Rising Above a Fragmented Market

Rising Above a Fragmented Market

When it comes to basic market dynamics, the IT services industry can be characterized in economic parlance as a fragmented industry. The characteristics include low barriers to entry; lots of small to midsize competitors; specialized markets requiring technical and focused skill; a large number of different market segments and buyer groups; the absence of dominant market leaders with large market shares and widespread buyer recognition; and vast numbers of buyers, none of which buys in large-volume quantities.

The fragmented IT services industry has a competitive set of companies that numbers in the hundreds of thousands, all of which are selling pretty much the same technologies, all going after the same customers and — perhaps most troublesome — all displaying a frightening lack of differentiation.

From Microsoft’s perspective this is a good situation (although much of the new Microsoft Partner Network is designed to differentiate its partners). The technologies are the heroes, sold at a price that gets Microsoft what it needs, and Microsoft has this gargantuan army of partners fighting among themselves for the corporate buyer.

From the partner perspective, well, you’re caught in the middle, sandwiched between the prices you pay for the products and services from Microsoft and the dollars that corporate buyers have to spend. The latter amount has both a real ceiling in terms of corporate budgets, and an artificial ceiling, courtesy of the hundreds of thousands of your competitors all clamoring for the same corporate financial pie. Given that among the competitive set in all market segments will be a cadre of low-cost providers, you can see why this is a tough business.

So what do you do? How about specialization and acquisition? These two strategies, done smartly, can get and keep your company in a position to dominate the segment of the market in which you choose to compete, and to stay ahead of what is likely to be the continued consolidation of the industry.

The three pillars upon which an effective specialization strategy can be built are technology, vertical and geography. The key is to identify what combination of these pillars represents your best chance for success. The range goes from being a specialist in a specific vertical with a range of technologies, to a broad geographic player with a single technology.

Please be aware, however, that it’s not enough to just offer technical expertise around these technologies. You’ll need to demonstrate that you have the requisite business acumen that justifies the use of the technologies. But whatever you do, do not become what I’ll call a geographic generalist, which is anything for anybody, anywhere — a surefire path to nowhere.

The obvious advantage of a specialization strategy is that it separates you from the pack. You reduce the number of rivals and better insulate yourself from competitive threats. You attract and retain better talent. You command higher billable and utilization rates from buyers who are less sensitive to price for effectively differentiated products and services. You generate greater demand more efficiently, thereby increasing revenue and profit, and you significantly enhance the value of your company.

Once you’re an effectively specialized company, you’ll be the intellectual and financial envy of your competitive set. As a result, you’ll become highly attractive to the acquisitive set — companies that will pay dearly for your company and be glad they did. If you’re among the acquisitive set, these are the companies that you should be scouring the country for because they’ve carved out a very special place in the market and should be acknowledged for their achievements.

It’s likely that the DNA of the IT services industry is such that it will be a fragmented industry for the foreseeable future. Our bet is that such will be the case. That being said, it’s also our bet that the real winners in the industry will be those that set a specialization course for themselves and then look to acquire or be acquired by like-minded, specialized success stories.