If you were to ask most start-up vendors, they would say analyst firms like AMR are too pricey. If you ask Gene Hall, CEO of Gartner he would likely say “Give me a break – we had a loss last quarter”.
I help CIOs negotiate software and outsourcing deals, not their contracts with analyst firms (since the corporate spend amount on analysts is relatively small), but one client recently asked me what I thought of analyst firm pricing. I had not focused much on analyst economics since I left Gartner in 1999, but now that I have it is an eye opener.
Forrester’s gross margins averaged 65% over the last 5 years (Reuters figures via WSJ Online). Gartner research margins were 61% in 2004 (overall Gartner's margins averaged 52% because Gartner does more consulting projects, which are less leveragable). Meta's 2004 10-K shows comparable results prior to its acquisition by Gartner. The research margins (at least in these public analyst firms) approach those of premium priced software companies (Siebel at 67%, Oracle at 74%) and much higher than those at well run IT services firms like Accenture (35%) and Infosys (45%). You can argue they are in different technology segments, but they are all labor intensive.
As my blogs on software maintenance pricing, outsourcing pricing and productivity in services vendors reflect I think there is a fair amount of fat to be trimmed from those contracts, so how could I not say the same about analyst pricing based on their gross margins.
The analyst operating margins, on the other hand are much, much lower than at the software and services firms I mention – almost 30 basis points less than Oracle or Infosys. This is a result of bloated selling and marketing costs (40%+ of revenues even when annual subscription renewal rates are in the 70 to 80% range) and insufficient administrative leverage - so half of every dollar in SG&A expenses.
Not sure why customers should keep funding this double hit of high margins and SG&A inefficiencies. Here is my perspective on rethinking economics, first from a corporate buyer viewpoint – then from a vendor buyer viewpoint.
Some of the techniques I recommend around software and services negotiation can also apply to negotiations around analyst pricing:
a) De-compose what you get from your analyst firm – number of specific calls/visits with analysts, number of RELEVANT research reports (like software companies which release tons of bug fixes, many do not really help you much), number of events - and ask to “pay as you go”. You may be shocked how little analyst contact your company has (the firm’s call center has those metrics), or how few reports you really read. It should be similar to an SLA in outsourcing deals.
b) As IT moves to “utility computing” so should research. Pay a premium for “innovation, emerging areas” (see examples in section d of my blog “The end of corporate computing? The beginning of chaos…), much less for more mature infrastructure, application or governance topics. You need to define what is "innovation" - analyst firms have a tendency to hype various topics as FUD is Analysts' Oxygen by Louis Columbus points out
c) Even better, pay for certain services on a performance basis – based on percentage of savings based on their vendor pricing or benchmarking intelligence. (in that case, buyers should not care if the gross margin is 8% or 98% - so long as their savings are 5 to 10X the fees) . I may be opening “Pandora’s box” here since a growing percentage of analyst revenue comes from vendors and this is naturally a touchy subject – but as a buyer, that is a measurable service. (Analyst firms need to realize that blogs and user groups are shifting influence to the global community of users – and there is no one more trustworthy in a technology evaluator’s eyes than someone giving advice with no financial gain for aligning with opinion with one vendor or another)
d) Ask them about their "global delivery model" -offshore and “at-home” delivery – and why those savings are not being passed along. The model works in much more complex software and BPO areas – it should in industry research as well. As leverage, buyers should start using some offshore and other newer research firms on their own on a project basis.
e) Help them lower their SG&A costs by signing up multi-year deals but at significant discounts to reflect the lower selling/billing costs on such contracts.
When it comes to vendor negotiations with analyst firms, the amounts involved are relatively much higher. I believe most of Gartner’s largest customers by revenue are vendors. Also for smaller vendors, the annual analyst fees are sometimes a quarter of their entire marketing budgets.
I would decompose the pricing based on market intelligence the firm provides me (closely tied to items a and b above) v/s influence, which should be based on how many buyers this firm helps influence. I realize it is not as simple as Google or Adbrite ad measurements, but I know some vendors who do a pretty good job measuring how much prospect/customer traffic is attributable to each analyst firm. It would be comparable to c) above – pay for performance. Given the objective role of the analyst, you cannot expect to compensate them for sales successes, but you should be measuring them for access to opportunities. (readers may also enjoy my related blog on letting/indeed forcing analysts to spend more time with buyers in Analyze This! )
Items d and e above are equally relevant to vendors; Item d – especially so. Many vendors have their own offshore software development and BPO operations – building captive market intelligence offshore or finding local offshore alternatives should not be that difficult.
Vendors also pay a steep price for analyst consulting days (as much as $ 8K a day) – they use these much more than buyers do. When I was at Gartner, I found these days of focused attention were helpful both to analyst and to the vendor. Now putting my sourcing hat on, I think vendors should not give up on these, just pare them down to much more reasonable rates.
Vendors would find it helpful to assign a financial or a hard nosed sales executive, not just a marketing person to watch the analyst spend - then the “influence v/s intelligence” debate would likely be much more analytical.
I met a Wall Street analyst a few weeks ago who tracks tech research firms. This analyst’s perspective was analyst firms should go private or remain so. “Right now, they are pleasing neither Main Street nor Wall Street. I would rather have them focus on their customers – which being private would allow them to do better”. The Gartner and other boards can deal with investor expectations. You as a customer have the opportunity to push for much better economics and service levels, whether they go private or not.