Mid-size analyst upstarts are creating value faster

One of the surprises in the 2013 Analyst Value Survey was the rapid improvement by a number of mid-sized analyst firms. Many users of analyst services tell us they are getting great insight at a fraction of the cost of larger firms. However, there are substantial obstacles. How can these firms scale up profitably to meet the opportunity? Will they lose their edge if they get larger? Our research suggests they can, but that requires focussing on client needs, rather than prioritising research quality, and on boosting their sales channels.

The opportunity.

What the study has shown is not just that mid-sized firms can compete with the largest firms on value, but they can also grow very quickly. Firms like HfS Research, Constellation and Gigaom have built their brands very quickly, in just a few years, and are now more visible than more established firms. A great example of this is shown by the Net Influence Vector score from our survey, above.

Our survey asks the users of analyst firms about which firms have been rising in influence. Those answers got some attention from HfS Research.  However alongside those positive scores, shown by the green bars above, our survey also asked which analyst firms are falling in influence (those scores are shown in red). I’ve subtracted the negative scores from the positives ones to produce a net score, shown in black. The Net Influence Vector score shows, for each firm, the net percentage of the respondents mentioning a firm as having rising or falling influence. This chart shows the percentages for the firms about which the most respondents had an opinion. The score is a vector: it shows the direction and magnitude of a change. So this chart shows the net difference in overall influence, year on year. It does not, of course, show influence itself. Gartner and Forrester, for example, are more influential: that is shown by the Analyst Value Survey. The chart above shows the important changes in influence.

Newer firms like HfS and Gigaom have come from a lower base of awareness. Their rise makes it all the more remarkable that HfS was not only one of the two firms which the most people commented on (alongside Gartner) but also had the highest Net Influence Vector score. Gigaom and Constellation’s scores were almost as high, but far fewer people commented on them. The high score also reflects HfS’s successful 50:50 income split between vendors and end-user clients, developed through compelling offers like its Sourcing Executive Council.

Both new firms and established firms are rising.  NelsonHall has tested using these methods. So has PAC, a well-established firm that has developed its profile in Germany and France using similar methods, and in particular through the IT Research Board, which gives influential end users free access to research.

A huge part of the success of all these firms has been through giving away insight and by personalising their output under the analysts’ names. Social media and free research make analysts’ views spread faster while attributing insight to ideas, rather than organisations, swims with the social media tide. The HfS blog claims a million hits a year, which drives brand awareness, business development, customers’ use of the firm’s research and makes it easier to get end-users to take part in research. It’s a case study approach in how an upstart firm can become a tier one leader in its niche in just a few years.

A huge part of the success of firms like HfS is incorporating highly-skilled analysts whose reputations are already strong. A strong roster allows those firms to hit the ground running.

And if those firms can broaden our their value propositions, offering advisory services, events and community networking then there are huge market opportunities.

The obstacle.

Of course the challenge is: who will pay, and how? By using social media and giving away tasters of their research, these firms can give clients a sense of the value they can offer. However, how can they reach out to clients in a way that generates revenue? One example is pure ecommerce: Michael Wolf’s NextMarket site sells research reports and subscriptions from an online store. With over 750,000 Soundcloud subscribers, NextMarket clearly has found a place on the radar of a certain part of the industry. Needless to say, podcast subscribers don’t all become listeners (some of them will be ghosts in the machine), let along customers, but that following takes time to build.

But the main challenge is how can upstart analyst firms position themselves more clearly? Why should users choose and trust them? What sort of subscription services can they provide, which allow them to get away from expensive sales activities? All of that requires brand equity, customer insight and strong sales people.

The solution.

What the upstart firms have shown is an ability both to find a richer value proposition, based around seasoned industry figures giving a lot of deep insight, but also hiring the sales force needed to help them find a place in the market. While many start-ups focus on putting analysts in place (of course almost all are founded by analysts) few understand the need to make genuine industry expertise available to clients, and almost none put enough effort into business development.

And the enthusiastic personality of those firms is also different: positive, upbeat, based on soft skills and client handling as well as pure analysis. That’s a compelling offer, and it’s reflected in the incredible speed with which firms like HfS Research have gone from launch to entering the top tier of analyst firms. And the proof of that pudding is shown by our Analyst Value Index, which ranked HfS alongside Gartner, NelsonHall and Forrester as the analyst firms valued valued by clients.

Right now, many of these upstarts are niche firms. We think that regular engagement with their clients and success in helping clients meet their challenges will start to stretch out the areas of expertise that these firms have. As they build out their sales structure, service portfolio and their expertise, we think it’s quite possible to imagine an upstart firm being a leader in five years.

Needless to say, this also opens up the opportunity for mergers and acquisitions. Our post on the ‘Analyst Cycle” in 2006 still holds good. As these firms grow, they need more scale, to be able to answer a wider range of questions, to sell into more firms and more countries, and to finance their operations.