Like it or not, the analysts’ business model is not broken

If the business model was broken then top analyst firms like Gartner and Forrester would underperform their competitors: that’s the key point underpinning our recent defence of analysts. In fact, the top firms are increasing their lead. Their approach is producing unhappy customers (See the comment here) but any resulting loss in customers is much smaller than the corresponding revenue increases that result from seat-based pricing.

Don’t misunderstand the motivation for these comments: The analyst firms are not my clients. I’m a former analyst, and our firm tracks the analyst industry for clients in the high-technology and telecoms markets. I think it’s important that analyst firms’ clients take a realistic view at the value those firms provide, as many folk are doing. There’s no point, to take one common example, complaining to analysts when their industry forecasts don’t get within 5% of the actual number: market forces just don’t support much greater accuracy than we have now. People need to understand what they will get from analysts, and look elsewhere if they need something else.

In the IT services space, in particular, we have seen the growth of advisory firms like Orbys whose consultants are, overwhelmingly, industry veterans. It advises on procurement and its analysts’ skill is really more on negotiation rather than on research. But there can be a downside to using consultants whose expertise comes from past experience rather than current research (and, generally, folk at those advisory firms are not centred around ongoing research projects). They tend to base their guidance on their own experience, which means they tend to offer technical guidance based on solution which have crossed the chasm into mass adoption (Of course you could hire Tom DeMarco or Tim Lister, but their hourly rates and availability might limit your access).

Readers are strongly recommended to read the reaction to James’ post. The challenge to any alternative business model is how to monetise the value created by providing research to clients at a lower price point. There are two principal alternatives:

  • [1] fake open source (vendor-funded research given away, not produce using an open source approach), in which extra value is generated for the vendor who therefore pays (Read ‘Is free analyst research really “open source”?’);
  • [2] leave money on the table (strip down costs through lower remuneration, iterative and incremental development of ideas, and the reuse of ideas from the vendor and user communities), in which talented analysts like James Governor forego the benefits they might experience in larger firms in order to test out a different business model.

Such approaches produce different outputs from the top analyst firms, as would the highly marginal third option: real open source of the type aimed for by Wikibon. All of these approaches tend to use less systematic interviewing of mainstream users outside the blogosphere, because of the high cost of basic research.

Of course there are other alternatives to paying by the seat. Many clients fear pay-per-view pricing because of the uncertain upper value of the service.

The business model used by the top analyst firms disappoints and frustrates some clients, a few of whom will take some of their money elsewhere. But, as long as the top analyst firms continue to outperform their peers, we can’t say their business model is broken. Demand for their work is relatively price-inelastic, and that is not likely to change.

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