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Making sense of CRM's vertical market mania

The biggest CRM vendors are creating apps that appeal to a smaller set of users in individual industries. How do their strategies differ, how much will this extra expertise cost you, and what does the vertical trend mean for the current crop of best-of-breed providers?

For years, CRM vendors fought off one another by seeking to capture a broad base of customers who would all use their one-size-fits-all applications. No longer.

According to industry insiders, the horizontal market has essentially played itself out, and vendors are now scampering to reach new vertical heights. While this is hardly a recent phenomenon, the larger vendors in the market continue to position themselves as the best option in individual industries, even if it's impossible to answer every market's need out of the box.

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"The first thing to realize is industries still need customization," said Erin Kinikin, vice president and research leader at Cambridge, Mass.-based Forrester Research. "Companies are never going to treat their customers generically."

Still, the four biggest CRM providers all have software for individual markets, though their strategies on just how to tackle industry-specific functionality differ.

"We believe most of the value out of the base-product CRM is fairly similar across the board," said Joe Davis, vice president and general manager of CRM at PeopleSoft Inc. "There are certain things that need to be there for certain industries. We prefer to go deep with fewer industries rather than shallow with many."

Pleasanton, Calif.-based PeopleSoft currently has vertical-specific offerings for financial services, including editions for banking and insurance; government, introduced last summer and focused on municipal and state offices; communications; and energy.

With a strong customer base in the financial services and telecommunications industries, PeopleSoft elected to delve deeper into those markets with specific requirements. The recent acquisition of J.D. Edwards & Co. will allow PeopleSoft to make a more concerted push toward manufacturing as well, Davis said.

Siebel Systems Inc., San Mateo, Calif., has a long history in financial applications and began addressing vertical functionality five years ago, according to Rakesh Shetty, director of Siebel finance. That in turn led to advancements in subsets of the financial industry such as insurance, health care and banking operations, ranging from retail to institutional to commercial banking.

Siebel has taken on a wide range of markets with vertical software in 21 industries. Currently, 80% of its applications are industry specific, and that software represents 80% of Siebel's sales, according to Curt Lockton, general manager of Siebel high tech and manufacturing.

SAP AG, Walldorf, Germany, which recently released a consumer packaged goods CRM application, appears to be taking a similar tack, going after 21 industries. It emphasizes its focus on integrating with back-office applications. SAP also claims to have begun addressing the vertical market as soon as it began to roll out its horizontal platform.

"Our focus has been to develop a CRM product that addresses the entire value chain, first connecting all systems within an enterprise to a customer-centric philosophy and then connecting upstream to the value chain and downstream," said Darc Rasmussen, SAP's vice president of global CRM strategy.

Redwood Shores, Calif.-based Oracle Corp., which came late to the vertical push, announced its own vertical applications last month in the Oracle E-Business Suite 11i.9. Taking a different approach, Oracle has embedded all vertical application functionality within its base software, allowing certain functions to essentially be turned on and off with a switch. All CRM customers receive all the vertical features, but each only enables those that it wants.

Vertical limits?

How much verticality is too much? Dig too deep and vendors run the risk of tapping specific company needs. For example, the difference between the sales process at pharmaceutical competitors Merck & Co. and Pfizer Inc. is great, PeopleSoft's Davis said. Vertical software still has to leave room for organizations to customize to meet their individual requirements.

"We don't believe it's necessary for a vertical [solution] in every market," Davis said. "Our goal is to build out the core as much as possible and have enough flexibility to meet a company's needs."

That flexibility is what helped PeopleSoft beat out SAP and Siebel for French carmaker Peugeot's business, despite fact that the other vendors have automotive-specific CRM applications, Davis said.

Vendors still have their individual focus, but for the most part they're going after the same industries and will have "their best success where their install base is the biggest," Kinikin said.

SAP, with 60% of its customer base in manufacturing, is a strong CRM player there, while Siebel has succeeded by appealing to its financial services base, Kinikin said. Though Oracle is coming late to the vertical game, she expects it to make strides in manufacturing and telecommunications.

While the "verticalization" race is clearly on, the finish line has yet to be reached.

According to Siebel's Lockton, nirvana would be delivering customers everything they need right out of the box. That's obviously never going to happen. Siebel's goal is to have its horizontal products offer 60% of a company's needs and vertical offerings provide as much as 85%.

"We're not close to that in any vertical," Lockton said. "If we had twice as many engineers, we wouldn't get to that in 12 years, and as long as industries are somewhat heterogeneous, I think we'll never get to that 100%."

Pricing on par

Currently, customers can expect to pay about the same for industry-specific applications. When the market recovers and the vertical software begins to diverge from mainstream solutions with dedicated hardware and customized options, expect an increase of 20% to 25%, said Scott Nelson, vice president and research director with Stamford, Conn.-based Gartner Inc.

"I tell firms not to get to far into vertical apps unless they are veterans at CRM," he said. "When you are just learning your way, there is so much low-hanging fruit that a horizontal application is usually more than what's needed, and firms will be able to ride those capabilities for a long time."

Still, with the biggest vendors moving toward verticalization, questions remain about where the best-of-breed providers fit in. For instance, pharmaceutical-specific applications from the large CRM providers often compete directly with software from smaller CRM vendors that focus squarely on the pharmaceutical industry, like Dendrite International Inc. and StayinFront Inc.

"That becomes a challenge," Nelson said. "[Best-of-breed players] have to avoid the trap of getting into a no man's land where they're no different from the big providers with their vertical offerings but don't offer the same generic features."

Long term, the niche market -- like the market in general -- is going to shrink, Nelson said. There may be room for the best-of-breed players, just not as much.

"What you'll get down to is two, maybe three large vendors who provide the baseline, and a number of verticals and one or two players who survive just being vertical specialists," PeopleSoft's Davis said. "They'll never be able to grow beyond a certain point."

Nelson said big vendors, whether vertically or horizontally focused, are a good fit if a firm takes a process view. In other words, it views customer relationships as an ongoing process that relates to other areas, instead of merely transactions. Then, the ability to use workflow elements across the whole application makes sense, he said.

Next Steps

Horizontal vs. vertical CRM: Which is the best option?

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