The continuing rise of the ’boutiques’

Network World this week carries an interesting quotation from John Halamka, CIO of Harvard Medical School and CareGroup Healthcare System in Boston.

“We had been buying into research firms because they were very helpful from a strategic standpoint and the world wasn’t so complicated then,” Halamka says. “But over the last year and a half I have absolutely canceled every one of my enterprise generic kinds of agreements and replaced them with niche consulting agreements.”

The article argues that this is a trend across the industry, and continues to say:

In order to get very targeted research, Halamka says he could be using as many as 10 smaller research services at a time, such as DNS specialist Men & Mice and The Protocol Analysis Institute. At the same time, he has an in-house research staff that helps sort through information and do “in-house prototyping and proof-of-concept work.”

“So with the in-house research staff plus the devoted smaller firms, my budget on the whole has gone up,” he says, estimating that he spent about $200,000 annually for large research firm subscriptions, but now spends about $250,000 with smaller, niche consultancies. “But I will tell you that I believe I am getting much more value for that dollar because it’s so project specific.”

Of course, only a handful of people are interviewed for the article, and their experience will be partial. However, it reflects one reason why we are more cautious than most in seeing the current period as one of the consolidation of the analyst industry. The pace of mergers and acquisitions is always brisk in the analyst industry because they are such attractive businesses to turn around: these are profitable, strongly cash generating businesses with, generally, poor general management and financial controls. An excellent example is Yankee Group which with fully half the number of employees of Forrester generates $10m in revenue compared to Forrester’s $140m, according to Yahoo Finance‘s numbers today.

However, we don’t see dramatic concentration of market share. For every META Group or Holway that is acquired, new Meton Groups or MWD Advisors appear in their place, like the new heads appearing on the mythical Hydra Lernaia. Barriers to entry are low, economies of scale are rarely exploited and, as Network World suggests, the value of a specialist firms to customers can be greater than that of Gartner, IDC or Forrester.

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