Tech vendors get focused on vertical industries
by Robert Mullins
With information technology spending expected to be lukewarm again in 2003, sellers of technology have to try to make the best of a bad situation. One way is to focus on a few industries to sell into rather than trying to sell to everyone.
Local IT vendors were advised at a forum in Santa Clara hosted by market research firm IDC to pursue a vertical markets strategy - rather than trying to sell horizontally across all industries.
According to the firm's forecasts, worldwide IT spending in the enterprise market may grow as much as 5 percent in 2003 after declining 2.3 percent in 2002. However, there are a number of variables. If the overall economy continues to lag and if the United States starts a war with Iraq and it becomes protracted, 5 percent might be too much to hope for.
Also, some industries may be more inclined to spend on information technology in 2003 than others. Understanding the needs of those particular industries will make the sale easier.
"IT vendors are trying to get more intimate with their customers," said Meredith Whalen, vice president of U.S. vertical markets research for IDC. "In a situation where IT budgets are being cut back, IT vendors understand that business problems vary by industry. Therefore, the vendors themselves need to have a vertically oriented strategy."
For instance, Whalen says the aerospace industry is expected to spend more in 2003 because of the expected uptick in defense spending by the U.S. government. On the other hand, the financial services industry is expected to spend less on IT because, given the generally bearish stock market, many traders are staying on the sidelines so commission revenue is depressed.
Pursuing a vertical markets strategy requires understanding the "pain points" of the different industries. In an era in which IT budgets are tight, customers only focus spending on the problems that need to be fixed right away, said John McNulty, chairman and chief executive officer of Secure Computing Corp. of San Jose.
Secure Computing makes technology that protects computer networks from intruders. One of the vertical markets the company sells into is health care, an industry that represents about 19 percent of the U.S. gross domestic product but which generally is poorly automated. Many doctors offices still store stacks of paper files and clerks still work on computers running DOS.
New pressures are mounting on the health care industry to automate, McNulty says. The federal Health Insurance Portability and Accountability Act requires that health care providers and insurers digitize patient records but protect the privacy of those records. That is going to create a market for IT in health care that hadn't been there before.
"Health care was not on our radar screen three years ago," McNulty said.
IT companies pursuing a vertical markets strategy need to better understand the pressures that an industry might face, Whalen said.
Even companies whose technology could easily be used by any company also would find it wise to focus on just a few industries. Santa Clara's Emagia Corp., for example, sells cash flow management software for businesses, a product that should have wide appeal.
But Emagia is focused on selling to a few verticals for now. The 2-year-old company sells to high-technology manufacturers such as Solectron Corp. of Milpitas, retailers and pharmaceutical companies, said Emagia CEO Veena Gundavelli. He said the company may expand into other verticals later.
"Most companies want to fix this problem," she said.
IDC's Whalen says it is wise for smaller firms to focus on a few verticals when they are just starting out.
"You may just want to go into just one vertical, gain some expertise in that industry and then, as you expand and grow your company, move into maybe a second related industry," she said.
Mullins is a reporter for the Silicon Valley/ San Jose Business Journal, an affiliated publication..
