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IT Consulting Industry Outlook 2019

Background of IT Consulting industry

BERNAR DE LA HERA | Author and Partner ICT Specialist, ONEtoONE Corporate Finance

Traditionally, information technology or IT has represented a significant part of global transactions in the consulting sector. The IT consulting industry requires low capital investment, together with the high level of innovation and the impact that new digital technologies offer in all sectors of the global economy, are the key factors explaining an upward trend in this sector. The advantages of this industry are driving the interest and continuous need of companies to acquire new capabilities that allow them to enter these new and innovative markets. Since 2013, the rapidly expanding technological trends towards cloud computing and Big Data analytics caused larger competitors to enter the market through acquisitions of the smaller industry counterparts with developed technology and supporting infrastructure.

What is the IT Consulting Service?

IT Consulting is understood as the field of activity that focuses on advising organizations on the best way to use information technology (IT) in order to achieve their business objectives. IT Consulting industry is comprised of companies that offer business design and implement information technology systems and infrastructure. These IT consulting services provide expertise, experience, and industry intelligence to enterprises, helping to obtain better design, architecture, optimization, and implementation of security software, people, and processes. Industry giants like Accenture PLC and International Business Machines Corp. (IBM) have allocated millions in acquisition sprees in the past years, purchasing leading digital consulting firms like OCTO Technology and even institution-based projects like the MIT-run laboratory focused on the development of computer systems. The IT Consulting industry is known for the low capital requirements, thus it is also attractive for small to medium-sized businesses.

 The IT Consulting industry is known for the low capital requirements and is therefore attractive for small to medium-sized businesses.

According to IDC, the global IT industry surpassed $4.5 trillion mark in 2017. A large amount that is more widespread and established in mature technology markets such as the U.S., Europe and the Asia Pacific, where the robust infrastructure and a large installed base of users equipped with hardware provide the demand.

Trends in the market

Artificial intelligence & Automation, Cybersecurity and Cloud-based solutions are the most popular sub-sectors of the IT consulting industry. Here are some highlights of these three advanced technologies:

Artificial Intelligence and Automation add an additional layer of intelligence to the existing technical solutions that companies are building, and provide a more extensive IT architecture to tackle a broader range of problems. The main advantages of automation are cost reductions, improving customer services and allowing for more precise oversight of trends impacting the clients’ business. Consulting service providers are also actively implementing automated back-office functions in order to optimize the invested time and effort of employees accomplishing laborious back-office tasks.

Cloud-based solutions refer to the array of resources, on-demand services, networks, applications that can be accessed through a shared cloud infrastructure. The cloud’s value proposition solution facilitates faster and easier experimentation and innovation in the business context.

Cybersecurity is the technology designed to protect systems, networks and data from cyber attacks and data protection infractions. The latest disruptive impacts of new cloud-based solutions on the company’s business and operating models make cybersecurity a critical investment priority. The consequences of suffering a cyber attack range from loss of reputation and business assets to the costs of solving damages.

 You may be interested in:  High-Tech Industry Outlook 2019. M&A in disruptive environment

M&A in the IT Consulting Industry

During 2018 the average value deal in M&A Activity in the IT consulting sector accounted for 46% in North America and 38% in Europe, which represented eight out of ten transactions while Asia represented a smaller chunk with 11%. Furthermore, the average price deal of the United States is practically 3 times higher than in Europe, which shows a significant difference in the IT services companies in these geographies.

According to the data collected for the present report, Artificial Intelligence is being aggressively adopted by forward-looking businesses, particularly in the banking, retail and automotive sectors and rising buyer demand for AI players. The demand for business with Cloud-based services remains robust but in line with previous years. Finally, Cybersecurity continues the growth as a consequence of the high demand for cloud solutions and connected device.

Overall, if the expected growth materializes in the years ahead, the spending will overlap the $5 trillion mark by the end of 2019 compared to the results from previous years. Disruptive IT services will be the catalyst for a large part of M&A transactions worldwide, increasing the interest of the consulting industry in transactions within this area.

If the expected growth materializes in the years ahead, the spending will overlap the $5 trillion mark by the end of 2019.

