For many business executives, technology analysts are the consiglieres of the Fortune 1000. These trusted advisers seem like the voices of objectivity, offering unbiased wisdom about the endless outpouring of business technology. For harried executives beset by vendor hype, this measured counsel is worth the millions paid annually for subscription services and more customised advice. But in an industry that touts objectivity as its primary value and sales tool, research companies do little to encourage or police the objectivity of their analysts. These organisations quietly profit from the same technology vendors their analysts cover in ways that many observers would classify as conflicts of interest. Consider the following:
Most of the companies Darwin spoke to do not forbid their analysts from owning stock in the technology vendors they cover.
Doing paid consulting work for the very technology companies they research is a universal practice for analyst companies.
Some companies have their analysts author reports that are underwritten - and approved for publication - by the vendors covered in the reports. Known as white papers, the reports are published under the analyst company's name, not the vendor's, and are used as vendor marketing materials.
Most analyst companies rely on the value of a good reputation to keep their employees' noses clean, and this works - partially. Few analysts want to gamble their prestige and minor celebrity on blatantly shilling for the vendors they write about or consult with. But the above-mentioned policies call into question the research companies' commitment to critical objectivity. And as their bread-and-butter market of research subscription services nears saturation, the analyst industry faces growing pressure to find new sources of income - ones that could further erode objectivity.
"If you're taking money from vendors and users and making recommendations on what both of them should do there's a conflict of interest," says Clay Ryder, vice president and chief analyst of Zona Research Inc., an analyst company that says it avoids this issue by serving only vendors.
But others disagree. For example, Tony Friscia, president of AMR Research Inc., says it's unlikely that vendors will exert undue influence over his analysts. "If they represented a large percentage of our business, then they would clearly have influence," he says. "But no vendor represents even 1 percent of our total revenue." In other words, no vendor has enough clout. Analyst objectivity is vital to the businesses that buy analyst research because they depend heavily on it. In fact, an exclusive Darwin survey found that more than 86 percent of respondents said that analyst research was at least somewhat important to making technology spending decisions. "If we sensed that the advice was biased, we would stop using the firm," says David Westmoreland, vice president and CIO of Arrow Electronics, a Melville, N.Y.-based electronic parts distribution company. Though 81 percent of respondents to Darwin's survey believe the advice they receive from analyst companies is at least fairly objective, 80 percent expressed some degree of concern that analyst companies sell services to the same vendors they cover.
As market pressures on the analyst companies increase, will their objectivity become more threatened? The success of the industry could hinge on the answer.
The technology research industry started in the mid-1960s as a way for technology companies to keep abreast of market conditions. At first, analyst companies concentrated on selling numbers about market size, market share and strategies to technology corporations and Wall Street. But in 1979, Gideon Gartner began analysing things from the computer user's perspective. He sold research and analyst face time to two audiences: businesspeople who wanted help picking technology products and strategies, and vendors who wanted to know what the users were thinking. Gartner Group Inc. built and still owns the user research market - with US US$ 734 million in revenues in 1999, it is seven times the size of its nearest direct competitor, Meta Group.
User-oriented research companies such as Gartner, Meta Group Inc. and AMR Research command great customer loyalty, according to Outsell, a Burlingame, Calif.-based research company that tracks analyst companies. AMR Research, for example, touts an 80 percent renewal rate among its customers. And the relationships have deepened as analysts helped companies wrestle with a succession of complex technology calls to arms: Y2K, enterprise resource planning (ERP) software and now e-commerce.
Their increasingly important role as personal gurus to the Fortune 1000 has not made the typical analyst any easier to live with, say some. "To be an analyst you basically have to be an egomaniac, number one, and obnoxious, number two," says Charlie Gulotta, head of analyst relations for IBM Global Services. Analysts have to take risks and make bold predictions - not a calling for the faint of heart. "You have to be single-minded and have thick skin to defend yourself when you are attacked," Gulotta says. Analyst companies foster their analysts' natural tendencies to be lone wolf types - most do their research and writing work sequestered at home and spend the rest of their time visiting customers and vendors or speaking at events.
Because so much of the work they do is individual, analysts have a lot vested in their personal reputation. Becoming a respected guru is the key to adding and keeping clients and is one of the primary factors leading to career ascendance. But is it enough to serve as an antidote to the influence of vendor money? Research companies and computer vendors are closely intertwined, a condition that is hardly likely to change. In fairness, analysts need to spend time with vendors and their products in order to properly evaluate the technology. But analyst companies also must grow, and there are only so many big companies that need to buy technology research. Analysts are beginning to target the small to midsize company market, but computer vendors offer a more attractive growth option. And as the vendor-analyst relationship grows tighter, the following common practices must be presumed to have an effect on analyst objectivity.
