Taking the vertical road

Focusing on vertical markets can provide safe income during a slump. But, as Martin Lynch reports, resellers must be prepared to work.

Vertical markets, ranging from the public sector to finance, manufacturing, telecoms and retail, are often seen as safe havens in an economic storm.

However, the notion that sticking to a select few markets can insulate you from a broad economic slumps is true only some of the time. When that economic slump is global and lasts for years, every market can be hit.

This is the case at the moment, with the exception of the public sector, which remains protected. Regardless of global gloom, the tax man gets his cut first, so there's always money for public-sector IT.

The idea of becoming a specialist in a few small areas is attractive to some channel players, while others don't like the idea of putting all their eggs in one basket.

There are a lot of resellers that prefer to offer products and services across a range of markets, on the ground that broader appeal opens more doors.

The downside to this is that they face stronger competition, and a number of broadline resellers have fallen by the wayside in difficult times.

Others have been forced to look more closely at market specialisation.

Although the potential customer base might be smaller, it is clear that vertical markets offer a better chance of long-term return on investment (ROI) for the reseller willing to put the necessary work in.

Much IT spending has been hammered by the recent global downturn, but things are finally beginning to turn.

Some vertical markets, particularly those in the public sector, are picking up faster than others and are looking like the place to be in 2003.

The public sector has always been less susceptible to market forces because budgets are often allocated for projects well in advance.

Private-sector companies hit by market forces are likely to have their IT budgets stripped away in the blink of an eye.

The public sector has recently become even more attractive, and not just because the private sector has reduced spend to a trickle.

The government has allocated more money than ever to dragging the UK's local government, health care and education systems into the 21st century.

According to analyst Gartner Dataquest, vertical markets across the globe are preparing to start spending on IT again.

The forecast for 2003 in 14 business segments is bright and sunny, with all sectors looking to increase IT spending. It might not mean rocketing sales, but it will mark a slight improvement over recent years.

Gartner suggests that the industries projected to show the strongest growth in 2003 and 2004 are government and health care, but even these segments will attain only single-digit growth.

The analyst believes that the largest vertical markets - financial services, manufacturing, government and communications - will make up 67 per cent of worldwide business IT spending in the vertical sector in 2003.

And outsourcing is set to play a growing role, particularly in financial services and the public sector.

A study by analyst Datamonitor recently predicted that financial services spending on IT outsourcing will grow by 27 per cent in Europe to $12.4bn by 2005.

The firm's IT and Business Process Outsourcing in Financial Services report said that UK institutions will fork out $3bn of that total, rising from $2.3bn last year.

New contracts worth billions of pounds between JP Morgan Chase and IBM, and ABN Amro and EDS are evidence that outsourcing in the financial services arena is becoming the accepted way to implement new technology.

In July Chancellor of the Exchequer Gordon Brown announced an extra £1bn for government IT spending, the biggest increase in public spending for 30 years.

A lot of that money has been earmarked for education, e-government at a local level, benefits payments, Customs and Excise and small-business services.

"In a nutshell, the private sector is skint and the public sector is flush," explained James Governor, principal analyst at RedMonk.

"The public sector is what everyone wants a slice of. We have certainly seen the big consultancy firms frantically scrabbling around looking for health care consultants. There are billions of pounds to be earned from these contracts.

"Just look at some of the big consultancies. Public-sector groups whose calls they wouldn't have returned a few years ago are now key customers.

"IBM is trying to recruit a lot more vertical partners as part of its push into SME businesses, and it has been very focused in its efforts.

"IBM is even offering staff to certain resellers on secondment for a year or two to help organise the services."

James Weir, senior analyst at IDC, has also noted increased interest and competition in the vertical arena.

"Vendors are struggling in the private sector," he said. "It's not as if the public sector is a soft touch, but both the large vendors and consultancies are putting in a lot more effort to get in front of public-sector people.

"The financial services sector has been one of the hardest hit, which means that most of the big consultancies have also been hit hard. They are now targeting other vertical sectors and the price competition is becoming fierce."

Andy Shepperd, general manager networking at distributor Computer 2000, added: "The public sector has been recession-proof and all sectors of the channel should be focusing on it. The funds have been already allocated, so the spend is there."

Ian Lockhart, infrastructure design manager at Ideal Enterprise Solutions, pointed out that business is good at local government level.

"Last year was a good year for us, particularly with local councils investing in storage area network technology," he said.

"We are doing tender after tender. While you might think that some of them wouldn't have two pennies to rub together, it's not the case. The public sector has been less traumatised than the private sector."

A few months ago, market watcher IDC predicted that this year would see a boom in e-government contracts for the IT services industry.

It reported that spending in western Europe would grow from £1.8bn in 2001 to £5.5bn in 2006, while in the UK the jump would be from £345m to £1bn over the same period, a compound annual growth rate of 25 per cent.

"The UK came out pretty well in terms of e-government implementation in comparison with other European countries, but not as well as you'd expect from one of the leading economies," explained Weir.