The full report  “IT CONSULTING INDUSTRY OUTLOOK 2019” offers more information about services provided by IT consulting firms, geographical segmentation, and a detailed overview of the M&A transactions carried out by the leading companies in the IT consulting sector. Download it here in order to have a deeper understanding of today´s M&A landscape within the sector.


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New M&A transaction advised: Midsona acquires Davert

New M&A transaction advised: Midsona acquires Davert, a leader in the German organic food market

Midsona AB (publ) (“Midsona”) has reached an agreement for the acquisition of German company Davert. The M&A transaction, which has been advised by ONEtoONE Corporate Finance and Seufert Rechtsänwalte on seller´s side and Strata Advisory AB, Heuking Kühn Lüer Wojtek and Fredersen Advokatbyrå AB by on buyer´s side, involves the acquisition of the German leading company in the organic food market with a turnover that exceeds 60 million euros per year. The total purchase price is approximately EUR 48.5 million (~SEK 511 million), on a debt-free/cash-free basis, and will be paid in cash1.

About Midsona

Midsona holds a strong position in the Nordic market with own strong brands within health foods, personal care and hygiene. Midsona also sells a number of licensed internationally established brands. Our products are sold through grocery and convenience stores, pharmacies, health stores and internet. Midsona’s priority trademarks are: DALBLADS, FRIGGS, HELIOS, KUNG MARKATTA, MIWANA, NATURDIET, ESKIMO-3 and URTEKRAM. Midsona has annual sales of about MSEK 2,173 (2017). The Midsona share (MSON) is listed on NASDAQ OMX Stockholm, Mid Cap.

About Davert

Founded in 1984 by Rainer Welke, Davert is a pioneer in the organic food industry in Germany. The Company is a leading manufacturer and distributor of organic dry packaged food, offering products under its own Davert brand as well as private label products. Davert’s portfolio includes a broad range of organic products in categories such as convenience products, snacks, superfoods & nuts, breakfast cereals, rice and pulses. Davert’s products are sold through various channels including grocery stores, drugstores, health food stores as well as to the food services industry.

In recent years, Davert has launched a new brand design, broadened its product portfolio and extended its distribution. In this period the Company also moved into a new, purpose-built production facility and significant investments were made in state-of-the-art manufacturing lines and an automated warehouse. Davert has approximately 150 employees, all of which are located at its facility in Ascheberg, North Rhine-Westphalia, Germany. Sales in 2017 were EUR 64 million (~SEK 616 million).

Financial Effects of Acquisition on Midsona

For the financial year 2017, Davert achieved sales of EUR 64 million (~SEK 616 million) and adjusted EBITDA of approximately EUR 4.4 million (~SEK 42 million). For the current financial year, Midsona expects Davert’s sales to increase compared to the previous year and to achieve adjusted EBITDA of approximately EUR 5.0 million (~SEK 53 million). Not taking into account any transaction-related costs, financial or synergy effects, the purchase price would represent a current year EV multiple of approximately 9.7x EBITDA.

Synergies are anticipated to be realized in areas including production, cross-selling and procurement. By 2022, these synergies are expected to have an annual impact on EBITDA of approximately EUR 3.8 million (~SEK 40 million). Initial synergies are expected to be realized during 2019. Midsona has financed the M&A transaction with a new debt facility.

 

(1) The purchase price excludes: (i) a capital investment in a new production line of EUR 8.5 million and (ii) potential payments between April 2020 and 2022 of up to EUR 6 million in aggregate contingent on Davert exceeding specified financial targets. The capital investment will provide Davert with new production capabilities targeted at attractive, fast growing segments. The investment program is expected to be completed in late 2018.

Note: Purchase price and 2018 figures converted to SEK at exchange rate of 10.54. 2017 figures converted at 2017 average rate of 9.63.

Click here to find more M&A transaction advised by ONEtoONE!

Due Diligence, a litmus test in the buying/selling of a company?

Imagine that you are going to buy a flat but you have only been able to view it in photos. You liked what you have seen up to this point but ¿would you really buy it based on a couple a photos? I’m sure the answer in no. Something similar happens during the process of buying/selling a company. The potential buyer only sees the “photos” that the seller wants to show him. The due diligence process is the way the buyer gets to know about the actual state of the company and whether or not these photos are “photoshopped”.

