Are the vendor-centric analyst firms heading for tough times? Will end-user centric analyst firms do fine?

Forrester and Gartner both posted double digit gains in Q2FY08 while IDC and Yankee Group are laying off analysts. What’s up? 

One explanation might be the difference in client base composition of the two types of analyst firms. Forrester and especially Gartner get most of their revenues from end user clients and much less from vendors. For example, we estimate that over 70% of Gartner’s revenues come from IT managers in corporations. Contrast that with IDC where we estimate that it gets over 85% of its revenue from technology vendors. This difference is very relevant because enterprise end users don’t dramatically decrease their spending on analyst contracts during an economic downturn, they are pretty steady. Often they are using analyst information to validate and justify IT expenses.  Vendors, on the other hand, dramatically change their spending on analyst contracts during economic downturns. This is because most analyst services are paid by marketing budgets, which are usually the first to be cut as an economic recession approaches.

This was the pattern during the last major tech economic downturn, 2000-2003, during the post-Y2K period and concurrent ecommerce Dot Bomb. While Gartner’s vendor business cratered during this period, its end-user business was reasonably steady post Y2K, so its overall revenues only dropped 7%  from 2001 to 2002. Forrester, which was much more vendor-centric and especially dot com startup heavy in those days, saw its revenues drop by a whopping 40% from 2001 to 2002. Adding more IT end-user revenue fast was a major motivation in Forrester’s acquisition of Giga Information in January 2003. There were a number of vendor-centric boutique analyst firms that went out of business or nearly died during this period.

There is another aspect in the revenue decline of vendor-centric analyst firms and that is “influence.” Firms like Gartner have major direct impacts on vendor sales deals through their end user inquiry calls. Impacts on revenues get the attention of vendor sales reps who pass along the intelligence to AR by screaming at AR to do something about Gartner. Vendor-centric analyst firms rarely show up in vendor sales deals and therefore generate little heat from the vendor sales teams. As a consequence, when vendor AR teams are debating (either internally or with their market research colleagues) which analyst services to cut, often they will keep the Gartner or Forrester contracts while cutting the (perceived) less or non-influential firms.

Sign up for the free SageCircle Coffee Talk “What to do when an analyst is laid off” on Tuesday, September 2nd, at 8:30 am US Pacific time. Click here to register.   

SageCircle Technique:

• AR should be educating stakeholders that the troubles of vendor-centric analyst firms do not indicate that the overall influence of analysts is decreasing
• AR teams need to carefully evaluate the real versus perceived influence of analysts firms – there is a tendency to overweight Gartner’s and Forrester’s influence while underweighting smaller firms’ influence
• Purchasing decisions for analyst services should take into account a broad set of criteria and not just be focused on perceived influence

Bottom Line: It is important that members of the analyst ecosystem do not over react to layoffs by vendor-centric analyst firms. Vendor executives might jump to the conclusion that all analysts are becoming less influential and thus “let’s ignore the analysts.” It is important for AR teams to analyze which firms are in trouble and educate their stakeholders on what is really happening.

Question: AR teams – How have your analyst services purchasing decisions change since the beginning of 2008? What is causing the change?

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