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Targeting Verticals
CRM vendors see huge opportunity in serving niche markets.
For the rest of the August 2002 issue of CRM magazine please click here
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Tunnel vision is rarely looked upon as a good thing. However, going narrow is becoming more widespread among the top CRM vendors as they all try to customize their broad product offerings to address specific growth markets. Tight information technology budgets, the demand for rapid deployment, and the need for a quick return on investment are fueling customers' desires for CRM solutions that are tailored for their specific industry. Realizing this opportunity, CRM vendors are pleased to oblige. Automotive, manufacturing, government, insurance, retail banking, energy, healthcare, travel, financial services, and high-tech--you name the industry and there is likely a CRM package aimed specifically at that sector. If not, there soon will be. "I don't know about any segment that is being ignored. Verticals are happening now. It's not an if, but rather a when," says Denis Pombriant, vice president, CRM managing director for Aberdeen Group Inc., a Cambridge, Mass., research firm. There is no argument. CRM verticals have become big business. CRM market-share leader Siebel Systems Inc. has the most vertical solutions, with about 20 different offerings. That accounts for nearly 80 percent of the company's $2.05 billion annual business, according to Forrester Research. But Siebel is not the only enterprise CRM player to tailor its offerings for niche markets. Other big vendors, including Oracle Corp, PeopleSoft Inc., and SAP AG, have a wide range of vertical solutions. In fact, this past April PeopleSoft launched specific vertical offerings for government, high-tech, insurance, and energy. Each of these industries feels that its needs are unique and as a result wants a solution that is specifically geared toward its language and basic business processes, says Stan Swete, senior vice president, general manager of CRM at PeopleSoft. That is why these verticals are just the beginning, he says. In May mid-market CRM player Pivotal Corp. said it, too, is launching versions of its CRM offering targeting healthcare insurance, investment banking, and real estate/construction. The company is also planning to include other verticals, says Leonard Zaplowski, vice president of vertical products at Pivotal. However, he declined to say which industries Pivotal will focus on.
But not every CRM vendor is undergoing a dramatic wake-up call. Some, such as StructuredWeb Inc., which provides online sales and marketing solutions to small businesses, have always lived in a vertical world. The Secaucus, N.J., vendor started three years ago with only vertical markets in mind. StructuredWeb targets six verticals and has a list of 45 others that it plans to pursue in the future. The company may set it sites on small businesses, those with 5 to 50 employees, but its chief executive officer, Daniel Nissan, says that that market is anything but small, adding that there are a minimum of 10,000 to 30,000 businesses in that space. Specifically, the company focuses on niche businesses like resellers of office furniture and telephone systems. Rounding out the verticals landscape are vendors focused on serving one industry. For example, Dendrite International Inc. offers CRM solutions for the pharmaceutical industry, and Amdocs Ltd. provides CRM, billing, and order management to the telecommunications industry and business support systems for directory publishing companies. Some industry executives believe the more vertical the focus, the better. "I'm always in favor of more verticalized solutions," says Tom Hill, program manager of the education and training center for Hewlett-Packard Co.'s Non-Stop Enterprise Division. "From a training perspective it makes it easier. It also makes it easier for users to focus on their jobs if the applications use language and process that are specific to that industry." Chip Overstreet, vice president of corporate marketing and business development at Blue Martini Software Inc., a San Mateo, Calif., developer of CRM customer-facing applications, agrees, saying users are demanding tailored applications targeted at their industries. "Users don't want broad applications," he says, "They are getting more savvy, and by working with savvy customers we are able to weave some of that back into the product and offer solutions that are even more focused." But how much is of these vertical applications are really vertical? Vendors that cater to one industry say that the vertical part of the solution often accounts for at least 60 percent of the application's code. In contrast, 50 percent the code of a vertical solution is the same as the broad CRM offering in many cases, while only 25 percent is written for the vertical, and 25 percent is customizable, Pivotal's Zaplowski says. And although there are unique elements to every market, there are items like business processes that might be applicable in several other industries, and having a hand in many verticals may help improve each one, he says. Big Potential To put things in perspective, there are 4,500 Standard Industrial Classification codes in the United States, according to the U.S. Department of Labor. SIC codes are four-digit numbers the government uses to group together and classify businesses. To vendors that means countless potentially niche markets to focus on. Meanwhile, the top verticals--manufacturing, services, government, and the public sector--seem to be the focus of most of the bigger CRM players. "Everybody in the CRM space is going after the same market, because it's low-hanging fruit," says Sharon Ward, vice president of enterprise business applications for Hurwitz Group, a Newton, Mass.