Engineering Services Growth Loop: Verticals, Horizontals, and Investments

How to scale up engineering services? How to create a sustainable growth loop?

In this context, one point which often comes up is the horizontal vs. vertical focus of engineering service providers. The other point is how and where to invest for growth. In my research:

Vertical capabilities provide differentiation, and horizontal offerings help scale up. Once service providers attain scale, they can further invest in differentiating capabilities, and the growth loop continues.

Both vertical and horizontal engineering services are important. Vertical-specific engineering services often require complex expertise and have low scalability but provide differentiation. Horizontal engineering services, in comparison, require medium expertise and have high scalability.

 Indian broad-based engineering service providers (engineering arms of IT service providers) have scaled faster than pureplay engineering service providers over the years. There are many factors at play here, and one of them is effective horizontals. IT service providers have better expertise and experience in creating horizontals.

 If you ask clients of broad-based engineering service providers what one thing they can improve, vertical or domain skills often come on their wish list.

 For an engineering service venture in the early year, the best strategy is to focus on verticals for differentiation. That's how many pureplay service providers have started. Engineering service providers who have scaled are able to build strong horizontals also.

 How do verticals help in differentiation?

For any service to have differentiation, it should have difficult to find expertise with people and specific capability assets. Investment in verticals helps to create differentiation

• ·SMEs with industry domain knowledge and industry-specific certifications
• Investment in industry-specific labs solutions, test beds
• Learning curve: Industry knowledge is difficult to acquire, and there is a significant learning curve that creates differentiation

How do horizontals help in scaling?

For any practice to scale up, there should be good demand from the client side, and from the supply side, it should be easy to recruit, train, transfer, and create a bench of resources. Horizontal practice helps to do that

• Large resource pool: A horizontal capability across customers which require similar skills, say software or embedded engineering across verticals, can be fulfilled from a large pool of resources in the market.
• Faster recruitment: These resources are easy to find in the market compared to vertical expertise
• Resource transfer across projects: Resources can be moved around projects as skill sets and capabilities are similar.
• Bench availability: It is easy to create a bench for horizontal resources and can be used to ramp up in comparison to vertical resources.
• Solution investment: The better business case for investing in solutions as they can be utilized across a larger number of projects.
• Capability credentials: A large number of horizontal projects across customers provide more capability credentials and reference customers
• Less conflict of interest: In vertical projects, there is sometimes a conflict of interest, and resources can't be moved among competing enterprises. In horizontals, there is less conflict of interest.
• Large deals: There are better chances of large deals in horizontal services.

How to develop a sustainable growth loop in engineering?

Only horizontals without vertical or domain knowledge will also not be good. Engineering service providers need to have a good balance between horizontals and verticals. Then they can have a sustainable growth loop

•  Differentiation is important. Vertical focus gives differentiation.
•  After differentiation, scale is important. Horizontal focus gives scale.
•  Scale enables enterprises to make investments. Investment helps in augmenting capabilities which helps in differentiation. The growth loop continues

Bottom Line: Vertical and horizontal focus is not the question of "or" but "and." Engineering service providers which have scaled up have both strong verticals and horizontals. The ultimate aim of any engineering service provider is to have a sustained growth loop for scale-up with a constant focus on horizontals and verticals and investments in changing engineering landscape.