Every buyer of a company specifies knowing the company’s real situation by means of an assessment, due diligence, which encompasses not only the financial side of the business, but also the legal, work, environmental aspects etc.

Traditionally due diligence is carried by the buyer once their offer (subject to due diligence) has been accepted. Normally realised between four and eight weeks, in which period the buy/sell contract is, in a parallel fashion, negotiated.

It is worth highlighting that the buyer usually requests exclusivity during this period if he/she is going to have to spend money on due diligence and it is normal to concede it. However, you should bear in mind that seller, while the due diligence process is ongoing, will maintain negotiations with a single buyer and running the risk that he/she may, by being in exclusivity, demand a final discount on the price.

Once due diligence has been finalised, the results can be an essential tool to verify whether the price offered is adequate. Consequently, the buyer has the ability to use them as a tool for negotiating the price and contract terms. This, combined with the fact that usually the seller is not conscious of his/her shortcomings until the buyer discovers them in due diligence, which can put the seller in a weak negotiatory position.

As well as this, it can happen that the seller may need to formalise the purchase urgently, thus he/she proceeds quickly to the contract signing, but will establish as a condition that the buyer was satisfied with the results of the due diligence, which we would be carried out in a more restrictive timeframe.

Without a doubt, the due diligence process is crucial in a buy/sell operation, it is the way to come across (or not) the potential “tweaks” needed relating to the company for sale.

The Company, or the Business?

Are you thinking about buying that company that you love?

You have already decided and you have succeeded in advancing a few steps in the buying/selling process with the owner of the company. However, you are confronted with one of the most complicated problems of the operation: the seller’s understanding of the inequality that exists between the value of the shares and the debt accumulated.

The most efficient method, as a buyer, to cross this obstacle and achieve your objective is to present the business to the buyer, rather than the company. This represents for you the most advantageous alternative, because with an acquisition you avoid the debt that the company has with the banks and the responsibilities from past events. These would remain with the company and in the hands of the seller while you, as the buyer, avoid the risks.

You may arrive faced with a company with a lot of debt, but if you put a price only on the business, the seller will understand better that you are implying that his shares are not worth anything. Since you are buying the business free of debt, you, as a buyer, also have the option of requesting a bank loan to complete the purchase and pay the seller. The reasoning of the banker will be due to the fact that the business has no debt, you will be able to repay the financing with the funds generated by the same business.

As you can see, it is more convenient to buy the business rather than the company because you avoid many risks that could harm you later down the line. The question now is: will it also be the most convenient option for the seller? In reality, the seller is left with the debt and will have to pay more taxes. However, it is an option to be evaluated and one which ought to be explored at the time of purchase.

Mergers & Acquisitions, Compraventa de empresas

Many M&A “advisors” are not effective

It is normal for a business owner who thinks about selling his company to be afraid of hiring advisors.

It is a key decision, there is a lot on the line, and many things are going through his head:

“Are they really going to fight for my best interest?
Do they really have a large enough contact base to sell this?
What if they charge me a lot of money, make we work, play around and then nothing really happens?”

These are all legitimate feelings; choosing the right advisor can be the difference between being able to sell your company or not, between maximizing its value or selling it poorly.

It is true, a lot of “advisors” don’t do an effective work. They are good at documentation, valuations, analysis, etc. But they don’t know how to locate the right buyer, they don’t have the technical resources and man power needed, so they can’t spend the necessary time to find the right buyer. That’s why regardless of their efforts and great skills they fail to sell your company and let you down.

A lot of “advisors” do not know how to locate every possible buyer around the world to find the best fit for your company, ideally the one that will pay the most, or they simply don’t have the resources to do it.

Due to this they are unable to find multiple buyers to start an auction, generating competition, which would drive your company price up and maximize its enterprise value.

Our experience in dealing with more than 1000 mandates has shown that 70% of the outcome of a business sale is based on an extraordinary amount of work on the buyer search, and contacting of the key decision makers. That is an intensive and heavy work load that can’t be done by a small team or a single advisor, the reality is that without a strong support system they will not be able to do it.

If this is your company and it is the most important operation of its history, You deserve an elite team working to maximize the transaction sale value.

If you want to sell your company, make sure that the advisor you choose can provide you with this level of search capabilities to find your buyer.

