IDC Canada unlocks the secrets of segmentation

TORONTO – If technology vendors want to beat their rivals the way the Toronto Blue Jays defeated the Minnesota Twins this week, they need to think more carefully about whom they’re pitching to, analysts told the annual IDC Canada Directions 2006 conference Wednesday.

As part of a “future four” series of presentations on the hardware, software and services markets, IDC Canada vice-president of customer segments Jamie Sharp used the Jays’ 6-3 win over Minnesota Tuesday night to explain the importance of “sub-vertical” markets. He referenced the Red Sox’s Ted Williams, who in 1941 achieved a .400 batting average in one season that has yet to be surpassed. Sharp showed a chart which indicated the median batting average, however, has remained relatively stable at .260 ever since.

“It has stayed the same because improvements of every aspect of the game have made perfect hitting near impossible,” he said, citing batting coaches and additional skills development instilled in rookie players. “When the game becomes that much harder, it becomes very difficult for anyone to really stand out.”

Sharp said technology vendors, whose products have largely been commoditized, face a similar challenge. The answer, he added, lies in deeper segmentation. Most companies today are product-oriented and make only minor efforts to tailor their portfolio towards a specific industry. Other firms developed their technology product around a specific vertical, and attempt to grow out of a niche. IDC says about 43 per cent of firms are product-oriented, about 12 per cent are industry-oriented while the remaining 45 per cent are a hybrid of the two.

Segmentation means making more distinctions within established verticals and customizing products and service strategies appropriately, Sharp said. Although the government does more than 50 per cent of all Canaidan IT spending, for example, Sharp showed bar charts which indicated vastly different priorities within the public sector. While 42 per cent of federal users recently told IDC electronic service delivery (ESD) was a critical area, only 12 per cent of municipalities have it on their radar.

“There’s no point in talking about ESD to municipalities, they’re not interested,” Sharp said. “Voice-over-IP is very hot at the municipal level because they’re working on a lot of CRM and 311-type of projects.”

Similarly, many vendors try to paint the financial services industry with broad brush but Sharp, who previously worked at TD Bank and Sun Life Financial, said insurance and capital market firms can be worlds apart from banks. “There’s still a lot of batch stuff going on in insurance,” he said, “whereas the capital market companies are usually more on the leading edge than anyone.”

When IDC broke down its research into the sub-verticals, analysts discovered that 14 per cent of banks are planning to spend on core banking infrastructure such as data warehouse software, servers and storage. It was the first time since he’d started working as an analyst that core banking emerged as a priority, Sharp said.

Mark Perrella, vice-president of IDC Canada’s technology group, said hardware such as volume servers are expected to see a 90 per cent growth rate this year, far surpassing client devices such as notebooks, which nonetheless are expected to grow 55 per cent. Overall, IDC is predicting a 4.3 per cent growth rate in hardware, creating a $14.2 billion market in 2006.

Technologies such as multi-core processing, virtualization and grid computing are helping to alleviate the uncertainty of many CIOs about compute cycles, he said. At the same time, the rise of the software-as-a-service (SaaS) model is addressing the concerns of customers who don’t feel they are well-served by the traditional licences they have purchased. The SaaS model also pleases vendors who no longer find licensing provides predictable, recurring revenue for their shareholders.

No matter how vendors segment their products, they must still account for a knowledge gap that exists in many IT departments, said Tony Olvet, vice-president of IDC Canada’s communications practice. In a recent survey, for example, only half of the IT managers who had implemented VoIP technologies knew what packet prioritization means, and 27 per cent of data network managers were not aware of multi-protocol label switching five years after it had been introduced.

“I’m not saying step off the gas in terms of selling the products and services,” Olvet said, “but you have to balance that with innovation and service to help demystify the technology.”

IDC Canada data indicates an ongoing decline in the growth traditional local phone service, which will fall by nine per cent this year, compared to wireless technology, which is set to grow 11 per cent over the next five years.

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