendous strategic fit. We acquired a company that has a very strong set of hosted managed services that are complementary to our current product set. It truly is a lift and shift. They are taking an on-premises solution and moving it fully into the cloud so there is clearly capex savings over the long term, and there is always services improvement.

They operate geographically primarily in Tennessee, which fits like a glove with our geographic footprint. The company has a tremendous team of talented people and a support and go-to-market model that will be assets to TekLinks.

Does Claris bring new managed services that TekLinks can scale out?

They have a tremendous go-to-market strategy and support model for the commercial market. They establish strong relationships with C-level folks at those companies. They essentially take over all IT support for these businesses.

We have a lot of experience in the enterprise space. We want to extend that [Claris Networks cloud services] support model and go-to-market strategy into our markets. And then we would like to take some of the TekLinks' products and services, including our voice product, our disaster recovery product and our security products, and bring those into the Claris portfolio.

Was the Claris cloud services key to this deal?

We look at TekLinks as an IT solutions provider where we have built strong relationships with decision makers, and we work together on whether it is an on-premises solution, whether it is a fully hosted solution or whether it is a hybrid solution.

TekLinks, with its hosting capabilities, its hardware/software resell capabilities and its professional services capabilities, is uniquely positioned to deliver the range of solutions from fully on-premises cloud to hosted clouds to hybrid clouds. Further, we can't be so provincial to suggest that every hosted solution belongs in a TekLinks or Claris data center. There are certain applications that absolutely make sense to be hosted by Amazon. We are happy to facilitate that. If Azure is the right solution, we are working toward that as well.

What is the Claris outsourced cloud services model?

The entire infrastructure typically moves into the Claris cloud and then IT support is provided for that cloud, or for any on premise questions that arise. So they do full IT-managed service support and full cloud-hosted support.

What percentage of Claris' customers rely on the cloud services provider for a complete IT outsourced offering?

Virtually all of them are completely outsourced.

At TekLinks, we have two distinct customer bases [enterprise and commercial]. In no instance are our enterprise customers completely outsourced to us.

On the commercial side, we have some of our customers who are completely outsourced and some that are not. What Claris does so well is the cloud hosting and the managed services support, tremendously well.

We have been very good on the cloud-hosting piece, but, frankly, we are not as proficient on managed services support across our company as Claris is. We are very good at that in our health-care practice, but in our regular commercial practice, we have not invested as strongly in that area.

It is not typical to find a company like Claris that is really good at hosting and really good at the managed services -- the whole recipe. Most just do the managed services piece.

What percentage of the TekLinks customer base is enterprise versus commercial?

The majority of our customers are commercial but if you look at our resale business, the majority of our revenue with resale and professionals services comes from our enterprise business.

The TekLinks managed services revenue is probably 50-50 across commercial and enterprise.

What is your vision for the new channel model and the future of the business?

The pace at which technology changes is tremendous. My view is we want to have tremendous relationships with decision makers at our customers so that we can engage them on their technology road map and support them on that road map over the next five to 10 years. We are not going to be exclusively on our hosted cloud or Amazon or resale. Those are products and services. We are there for the long term building solutions with our customers so we have to have a diverse set of skills in order to do that.

We have hardware software resale, professional services, hosting, managed services. We bring those tools to the table. Our challenge is harnessing those tools and building the customer relationships. We are disciplined in terms of geography and in terms of companies that fit with us. It is a complex business. We need to build strong customer relationships, and we need a model that is going to enable us to do that.

What does Claris bring to the table in terms of technical talent?

They have a superb technology team and have been very resourceful and thoughtful in the platform they constructed. We certainly strengthened our technology, sales and support team considerably. Their managed services support model is outstanding.

Their go-to-market sales and marketing strategy and how they execute on that in the commercial space is also something that is very attractive to us.

How fast do you see recurring revenue as a percentage of sales growing for TekLinks?

We see our managed services recurring revenue business growing more than two times the professional services and resale business.

It's important for all our business units to post growth. The recurring revenue piece is going to grow quickly. That's because the market is going in that direction. We are not leading the market there. We are supporting the technology under a recurring revenue model.

If the right solution is a resale model, we love that business, but in more cases than not it is a recurring-revenue model. And it is a model from my background that I know very well and am loyal to.

How quickly do you think TekLinks will become a company with the majority of its sales based on recurring revenue?

You have got to provide solutions to customers. Our view right now is that the solutions that make the most sense for customers now and for the foreseeable future are recurring-revenue-based more often than they are hardware- or software-resale-based. I don’t see that changing in the near term at all.

We don’t have a specific goal of when managed services is half of our revenue. Our goal is that all of our businesses grow every year and, given what I just said, we expect the managed services piece to grow two times or more versus the other businesses. That is our goal.

How far ahead is TekLinks versus the competition?

