Consolidation is the name of the game in the UK IT training market. February saw a flurry of acquisition activity, with three Microsoft ATECs (authorised training and education centre) changing hands.
Bristol-based Blueneck Computer Group was snapped up by Comtec for an undisclosed sum. Anthony Cook (Northern) was bought for ?an initial consideration? of #2.4 million by Delphi Group, the stock market-quoted computer services conglomerate. And Oxford Computer Group merged itself into the much larger US company Aris Corporation in a share-swap transaction.
The previous month Xenon, the #12 million Altrincham-based networking reseller and Novell authorised education centre (NAEC) and ATEC accredited training company, was acquired by Datrontech in a #3.7 million deal.
The lack of involvement of channel companies ? with the exception of Datrontech ? is a striking feature of these recent acquisitions. It can be difficult to make money from the sector ? as witnessed by Business Systems Group, which withdrew from the applications training market last November, citing cutthroat price wars. The company retains its Microsoft ATEC operation in London.
But training is, in essence, extremely profitable ? especially when running software vendor technical certification programmes. ?You can make #1 million a year profit on #5 million turnover ? if you run your business properly,? says Cheryl Harriman, a director at Interskill, Delphi?s training arm.
No wonder Datrontech is keen to expand beyond low-margin component distribution into training. The UK IT training market is worth #350 million a year, according to the trade magazine IT Training. Half of this is conducted by third-party companies.
John Kauffman, business development director at Azlan Training is prepared to take a stab, based on recent research compiled by the company on the size of the UK manufacturer certification market ? of which Microsoft and Novell account for about #40 million. Grey Microsoft training ? conducted outside the Microsoft certified system engineer (MCSE) programme ? could be worth as much again, he suggests.
The recent assault by publicly owned computer contracting firms on the Microsoft ATECs suggests the two-year-old market is a gold-mine. Last year Parity bought into the Microsoft ATEC business with the acquisition of Camberley-based Birtech. Delphi Group is also no stranger to acquisitions, having set up Interskill through the purchase of Royal Insurance Education Services.
Recent purchase prices indicate training companies are becoming increasingly valuable commodities. The up-front price Delphi paid for Anthony Cook (Northern) works out at 10 times pre-tax earnings (Anthony Cook Northern earned #250,000 pre-tax profit on #2.5 million earnings in 1996). By contrast, SHL Systemhouse paid five times the post-tax profit for its three training company acquisitions in the early 1990s.
Explosive growth in computer contracting is driving the training business forward. The Information Technology in Training Organisation (ITITO) estimates there are over 100,000 independent contract workers in the UK. To justify their high wages, contractors must expect to keep their skills up to date. And that means training.
Demand is holding steady for Novell certified network engineers (CNEs), the daddy of all publicly recognised qualifications, as well as Lotus Notes accreditation programmes. And great things are tipped for the newest scheme, recently introduced by Netscape, which is expected to tap the demand for all things intranet.
Microsoft certification training is booming. There are 1,030 MCSEs in the UK and another 3,000 are being put through their paces. Certification costs around #5,000 a person, so 1997 revenues will top #15 million. The real total is likely to be lot higher. There is plenty of grey Microsoft training, catering for time-pressed computer contractors that want the knowledge, not the piece of paper.
The urge to skill-up in Windows NT 4 has led to a shortage in MCSEs, particularly in the South East, where bands of freelance trainers are forming cartels and forcing up rates to #600 a day. Many ATECs, reliant on freelancers, are unhappy. But others could see this as an elegant example of supply and demand in action. MCT trainer day rates do not strike one as particularly excessive, considering that MCSEs can charge up to #1,000 a day in the City.
Microsoft accreditation requirements are propelling the drive to consolidate in the UK. Microsoft is also making it increasingly hard for new companies to become ATECs, which means that non-organic methods are the only practical means for late arrivals to gain a foothold.
The increasing dominance of multi-branch training companies, such as QA Training, SHL Learning Technologies, Comtec and Interskill, is also placing greater pressure on single-site operators, according to Russell Fry, head of training at Xenon. ?This is a natural consolidation in what has been a fragmented market. Azlan is the market leader in accredited training and there is a huge gap with everybody else in the field.?
