Most services firms are horizontal, in that they can provide their services to any type of client. This is good and bad.
Being horizontal means a firm can market to any company that at some point might need their services. This makes the potential market for a firm big. This is appealing to the leaders of services firms because it creates more possibilities for client referrals and serendipity.
On the surface being horizontal for services firms seems appealing. Do more with more. But often when you are marketing to everyone you are marketing to no one. As a result, firms that are horizontal might struggle to speak to potential clients directly enough and with a clear enough message to resonate effectively. Horizontal firms run the risk of their messaging and positioning getting lost in a sea of similar marketing activities by other firms.
Services firms that are horizontal can struggle to have a strong value proposition with potential clients. Potential clients are trying to de-risk when selecting a services firm to engage with and part of de-risking is engaging with a firm that has done what a potential clients needs done. Potential clients will want to see tangible proof that a firm has done what they need done and preferably as close to a 1:1 as possible. Horizontal firms tend to have clients across many company types and industries meaning they have probably done something similar to what a potential client from a different industry wants but not likely anything close to a 1:1. This makes the task for a firm’s salespeople harder because they have to get a potential client to trust the firm has the capability to help the potential client to accomplish what they want to without any direct proof.
So what’s the alternative for horizontal services firms that want to develop a more clear client value proposition and messaging? Becoming more vertical. There are different ways of becoming vertical for services firms.
The first is around services. A firm can focus its services in such a way that they are specialized. Some firms become so hyper specialized their addressable market can be just a handful of companies. But these hyper specialized firms are the best of the best at what they do and they often charge a premium for their services. Hyper specialization can be intentional from the outset of a firm because of the expertise of one of the founders of a firm, but in my experience most firms become hyper specialized because of some event or recognition during the life of a firm. For example an IT staffing that was operating as virtually ever other IT staffing does had a request to provide a technician for a very specific field assignment. The client then asked for more people to do the same specialized work. It also turned out that the other companies in the client’s industry needed similar work done and were happy to engage with the firm who had now developed an expertise in the area. The IT staffing didn’t plan on becoming specialized, but the opportunity presented itself and they capitalized on it. Their area of specialization quickly outpaced the rest of the firm and they transitioned out of the generic, highly competitive IT staffing.
The second type of verticalization for services firms is around industry/client type. The case could be made for the above IT staffing firm that they verticalized around an industry/client type. It kind of becomes a chicken and egg situation as by having verticalized services a firm expects to become industry/client type verticalized. One should beget the other. The primary difference I want to call out around the two is that when a services firm vertilicalizes around services a firm is providing essentially the same service but to a narrower set of clients. When a service firm verticalizes around an industry/client type, often a firms services have to change and evolve to serve the specific industry/client type they are now pursuing and serving. In the case of the IT staffing company they did both. First, they basically provided the same service for the vertical clients they had been providing to any other clients. Second, as they realized the vertical potential they changed some of their processes and services to better align with and to serve the new vertical clients.
The third option, but much more difficult to pull off, is a services firm goes after a new industry/client type and in doing so has to rethink and reconfigure the way the firm operates. An example of this might be a design firm that starts out doing graphic design for book covers that then wants to or needs to evolve into digital design. The firm will have to approach the work differently, likely even learning skills or adding new team members with new skills, as well as acquiring clients differently. Current clients will often pull a services firm through into new services and spaces. In the case of the design firm that had traditionally designed book covers, a publishing client asked if they could also design the website and accompanying mobile app for the book. The firm agreed and was no longer just a book cover design firm. Services firms don’t have to take the bait and to add or shift their services into new areas, but sometimes it makes sense for a firm to as a way of expanding. What firms have to be careful of in a situation like this though is the move from being mostly vertical to at least partially horizontal. The design firm was vertical when it was designing book covers. The firm could have stayed vertical with its new digital design work if the firm had stuck to designing digital presences focused on books. The design firm decided to further expand its digital footprint beyond books because the firm had added team members to do the digital design work which meant the firm needed more digital work to keep the new team members busy. The firm began doing digital design for non-book clients which then made the digital design aspect of the firm horizontal while the book design part remained vertical. The firm became frustrated with the lack of consistency, the client turnover, and the rate competitive pressures with the digital design aspect of the firm. They had not foreseen and understood the path they were choosing to be on once they decided to expand beyond digital design for book clients. The firm is now a challenging position of deciding whether to verticalize again solely around book clients or whether to maintain the lower margin and highly competitive horizontal digital design work. Going back to being vertical will mean the firm cuts a number of team members in the horizontal digital design service area but also means the firm will be performing better overall, even as a smaller firm with an entirely vertical approach.
Services firms can also verticalize around a product. In most cases a product means a software product, rather than a physical product. Services firms can productize their process, know-how, or a problem identified after serving similar clients over many years. The digital product firm I am a Principal in, AWH (awh.net), helps services firms to create software products for recurring revenue, larger profits, and to increase firm value. A product is also a way for services firms to verticalize because typically a software product that is created by a services firm is going to be targeted at a specific problem for a specific type of customer. These software products might not have massive market potential as would software companies that are software companies from the outset, but a services firm with a software product can leverage the product to go deeper within a particular industry/client type. The addition of a software product for a services firm also often means a services firm beginning to offer specialized (i.e. vertical) services around the implementation and use of a software product by clients.
So is it better to be horizontal or vertical as a services firm? The honest answer is it depends, but I would say after observing and working with a number of services firms that vertical is better. Services firms that are more vertical than horizontal can command higher rates, make more profit, and have a more predictable operation. Vertical firms also tend to have shorter sales cycles and of course have an easier time of marketing because of clarity of target client and positioning.
Plenty of services firms are successful being horizontal so the decision for a firm to be horizontal or vertical isn’t an absolute. It comes down to what is going to position a firm to be the most successful and to help firm ownership to achieve the outcomes they want professionally and personally.