"There are still a lot of issues about country readiness, and delays with broadband haven't helped.

"There was a big initial push for e-government but that has not translated into transactional readiness. Councils are looking at what they need to do on the back-end.

"The big issue is getting the infrastructure in place to offer these new services. The infrastructure in many areas is pretty historic, and many are still trying to upgrade from green-screen and mainframe environments."

Outsourcing seems to be the way things are heading, especially in areas where IT skills and the budgets to invest in permanent IT staff are lacking.

From hardware to applications, those without the skills are willing to let others handle the job for them, as long as the business and ROI case is strong. Technology no longer matters half as much as the tangible benefits for companies.

There has also been a transfer of focus in the vertical sectors, and many large IT companies and consultancies are desperately seeking new business outside their habitual haunts.

The massive spending on enterprise resource planning and customer relationship management contracts in the areas of financial services, retail and manufacturing has been curtailed.

A mixture of slashed budgets, lower demands for goods, lower consumer spending and disappointing ROI from IT solutions has seen the big IT sharks hunting for new blood.

Many of them are now circling the rich and juicy public sector, which they previously largely ignored.

"IT skills are often lacking in the public sector and outsourcing represents a large opportunity for service providers," said Governor. "Infrastructures that can be rented or leased will be attractive to the bean counters."

Weir added: "Outsourcing is becoming more common. Local government will outsource the infrastructure stuff and use the savings to build the back-end applications they need, for processing car parking fines and so on."

The opportunities are still there for resellers looking to specialise in vertical segments, but the arrival of focused big players is set to bring about major changes.

"Everything is still up for grabs, but smaller resellers need to make their skills attractive to the big companies like IBM and the consultancies, because they are going to win many of the big contracts," explained Governor.

There is a misguided notion that, just because the public sector is healthier than the private sector, finding an entry into it is as easy as knocking on your local council's door and going, 'Ta-da'.

Everyone already operating in the public sector knows that the procurement process can often come across as a terrifying mix of bizarre business practices and black magic.

And don't forget just how long and expensive the process can be, or how much red tape there is to cut through.

"The painful procurement process is the biggest challenge facing resellers entering the arena," warned Shepperd.

"They may choose to partner with existing resellers or suppliers in the market; that's the best route for the smaller reseller.

"There is a lot of money to be made, but a lot of effort needs to be put in. This is not a market for a quick win.

"There are compliance issues to adhere to, with suppliers being asked to provide things like financial records, projections, customer references and proof of skills."

Weir agreed. "It can be a very expensive market to pitch to, especially in the central government arena," he said.

"Things are not the same in the local government space, where some people have never even seen an IT services company before.

"In the end, it's all about who you meet. For instance, if you are pitching to IT managers, they will understand the issues and the process can get moving.

"But if you are selling to the e-evangelist, who is essentially the poor bloke pushed into the role of evaluating IT, then the process can be very drawn out."

The rules of procurement in the public sector are always changing. Right now resellers involved in the health sector are holding their breath.

The appointment of Richard Granger as the new director general of NHS IT has sent ripples of panic through the channel, especially since his claims last December that one of the major concerns was the need to streamline the whole IT purchasing process.

Some have taken this to mean that there will be fewer suppliers, while others were heartened by his statements last month saying that big IT suppliers do not have the necessary skills needed to deliver technology projects effectively.

"The NHS side of things is massive," said Governor. "We are talking about billions in expenditure, making it one if the biggest deals around.

"Right now, though, the NHS is changing the way it does business and whittling down the supplier list.

"The big question is how this new purchasing mechanism will work, and whether smaller companies will get pushed out.

"I think there has to be room for smaller companies to deliver the services because it can't all be done by the big companies."

There is a lot of money to be made from public sector markets but it can take a significant amount of time, skill and money to get your foot in the door.

The public sector is certainly not a market for those who are simply looking for a quick financial fix because times are hard in the private sector.

You cannot just specialise and 'unspecialise' at the drop of a hat. But for those willing to put in the effort, vertical markets generally reward trusted partners with business over the long-term.

HOT VERTICAL MARKETS:

Education
This a strong market at the moment due, in part, to the £100m 'Laptops for Teachers' initiative and the government's political and financial commitment to making IT an integral part of the educational process.

Health
The NHS has billions to spend on new IT systems and on replacing old, failed systems. It is a gold mine for those who know what they are doing and a money pit for those who are in it for the quick buck.

Local government
The replacement of legacy systems and other projects are making this segment more attractive as the online government deadline of 2005 draws closer.

Financial services
As confidence in external suppliers of IT grows, the outsourcing opportunity in the wealthy financial services sector is set to boom.

Manufacturing
Hit hard by the recession, IT spending in the manufacturing sector is set to increase again, according to Gartner. Worldwide IT spending for manufacturing in 2002 will be up to $326bn, a 5.5 per cent increase over 2001.

Retail
Software, security and online projects are top of the agenda for the retail sector. IDC predicts that the western European retail sector will grow by over seven per cent between 2002 and 2006.