Advisory Report

Verticalization Requires Precise

Solutions Fine-Tuned to Sector Needs
September 28, 2011

Issue

Service providers (SPs) are increasingly structuring their products and organizations along vertical lines to
address individual industries. This enables SPs to offer products that have been specially customized for
particular industry sectors, so as to get closer to customers and differentiate themselves from more general-
ist competitors. Due to its moneymaking potential, the finance vertical has traditionally been the favourite
target for such attention by many service providers.
Michal Halama The finance sector is broad, comprising retail banking, investment banking, insurance firms, hedge funds
Current Analysis
and so on. The finance vertical is one of the most mature sectors in terms of verticalized offerings by ser-
Principal Analyst,
Business Network vice providers; products for the vertical have been customized to a higher degree of granularity than those
and IT Services for other verticals: for instance, down to specialized services for automated financial trading. BTs Radianz
and Colts Market Prizm, for instance, have each been offering low-latency services to this sub-segment for
some time (for more information, please see Colt Adds Cloud and Data Center Expertise to MarketPrizms
Financial Market Capabilities, May 11, 2011).
Economic downturn and the banking crisis have not altered service providers vertical strategies, but
finance sector clients now have more constrained budgets alongside expectations of specialized services.
To continue to compete, service providers have to respond with improved services, customized for sub-
sections within the finance vertical, which achieve lower costs. This pressure is likely to continue and the
trend to fine-tune vertical solutions to customer needs will continue to crystallize within service providers.

Current Perspective

Throughout the network and IT services industry, there is a growing trend towards verticalization. The
move to develop or adapt products from general use to suit the specific needs of individual industry verti-
cals such as finance or healthcare is being made by network service providers, as well as system integrators
and IT service providers. Companies such as IBM, Capgemini and others began to verticalize long ago,
so the trend is not brand new. It has also been tried by other providers in the market on occasion. Earlier
attempts were less widespread among providers acting at the same time and met with mixed success in the
market and within the service provider companies themselves. Success was often limited by the inflexibility
and unit cost of adapting contemporary technology, over-ambition around the sheer number of verticals
to cover, and a lack of readiness to change by some parts of service provider organizations. Technology
has moved on to offer greater flexibility, and customers have grown more accustomed to outsourcing in
general, with vertical expertise now becoming an expected competence of service providers.
Supply Side
The current trend to verticalize is more common than ever among service providers across the board.
Players ranging from BT Global Services, COLT, T-Systems and Cable & Wireless Worldwide to HP

2011 Current Analysis Inc. All rights reserved.

For more information, please call +1 703 404 9200, toll-free +1 877 787 8947
Europe +33 (0) 1 41 14 83 15. Or visit our Web site: www.currentanalysis.com 1
 Advisory Report