Written by Enrique Quemada, president of ONEtoONE Corporate Finance.

Mergers & Acquisitions, Compraventa de empresas, Enrique Quemada

Mergers & Acquisitions, Compraventa de empresas

Beware of the shark´s kiss

Private equities have many techniques to get what they want. They are manufacturers: they manufacture money, buying cheap and selling expensive, so beware.

Don’t only negotiate with one private equity firm; prepare alternatives, whether they be private equity or other buyers and investors. If you only negotiate with one, you will lose your negotiating power.

The sale of a stake to private equity is usually a more complex process than selling to an industrial investor. Therefore, I strongly recommend that you don’t embark on negotiations alone; hire a professional advisor who is as prepared as your counterparty is.

Private equity firms will try to get exclusivity during negotiations; don’t grant it to them until you have a good letter of intent. This way you won’t lose negotiating strength while you try to agree on key points.

*1*When negotiating with a private equity firm, I recommend that the letter of intent be as binding and closed as possible.*2*

I try to negotiate all the key areas of the operation in this agreement so that the private equity firm has less room to maneuver after due diligence is finished.

I suggest you to do a due diligence and analyze the private equity firm you are negotiating with. A good way of doing this is to speak with other owners who have worked with the firm. Private equity firms usually put the companies they have invested in on the website.

They will be your partners and you will have to trust them when they become part of your company, but before then they are your opponents and you should be careful to protect your own interests.

 

Written by Enrique Quemada, President of ONEtoONE Corporate Finance.

Enrique_Quemada_President_Global_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

Owner’s fatigue? Prepare to sell the company

More than a third of the business owners are 55 or older. For many of them it is time to prepare for sell.

One of the main objectives of the preparation process is to identify the key aspects that need to be improved and reduce any possible risks that a potential buyer might perceive to be a problem.

There are many businessmen who, at 55, decide they have enough money and “have done it all”, they no longer feel the urge to continue fighting and would rather focus on other pastimes, such as travel.

They may feel a social responsibility to dedicate the rest of your years to an NGO, maybe you want to buy a company focused on another activity, perhaps you want to devote yourself to politics or to your family (to enjoy spending time with your grandchildren in a way you couldn’t with your children because it coincided with the initial stages of your company). Having founded or inherited a company doesn’t mean you have to spend your whole life dedicated to it.

Others prefer not to retire until 70. In a highly competitive business world like today’s, without complete dedication from its owner, a company can rapidly deteriorate: the necessary amount is no longer invested, it loses competitive strength, and talented employees notice a lack of drive within the company and look for new work. It creates a vicious cycle that ends with the life, closure or bad sale of what were once magnificent organizations.

This situation is very common; the employer does not want anyone to know that he is willing to sell, which means he cannot completely explore the possibilities. It is also common that a business owner sees his competitors as the best candidates, but the idea of them knowing that he is selling makes him dizzy. He doesn’t know the techniques that exist in order to correctly manage confidentiality and he doesn’t know where to find other buyers.

As he doesn’t see a solution, the businessman gradually lets time pass by and it becomes increasingly difficult to sell.

If a businessman is 63 and wants to sell his company and retire in two years, it is always a good idea to start preparing the company for sale.

Any businessman thinking of selling his company should start preparing one or two years in advance

When you want to sell a house, you make improvements such as painting it, mowing the lawn, cleaning it and fixing anything that’s broken. These small touches can increase the value of the house in the eyes of the buyer because it changes its overall aspect. With a value much higher than a house, this advice rings even more true when it comes to your company.

If our client has time, we always begin to prepare his company one or two years in advance. This way, we have more time to improve its value, make it more attractive, interest more buyers, increase our chances of success, remove obstacles, and minimize the fiscal impact and economic consequences of the sale.

Don’t forget that by failing to prepare, you are preparing to fail.

 

Written by Enrique Quemada, president of ONEtoONE Corporate Finance.

Enrique_Quemada_President_Global_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

When selling your business: surround yourself with the best

Selling a company is a much more complex process than any other sale, as a company is a living process and its sale affects third parties: Employees, clients, suppliers, banks, tax authorities, etc.

At the same time, it also implies legal responsibilities that may have important economic consequences for the different parties. For this reason, I recommend you to surround yourself with professional advisors.

