The Perfect Fit

But instead of keeping the broad approach of Sprint's consulting business, Mehrotra shifted gears to concentrate on a select number of vertical industries, including the health-care and pharmaceutical market, and solution areas such as network-security and HIPAA-related requirements. Mehrotra says Paranet Solutions uses a slightly different tactic than other VARs. While it offers a range of technology services, from network integration to security consulting, Paranet intentionally built up skills and knowledge around key verticals and their business processes.

"We believe that every vertical has a very good idea of the solutions for their top three business problems, but it's the next four or five where they struggle. What one industry struggles with is sometimes a version of some other industry's top three," Mehrotra says. "It's not just the specialization that has helped Paranet, but the ability to apply solutions from different industries to the health-care vertical."

As a result, the health-care industry became one of Paranet's most successful businesses, and the company saw its revenue blossom more than 130 percent in 2002; Paranet also earned a VARBusiness 500 Award this year for excellence in the health-care market. Other VARs have also decided to specialize in certain markets or technologies, developing specific skills to help distinguish their businesses in a crowded field. In fact, VARBusiness' 2004 State of the Market research shows that approximately two in five solution providers have become more focused on specific vertical industries, while nearly half say they have become more specialized around particular technologies. In addition, a majority expect to remain "specialists" when the economy recovers. Slowly but surely, VARs are picking their niches to help drive their businesses.

Vertical Value
If you could be proficient in any vertical market, which would you choose? We asked solution providers to identify the three markets that promise the greatest opportunities for their businesses in the next three years. Among their tops picks are the always-popular financial-services, health-care and federal-government markets.

Cognizant Technology Solutions decided to invest more time and money into developing vertical practices around two of these industries--health care and financial services. Kumar Mahadeva, founder, chairman and CEO of Cognizant, credits that focus with helping his company exceed its goals this year. The Teaneck, N.J.-based solution provider, which offers software-development and integration services, recently topped its third-quarter expectations and grew its revenue 60 percent from one year ago to nearly $100 million. Mahadeva said in Cognizant's quarterly earnings call that the solution provider will continue to build on its targeted vertical solutions.

"It's clear that Cognizant's investment in vertical practices is paying off," Mahadeva said.

The federal market appears to be gaining more attention from VARs, despite hurdles such as the GSA Schedule and other regulations. While only about three in 10 of solution providers surveyed believe the federal government market will be a "mainstream" vertical for them imminently, 44 percent of large VARs ($10 million or higher in annual revenue) say that sector will be a leader for a possible economic recovery in 2004. With agencies and departments scrambling for everything from infrastructure upgrades to security measures, many solution providers believe federal dollars will help power their businesses next year. And clearly, the larger the VAR, the more it thinks it can handle the sometimes-demanding nature of working with the feds.

Government integrators like Red River, based in Lebanon, N.H., are betting on such government spending. Red River, whose entire revenue comes from federal-government and U.S. military customers, concentrates primarily on Sun-based solutions. With deep expertise in high-end Unix computing, it grew its sales more than 15 percent last year to $63 million.

"Sun's servers and workstations are extremely reliable and are real workhorses, so they're very popular in the federal government," says Andrew Sullivan, business development manager for Red River's Sun operations.

Other systems integrators in the federal-government market are also finding niches within niches, such as Holcomb Enterprises. As a 30-year IT veteran, founder and CEO Scott Holcomb knows how competitive the government market has become. With government departments and agencies now looking for specific solutions, Holcomb decided to drill down even further into precise technologies and vertical industries, such as health care.

"The reality is the industry is becoming more specialized," Holcomb says. "Even in the government market, agencies are contracting and subcontracting in a very focused manner, so we have to respond."

Within its federal-government practice, Holcomb Enterprises is concentrating on health-care-related IT projects for the military and other agencies and departments, and is currently working with the U.S. Navy to deploy a mobile communications network with handheld computers for field doctors and medics. Indeed, Holcomb Enterprises grew its revenue more than 11 percent last year by focusing on such projects. Likewise, VARBusiness research shows that solution providers see the health-care, medical and dental market as the most lucrative opportunity for 2004; 64 percent of midsize VARs expect it to be a leading vertical next year, while 56 percent of small VARs and 59 percent of large solution providers surveyed said the same.

"Right now, the medical and health-care field is still using these old databases and outdated systems, and there's a need to bring the vital data out and deliver it to remote workers," Holcomb says.

