Is Verticalization the Right Strategy for MSP Growth?

Terry Ledger’s first customer was a “really strange one.”

They were a semiconductor brokerage house. Think of it as a stock market for computer parts. If Acme Corp has an excess of one hundred thousand chips and Wayne Enterprises is mothballing production because they need one hundred thousand parts, the brokerage plays matchmaker.

As the founder of Network Coverage, a managed service provider (MSP), it was Ledger’s job to keep the brokerage’s systems running. But he quickly learned that the semiconductor stock market was a world unto itself, packed with intricate processes and complex software.

Perhaps understandably, Ledger didn’t niche down into the world of semiconductors. Instead, he pursued customers in a wide range of industries, securing clients in manufacturing, engineering, biotechnology, among others. During this exploration, he realized he was attracting more and more customers in one vertical: commercial construction.

Year by year, he acquired more construction expertise and developed a stronger reputation among building companies. Eventually, Network Coverage was seen as the MSP for construction businesses in the Greater Boston area. He says this process of verticalization was key to the success of his company.

If you aren’t familiar with the term, verticalization refers to specializing in specific industries, functions, channels, or regions. In the case of MSPs, it almost always means industry verticalization—that’s specializing in banking, healthcare, life science, and so on.

Ledger isn’t alone in his support of the tactic, either.

Business leaders have been promoting verticalization for years. They promise that niched organizations will gain institutional knowledge, accelerate their marketing efforts, and enhance their reputation.

But the reality is less clear-cut. Alongside all the headline benefits are underappreciated risks and overlooked drawbacks.

For a balanced analysis of verticalization for MSPs, read on.

Learn the ropes—once

There’s a lot of operational overlap between modern businesses. Almost all companies will have email. Most have a cloud storage platform. A lot will have some sort of security. But beneath the basic technology lies a layer of industry-specific technology.

Take architectural, engineering, and construction businesses—jointly known as AEC.

Whether you’re supporting an architectural firm, contracting business, or engineering practice, chances are they’ll be using the same CAD, accounting, and proposal software. Once you’ve worked with half a dozen AEC businesses, you’ve worked with them all. That industry expertise is invaluable.

“We know all the AEC applications,” says Ledger. “We can circumvent the vendor and can provide most customers with first level of support. That’s opposed to escalating issues up to the vendor and relying on them getting back to us in a timely fashion.”

Tap into the marketing network effect

Think of your customer’s business as a premium saloon or coupe. When it breaks down, they’re not going to go to a generic dealership to get it fixed. They’re going to look for someone who knows what they’re talking about.

“If someone drives a Ford, they’re probably not going to bring it to the Chevy dealer to get it fixed,” says Ledger. “The Chevy guys know how to fix a Chevy. The Ford guys know how to fix Fords.”

It’s the same story in managed services. Legal firms will want someone who understands their security needs. Manufacturers want someone who gets CAD.

When you’re the go-to provider for a particular industry, that’s a powerful competitive advantage. In smaller or insular markets, the impact is magnified.

For example, most large construction company owners in any region will know each other. They’ll attend the same conferences, see each other at cocktail parties, and recruit from a similar pool of employees. When they start talking about a provider as a specialist or expert in their field, that’s the strongest form of marketing you can ever get.

Repeatability and profitability

Consider two customers. One is a carbon copy of a different long-term customer—same industry, organizational hierarchy, business processes, and so on. The other is unusual—new geography, new sector, strange ways of doing business.

Of the two, which do you think will be more profitable? The first, of course. You’ve probably spent less on marketing and sales to attract them. Your discovery and onboarding will run like a well-oiled machine. You’ll likely predict any issues and anticipate any opportunities.

In short: When you work with similar customers, you can develop repeatable processes. You can work more efficiently, drive down costs, and carve out more profit.

Consider the drawbacks

Verticalization sounds like a silver bullet for MSPs. More expertise, stronger marketing, improved profitability. What’s not to like? Unfortunately, the practical reality isn’t quite so clear. Alongside all the benefits are a handful of serious drawbacks. Before driving a verticalization transformation, it’s important to consider them carefully.

First, verticalized businesses experience amplified negatives.

“In much the same way cocktail parties lead to referrals, they can bite you in the ass,” says Ledger.

Any negative feedback or commentary gets heard by a significant proportion of your target market. Even if the claims are unfounded, untrue, or exaggerated, they still have a harmful effect. Say the power goes out in a city and an executive decides to blame their MSP. It’s not fair, but people will listen to their complaints.

Second, recruitment becomes harder. When you niche down into specific verticals, you’re adding another layer of challenge to talent acquisition. Not only do you have to find a competent tech, but you have to find one who understands the ins and outs of education, energy, or public sector work. If you can’t find the right people, you have to invest in specialized training and education to bring generalist new hires up to speed.

Finally, there’s an opportunity cost. By targeting one specific vertical, you are ignoring others. The markets and opportunities you overlook may be highly profitable and rewarding.

To verticalize or diversify?

Unfortunately, there’s no one answer. Each business has unique strengths, circumstances, and goals. Often, organizations will land somewhere in the middle.

Take Terry Ledger. Although he has an enviable reputation as the MSP provider for commercial construction companies, around 40% of his business comes from other industries.

“We have manufacturing and engineering,” he says. “Some biotech because of where we're based. We’re just north of Boston so biotech is an obvious one for us.”

When considering verticalization for your MSP, evaluate your own circumstances, weigh up the pros and cons, and make a choice that’s right for you and your business.

If you’d like to work with Network Coverage, you can contact them here. And for more insightful perspectives from other expert MSP leaders, check out our Rockstars of MSP series here. In this series, we dive into several managed service partner success stories.