Published on the 12/09/2022 | Written by Heather Wright

A hot market, but with a way to go…

Vertical software may gearing up to eat the world, but there’s a way to go yet, especially here in Australia and New Zealand.

Forrester’s Global Software Industry Forecast 2022, shows globally application software sales are expected to see an 11.4 percent CAGR this year and next, exceeding US$400 billion.

“There seems to be a barrier to shifting from widely used horizontal platforms to even the more verticalised modules of the same solutions.”

Front office apps, such as CRM, and industry vertical solutions are forecast for the fastest growth, with vertical software growing at 13.3 percent, and CRM up 11.9 percent.

ERP, which Forrester says has been the slowest market to modernise, is expected to grow at 10.4 percent, with the analyst firm noting that 24 percent of software decision makers deploy ERP on-prem compared to 19 percent who voted for modern SaaS deployments. 

So how about that hot market of vertical software?

Forrester says vertical SaaS pure-plays have a big opportunity to replace legacy custom-built software with modern cloud applications. And it’s certainly got the attention of major cloud service providers who are spinning up offerings.

Case in point: MIcrosoft’s industry specific clouds which the company began launching early last year. Oracle’s June acquisition of health digital information systems provider Cerner also points to the shift.

Of course, vertical isn’t really new. There were traditional on-prem solutions which were deeply verticalised, including SAP’s CRM offerings, with 20 industry editions. But Forrester says they gave way a decade ago to lightweight industry templates which didn’t go deep enough to deliver maximum benefits, and highly verticalised born in the cloud offerings with a relatively narrow set of usage scenarios. 

Now Forrester says vertical software companies have seen ‘explosive’ growth in the past decade, to reach a combined market cap of $650 billion – up more than 800 percent. 

A second report, The Rise of Industry Cloud Solutions, says industry cloud solutions will be the preferred platforms in the next five years. 

But Sam Higgins, Forrester’s Sydney based principal analyst, says he hasn’t seen as much emphasis on industry vertical adoption across the Australian and New Zealand markets yet.

“It is not to say firms aren’t, just that as a region with a fast follower adoption pattern, there seems to be a barrier to shifting from widely used horizontal platforms to even the more verticalised modules of the same solutions,” he told iStart.

There is, of course, the argument that vertical solutions tend to be behind the game in terms of modern software architecture, thanks to the smaller addressable market – and therefore increased difficulty in attracting the necessary investment capital. That can result in companies – particularly in local markets, opting instead for buying generic ERP for example and then enhancing them with third-party plug-ins from ISVs, building their own customisations on top or, increasingly, opting to solve problems with Power BI-type intelligence. 

Himank Joshi, a researcher on Forrester’s ForecastView team and one of the authors of the Global Software Industry Forecast 2022 report, says one or two vendors dominate most vertical markets.

“For vertical software businesses market leadership is the prize,” Joshi told iStart. 

“We have seen a new breed of emerging cloud based vertical companies that have immense opportunities to replace customised on-premises applications from legacy providers or monolithic home-grown application within industry verticals. 

“Additionally, many of the most valuable vertical software companies have been built in new markets that lacked access to software. These are greenfield opportunities which gives advantages to early entrants.”

Others are making upmarket moves, initially catering to SMB or mid-market buyers before expanding to enterprise as their product matures.

“With cloud service providers interest in verticalisation strategy now beginning to crop up we consider some of these companies as lucrative M&A targets,” Joshi says.

He admits that broadly the vertical software market remains relatively less mature and untapped than horizontal software for some industries but says there is continuous momentum for industry solutions building. 

“Over the years many of these modern cloud based vertical software companies are adopting strategies to deepen their competitive moats and maintain their leading positions within verticals focused around building powerful platforms and product integrations offering quality upgrades, scalability, and better business alignment.”

Higgins says there are some great examples of local businesses building their own platforms as part of wider ecosystem plays.

He cites the example fo Reece Plumbing which ‘reimagined’ their customer experience and built a custom platform to address their specific needs. 

“But firms must be mindful that if they have focused on using packaged software – be it on-premise or SaaS – their internal development capabilities may have atrophied to the point where continuing to use finished software solutions with vertical capability makes great sense – like the [customer service platform] Kraken Platform that was spun out of Octopus Energy Group,” Higgins says.

“These can still be configured with a small layer of low-code/no-code business rules to help firms differentiate but could very well be a safer path than building up a complete development team with all the surrounding people, process and technology required to undertake modern application development.”

There are both benefits and trade-offs to industry solutions. 

“Industry clouds will be the preferred way to purchase five years from now, yet today’s decisions are not as clear,” The Rise of Industry Cloud Solutions says.

“Many industry clouds are nascent, with lighter-weight and incomplete capabilities. Plus they can be more expensive out of the box and often require specialised resources to install, manage, upgrade and service.”

On the pricing front, Forrester notes many, like Microsoft Cloud for Healthcare, are often double the price. 

When choosing vertical solutions, Joshi says due diligence is the key.

“Businesses should have the ability scan the vendor landscape and look at offerings specific to their end-to-end workflows and usage scenarios, through evaluation of vendor’s reputation, domain expertise, customer references and its partner ecosystem. 

“Assessing techno economic viability for industry solutions and comparing costs with custom development of tailored solutions from a horizontal one or building around viable vertical SaaS alternative can serve as an important step for cost benefit analysis and better decision making.”