Holcomb says specializing in particular technologies or industries usually requires a strong focus on services; a variety of consulting, integration and managed services can help solution providers distinguish themselves.

"You get a pop once in a while with a big product deployment," he says, "but for the most part, you have to rely on some unique type of value-added service."

Technology Targets
So if solution providers are finding success specializing in a particular vertical or technology, why not take it to the next level and combine both approaches?

Many VARs are already doing that. Take RapidApp, a Chicago-based solution provider. Mitch Northcutt, CEO of RapidApp, says his company focuses on integration and consulting services rather than product sales. Specifically, RapidApp specializes in server-based computing solutions and teams with vendors such as Citrix and Softricity. Typical engagements for Northcutt's company involve migrations to Windows 2000 Active Directory, or Citrix MetaFrame deployments.

"I try to develop deep expertise in new technology areas and then wrap value-added services around the technology," Northcutt says.

Like other solution providers, RapidApp has discovered opportunities in the health-care market. Last year, the solution provider performed a mammoth migration project for the University of Illinois at Chicago (UIC) Medical Center, which was trying to consolidate its business applications and data to one point of management. RapidApp migrated the hospital, which had 507 patient beds and 715 physicians, to Citrix's MetaFrame XPe application server software and NFuse Classic software running on Microsoft Windows NT to give more than 5,000 users remote access to the medical center's business applications. After that project, RapidApp began helping UIC's Medical Center implement Citrix's NFuse application portal software so users could access the business application from a Web browser.

RapidApp is so focused on Citrix technology that it holds two rare designations: Citrix Certified Consulting Partner and Citrix Authorized Learning Center, along with more than a dozen individual Certified Citrix Administrators. The investments in such certifications are hefty, but Northcutt says they ultimately help RapidApp win over customers. And, according to our survey, nearly 50 percent of all respondents say that technology specializations have increased their profitability.

"You have to have deep knowledge of Windows and have very strong skills--not just strong, but very strong--in Citrix technology," Northcutt says.

Technology focus has proven to be a strong driver for Fedstore, a solution provider based in Germantown, Md., that was formed two years ago by brothers Jack and Andrew Cayouette. As the company name implies, the brothers wanted to focus on federal-government customers, but since launching Fedstore, the brothers have branched into the private sector, such as hospitality, which now comprises roughly 30 percent of Fedstore's revenue.

Nevertheless, Fedstore concentrates most of its time and energy on one solution area--security. The solution provider resells a broad line of PCs, servers and network equipment, but its bread and butter has become IT security solutions based around such vendors as Check Point, Nokia and Symantec. "It's pretty common to find outdated security systems and Microsoft environments with a lot of holes and vulnerabilities," says Andrew Cayouette, vice president of sales at Fedstore. "A lot of our clients hire us to move them to Unix environments and modernize their security infrastructures."

Despite its specialization, Fedstore is careful not to concentrate only on security products, Cayouette says, and instead hones in on the typical business problems experienced by its government and commercial clients.

Niche Nation
Like RapidApp, Sirius Computer Solutions has also made a strong commitment to one vendor in particular--IBM. After building its business around Big Blue's server business and becoming one of the largest IBM eServer VARs in the world, San Antonio-based Sirius decided to turn its attention to storage. But it wasn't easy, according to the solution provider.

"EMC was tearing us up at every turn five or six years ago. IBM just didn't have a strong presence in storage," says Chris Mierzwa, director of open systems and storage at Sirius. "All that changed in the past five years."

After introducing its Shark technology in 1999, IBM began building an improved channel strategy for its storage business and soon unleashed the TotalStorage Solutions Center program for IBM Business Partners. Sirius joined the program, which features IBM storage "solutions centers" co-funded and developed by Big Blue with each partner, and quickly began ramping up its storage business by attaching solutions to its server sales.

Today, Mierzwa says that storage solutions represent half the company's business. The solution provider is combining its storage expertise with its familiarity of certain verticals in which the 20-year-old company has been historically strong.

"We've seen a lot of big, big projects in health care due to recent legislation like HIPAA," Mierzwa says. "Financial services and manufacturing/distribution have also been huge for us. The Sarbanes-Oxley bill was a gift from God."

Mierzwa says developing strong skills and earning a spot in IBM's TotalStorage program was extremely challenging; certification tests demanded an in-depth knowledge of storage technology and architecture. But Mierzwa says the investment has paid off, and then some.

"Open-systems storage has increased dramatically for us," he says. "If we hadn't made that big of a commitment to storage, then we wouldn't have experienced double-digit growth."