--based market research firm. "It's easy to justify the need for CRM in telecom and financial services." But now that those markets are nearly saturated in terms of CRM choices, vendors will start targeting a second wave of industries, industry executives say. While manufacturing will continue to be a top focus, more business-to-business penetration is likely, Ward says. She also notes that financial services has the highest CRM penetration and the highest vertical penetration to date. All these verticals have deepened the nature of the market. "The top ten CRM markets will be a source of increased innovation from CRM vendors," Pivotal's Zaplowski says. And hopefully revenue. The enterprise customers' demand for verticals has made it nearly a must-have offering for CRM providers that want to survive and grow, Aberdeen's Pombriant says. At the high end Siebel and SAP are offering vertical solutions in an innovative way that is also cutting their costs in the process, he says. "Siebel and SAP are separating the business processes from the applications," Pombriant says. "The processes are highly specialized. In making them separate and building the standard function at the app level and at the processes level, and then putting them together in ways that result in vertical applications, these companies are taking a modular approach. It's taking the challenge out of the application implementation cycle and making CRM more attractive." The CRM mid-market also continues to be a huge opportunity, and since there has not been much traction with horizontal applications, vertical applications might have a better chance of taking hold, Pombriant says. Market research firm Jupiter Media Metrix estimates that purchases of CRM, e-commerce, and financial management applications by midsize North American companies will grow to $3.4 billion by 2006, up from $971 million in 2001. And Gartner Dataquest says the sharpest increase in CRM deployments will occur in companies with revenues ranging from $500 million to $1 billion. To date, vertical applications have been less important in the mid-market, says the Hurwitz Group's Ward. "There hasn't been anything that really addressed the mid-market's needs," she says. "The low-end users often use resellers that differentiate themselves through customization and vertical function. The high-end users can afford software that is verticalized or can afford to hire someone to customize it. But the mid-market has been squeezed out of both." Both enterprise and mid-market customers appreciate vendors that have tailored vertical solutions, because they feel they do not have to educate the vendors on their business. "The basic premise behind any vertical solution is, the tolerance that companies have for customizing anything is increasingly limited," says Chad McClennan, president and CEO of The Customer Group LLC, a Chicago-based consultancy. "With verticals there is less training. It's no longer the customers have to teach my company and my industry 101 to vendors." Vendors need to understand who are their customer's customers and who are their customer's suppliers and everything else about their business, according to industry executives. "The companies that just do one thing like pharma will get a decent amount of traction," McClennan says. The reason is, many companies have a fear of failing with the large applications that are not tailored to a specific industry, but just sprinkled with industry functionality. However, McClellan says, verticals perpetuate the fallacy that they will run right out of the box. Customizing horizontal CRM solutions has a high total cost of ownership because the software must be maintained and modified to take advantage of upgrades, and requires specialized IT skills. But vertical solutions are not without costs. "They will still require a significant people-and-process investment. They are not just up and running. There is configuration, maintenance, upkeep, and training," McClennan says. Even with the proliferation of vertical solutions, some companies are choosing to stay with a more mainstream application. Prior to implementing its current CRM solution, Bernina of America, the Aurora, Ill.--based office for the Swedish sewing machine maker, looked for a vertical solution, but found nothing, says Sylvain Bergeron, Bernina's Internet manager. At this point, with its CRM rollout going live this month, it's too late to change course, according to Bergeron. "We started this five months ago; the thought of starting over would be overwhelming and probably a waste of time at this point," Bergeron says. Verticals may not be for everyone. Most vertical offerings are developed to support an industry's common practices and do not help create unique processes that offer a competitive advantage, some industry analysts say. While most industry watchers agree that delivering verticals to customers is a good thing, some would like CRM vendors to keep the functionality as the major focus and the vertical as the minor focus. "You don't want to lose sight of bringing best-of-breed solutions to customers in horizontal markets," McClennan says.
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