We feel we are pleased with how we are positioned in our markets but certainly not satisfied. We welcome competitive bids. The only time I get frustrated is when I hear about a deal that we didn't bid on that we would have liked to. That is how we think about ourselves. We need to get in front of more prospects going forward. And I think the Claris sales model will help us in that regard.

Does Claris bring a different sales capability that you don’t have?

It's a direct sales strategy that is very commercial-based, decision-maker focused. It is a very hunter-based sales approach with executive-level and technical support as part of that equation. You have a strong hunter sales model with terrific executive and technical support to get those solutions identified and implemented and supported.

How do you feel about the future of the IT services business with the recurring-revenue model?

The margins associated with our recurring-revenue business are significantly stronger than our hardware-software business. Adding Claris to TekLinks certainly improves the overall current and forecasted performance of the business. And, most importantly, it improves our prospects for growth.

We have been talking about managed services growth, and we have just identified a lot more market territory and a very good go-to-market strategy to accelerate that piece of the business.

Claris is very strong in Nashville, and we have had our eyes set on Nashville for a very long time. So it is a great way for us to get ourselves positioned in Nashville, which is really a terrific market.

Do vendor relationships change in the recurring-revenue model?

The vendor faces do not change for us based on this transaction. We, obviously, from a TekLinks perspective, pick up a couple of new relationships with software providers, which we are excited about. But our strategic vendors remain unchanged as a result of this transaction.

Talk about the TekLinks acquisition strategy.

This is the second acquisition since I joined in 2012. We did a small health-care-focused, managed services provider acquisition in the first quarter of 2013. It has been about two years since we have done an acquisition. We have been very vigilant in looking.

We have spent a lot of time looking. I have had a relationship with Claris since before I joined TekLinks. TekLinks and Claris know each other very, very well.

Will you do more acquisitions?

We will remain very focused on Claris-like opportunities.

In this case, the majority of Claris' revenue is managed services, and that is attractive because that is the fastest-growing segment of what we offer.

But, again, we are looking to strengthen our customer relationships in footprint and expand our footprint in a contiguous fashion. So I would not rule out a strategic player that may have a balance of revenue tilted toward hardware-software. But that company would have to have a base of customers that I thought were very prone to migrating to managed services.

What does the market look like in terms of the valuation for managed services companies with recurring revenue?

Managed services providers, especially hosted managed service providers, that have scale -- at least $3 to $5 million in EBITDA, and maybe low teens to 20 EBITDA. There is not a lot of those guys around. A lot of managed services providers have a support model and are sub-$5 million in revenue, and there are lots of those. And we know there are lots of hardware/software providers that have quite a bit more revenue -- maybe $25 to $75 million in revenue -- but probably EBITDA of about 5.

We have certainly been beating the bushes in the Southeast for the past almost three years looking for partners that make sense. We have relationships with some companies in our footprint that remain very interesting to us.

How do you refer to TekLinks when you are in front of customers?

We are an IT solutions provider. There are certain enterprise customers where we sell them quite a bit of gear and professional services as part of their overall IT solution. We have to build relationships with decision makers to understand the direction they are going and then plug into them. So we look at, do they just need initially some professional services to do an assessment of their environment? They don't know what they don't know yet. So we'll do a professional services assessment and then we'll come back and say, 'Based on what we know, it would make sense to us that some of your applications can clearly be hosted, but we are looking at some of these proprietary applications, latency issues, etc...

How fast are customers moving to the cloud?

Across our entire customer base, including enterprise customers, much more of our discussion is on cloud architectures. In fact, we just sold last week a very nice recurring-revenue deal. It is an on-premises cloud that we are going to support. Because of performance issues of the application, and the size of the circuit and latency concerns, it didn't make sense to bring that environment to a TekLinks cloud. We have the on-site professional services relationship. We have the hardware/software resale. We are installing all the gear and configuring the cloud on-premise. The customer is paying for that equipment on a monthly basis, and then we are doing all of the technical support of that platform. Then we'll do professional services work to grow and modify that platform. It is a cloud architecture more often than not these days, and then we look at where and how we are going to construct it.

What percentage of time are customers choosing a cloud architecture?

It is not the majority yet, but you can see it is moving. Since last summer, there are just more and more discussions around that. I can't put a percentage on it.

In some cases, it is an on-premises cloud, and we are selling it in a hardware/software manner, and the customer is electing to do their own support. But we think, over time, we can strengthen our support model and transform more of that into a recurring-revenue model. It is rare to have a discussion now that isn't at least in some ways referencing the cloud -- even if it is a very tactical sale where we make sure it is not an obstacle to the customer's evolution to the cloud.

What is keeping you up at night with regard to running the business?

The things that really burn you are not the things that keep you up at night. It is the things that you should have been worrying about but you weren't.

But technical talent is always a challenge. Right now, at a tactical level we are really well-positioned on a products and services perspective and, overall, on a technical talent perspective.

It is a carpe-diem approach from my perspective -- seize the day. We have got a great story to write with our customers. We need to get out and begin writing that story with more customers.