Zijun Lian-Current Status & Future Trends of Vertical SaaS Software Company

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<p>Zijun LianAlan, LeongMGMT 499 A 08/19/16 Current Status &amp; Future Trends of Vertical SaaS Software CompanyIntroductionToday, firms recognize the value of cloud computing to their businesses. Cloud-based software debuted in the software market as horizontal products that targeted a huge consumer base by focusing on software categories. As an increasing number of companies deployed on-demand applications due to its advantages over on-premise solutions, it became apparent that there was a need for industry-specific SaaS. Vertical SaaS now accounts for a notable market share in the cloud computing landscape that was initially dominated by horizontal solutions. The present paper seeks to explore the impact of vertical SaaS. More specifically, the discussion will cover the benefits imported by this platform in the transport, energy, manufacturing, healthcare, and hospitality industries. The analysis will also cover the distinctions between horizontal and vertical SaaS as well as the market opportunities within the five industries. Horizontal versus Vertical SaaSSaaS cloud computing revolutionized the software industry. During the advent of this technology, horizontally-focused SaaS companies sought to disrupt the market for on-premise solutions. At the time, it was expensive to develop solutions that suited specific niches. Instead, the initial market entrants chose to design horizontal SaaS solutions that catered for wide business functions including finance, customer relationship management (CRM), analytics, e-commerce, human resources, and so on. For instance, SalesForce and Oracle provided CRM and online accounting software respectively meant for companies across different industries. Horizontal SaaS refers to products that are designed for a variety of industries, and it emphasizes on software categories that cover broad business functions and target mass consumers in every industry. Under the horizontal enterprise model, companies focus on the breadth of the market. Firms like Oracle, Microsoft, and SalesForce design software products that target a mass market comprising of consumers from every sector. The businesses preferred the horizontal approach as a means of competing against well-established on-premise solutions and to convincing more clients to switch to cloud-based SaaS. Fortunately, this approach worked. An increasing number of consumers began to deploy horizontal SaaS as they realized the value of cloud computing.In essence, cloud-based SaaS solutions imported multiple benefits over conventional on-premise applications. First, cloud-based SaaS led to sizeable cost savings. cloud-based SaaS users typically gain access to business applications online, deployed by software vendors as a service instead of having to install a product on their servers. There is no need to obtain, install, configure or maintain costly hardware and software, which either reduces or eliminates overhead costs. What happens is that the SaaS software vendor caters for any IT infrastructure and rolls out any upgrades. The other advantage associated with SaaS is scalability. As businesses grow, they need to include more users and instead of purchasing additional software licenses or on-site server capability, they could simply adjust their cloud subscriptions. Additionally, cloud-based SaaS is accessible from any geographical location, which is especially beneficial for companies that work in remote areas. Cloud-based SaaS solution is also resilient. The data and IT infrastructure reside in the vendors data center, meaning that users do not have to suffer downtimes since they can simply access the cloud from any location. As horizontal companies ventured into designing SaaS solutions in different software categories such as human resource management, CRM, and accounting, the applications became an integral part of improving efficiency in these business functions.Over time, SaaS usage gained traction and is expected to phase out on-premise solutions. Today, horizontal SaaS companies hold a large share of the software market. Consumers understand the benefits of cloud computing and no longer need to be educated about its advantages over on-premise software solutions. Companies in this landscape have now shifted their focus from creating awareness over cloud products and customer acquisition to customer retention. Even so, the horizontal software market currently features high competition due to the proliferation of excellent products that customers can choose from. Horizontal SaaS providers find it difficult to deliver distinct applications that differentiate them from their competitors. Aside from that, the market already has established category winners. The market leaders in SaaS software are SalesForce (held 11% of the market as at 2015), Microsoft (8% of the market share), and Adobe (6%) (Bourne para 3). Consequently, new market entrants and smaller businesses found difficulty in gaining market share because established category winners currently dominate the horizontal SaaS landscape. Furthermore, large corporations have the capacity to pay top dollar for emerging innovative solutions within the industry. In contrast, their smaller counterparts do not have this financial advantage and may not even have the ability to design unique enterprise-grade products that can compete with dominant products. Horizontal SaaS providers also have to incur high costs in marketing their products to the large addressable market. One of the major drawbacks of adopting a horizontal business model is that it is difficult for companies to be capital-efficient because of the heterogeneous nature and large size of the target consumers. Fundamentally, the strategy of targeting a high-volume market with a large consumer base means that horizontals have to incur high expenses on marketing campaigns. Due to the broad base of customers, marketing spend in horizontal SaaS companies exceeds the amount spent by their vertical counterparts who target a smaller homogeneous market. A comparative study of a sample of five horizontal and vertical companies showed that the former spent an aggregate of 43 % in sales and marketing expenses in 2013 (Spielman para 5). The latter only recorded an average expenditure of 25 % (Spielman para 5). The inevitable outcome of higher expenditure on sales and marketing is reduced profit margins. When SaaS made its debut in the global software market, horizontal providers mainly developed products that were widely applicable as they targeted a vast market. For this reason, they did not build industry-specific offerings that catered for the needs of specific industries. This situation created a demand for better-tailored and niche-specific software solutions that led to the emergence vertical SaaS companies. As industry leaders like SalesForce, Oracle, and Microsoft focused on developing products for a mass market, a new branch of vendors began to shift from this horizontal approach to a vertical one. At best, the horizontal companies offered generic cloud computing that did not necessarily take into account the apparent variations across different segments. Vertical SaaS created a wave of disruption that hit the advancing horizontal space. Vertical clouds have the same advantages as horizontal solutions over on-premise software with regards to cost savings, scalability, resilience, and