Report: Enterprise Services, Atos, Capgemini and IBM are simultaneously including verticalization in their
business strategies. They are following through with product and solution development (adaptation to
Verticalization vertical solutions), management wrap and organization structures that address verticals individually.
Requires Precise Verticals that attract particular attention from service providers include the public sector, healthcare,
Solutions manufacturing, and finance sectors. All are big markets and the supply sides interest is really a
Fine-Tuned to reflection of historical levels of IT spending by customers in those sectors a perfectly appropriate
Sector Needs consideration for service providers. One reason for failure in earlier attempts at market verticalization
Business Network
was that consideration of how well service providers could serve those specific verticals in different
and IT Services and useful ways was so secondary to how big each market was. Some providers, particularly the largest
(i.e., IBM and HP ES), have practices for almost all verticals. This means they do not have to turn
away valuable customers from any vertical. However, this is more challenging for smaller IT and
network service providers that lack the scale of an HP or IBM. The more verticals that each provider
attempts to address, however, the less vital and special (as a revenue stream and as a part of its vision
and mission) each specialism becomes to that provider. The standard solutions offered may also not
be as tailored as needed by any one vertical. The providers are still in the big business of building on
standard solutions to customize for individual accounts.
The scale of the largest providers can permit this breadth so that they may meet specialist needs in
each vertical industry they address. Smaller players need to be tighter in their selection of verticals on
which to concentrate. Finer specialisms can be very useful for branding and characterizing a player in
the minds of customers in select vertical markets. T-Systems has, for instance, developed a powerful
reputation for itself within the automotive industry, taking it deeper than simply the manufacturing
vertical sector. Germanys strong tradition in automotive manufacturing has helped the Deutsche
Telekom division, but T-Systems collaboration platform goes further, with unified communications
and collaboration solutions that enable geographically diverse automotive designers to collaborate
effectively. T-Systems is a major SI player in the German market and caters to other verticals and
geographies too, but it is certainly highly notable in the automotive sector. Atos, an independent
IT services player, free of the backing and responsibilities to a telco, has built a prominent specialist
practice in healthcare. Again it has other vertical specialisms, but healthcare is one that stands out
because of its health sector business and technology consulting and is complemented by hands-on
BPO services to corporates for occupational health, health screening and even training for nurses.
Demand Side
This time around, the supply side trend coincides with the increasingly demanding needs and
expectations of customers in some verticals. In previous rounds of verticalization, customers were
less open to any managed services and particularly sceptical about closer specialization by SIs and IT
service providers, partly because it was little known and partly because specialist expertise was strongly
lodged in individual industry firms rather than in service providers. The general march of outsourc-
ing in the intervening period has cured the markets lack of familiarity with IT service provision and
furnished IT service providers with specialist, vertical expertise in-house to offer other clients.
This has also created an oversupply of IT service providers in the most attractive sectors. Due to its
moneymaking potential, the finance vertical has traditionally been replete with funding for technol-
ogy, and often the latest technology, which can help users in their pursuit of money. Consequently,
the finance vertical has become the firm favourite target market for IT service providers. With many
IT service providers overcrowding the finance vertical, the need is pressing for greater differentiation
to retain and grow business; the same applies to other target industries, but to a lesser extent. Hence,
it is in the finance sector that the IT services verticalization trend is at its most mature and advanced.
The financial sector comprises a broad group of diverse needs and IT services client types. Clients
include retail banking, high net worth banking, investment banking, buy and sell sides in capital
markets, and more, with insurance of various types on top (for more information, please see Financial
Services: A Mainstay for IT Service Providers, November 11, 2010). Service providers already sub-
segment their products in the finance vertical; some also structure their organization to address these

2011 Current Analysis Inc. All rights reserved.

For more information, please call +1 703 404 9200, toll-free +1 877 787 8947
Europe +33 (0) 1 41 14 83 15. Or visit our Web site: www.currentanalysis.com 2
 Advisory Report

