There are hundreds of vertical industry cloud providers and horizontal specialists in portions of “source to settle” process (e.g., supplier search, supplier credentialing, e-invoice, payment).  Most industry cloud providers are specialists in both areas–that is, they cover just a portion of the source to pay process for just one industry.  This focus has helped many of them to survive and sometimes thrive.   But for many, this focus has also been a constraint to getting large enough ($100 million in revenue+) for an attractive exit via the public market or PE firms.

There are, at least, two obvious ways for ICs to get bigger:

  • Apply the source-to-settle business process in which they specialize across industries (Serial Verticalization) or
  • Dominate the entire source to pay business process within one industry (Industry Dominance)

This post covers the former growth strategy. I’ll cover Industry Dominance in the next post. First a brief digression.

You may think of Chipotle as a burrito-maker, but Chipotle would respectfully disagree. Chipotle sees themselves as experts in a particular “fast-casual” food delivery process from farm to fork.  Chipotle applies this business process mainly to Mexican food (burritos), but now they are applying it to Asian food in the form of their newest concept, Shophouse.  A consumer enters a Shophouse, chooses a “substrate” (e.g., noodles, rice or salad greens–this is my term, not theirs), then chooses a “protein” (e.g., chicken, beef, tofu, or pork) and then chooses veggies and sauces and pays.  It’s just like Chipotle, except its vaguely pan-Asian, not Mexican.  And according to the Wall Street Journal, Chipotle is going to apply this business process to pizza.  (Presumably they will have those turbo-charged ovens from Quizno’s to cook the pizza!)  Chipotle’s approach is a somewhat tasty example of serial verticalization.

In B2B software, several companies have successfully established themselves as experts in automating a portion of the source to pay process–first in one vertical–and then across other verticals.

  • In supplier credentialing, both Achilles and ISN started in oil and gas and expanded into other capital-intensive industries, and beyond
  • As mentioned previously, eLance and Odesk are merging, in part, to spread their business process across more verticals in the freelance buyer-supplier matching market
  • started by matching buyers of engineered parts with job shops/metal benders, but then extended its matching capabilities to the textiles industry
  • Several providers of international trade services have moved from footwear and apparel across industries
  • Some of the providers in logistics visibility and supply chain execution started with one mode of transportation and subsequently expanded to others
  • Even a little procure to pay specialist in cinemas (talk about specialization) has tried to build a sister company to move across industries

Still, the number of successful serial verticalizers is rather limited, as this is not an easy strategy to execute.  Serial verticalization requires:

  • First and foremost, domain knowledge in the new industry.  This means finding new executives who do not typically run in the same circles as the founders and often speak a slightly different “language”–even though they may be referring to the same basic business process!
  • Tweaks to the product.  These tweaks often need to be made before there are a critical mass of clients in the new vertical.  The investment necessary for these tweaks always looks speculative relative to the enhancement requests of the installed base and therefore, may never get made.
  • Reaching out to new buyers and marketing at new venues and
  •  An understanding of new laws, regulations, customs, or supply chains

In short, it takes commitment and time to something outside a company’s normal comfort zone to attack a new vertical.  It also requires great timing.  Some companies try to go horizontal from the start and fail.  They do not provide enough depth and domain expertise for any one industry. Some companies wait too long and cede strategic space to competitors.  The debate on when to add new verticals and how often to do so, should begin as soon as the first vertical seems well underway to being captured and, for these companies, probably never ends!

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