augmented efficiency. However, vertical SaaS companies narrowed down their specialization at the niche-level developing sector-specific offerings that met the unique demands of each industry. Industry-specific cloud companies moved to resolve the issues that their horizontal peers initially considered too fragmented to address by delivering innovative software solutions. There are several other factors that distinguish vertical SaaS from horizontal SaaS. First, as mentioned earlier, large software vendors design products with the objective of maximizing on the available mass market. Conversely, vertical SaaS products are developed to address sector-specific issues, which often results in a highly targeted sales and adoption process. Such companies can carve out a substantial market position since their products are superior to generic ones due to their narrower focus on the specific needs of an industry. This business approach allows them to focus their capital on offerings that are widely acceptable to the addressable market, which also meet the pain points that are ignored by horizontal software providers. Indeed, the overall addressable market for Vertical SaaS is lesser than the one for horizontal SaaS. Even so, their target market is homogeneous in nature, which enables startups to penetrate easily and thrive in the market. For customers within different industries, the niche-specific nature of the products effectively minimizes or even eliminates the need for them to customize horizontal SaaS, which saves money and enables them to achieve higher productivity. One of the main characteristic of the vertical SaaS marketplace is low competition. The main reason for this is that there are no definite category winners. As a result, vertically-focused businesses need not face market leaders who have entrenched their positions in specific niches. What's more, product differentiation is quite problematic under the horizontal model, but it is highly achievable for vertical SaaS businesses that provide better-tailored products in specific industries. Also, business success in the vertical front is difficult to replicate, which is advantageous for companies who have obtained success within their vertical. In contrast, horizontals can easily copy the models used by others and still thrive, which creates stiff competition in the market. In effect, this enables the vertical firms to gain a competitive advantage over their counterparts. Companies that work under the vertical business model are also more profitable because there are relatively fewer verticals in the landscape. Other than that, specialized vendors also have the advantage of charging premium prices because they offer specialized products and face relatively low competition that would bring about pricing wars. Vertical SaaS firms deliver software solutions that become deeply entrenched in the workflows of their customers after adoption. Horizontal cloud vendors typically direct their attention and energy on a slice of a clients business, which then forces them to pursue growth opportunities by bringing onboard new customers across several industries (Spielman para 15). However, the emphasis of a vertical organization is on renovating the core business functions and operations of a specific sector to foster greater impact on each client (Spielman para 15). This increasingly deep integration into the operations of their clients allows vertically-driven businesses to earn more revenue from existing clients as well as entrench their position in the market. According to Speilman, targeting a single sector presents the opportunity to satisfy specific needs (para 7). Once a vertical cloud business has addressed a key pain point, it can expand its portfolio to cater for other needs within the sector (Spielman para 7). Under the vertical cloud system, a key product can evolve into an all-inclusive platform with many layers of products designed to meet the needs of an industry (Spielman para 7). All things considered, it is possible for startups to venture into the vertical SaaS market, provide reliable industry-specific products, become category winners, and dominate their selected niche. Vertically-focused businesses have to educate their target consumers but have less marketing spend than horizontals. Vertical SaaS vendors have to spend time and money educating clients to convince them to migrate from either on-premise or horizontal solutions and instead deploy industry-specific software. Despite this obstacle, this business model remains attractive because it involves low marketing spend. In essence, focusing on a narrowed down market inadvertently reduces the addressable market, which enables vertical companies to reach their customers faster and at lower costs. It is also possible to leverage low-cost marketing strategies of acquiring customers like receiving referrals through word of mouth or even targeting clients during industrial events. Vertical SaaS companies can cover the potential client base with a leaner sales force than their horizontal counterparts (Spielman para 6). As a result, verticals make more savings, which has a positive effect on their profit margin. Spielman affirms this point by noting that this cost-efficient customer acquisition framework increases profitability as well as business growth (para 6).Vertical SaaS in the Manufacturing IndustryToday, manufacturers face challenges that are unlike any of the issues they encountered in the past (Invensys and Microsoft i). Some of them include a volatile global economy, unpredictable changes in consumer purchasing behaviors, greater connectivity, and rise in consumer technology (Invensys and Microsoft i). As a result, manufacturing companies have to embrace and deploy automated SaaS-based solutions that will enable them to leverage the opportunities created by these changes while avoiding the risks associated with them.In the first instance, global economic conditions such as currency fluctuations, unemployment, and flat spending have an impact manufacturers profit margins (Invensys and Microsoft 2). The solution might lie in adopting vertical SaaS-based manufacturing solutions. In essence, deploying cloud software reduces IT infrastructure and the lifecycles of existing or new operations by up to 54% (Invensys and Microsoft 2). In effect, cloud computing leads to cost savings and reduces time for marketing (Invensys and Microsoft 2). SaaS offers effective solutions at lower cost of traditional desktop software. Further, it enables manufacturers to run their production processes efficiently from inputs acquisition, processing orders, scheduling, and routing, to order fulfilment and pricing. As a result, companies achieve higher productivity, roll out finished goods at a faster rate, and avoid incurring unnecessary expenses.Manufacturers also operate in a logistics-intensive landscape, which makes it necessary to achieve seamless supply collaboration and optimal performance across the network. Companies within the industry use vertical SaaS solutions for supply chain management. The software enables chain partners to build and maintain critical relationships through real-time communication with top industry performers. In essence, cloud computing fosters the creation of a cohesive supply chain network that brings together multiple players together. The outcome of this integration is higher visibility and scalability. SaaS users access critical business intelligence that ultimat...</p>