Should resellers take the vertical route?

Following the lines of vertical markets can be a profitable, but sometimes tricky business for smaller companies.

Be an application service provider (ASP). Be an ebusiness solutions developer. Move into consultancy. These are among the most common routes to riches and glory piled upon resellers these days by well-meaning experts.

Those suspicious of anything quite so modish might well be asking themselves whatever happened to yesterday's failsafe reseller strategy, the niche vertical market. Surely focusing on one, or at most two, industry sectors can be expected to sustain a reseller business in these tough and competitive times.

Or can it? Is vertical specialisation dead, or a solid if unfashionable way of holding up margins while creating a lasting bond with customers?

A solid body of evidence would suggest the latter. A growing number of New Economy service provider businesses are starting to lean in a niche direction.

Nearly half of all the ISPs in the US are now targeting their services at end-user companies in particular sectors, says a report from Reality Research and Consulting. Top vertical niches for these ISPs are telecoms, which was cited by 45 per cent, and financial and investment services, named by 36 per cent.

On the other side of the Atlantic at least, even application service providers seem to be getting the specialist message. USinternetworking, one of the largest ASPs in the US, says it now plans to take on vertical markets. Andy Stern, chief executive, says the company will start choosing integration partners in the next quarter to offer customised services to industries such as travel and finance.

Let's get vertical
Others are up to the same game on this side of the Atlantic. SAP's bid to up the ante against rival Oracle has seen it adopt vertical tactics. The German vendor has been criticised for missing the internet boat, but it is now repositioning itself as a web applications supplier.

To help further this ambition, SAP has taken a $250m equity stake in ecommerce infrastructure supplier CommerceOne, which has established a strong position in vertical markets such as the automotive, aerospace and energy industries. CommerceOne will integrate its technology with SAP's supply chain, customer relationship management and business intelligence applications.

This should not be taken to imply that a vertical strategy is a guarantee of success, particularly for resellers. This is partly because the lines that divide one vertical sector from another are forever blurring, making it a tricky business to operate within one market in total isolation.

Ken Batty, UK marketing director at IBM, acknowledges that this is a growing issue for vendors and resellers alike. He says IBM treats vertical markets as a part of its strategy, in conjunction with a broader view that allows for integration between different markets, and he urges resellers to take the same approach.

"If you spoke to an IBM corporate account manager 15 years ago, you might have found he worked with Barclays Bank, McDonalds and Tesco. Everything was organised geographically," he says.

"One of Lou Gerstner's first moves in 1995 was to reorganise the company along vertical lines. But he was adamant that this was not going to be at the expense of the integrating technologies that made us special. Any client manager can call upon relevant bits of IBM outside their vertical unit," he adds.

A small problem
Now IBM divides its larger accounts into vertical units that address markets such as telcos and utilities, retail and distribution, and banking and finance. But Batty says that in the smaller enterprise space, this is not always possible. "Among medium-sized companies, we also have sectors, but smaller businesses are far less easy to divide up along neat lines."

And so it is with IBM's reseller partners. "We used to encourage business partners to line up against sectors," says Batty. "It works in some cases, but a lot of partners were saying to us, 'My expertise is Oracle and Unix, please don't pigeonhole me in one vertical market." Now some are classified as being in particular markets, while others specialise in horizontal solutions like customer relationship management [CRM] and ebusiness."

Batty accepts that attempts to impose too much of a template on partners are doomed to failure. "We are constantly struggling for ways to structure and organise partners, but always fail because the reseller sector is so complex," he says.

"My experience is that if you try to put resellers in a box, some will find it hard to grow. When we are sharing out the sales leads, someone might miss out who could do the job because we have classified them too narrowly. It's easier to say to resellers, 'What is it you don't do?'"

Batty adds that a vertical tag against a reseller's name has other down-sides too. "Big corporates are no longer competing only vertically any more. Shops are into banking, banks are into insurance. Even resellers themselves are part of this trend by getting more and more into providing finance. The internet is enabling a lot of the breakdown between barriers. Amazon.com is selling books and CDs, forcing people like Waterstones into the CD market."

Clearly, in such a climate it is only a strong-minded reseller that looks at only one type of customer.

If a traditional approach to the vertical issue is getting harder to sustain, are there not more modern approaches that look forward to a web-enabled future while allowing some of the cosy specialism of the Old Economy model?

Say the word 'vertical' to a lot of people in an IT context, and they will assume you are talking about vertical portals or e-marketplaces.

Cashing in on e-marketplaces
With the online business-to-business (B2B) market set to be worth $3tn by 2003, and the current explosion in vertical and horizontal trading communities still going on, setting up an e-marketplace might look like a good opportunity for an established service provider or reseller to deepen its relations with a particular sector while at the same time embracing the internet.

However, bear in mind that while quite a few of the bigger ecommerce exchanges are struggling to get enough bums on seats, most of the smaller so-called private exchanges are thriving. In fact, almost 90 per cent of the world's B2B ecommerce this year will flow through private e-marketplaces.

Private marketplaces are the work of organisations seeking to switch relationships with suppliers to an e-procurement model, within a closed and highly selective network.

In this way, they are realising various goals such as disintermediation, better forecasting and planning, lower inventory and consequently lower risk. And unlike old-school electronic data interchange, with which private exchanges are so often compared, the technical barriers for participation by these suppliers are low in theory.

If you have a number of customers within a particular sector, helping them to adopt such a model could be a way of focusing your efforts more closely on that sector.

Alternatively, there are many small niches that do not yet have a public all-comers exchange to address their needs. You may not get an entree into the automotive or health B2B sectors, but if you already supply independent chemists, for example, or restaurants, then it could be a case of getting in there before someone else does.

Many resellers might be put off taking a vertical route for fear that this will rob them of valuable horizontal perspective. After all, if you spend all day devising solutions for forestry companies or pet shops, who is going to tell you about the latest CRM innovation?

Vertical advantages
The main virtue of vertical markets is the ability to excel in a narrow range of disciplines. The fewer plates you spin, the greater your chances of keeping them aloft. To ensure that this narrow focus is as undiluted as possible, resellers should consider making distribution partners work for their living by providing non-core horizontal technologies and services that they can brand as their own.

Wholesaler Westcon, for example, has been offering its resellers an easy route to providing network services without holding this expertise in-house. It is offering its customers managed Frame Relay services as well as Frame Internet Access that they can pass onto customers.

John Chapman, business development director of Westcon, says: "We believe we are offering our resellers the best opportunity to be serious players in the managed services market. They will have an advantage over the ISP or telco moving into this space as they will already have the relationship with their customers."

There is no one-size-fits-all answer to the vertical market issue. Just as no modern business can thrive on only one revenue stream, so no reseller can hope to prosper unaided by existing in total vertical isolation. The paradox is that as other types of player - ASPs, telcos, management consultants - crowd in on the data market, it is resellers' intimacy with their customers and their knowledge of how their businesses work that gives them their best shot at survival.

Conclusions:

• A large number of New Economy companies are choosing a vertical route to market
• For resellers, vertical specialisation is no sure-fire route to success, because of the blurring of boundaries between market sectors
• However, it is easier to divide large enterprises into vertical groups than smaller companies
• Ecommerce exchanges offer one route into vertical specialisation, but private ones are more profitable
• If you want to focus on a particular market, then relying on distributors to give you horizontal technology back-up will be important.