During the sale of a large business, both the buyer and the seller always rely on professional advisors to help them through the process.  Even though this should also be the case with smaller companies, we still see many business owners selling their businesses by themselves without looking for support from a specialized advisor.

When a buyer interested in the company arises, the business owner decides, in many cases to deal with this potential buyer himself, without the help of a professional expert. By doing this, the process can become extremely lengthy and the negotiations may get “tied up”.  Who is going to know my company better than me? By this argument, the business owner justifies the reason behind managing the sale himself.

The buyer, on the other hand, uses advisors with a lot of experience both in the finance world and in negotiation and with a strong focus on the market. The seller is at a clear disadvantage because he does not possess this experience and this is reflected in the deal´s outcome.

Your advisors can provide imaginative solutions at times were the negotiation seems to be going nowhere. By providing financial solutions, they can use this to arrive at an optimum price for the company during the negotiation.

Good Advisors are expert negotiators when it comes to the buying and selling of businesses, they know how to frame the negotiation and are able to guide the client by advising him about what should be the convenient thing to say during the negotiation.

A good team of advisors stops the client from making  many errors, increases the possibilities of selling the company and manages to attain a much higher price for the client´s business.

Selling a company is not an easy job, and it requires a lot of time. During the period of searching for investors and negotiations,  you should focus your efforts on improving the company´s financial results while at the same time monitoring the advisors and demanding to be informed at any step.

Without advisors, it is very difficult to maintain confidentiality and, at the same time conduct a rigorous search to find the best buyer or investor for your business.

Surround yourself with the best. This process will be one of the “moments of truth” in your professional life. Don’t skimp on the quality of your advisors. As I have, I imagine that you too have also come to realize that “cheap is expensive”.

 

Written by Enrique Quemada, president of ONEtoONE Corporate Finance.

Enrique_Quemada_President_Global_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

Innovate Today

I am often asked what innovation is. Is it a new unique technology, a cool new product, does innovation mean coming up with the next iPhone or medical device, can I innovate if my business is not a startup, tech company, or sexy new venture. The truth is innovation is not that complicated; in management innovation is the result of a process that brings various novel ideas in a way that has an impact in an organization, this can be a new idea or a more effective process. It can also be the application of new solutions to existing company needs; innovation is simply something that marks the company in a positive way, and as a result transfers into better solutions, services or efficiencies to your clients. That is why I always say every company can and must innovate.

Innovation is a catalyst for business growth, which is what makes it so important. Ford changed the way we produce by reorganizing the manufacturing chain and the internet changed the way we look at businesses geographies forever, but even small innovations like color coding have had a deep impact on our daily lives. We can’t grow without innovating, in biology evolution is innovation, and innovating is the way organizations and economies evolve.*1* Joseph Schumpeter argued that industries must incessantly revolutionize the economic structure from within, and that is exactly what business leaders and entrepreneurs do every time they come up with ways to improve customer satisfaction, reduce costs and times or better their relations with suppliers.*2*

The next question I’m asked is, what do I have to do to innovate. The answer is not as straight forward as for other business functions, but it is much more fun. To promote innovation leaders must be irreverent, question the way you do everything and the way your industry operates.  Be inquisitive look at your competitors, other industries and even nature. Figure out what they do and how do they do it, sometimes innovation comes from crosspollination between industries or functions, one thing is for sure innovation will not come from doing the same that we have been doing, no change has ever developed by not challenging the way things are done. And don’t forget to look into what you are doing correctly today it is easier to innovate in areas that we excel at than those where we have problems.

Innovation can easily be linked to positive changes in organizations since it usually brings with it efficiency, increased productivity, better quality and in general increase value to our clients that will translate into more market share and loyalty. But none of this is possible if we don’t create an innovation culture in the company and put in place the structures and resources to implement innovation and make it part of employees tasks, be sure you are not only creating but nurturing an innovation environment in your organization. Your top executives and you have to break away from traditional ways of thinking and doing things and learn to use change to the advantage of the organization.

All organizations can and must evolve, innovation happens by many reasons sometimes is a result of a shift of the companies environment and its need to adapt, other is because of a new technology coming into play, some innovation is a result of a failure on our normal system and a quick fix brings innovation, sometimes with us even noticing it. But if we keep our eyes opened to find unserved needs, have the best people and technology in place and are willing to put in the right resources we will be innovation drivers in our companies and industries.

