Bad news for analysts, good news for CIOs

FRAMINGHAM (03/17/2004) - Question: What are you doing about spending on IT analysts and research?

Answer: "We've reduced costs on IT advisory services by 40 percent," says Greg Smith, vice president of IT and CIO of the World Wildlife Fund, "and we haven't seen a difference. We execute the same as we always have, just at a much lower cost."

"Our spending on analysts is down 50 percent," says John Halamka, CIO of CareGroup Healthcare System, a network of prestigious hospitals affiliated with Harvard Medical School. "The role of the analysts as information navigators is not as relevant anymore."

"We cut (Meta Group Inc.) right out three years ago," says Jean Wilson, vice president of information services at L.L. Bean Inc. "I don't think saying to our executives, 'Well, Meta says X,' carries a lot of weight at this point."

Outsell Inc., a company that tracks the analyst industry, echoes this sentiment in its 2003 report "Competitor Assessment: Watching the IT Watchers -- A Segment in Turmoil." From 2002 to 2003, the average per company spending on IT research, reports and services declined 41 percent, from US$127,905 to $75,786. Outsell predicts it will fall another 11 percent this year, to a relatively meager $67,434, saying, "The math points to little or no growth, or even declining growth, for the foreseeable future."

More bad news for the influence industry: CIOs who signed multiyear contracts two and three years ago now want out. "We're under contract (with one of the large IT analyst firms), but we'll be rethinking that spend," says a CIO who requested anonymity.

Even IT executives who haven't yet reduced spending sound like they might. "We can afford to keep our subscriptions," says Anne Rogers, director of information safeguards at Waste Management Inc., "and we still get some good information. But the influence the analyst firms have is waning. Their information is somewhat more questioned. I'm not sure they'll ever hold that pedestal position anymore."

Every one of these CIOs say that analysts provide a service they need, but they are no longer willing to pay what the companies want to charge them and, more important, they don't want to pay the way the analysts want them to -- by subscription.

The consequences of this disconnect are clear: painful rounds of layoffs, property sell-offs and other cost-cutting indignities. Giga simply surrendered a year ago this month and was acquired by Forrester Research Inc. Then, in December 2003, Gartner Inc., the industry's dominant player, with an estimated 43 percent of the market, cut 5 percent of its workforce and took a $30 million restructuring charge.

Ironically, the IT analysts have been unable to do for themselves what CIOs have paid them billions of dollars over the years to do: forecast a market trend.

As a result, these companies are undergoing what Outsell calls "permanent structural change." While the Big Five companies -- AMR Research Inc., Forrester, Gartner, IDC (a sister company to CIO) and Meta Group -- will likely survive, and maybe even rebound, they won't rebound as firms focused on IT research and analysis. They are becoming different kinds of companies, offering different products to different customers. (IDC historically has derived the lion's share of its revenue from vendor companies.)

They already do more consulting than ever before; they're trying to make up for CIOs' lack of spending by selling directly to business unit leaders and new customers such as financial analysts. When they do target IT, it's with peer networking and community services (roundtable breakfasts, online seminars) -- services in which research and analysis are tack-ons to a broader offering.

It's not that traditional research and analysis is suddenly worthless.

It's just worth less.

This puts CIOs in a great position. "My recommendation to CIOs is clear," says Smith. "Do comparative shopping. Buy research on a trial basis. Do comparisons with boutiques. Let the vendors know they're not the only game in town. You can get high-quality research at an affordable price through the Internet or on a per-call basis. I know for a fact this works."

How we got here

The success of the IT research industry was based on a simple formula: People will pay for knowledge predicated on access. The earliest, most influential figure in the industry was former IBM Corp. employee Gideon Gartner. He founded his eponymous company in 1979 and immediately its value to IS was obvious: Gartner's IBM experience was worth paying for if you wanted to buy IBM mainframes. He brought MIS executives together to negotiate better prices from the Big Blue monopoly.

The rapid rate of technological development also enabled analysts to charge premiums for their research. There was always something new -- minis, PCs, networks, viruses, Y2K. This afforded plenty of room for firms large and small. Aberdeen Group Inc., Dataquest, Dell'Oro Group Inc., Forrester, Gartner, Giga, IDC, IntelliQuest Information Group Inc., Meta, The Yankee Group -- every analyst firm sold some version of the kind of access Gartner pioneered, access to vendors, product plans or statistical data.

As early as the 1980s, users asked for consulting, too, and the analysts added some, but carefully. They needed to make sure they protected the IT research business because it was based on subscriptions and provided a continuous revenue stream. Businesses depend on predictable, repeatable revenue. Consulting produced one-time revenue.

When the Internet first arrived, it appeared as if the analysts would grow richer still, like oilmen stumbling on Alaska. Suddenly there were dozens of new markets -- browsers, Web servers, e-commerce, security and so forth -- that CIOs needed analysts to sort out. Initially, demand did skyrocket. But the Internet's ultimate effect proved to be exactly the opposite, as if the analysts were railroadmen stumbling upon the automobile. The Internet devalued access. It had been priced at a premium because CIOs didn't have it. Now they did.

Some CIOs started to replace analysts with research by their own in-house experts and peer-networking groups, either online or through e-mail. Today, access is ubiquitous and sophisticated to the point that CareGroup's Halamka asks rhetorically, "Why buy Gartner when Google's free?"

By 1998, the IT analysts' revenue growth was already slowing and margins were thinning. Then, in 2000, the bubble burst. That accelerated the analyst firms' revenue decline by discouraging their clients from spending on nonessentials. It also slowed the development of the new technologies upon which the analysts had feasted.

