By Paul DeGroot [bio]
Posted: Oct. 14, 2002

The following is the full text of an article published by Directions on Microsoft, an independent research firm focused exclusively on Microsoft strategy & technology. Each month we make one or more key articles available to non-subscribers.

To improve its ability to meet the needs of larger customers, Microsoft is sharpening its focus on specific industries. The company is consolidating responsibility for vertical markets under one manager, adding staff with industry-specific expertise, and giving a high profile to partners who can sell and deploy specialized, large-scale solutions. Targeting the needs of specific industries and markets is not entirely new for Microsoft, but a more focused approach to vertical markets is critical if the company is to grow sales in large accounts. Although Microsoft’s desktop products might be well established in such accounts, competing products are more widely used for mission-critical and specialized line-of-business applications.

Vertical Markets a Path to Data Centers

Microsoft's increased focus on specific industries springs largely from its desire to sell more server products into corporate data centers. Its product line has evolved from the business desktop, and it has achieved considerable success with general, "horizontal" server applications that are used in virtually every business, such as databases, Web servers, and e-mail servers. But success in the corporate data center or in enterprise lines of businesses requires industry specific solutions and a high degree of customization and consultation: commodity solutions offer no edge to a company, because competitors can easily employ the same solutions. And data center customers will not bet on a vendor which, for all its technological expertise, appears ignorant of the customer's business priorities.

The most efficient way to satisfy enterprise customers, says Gerri Elliott, corporate vice president of Microsoft’s Industry Solutions Group, "is to speak their language, understand their business, understand their problems, proactively bring business solutions that are specific and relevant, and talk about value rather than terms and conditions."

Three Efforts Toward Vertical Solutions

Microsoft's response is to focus more on vertical solutions: software and services that serve the needs of a particular industry or market. For example, vertical solutions in the oil and gas industry would include highly specialized and integrated geological and geophysical applications. Vertical solutions enable Microsoft to move beyond horizontal commodity software, without going all the way to custom solutions that work well for a specific customer but cannot be sold to other large customers without significant additional customization.

Microsoft currently has three types of vertical solutions.

Microsoft Solution Offerings (MSOs). Announced in 2001, MSOs bundle server applications and "glue" code from Microsoft or third parties, along with architectural guidelines, deployment scripts, and other pieces that can be used as the foundation for specific solutions. MSOs have been tested in real deployments and include performance metrics that can help a customer determine how a project should be sized to handle the expected load. Most MSOs are marketed in concert with a batch of partners who have received additional training on how to configure and deploy the MSO and who, in many cases, have installed them in the field. (For more information about MSOs, see "Solution Guidance Expanded" on page 13 of the Sept. 2002 Update, and "Integrated Solutions Push Server Software Sales" on page 10 of the Jan. 2002 Update.)

Vertical Solution Offerings (VSOs). While many MSOs are for horizontal functions, such as Web hosting, business intelligence, or e-commerce, Microsoft and its partners are adapting them for specific industries and also designing VSOs that have the same general design as MSOs but are aimed at a specific vertical.

The result is an industry-specific solution that uses Microsoft products as its foundation but that has been tailored to meet a particular requirement of a large number of organizations in a particular vertical market. For example, a solution designed to help U.S. healthcare organizations meet new government requirements for exchanging health data electronically is aimed specifically at the healthcare vertical, and has no application elsewhere.

Partner solutions. Vertical solutions built by Microsoft partners are an important element in the sales effort because, although not built by Microsoft, they make extensive use of Microsoft technologies and are often deployed on top of Microsoft’s server products, such as Windows Server and SQL Server. Most Microsoft sales in vertical markets are likely to involve a partner solution, says Elliott: Microsoft has very few vertical solutions of its own and will rely heavily on partners for solutions that meet industry-specific needs.

In the more distant future are partner solutions that use Microsoft’s planned Microsoft Business Framework, a library of code and tools for common business application functions (such as a general ledger) and low-level development tasks (such as generating data input forms from an application's database schema). Microsoft hopes the Framework will save vertical ISVs and partners the effort of duplicating common business functions and will allow them to spend more time tailoring software for particular markets. The Business Framework, however, is unlikely to be available for at least three years.

Organizing for Vertical Sales

Microsoft has had units that specialized in particular markets for many years. Most of these early efforts focused on large markets that made extensive use of desktop software, such as government (Microsoft initiated this vertical team in 1982), finance, and education. But responsibility for tackling enterprise-level vertical sales was dispersed within the company, with some responsibilities carried by the Industry Solutions Group (ISG), which is part of the U.S. sales team, and others by the Enterprise and Partner Group (EPG), a different leg of the sales organization.

All of Microsoft’s vertical efforts have now been consolidated in the ISG under Elliott, an IBM veteran who most recently led that company’s vertical sales for retail, travel, and transportation organizations. One of ISG’s most important roles is to identify and target new verticals, a role that requires assessing the amount of IT spending in a vertical and how well its needs match current Microsoft products and skills.

Industry Solution Units House Specialists

Microsoft added new industry solution units to focus on healthcare, retail, and manufacturing in July 2002, and teams targeting professional services and entertainment should begin operation in 2003. The company will continue to study other vertical markets and may announce them in 2003, says Elliott.

These teams range in size from about 90 to 300 people, each of them headed by a general manager who reports to Elliott. Each industry unit also has a a vertical solutions unit (VSU) led by a managing director who is responsible for overall solution strategy in that vertical.