Report: segments more precisely. It is common now for providers to address retail banking and investment
banking separately. This finer verticalization is still not sufficiently intense for such a diverse range of
Verticalization client sub-sectors, so some players go further to differentiate themselves.
Requires Precise
Todays automated financial trading depends on mathematical models developed by quant analysts
Solutions
and traders married with speed of access to market data, processing of information, execution and
Fine-Tuned to
high volume to maximize returns through arbitrage and investment strategy while limiting downside
Sector Needs
risks. In this environment, trading volumes and opportunities are extended by increasing the fre-
Business Network quency and therefore the number of trades conducted in a given time period. Low-latency systems
and IT Services
and networks are employed to speed up access and trading responses to data. Proximity hosting is
being used to accommodate traders systems and minimize the distance between the various parties to
trades, congregating them around established trading venues, such as financial derivatives exchanges.
These methods reduce the time taken to receive information and complete trades.
Time Is Money
Specially configured networks that achieve a low latency of less than one millisecond are deployed for
this specialist vertical sub-section of the financial industry. BT, for instance, has earned renown with
BT Radianz during its ten-plus years. The companys model of shared connectivity and additional
services across a low-latency network overcomes the complexity of point-to-point connectivity be-
tween each individual trader and counterparty in a host of trading venues and proximity data centres
and at reduced costs. Colts MarketPrizm also offers a low-latency network, market data services and
proximity hosting.
Hardware acceleration can be used to reduce latency to ten microseconds, but at greater capital cost
for equipment and maintenance (up to around GBP 1 million for a first-year charge), with the cost
multiplying along with the number of trading venues in which the equipment is deployed. The
highest-end trading firms have been able to afford this operational investment in key trading venues,
creating growing aspirations and expectations from end users. Partly due to the economic downturn
and the credit crisis, however, IT managers in even this high-value finance sub-section now have more
constrained budgets, though they continue to contend with the expectations and aspirations of end
users. Stretched IT teams with other duties to perform have some relief. In many instances, the deci-
sion makers are actually the end users themselves, as they are closest to understanding and balancing
complex trading needs with costs involved, and their moneymaking prowess means they still have the
clout in their companies to demand services.
Even so, hardware costs and the complexity of maintaining FPGA technology are an issue even in the
once spendthrift financial trading vertical. Colts MarketPrizm is addressing this in partnership with
Exegy through a hosted managed service (PrizmX) that offers shared usage of a hardware appliance
across multiple clients on a subscription basis for a market data and order routing service, with appli-
ances collocated in each trading exchange to reduce delay further. The company claims that its service
charges over a year amount to around 20% of the costs of a DIY solution dedicated to one customer,
to make it affordable for smaller trading operations as well as appealing to larger concerns. It will also
avoid internal resources having to maintain an appliance and normalized data for exchanges frequent
updates, as well as lead times for service delivery, and it makes use of MarketPrizms existing market
data infrastructure service. The service is available in Chi-X Europe and BATS Europe now and is due
to be rolled out with appliances for the London Stock Exchange, Deutsche Borse and NYSE Euron-
ext by the end of October 2011. Some asset classes, algorithms and trading strategies will continue
to trade perfectly well at above 100 microseconds latency and the likes of Colts MarketPrizm and
BT Radianz will continue to cater to them. Even so, Colts move is more than simply a new service
launch; it amounts to Colt intensifying vertical specialization.
Conclusion: Dare to Be Different
Verticalization was started by service providers to get closer to customers and differentiate themselves
in an effort to overcome commoditization and consequent price pressure among numerous competi-

2011 Current Analysis Inc. All rights reserved.

For more information, please call +1 703 404 9200, toll-free +1 877 787 8947
Europe +33 (0) 1 41 14 83 15. Or visit our Web site: www.currentanalysis.com 3
 Advisory Report

Report: tors using horizontal approaches to geographic markets. The most lucrative verticals, however, attract
the same crowds of large and small service providers. So, the next step in competitive differentiation
Verticalization is to configure organizations and develop services to enhance appeal to narrower vertical markets.
Requires Precise Here too, the increased relevance of specialized solutions can increase the value of solutions (and their
Solutions providers) to customers. Narrower markets, though, have fewer customers for effective demand, and
Fine-Tuned to todays economic conditions are eroding effective demand even in traditionally spendthrift markets.
Sector Needs To increase the effective demand of slimmer customer bases, service providers are developing lower
Business Network
payment options, such as shared, hosted appliance services and multi-tenanted cloud services using a
and IT Services shared platform with privacy controls.
Few service providers will be able to cover all the finest sections of vertical markets to equal degrees
of specialization if the trend to narrower vertical sections continues. It is doubtful that all providers
ostensibly focused on any sector will be able to cope with all requirements in all the fine divisions of
the financial vertical. Larger players have the scale to straddle multiple verticals, but the rewards may
not warrant the investment if financial sector customers continue to demand more for less. In the
frenzy to compete, it will take some time for players to take stock. Service providers will then have to
make clear choices of the narrower verticals in which to compete, basing their choices on where they
present clear advantages. To a degree, this levels the playing field for large and small service providers
in narrow sections of vertical industries, except where customers individual specialist interests are
contiguous with other market sub-sections (making it easier for providers to align adjoining vertical
interests).
The trend will take some years to complete and is unlikely to reach the logical conclusion of all
service providers becoming narrow specialists. Most service providers are likely to retain capacity to
provide general services to any vertical; after all, they will not want to turn away business, and even
very specialist customers have general telecom and managed services needs. They will augment those
services with select, narrower specialisms that become major competitive differentiators. Service pro-
viders must make clear communications about these selections. Some of the service providers may not
have previously been a natural consideration for specialist customers, so prospects in the finest vertical
markets need clarity and promotion to become aware and understand their new options. Taken
together, the more precise solutions for narrower verticals and clearer positioning and communication
by providers align with their other moves to improve customer selection and avoid wasted time and
resources on unprofitable bids, so they can contribute further to players bottom lines.