Many analyst companies responded by increasing their focus on consulting. It was one-time revenue, but it was revenue.

The disconnect

Since then, every remedial step the analysts have taken to shore up revenue and appease stockholders has exacerbated their disconnect from CIOs. When the research firms went left, CIOs looked right. If the research firms offered white, CIOs needed black. It was the opposite of syzygy.

For example, analysts got younger just when CIOs started yearning for more veteran IT analysts with real-world experience to help with complicated integration projects. Many IT analyst companies got rid of their most experienced analysts in favor of less expensive "newbies out of Cornell," as one ex-analyst put it. Norma LaRosa, president of Kensington Group, another company that tracks analysts, reports that in the past decade, the average experience of analysts has shrunk from more than 10 years to about three.

CIOs now get from their own staffs the academic trending and forecasting services that the newbies can provide. "The difference is more and more companies have people like myself who are embedded in technology," says the chief technologist of a manufacturing company that recently cut 25 percent of its advisory services budget. "When I'm sitting down to figure out a new wireless technology and who the right players are, I would not go to an analyst firm," he says. "I do it."

What CIOs can't get from their own staffs, they want from someone who's been inside a factory full of problems, not someone who's studied up on them in Supply Chain 101. One analyst who requested anonymity observes, "CIOs are more sophisticated today. They're asking how to build the building. Analysts are still telling them about the hammer market."

The analyst companies have also downplayed personal relationships (possibly because they let go of the analysts who had them) in favor of products (Gartner's Magic Quadrant, Forrester's WholeView research, Meta's Infusions) just when CIOs wanted more personal interaction.

Analysts have sought to reverse the revenue decline by increasing value -- for example, linking consulting to analysis. But what CIOs want is a lower price. "Any time we have a conversation now, it's, 'We can help you write that RFP,' or 'We can help you with that contract,'" says World Wildlife's Smith. "They want to consult, but their rates are too high."

Desperately seeking subscriptions

The analysts have gotten the message that CIOs want relationships, not products, and are trying to respond. They have set up peer networking -- communitylike services in which CIOs can talk through problems with their peers, meet by vertical industry or by common interest, and get unfettered access to analysts and, by the way, research. (CXO Media, publisher of CIO, has recently begun a peer-networking initiative of its own.)

Gartner's community of CIOs is called EXP, and Ellen Kitzis, group vice president for EXP, says it's profitable and growing. There were 150 roundtable breakfasts last year, including sessions exclusively for female CIOs. Forrester's service is called Oval and is central to the company's efforts to grow.

But the services are still subscription-based (as is CXO's). Instead of responding to CIOs' call for more "by the drink" pricing, the analysts have stuck to their contract model in the hope that adding value will help the CIO justify continuing his subscription.

However, CIOs say the problems they face now are more tactical than strategic. The vice president of IT at a large manufacturer says he needs help with validation of systems and compliance, tasks he considers more suited to one-off engagements than long-term commitments.

But most of the big analysts are holding fast to the subscription model. Reinventing something as fundamental as subscription pricing may be too profound a transformation for large public companies to consider. Changing your pricing scheme qualifies as a reason for investors to panic, even if it's the right thing to do by CIOs.

"I think they got quite arrogant," L.L. Bean's Wilson says about analyst pricing. CareGroup's Halamka adds, "We've been surprised by their lack of willingness to consider alternative pricing models such as 'pay as you go.' Hopefully, their loss of revenue will result in more customer-friendly pricing."

Smith canceled his EXP subscription, saying, "I'm just flat out too busy (to participate)." Wilson networks with peers on her own and says the subscription model is why. "There's no way I'd have the patience for a subscription service again," she says.

The forecast: Poor

To bring back CIO dollars, the analysts are trying to adapt. Meta and IDC are offering more by-the-drink pricing. Gartner offers one-day engagements with analysts. They're building their expertise in the tactical pursuits that occupy IT departments these days, such as compliance with Sarbanes-Oxley as well as integration and logistics challenges. And they're building the community services for CIOs to replace revenue lost in research and forecasting.

"I'm not dismissing the fact that Gartner, like others, is struggling to determine how to provide the right value," says Gartner's Kitzis. "But I think we've realized the value has gone away from just giving (CIOs) information. We're focusing on the relationship versus just the information. We need to put the strong relationship model in place" -- via services like EXP -- "to figure out first their priorities, then what they want to see and how they want to see it."

Even here, Smith of the World Wildlife Fund thinks that the analysts' efforts may have the opposite of their intended effect. He values Gartner's online tools so much that he doesn't need their advanced services. "The search and delivery is so good it's putting the high-end services out of business," he says.

If analyst companies give CIOs what they want -- flexible by-the-drink pricing, one-time engagements, tactical expertise -- they have to be able to make a business out of it. The best product in the world will still fail if it's not as profitable for the seller as it is useful to the buyer. So far, it's not clear whether any of the analyst companies have untangled the new economics of IT advisory services.

"You look at a business that tries to sell one-off relationships, and you realize it's a very hard business model," says Louise Garnett, vice president and lead analyst of Outsell. There's a reason, she says, investors get nervous when repeatable, predictable revenue (that is, subscriptions) shrinks in favor of customer-friendly by-the-drink pricing. "You're never sure how much people want to drink. You need the same inventory for an unknown demand."

In other words, the pricing and services CIOs want from analyst companies may, in fact, contribute to their decline .

Any good analyst could look at that situation and realize that the forecast for their industry is poor.

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