Cloud Success May Eventually Hinge Upon Channel Verticalization

As the channel becomes increasingly engaged with cloud computing and managed services, many of the partners are likely to turn toward vertical markets as a means of differentiating themselves.

So says Gordon Ritter, a partner with Emergence Capital Partners, a San Mateo, Calif.-based venture capital firm that specializes in the cloud, mobility and enterprise social media sectors. The 10-year-old firm has played a key role in the funding of a number of major players, including, SuccessFactors, and Yammer.

"The first 10 years of the cloud was around horizontal applications," Ritter said. "The next 10 years we think will be led by more of a vertical opportunity as companies strive to be more creative, sometimes building upon the success of the horizontal services that came before them. Moving forward, success will be based largely upon expertise around vertical markets that best match their model."

[Related: The Top 10 Enterprise Cloud Services Companies ]

Sponsored post

Ritter said that although many of the benefits of cloud computing pertain to the reduction of sales and marketing costs as part of an effort to increase market share, the next step lies in the efforts to increase share of wallet.

"Once you enter a market with a particular feature set, you can tune it for a particular industry much more easily," he said. "You find yourself adding new services that can be quite different from the ones you started with, and therefore can take more of that share of wallet over time. Once you have layers of software and own the solution stack within a targeted vertical, you can then tie those layers together with the analytical piece that can also provide customers with increased insights about their data. This can provide a great deal of value to your customer."

Ritter acknowledges that the early days of the cloud have not been focused on the channel. But as the cloud becomes more mainstream, he expects a much more substantial role for channel partners that can adapt to the new model.

"There's not quite as much money up front," he said. "It's like a book of business, almost like an insurance broker would have. But, I think we will see increased opportunities for specialized partners who can leverage vertical expertise into higher price points and more consulting services than they would otherwise get by selling horizontal offerings."

NEXT: Where Are You Playing?

Ritter's prediction of a more verticalized channel cloud model is intriguing to Robert Bojanek, executive vice president of the ShoreGroup, a Syracuse, N.Y.-based integrator.

"That is a very deep question that depends on exactly where you are playing in the cloud," Bojanek said. "I believe you can be very successful with horizontal offerings as long as you have a very high degree of technical expertise. For example, we do a lot of contact center work, which requires a deep understanding of databases, reporting and strategies for the delivery of applications. It is very horizontal. On the other hand, I can also see situations where an integrator might be working with a more commoditized technology, but can differentiate based on a very deep knowledge of the specific vertical."

The debate is not new to the technology industry. New technology developments often begin with a horizontal mentality but then become more verticalized as they mature.

"It is a lot like the move to the Internet itself," said Phil Mogavero, vice president and regional CTO of PCM Inc., an El Segundo, Calif.-based integrator. They had to redesign their applications. The people who built those applications were either ISVs or people who were very skilled with software development. I'm not sure that a typical VAR will be able to create the processes necessary to fully execute vertically within the cloud at this point. That said, I also think some of the larger integrators, like ourselves, will focus on the vertical part to make sure that what we are building fully meets the needs of the customer."

Meanwhile, Chris Vincent, president of Global Data Systems in Lafayette, La., agrees that the channel model for the cloud will become more vertical over time, but he also feels that the transition is farther down the road than some people might believe.

"I think it's moving in the direction of verticalization, but I also think we've got to get the consumption model more fully converted," he said. "There's a lot of noise being made around cloud, and it is growing at an extremely rapid pace, but there is still a long way to go. In some cases, it's important to have solutions that are easily replicatable, and other situations where you need something that is a lot more customizable. It's a building block approach. You start with a more horizontal piece and then specialize as you go."