Another important group, separate from the VSUs, is the Industry Solutions Enablement Group, headed by David Kiker. Its role is to link the industry units with product development teams, ensuring that product feedback from industry teams and enterprise customers gets back to those who develop the software.

One of the most critical features of the industry teams is the presence of large numbers of team members who have specialized industry experience, and are therefore better equipped to understand the problems faced by customers, to guide the development of solutions that meet their needs, and to convince those customers to employ Microsoft solutions.

About 30% of the people in the industry teams are relatively recent hires who came from the industries that Microsoft wants them to sell to. The healthcare team includes several doctors, for example, while the government sales team includes a former four-star general and government policy administrators, and the retail operation is headed by the former CIO of a large retailer. Other team members are devoted to a particular vertical and most will not be involved in selling to customers outside that market.

"We were finding sales reps in some offices who had clients in three, four, five different industries. It’s tough to be an expert when you have so many industries to care and feed," says Elliott.

Vertical specialists play a part not only in selling Microsoft solutions but also in designing them and developing marketing strategies. The "thought leadership" for a vertical team resides inside the team itself, rather than elsewhere in Microsoft: each team identifies key trends or requirements in its vertical market and develops strategies that it believes will be effective in reaching customers in the market.

Location, Location, Location

One important feature of Microsoft’s industry teams is the way they blend geographic placement with industry specialization. Elliott says she learned this approach the hard way at IBM, where the company swung periodically between vertical-focused sales that had no geographic connections and regional sales teams that often lacked industry expertise.

Microsoft’s industry units are often based near the headquarters of key customers, particularly when those customers are located in a specific area, such as the auto industry in Detroit, the federal government in Washington, D.C., or the oil and gas industry in Houston. Industry teams also work in concert with regional sales offices where appropriate—Microsoft’s Washington, D.C. office has always had specialists in government sales, for example.

In all, says Elliott, about 90% of her staff are located outside Microsoft’s Redmond, WA, home base. "There’s tremendous value in being located in Detroit to call on General Motors, and in General Motors knowing that all the people key to them from a Microsoft perspective are right there, and they can see them every day, and know that the key metric for their own success is General Motor’s satisfaction with Microsoft."

The fact that Elliott works for Microsoft's U.S. subsidiary, headed by Kevin Johnson, is further evidence of the blend between product and solution specialization and geographic proximity. While the U.S. subsidiary will take the lead in marketing products to many verticals, other regions are expected to develop their own industry solution units. For example, the company’s Europe, Middle East, and Africa (EMEA) region is developing vertical marketing teams aimed at retail, government, and financial verticals, and the Japanese subsidiary is working on sales organizations that will focus on the manufacturing and electronics industries.

Role of Partners

Partners play a critical role in the vertical strategy, primarily because they have a large core of specialized knowledge and experience. In addition, many of them have already built industry-specific solutions for Microsoft’s targeted verticals that run on the Microsoft platform.

Partner solutions, combined with Microsoft solutions and platforms, form the core of Microsoft’s vertical "go-to-market" initiatives—concentrated selling campaigns that include a product or solution, sales training and marketing collateral, development of leads, and outbound marketing, such as advertising, events, and seminars.

When Microsoft announces solutions aimed at a particular vertical, it typically launches the solution along with ISVs who have already developed their own solutions based on the Microsoft platform and with consultants and integrators who can implement these solutions. The Microsoft sales team will promote partner products so that Microsoft can gain customers without developing products aimed at small niches.

For example, one of the roles of Microsoft’s federal government sales team is to monitor government Requests for Proposals (RFPs) that are put out for bid. The team matches RFP requirements with the skills or products of partners who have registered with Microsoft as partners for government sales, and alerts partners to RFP opportunities that they could be bidding on. Microsoft does not bid for the work directly, but by encouraging partners to bid, the company increases the likelihood that the contract will be fulfilled using Microsoft products.

Most of the support for specialized solutions is provided by the partners who create the solutions. Microsoft’s support responsibilities are related to its own products only and it does not incur additional support costs related to the customized solution. (Indeed, the partner who builds the solution might realize ongoing revenue from support for the solution.)

Vertical Challenges

Although Microsoft’s new vertical focus represents a more coherent and unified approach to the special needs of its largest customers, challenges remain, including the following:

Meeting special needs. Enterprise customers are often accustomed to having software vendors respond quickly to specific requirements. But Microsoft’s methodology is designed to roll out major releases periodically, with the occasional hotfix to resolve bugs that affect large numbers of customers. Furthermore, Microsoft may be required in some cases to ensure that its products are compatible with standards and protocols that have little application outside a specific vertical. The Industry Solutions Enablement Group is a start on the problem of how to respond quickly to the special needs of a few large customers and specialized partner solutions. In many cases, Microsoft will depend on its industry partners to respond to specific requirements.

Going global. The U.S. focus of the Industry Solutions Group achieves an important objective—keeping Microsoft close to its largest customers. However, many of those customers work in global business environments, and translating solutions that work well for U.S. customers into solutions that work well in other economic and regulatory environments will take time and commitment.

Resources

Microsoft Solution Offerings are described at www.microsoft.com/business/solutions.

Additional resources and information about partnering with Microsoft in selling to governments is available at www.msgovconnections.com.