Azlan is understood to account for 30 per cent of all Microsoft student material in the UK, bigger than the next three ATECs put together.
?To build a resilient training company you need more than one geographic area, and more than one product line, so you don?t have all your eggs in one basket if local competition drives down prices. It wouldn?t surprise me to see more companies under #2 million getting bought up,? says Fry.
Charles Caudle, managing director of Comtec, agrees. With the acquisition of Blueneck Computer Training, Comtec gains a sixth branch and a #500,000 jump in turnover to #6 million. ?There is a lot we can offer small companies,? he says. ?We approached a large customer in the Bristol area, offering MCSE training. They said yes immediately, and they also specifically said that they would not have signed up with Blueneck. Large companies are more comfortable dealing with big training companies.?
Coverage and market share is the rationale for Aris? acquisition of the #5 million Oxford Computer Group (OCG). Aris set up last year in the UK with a small ATEC in Reading. But the $22 million company realised it was not going to build organically very fast. With OCG under its wing, it has inherited three ATEC branches, and a growing Microsoft consulting business.
These days, customers are increasingly reluctant to travel for IT training, according to Caudle. ?Ten years ago we would have people coming down from Edinburgh and Newcastle to attend training courses in London. This is very rare now. Training has become a very localised phenomenon.?
The upshot is that bigger training companies must open more branches to be where the customers are. They can do this organically, or through acquisition. Fry says: ?We estimate we have more than half of the technical accreditation training in the North West, because we were the only serious training company in the area. And people don?t travel for training any more. The market has been fragmented up until now, and this may change. QA set up in Manchester in January and Azlan is opening up here too.?
Azlan is opening up in Coventry on 7 April and in Manchester in October, taking its UK network up to five branches. ?We need to provide regional solutions,? Kauffman declares. ?There is greater demand for training, which means greater investment. Money spent on travel and accommodation means less is spent on training, as it all comes out of the same pot.?
As market leader in the manufacturer certification market, Azlan sees little need to buy its way into the regions.
?We have looked very carefully at acquisition, but some of the companies out there are placing pretty high values on themselves,? says Kauffman. ?Frankly, it is much cheaper to open our own centres. Xenon may face more competition in its Manchester heartland, but it is also an active player in the branch opening game itself. It currently operates three sites, in Atrincham, Leicester and Newcastle ? the last two were opened only in the past year.?
To date, growth for the #2.5 million training business has been organic. But the company, which is now looking for sites in the South East and Yorkshire, says it will probably have to buy into the London market.
?London is so different from the rest of the country,? Fry says. ?It is a very difficult, very mature well-populated market. There is not the staff loyalty, so it is difficult to start from scratch. It is better to buy an established company than take the losses in getting started. And we are not keen.?
Xenon is that relatively rare beast ? a reseller which also successfully sells training. Resellers are among the biggest customers of accredited training programmes. They employ at least 50 per cent of all MCSEs in the UK ? and probably more, according to Microsoft channel marketing manager David Smith ? as up to half of the 25 per cent of MCSEs who supply their home address in their contact details are also thought to work for channel companies.
But few resellers have made much of a fist of selling computer training. P&P and SHL Systemhouse are the outstanding exceptions. P&P operates a #20 million IT training business through its QA Training subsidiary, acquired for #18 million in 1994, while SHL Systemhouse owns the #10 million training company SHL Learning Technologies, assembled by Bob Woodland in the early 1990s through the acquisition of three smaller firms. Since Woodland?s departure earlier this year, following an abortive attempt at a management buyout, there have been persistent market rumours that SHL Learning Technologies is up for sale.
Specialist Computer Holdings and Computacenter are also in the training business, although neither hold ATEC or NAEC accreditations. Computacenter, instead, subcontracts all of its technical training to Azlan.
Distributors have been much more successful in selling IT training. Azlan is by far the UK?s biggest supplier of manufacturer-certified training, with #10 million sales in the UK alone. Frontline, Ingram Micro, Interquad and Persona also run thriving training arms.
Hardware manufacturers and systems integrators are also active players in the IT training market. Unisys, Network SI, ICL-owned Peritas and Global Knowledge Network (spun out of Digital Equipment) all operate Microsoft ATEC branches. So why are resellers generally so poor at selling training into their customer base?