 

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Innovation doesn’t happen by chance, innovation is a result of a disciplined company that is always looking for opportunities and has created the right team and environment for it, but most importantly innovation happens because we as leaders make sure that our organizations culture is aligned with it and we allocate the right resources for it to be possible. Forget about innovating for the future start innovating for the present, as with strategy the key is to think of what we are doing today and how can we do it better, how can we add more value to our clients and be more efficient, as we do this we need not to guess what the future will be like but how we can start building the future we want, it is way more fun this way. *1* Be bold and let your imagination run wild because the only limits are the ones that we set upon ourselves and our organizations, there is nothing to wild or to crazy and we must not limit ourselves because the moment when we envision a crazy new world and set our minds in making it a reality that is exactly when innovation seems to magically appear. *2*

 

Written by Iliya Zogovic, President & CEO ONEtoONE USA.

Iliya_Zogovic_Partner_USA_ONEtoONE

Mergers & Acquisitions, Compraventa de empresas

Does Your Business have a Strategy?

Every time I speak with a client or mentee for the first time, they start by explaining their strategy. More often than not I have to stop them and explain that what they are describing is not a strategy, but an elaborate fantasy they have created about what they want to do or dream to become, unfortunately that’s not a strategy. Once they get over the surprise, we work on understanding what they really do and the difference between this and what they want to do. When this is clear they can begin to understand the misalignments between the two, and start working on correcting them. As simple as that they have a real strategy.

If you are an entrepreneur or business owner with a clear objective and vision start by analyzing each and every area, team member, and the structure of your business: figure out which of them are not aligned with your main objective and vision, then start working to fix this. Our job as leaders, whether you are the CEO or head of a team, is to identify and correct strategic misalignments. We have to look for them in every functional area of the business, culture, structure, corporate values, compensation structures, business model, priorities, and operations to mention a few. Analyze each and every component of your business because they are all important, and are cornerstones of your strategy. A slight misalignment of one component can convert into a full shift of your strategy.

Once you understand your objective and vision focus your mind on what you are not going to do, this is as fundamental to your business strategy as what you do. It is crucial that while you work on your strategy you don’t forget to think of what you are not going to do. If you think this way from the beginning you will have a strong growth path, while keeping centered on your vision and strategy. Knowing what we don’t want to do will give us the discipline to say no to an “opportunity that doesn’t align with our vision, before we end up drifting away from our vision in an ocean of opportunities like a loose buoy in open sea.

Companies have a gravitational tendency to mediocrity; those that succeed are the ones who manage to set themselves apart from the pack by focusing their strategy on a radical service differentiator, aligning their entire organization towards it. Everything that they do is focused on this objective: the people that they hire, the systems they create, the way they organize, their compensation structure, they are all aligned with this differentiator. This makes it easy to develop a strategy and stay focused on what will make us most successful.

Developing a strategy sounds really complicated, but the truth is if you want to develop a successful one, you have to make it as simple as possible. Focus on a concept that you dominate and are the best at in the market, make sure you differentiate yourself from the rest, and if possible that no one else does, but at least make sure no one does it exactly the same, or as good as you do. *1* The best things are usually the simplest ones, as da Vinci said, “Simplicity is the ultimate Sophistication,”  your strategic statement should be reduced to one simple sentence that states the genetic code and competitive advantage that makes you unique. *2* If done right, this strategy statement will be clear, concise, and memorable.

Once the strategy and strategy statement is in place is time to communicate your strategy and execute. Make sure that everything you do as a leader is aligned with your strategy, because if you act erratically and make decisions that are not aligned with your strategy you will send mixed signals to your team, which will negatively affect your image, your strategy, and ultimately your business. Make sure that everything you do is coherent with your strategy, and that you are crystal clear when you communicate it. Just like in our personal lives, our true challenge is to reduce the gap between what we say we are going to do and what we actually do, because this translates to the difference between what we want to become and what we are at any given moment of our lives. Remember we are not what we do once but what we constantly do, and usually how we do one thing is how we do everything.

 

Written by Iliya Zogovic, President & CEO ONEtoONE USA.