Channel companies see potential in an emerging strategy for growing their cloud businesses: put a vertical spin on otherwise horizontal Software as a Service apps.
Cloud applications such as customer relationship management (CRM) and enterprise resource planning (ERP) offer a broad set of features that enterprises across a range of industries can use. CRM aims to help organizations track sales opportunities, manage marketing campaigns and operate calls centers. ERP spans order processing, inventory management and financial management, among other functions.
But such cloud applications may not go far enough. A customer may seek features particular to its industry segment. Consulting firms, cloud services providers and independent software vendors now seek to fill that gap with vertical extensions to horizontal cloud offerings.
Sererra Consulting Group LLC, a technology and management consulting firm based in Irvine, Calif., launched its first vertical solution a couple of years ago: an app built on NetSuite's ERP cloud platform targeting Autodesk Inc. value-added resellers (VARs). From there, the company created a bolt-on addition to NetSuite for a fastener distribution customer. The company then created software for the industrial distribution vertical. Subsequent vertical solutions targeted verticals from energy to equipment rental.
"Verticalization is a very big part of what we have been doing in the last year and a half, and what we are going to be doing in the future," said Vijay Saha, founder and CEO at Sererra. "We are brainstorming what products should be developed and what markets we should go after."
Channel companies must take on a few challenges to make the vertical strategy work. For starters, vertical cloud app providers need to identify niches with sufficient breadth to justify the development of repeatable, industry-specific solutions. A commitment to update and maintain vertical software -- in a code library, for example -- is another requirement. Providers should also make sure they have the vertical-market implementation skills on hand to deploy their apps.
The 20 percent solution
Verticalization seeks to push customers over the last, and often crucial, functionality hurdles. Vik Gupta, director of business development at Sererra, said an ERP product typically covers 80% to 90% of a chief information officer's wish list. The resulting feature deficit is what the vertical add-ons address, he said.
"That is really where the verticalization comes in," Gupta said. "We check off all your boxes."
Vijay Sahafounder and CEO, Sererra Consulting Group
In the case of the fastener distributor industry, Sererra personnel found that the lack of features, such as vendor-managed inventory and material testing reports, inhibited the adoption of cloud-based solutions. Vendor-managed inventory lets distributors manage consignment-based inventory for customers, according to Gupta. The material testing reports feature, meanwhile, helps distributors manage the quality assurance documents associated with each inventory lot.
The missing vertical functionality can make all the difference for a customer considering a cloud solution, Saha suggested.
"That ... 20% could be the deal breaker," he noted.
Glenn Weinstein, chief technology officer at Appirio Inc., a cloud services provider based in San Francisco, said he sees verticalization as an extension to what customers already have in place. Appirio deploys cloud solutions for large enterprise customers, working with Google, Salesforce.com and Workday, among other partners. He said companies that are happy with the standard functionality from cloud vendors -- and seeing positive total-cost-of-ownership effects -- may eventually wish to build upon what they initially implemented.
They might ask, he said, "what more can we do with this? Can we extend this into the unique business processes of our company or industry?"
Weinstein said the need for vertical solutions is increasing as customers move those unique processes or the more mission-critical aspects of their operations to the cloud. Accordingly, Appirio has started to pursue specific vertical markets: pharmaceuticals, banking, media and consumer packaged goods. The company has dedicated sales and delivery teams to those verticals and is populating a cloud asset library with vertically oriented software components and frameworks.
The vertical approach, Weinstein explained, provides a way to deepen Appirio's relationships with existing customers.
"We think our long-term growth strategy is at least as much growing the customers we've got as it is winning new customers," he said.
ISVs cultivate verticals
The independent software vendor (ISV) channel also contributes to the vertical cloud trend. JAAS Systems Ltd., for example, had been focusing on client- and server-based manufacturing software designed to work with Microsoft Dynamics SL ERP. But in 2010, the ISV and VAR decided to create a manufacturing vertical solution for Acumatica's cloud ERP product.
"It's where the market is going and I think, from that perspective, we made the right decision two and a half years ago," said John Schlemmer, manager for North America Channel at JAAS Systems, based in Reynoldsburg, Ohio.
JAAS Advanced Manufacturing Software (JAMS) is a manufacturing suite that provides features lacking in Acumatica. Those including bill of materials/routing, material requirements planning and shop floor control, Schlemmer said. Acumatica and JAAS' manufacturing add-on may be deployed in Microsoft's Azure cloud, hosted by a third party, or installed on-premises by the customer. Schlemmer estimated that 20% of JAMS for Acumatica customers are on Azure, 40 percent are hosted, and 40% are on-premises.
JAAS continues to do a couple of Dynamics SL deployments a year, Schlemmer noted, but the business has shifted to Acumatica.
"From our standpoint, we view it as very strategic," Schlemmer said.
FinancialForce.com, a cloud applications developer that builds its products on the Salesforce platform, has created vertical applications in addition to horizontal software for accounting and billing. The company offers cloud-based professional services automation software as well as a media industry solution that automates the selling, tracking and billing process for online advertising campaigns.
Tom Brennan, vice president of marketing at FinancialForce.com, said it helps to have a mainstream, horizontal cloud foundation on which to deploy such specialized applications.
"A specialized piece in the cloud, by itself, will run into CRM and back-office integration issues," Brennan said. "We think it makes sense to build it on top."
Pursuing a vertical strategy
Channel companies interested in industry-specific cloud software need to weigh whether the product development and marketing expense is worth the effort. The initial idea for an app may come from a single customer seeking a vertical extension. The cloud consultant must determine whether the solution is reproducible across many customers or a one-off.
Brennan said the need for a particular industry-specific feature may surface again and again in conversations with prospects and customers. Those discussions may point the way toward a vertical application.
"The trick is to keep your ear to the ground," Brennan said.
Market research and financial analysis help refine vertical strategies.
"I think the biggest challenge is really looking at the ROI [return on investment]," Saha said. "How much money do you invest in R&D and marketing?"
Appirio has chosen to invest in an asset-centric approach to vertical industries. The company's cloud asset library includes components -- pieces of software that perform functions that go beyond what the standard cloud vendor packages can do. It also houses frameworks, essentially starter kits that Appirio's technical consultants can build upon. A framework could be an object model specific to an industry.
Appirio's R&D team maintains the company's cloud asset library. Submissions to the library are reviewed and graded according to maturity level.
In addition, companies pursuing the vertical cloud should make sure their industry expertise extends to deployment services as well as software coding. Brennan said cloud software providers must bear in mind that they are developing for a market as opposed to a one-off project. As a consequence, they need to provide a full set of services around the app.
"It's not just the software; it's how you do the implementation as well," he said.
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