How the new second tier of analyst firms can rise to the next level

A new second tier of analyst firms is being formed by the recession. Companies like Canalys, PAC and the newly independent Ovum are expanding into space relinquished or ignored by larger analyst firms. Their strategic asset is that their managers and analysts who evaluate investments over a longer period (in the jargon, with a longer time orientation) and desire closer relationships with clients. However, as their businesses grow managers need to qualitatively improve sales and marketing in order to take their businesses to the next level.

There is no shortage of proof of the growth of the savvy mid-size analyst firms. The Canalys Channels Forum has last hit record size, over 1,000, building on its Candefero community. With some vendors paying around a quarter of a million pounds each to access current and prospective channel partners, it was a powerful event. PAC continues to grow its community services, like the PAC CIO Board. Alongside its French homeland, the firm  is now the easy leader in the German market for software/services analysis, greatly outflanking Gartner and Forrester. Freed by Informa from its niche inside Datamonitor, Ovum has dramatically boosted its profitability over the last year and is expanding its reach.

In every case, these firms are making strategic choices which differ from those of the market leader. All of them are taking the freemium model to a higher stage: Canalys is giving away its data to around 4000 channel partners; PAC’s IT research board service give free access in exchange for CIOs deeper participation in research; Ovum is building on Butler’s experience with free events aimed at the end user community. These services work on multiple levels: they give new prospective customers a taste of the analysts’ value; they give the analyst firm more influence over the market; they allow the analysts to define their insight and make it more precise; they also raise the barriers to other analyst firms wanting to sell services to those firms.

One might term this Blue Ocean Strategy to the n-th degree. The big analyst firms look to monetise every interaction: Gartner now demands that even attendees at its updates for analyst relations professionals (which are during Symposium) are open only to ticket holders – even if those people are not actually attending Symposium. Look out for corkage fees next year if you bring your own soda. The new second tier is able to grow in niches because their strategy is too difficult for the big firms to imitate: it would liquidate the profits of larger firms, while the smaller firms don’t have profits to lose.

End-users benefitting from these services are not naïve. Unlike fattening pigs, they understand that since they are not the client they are, to some degree, the product. But the  growing analyst firms make this into a win-win. To understand how these firms ‘get’ their target audience, one had only to see the gleeful expressions of the male, 50something demographic lining up at the Canalys gala dinner to get photographed with the beautiful synchronised swimmers shivering in their little white swimsuits post-display.

Despite this success, these firms still struggle to monetise fully their strategic success. Many smaller analyst firms have almost no equity value because they depend fully on the personal contacts of the partners. That prevents the firm from developing a growth engine which can survive the departure of the owners. Often tenure is based on high remuneration for business leaders, which erodes profitability.

At the moment these firms have a perhaps temporary advantage caused by the inaction of the largest analyst firms. But they need to monetise and invest increasingly to maintain that advantage. To go to the next level, those firms need to invest in non-analyst executives: especially for marketing, process, sales and HR development. That allows the firm to build better sales pipelines, client relationships and client experience. Synchronised swimmers are not enough.

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