It all comes down to focus, Fry argues. ?We are wholly autonomous within Xenon Group ? with separate sales teams,? he says. ?You cannot bolt on training to other products and expect to make a success of it.?
Perhaps many resellers have got their fingers burnt with applications training. At one time, this was an easy money-spinner, now it is extremely hard to turn a buck.
Aggressive players like CTEC are establishing a dominant market position by heavy discounting. But volume pricing tactics require big customer throughput to succeed. Applications training has become very much a logistics-driven commodity business, according to Caudle, whose business mix is currently split 65:35 between applications and technical training.
?In essence, the secret is ensuring you have the right handle on training as a volume business,? says Caudle. ?In essence you are selling a training course, a trainer and a room. And obviously you will do better if you have got eight people in that room, rather than four.
?There is a close-knit mix of success features. The sales operation is the key to it all. But you also have to get the supply side right. This means close communications within the entire market.?
Comtec also adds value to its applications business through pre-sales consultancy. Last month, the company picked up a training award for its service which evaluates training needs for corporates.
?Customers are unable to gauge what their end-user population needs. We can provide the analysis, which gives us some return on the consultancy side, and we can also cut down on time-wasting by ensuring people are matched to appropriate courses,? says Caudle.
Interskill?s Harriman agrees with Caudle that ?logistics is everything? in the applications training business. But she also injects a note of caution. ?You have to be prepared to walk away from unprofitable tenders. A man, a boy, a dog and a bucket with no overheads could not make money on some of the prices some training companies are charging.?
Applications training is perhaps best left to the volume boys. But technical training is a different matter altogether. One would expect networking specialist resellers in particular to bolt on training revenues to their service-led businesses.
But how do resellers get their snouts into the trough? The answer is, alas, that it is already too late for most resellers to climb on board the ATEC bandwagon ? unless they are located in the margins.
The money required to buy into IT training companies is too great for all but the biggest dealers to contemplate. And starting from scratch is a very expensive option, too. This requires a lot of upfront investment and patience. Xenon Group?s Leicester operation is moving into profit only after a year. Newcastle is in profit after just two months, but the start-up costs were directly responsible for putting the group into the red last year.
Kauffman takes a different tack on the lack of reseller participation in the IT training industry. ?I like to think resellers are not involved because they have no need to. They have the relationship with Azlan. They can concentrate on their core competencies, and do not have the worry about the cost of building a strong training arm.
?The reseller methodology means that we can supply all our end-user training through the channel, and we create demand for them. The reseller model works particularly well in the technical arena, where companies want to go with one organisation for all their needs.
?We have developed a whole portfolio around the network infrastructure. We supply Cisco, Bay Networks, SCO Unix and the NOS volume marketplace. This is where other training companies fail, because they concentrate mostly on the volume market. But there is a real customer need for training in lesser volume but higher value products.?
Kauffman is entitled to his sales pitch ? Azlan Training is the UK?s biggest and probably the best manufacturer certification training company. And it certainly has the deepest penetration in the UK reseller base.
Where Azlan Training leads, others follow. Xenon Training and Comtec are both keen to explore the reseller route. Datrontech, Xenon?s new owner, has thousands of resellers on its books ? if it could get just a couple of hundred of their customers a year through Xenon Training?s doors it would be looking at an extra #1 million a year of high-margin revenues.
Comtec currently only has a handful of resellers signed up to its partnership programme, but in recent months it has met as many dealers as possible in preparation for a renewed foray into the channel.
Since November, Comtec has trained more than 800 dealers in Windows NT 4 as part of Microsoft?s Net Results channel scheme. The company will also play an active role in Microsoft?s Perfect Match programme, launched at last month?s Windows Show, a programme which brokers introductions between resellers and appropriate service and application software specialists.
Comtec will also supply the internet training element at this year?s Comdef, the annual reseller beanfeast.
Xenon Training and Comtec both have a long way to go to catch up with Azlan Training, as far as resellers are concerned. But the two companies? interest in wooing the channel shows that resellers still have a part to play in the IT training game. Even if they are relegated to the sidelines as paid spectators.
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