Software Makers Go Up, Not Out To Grow

If the software industry is going to grow, it'll have to go up, not out. That's the consensus of executives and analysts who say that software tailored to specific industries is the next big thing, if it isn't already the latest craze. Specific-market software, or verticals, is weaving its way into critical industries with high growth potential, such as banking, or with a desperate need to modernize, like health care.

For tech companies, the prospects can be limitless. While one software provider might address a critical need for one industry, dozens of other applications might be invented that could further automate everything, from retailers to automakers.

Giants such as Apple (AAPL), IBM (IBM) and Salesforce.com (CRM) are pushing hard into the market. Salesforce on Wednesday entered its second vertical — health care — in a week. But so are smaller vendors such as Veeva Systems (VEEV).

"If I talk to the right person, there's not one industry that isn't ready for this," said Katharyn White, who leads an effort for IBM, working with Apple, to tap vertical markets.

Apple-IBM Target: 100 Apps

IBM and Apple made headlines a year ago when the two one-time rivals joined forces to delve into verticals. Their aim was to develop at least 100 Apple iOS apps for 16 different industries. They've already built more than a third of those software programs for more than half the industries on their list.

The apps are finely targeted. One safety application signals telephone linemen when it's too windy to remain in work buckets.

White says the alliance is constantly finding a need for new applications and could easily end up constructing 100 apps by year-end, with more to come.

"We're not opportunity-short," she said.

Verticals now account for roughly 5% of all enterprise information technology spending, but that does not include related services such as consulting, implementation or other costs.

Plus, all those figures are growing, says Derry Finkeldey, an analyst with research firm Gartner. The actual share is probably much larger than 5%, she says.

'Concrete Business Benefits'

Finkeldey says a couple of industry trends have made verticals a hot growth prospect.

"Technology has become commoditized, and it has become more difficult for providers to differentiate their solution from others, and, buyers/users of technology have become more mature and are buying to achieve concrete business benefits rather than for novelty value," she said.

In decades past, many companies settled for software programs that were essentially one-size-fits-all kinds of applications, or horizontal in the tech world. Although many technology firms have been making specialized software designed to fit a specific industry or company for years, those programs often came at a high cost.

Now that technology is cheaper than it was 10, 20 and 30 years ago, it's easier for software makers to build more vertical programs.

Many are housed on shared servers on the cloud, at a cost that is much more attractive than the now-ancient practices of building entire hardware and software networks that used to put a massive dent in a company's capital spending budget.

Some are targeting verticals in order to achieve a rapid pace of growth. Relatively tiny Veeva is jumping into the game, specializing in health care applications to gain heft. Veeva already has uncovered a number of opportunities, including a program that lets drug company sales reps digitally talk via email to health care professionals without incurring the wrath of regulators.

Much-larger Salesforce has made verticals a critical part of its strategy to reach $10 billion in annual sales. It got underway last week with an initiative to create wealth management software.

On Wednesday, Salesforce said it would dive into health care with software designed to improve the relationship between doctors and patients.

Dr. Joshua Newman, Salesforce's chief medical officer, says the effort already has made some unexpected findings.

One is that overly generic software has created the impression that physicians are tech-averse.

"Doctors are Luddites because the technology so far has made their lives worse," he said.