Recommended Actions

Recommended Vendor Actions

Service providers that are considering verticalizing more finely to gain relevance among specialist
customers and win higher-value sales and wallet share should also budget for some dilution of these
rewards by the lower-cost options and other customer incentives that may be needed to improve
effective demand among the fewer clients in narrower verticals. Service providers moves should bring
higher-value sales overall, but they will be partly mitigated these considerations.
Service providers that have a focus on the finance vertical (such as BT Global Services, Atos, Colt,
Cable&Wireless, Capgemini, HP Enterprise Services and IBM, among many others) must review the
fine divisions in the sector and the growing demands of users in sub-sections for increasingly special-
ized services and service levels. They should consider each sub-segment against their competence to
satisfy its current and future requirements profitably, as expectations in some sectors advance rapidly.
Where they feel continuing profitably in some of the increasing number of sub-sections is unlikely,
they should abandon those areas and prepare strategy, communications, products and accounts teams
to position the company positively and flourish in their remaining sub-sections.
Service providers should prepare to optimize their approaches in vertical sub-sections for a more

2011 Current Analysis Inc. All rights reserved.

For more information, please call +1 703 404 9200, toll-free +1 877 787 8947
Europe +33 (0) 1 41 14 83 15. Or visit our Web site: www.currentanalysis.com 4
 Advisory Report

Report: level competitive landscape between large and smaller players. Large players such as Fujitsu, IBM
Global Services and HP Enterprise Services should choose and configure their own specializations to
Verticalization sub-sections where more customers have contiguous sets of individual specialist operations and needs.
Requires Precise Smaller SPs should specialize in individual sub-sections where customers tend to have the fewest
Solutions adjacent specialist needs.
Fine-Tuned to
Neither large nor smaller IT service providers should expect complete coverage of whole verticals
Sector Needs
with general or specialist services. Complementary general telecom and IT services needs are likely to
Business Network be met as well as ever by large and smaller SPs alike, so the key new differentiator will be the increas-
and IT Services
ingly narrow, specialist offerings except where service providers are permitted to cross-subsidize their
specialist ventures significantly with general telecom and IT services offers.
Colts MarketPrizm has a short timetable for expanding its new PrizmX service to more trading
venues and classes of investments (financial derivatives). This shows the companys determination
and commitment, which it needs to match with case references showing sales momentum. This is a
tricky objective given the publicity-shy nature of many potential customers, but in the small world of
high-frequency traders, results shine, so any success using the PrizmX service will eventually become
an open secret. MarketPrizm should present this reality to customers upfront to enlist their support in
wider publicity before opportunities for both sides to maximize upon positive exposure are lost.
The providers of software-based systems for high-volume trading should re-examine their offer-
ings on cost terms and consider offering lower-latency appliance (bundle)-based services in order to
compete. There is a significant CapEx cost to providing such services across multiple trading venues
and asset classes, so these players should also consider targeting their offers at clients trading in asset
classes with the least need for latency in the 10ms band.
Recommended User Actions
Hedge funds and other high-volume traders that believe the financial success of their trading
designs is being held back by latency in their current system will already have considered the ROI of a
dedicated appliance. They should now balance the ROI of promised lower-latency services at a lower
upfront cost from a shared appliance. If they have services from other providers, they should press
those providers to deliver similar latency levels.
Lower-volume traders should keep an eye on developments for high-volume traders to see how
previously prohibitive cost factors in automated trading tools change. Software-based trading tools are
far from obsolete, but they are likely to be superseded in time; therefore, providers that have skimmed
the market previously may begin to adapt services and offer them more broadly and affordably.

2011 Current Analysis Inc. All rights reserved.

For more information, please call +1 703 404 9200, toll-free +1 877 787 8947
Europe +33 (0) 1 41 14 83 15. Or visit our Web site: www.currentanalysis.com 5