Analysts As Consultants
On the face of things, it would seem natural to extend these experts' reach into the consulting field. Analysts certainly have the necessary depth of knowledge about technology, and many research companies have found consulting a new vital source of revenue. Indeed, the two biggest technology analyst companies, Gartner and Meta Group, both based in Stamford, Conn., have recently started consulting divisions that work with both technology buyers and technology vendors to set strategy. These companies tend to get the jobs that are too small to interest the Big Five consultants or strategic groups such as McKinsey & Co. or Boston Consulting Group.
But while the concept of analyst as consultant makes some sense, it also aggravates an inherent conflict of interest. For example, consider a scenario in which an analyst company consults with a corporation to select an integrator for a multimillion-dollar technology implementation project. "In my experience, [the analysts' recommendations] tend to be based on how much time the systems integrator spends with the analyst and how much [money] the integrator spends on research with the analyst company," says Tom Mangan, a partner at Accenture, formerly Andersen Consulting.
Analysts defend themselves by saying that users need objective advice, and that the Big Five usually have a vested interest in their recommendations. "Large integrators receive a finder's fee that is a polite version of a kickback from the vendor [they have an alliance with]," says Meta Group CEO Larry DeBoever.
But would corporate executives view analysts as objective strategists if it were commonly known that the analysts consult with both vendors and user clients? It's hard to imagine how such a relationship with computer vendors wouldn't cloud analyst objectivity, if only unintentionally. Even assuming that the analysts don't favour the client vendors over others in their reports, analysts cannot avoid knowing more about the vendors they meet with or consult with for days and weeks at a time than those they don't.
To prevent against conflicts of interest, the top analyst companies say they separate the consultants from the analysts. AMR, Gartner and Meta have consulting divisions with separate staff and different incentives and rewards from their analyst brethren. Yet all three acknowledge that the consultants need the advice and wisdom of the analysts to serve their clients well. The consultants call in analysts for occasional face time or conference calls to help sort out a strategy problem for clients.
At other companies, the separation between consulting and analysis is blurrier. At IDC (a sister company to Darwin's publisher, CXO Media), consulting project managers staff their projects with a mix of analysts and outside contractors. (IDC CEO Kirk Campbell says the company avoids conflicts of interest by preventing the analysts who consult with vendors from writing about those vendors in comparative product reviews that go to IDC's business customers.) Compensation Practices The motivations of analysts matter because they can wield extraordinary power over the fortunes of the vendors they cover. In April 1996, Forrester Research Inc. analyst Bobby Cameron wrote a report saying that the technology behind R/3 - ERP software vendor SAP AG's main product - was badly outdated and would be obsolete by 2000. The stock of the German giant plunged 9 percent in the two days after the report appeared. Though Cameron soon revised his views, few SAP employees have forgotten that report. "It was the first thing they threw on my desk on the first day I came to work at analyst relations at SAP," recalls Bill Wohl, former manager of analyst relations for SAP America, who is now director of public relations.
The bitterness between SAP and Forrester has not disappeared, even five years later. Wohl charges that Forrester analysts, who can receive extra bonus compensation based on their level of visibility in the press, may be purposely more controversial so that they will be quoted more often. "I believe that in looking at the statements they make in the trade and business press, [the payment arrangement] tends to make their statements be more controversial in nature," he says. "Their statements may be more about getting the news bite than just the specific facts and opinion about the products they cover."
"Sour grapes," responds Mary Modahl, Forrester's vice president of marketing. "We have written negatively about SAP, and they feel bad about that. Overwhelmingly, our analysts are reviewed on the quality of research they write and their interaction with clients."
A much smaller consideration in analysts' bonuses, she says, is their visibility in the markets they cover. "We get 2,000 press calls a month," she says. "We need to encourage our analysts to pick up the phone."
Much more important in determining an analyst company's fairness and objectivity, counters Modahl, is its policy on stock ownership by its analysts. Forrester has an official ban on the practice - so does Gartner - but not all of the top analyst companies do. "Why not?" she asks.
It's a good question. If a single analyst's report has the power to move the stock of the world's second largest software company 9 percent in two days, what's to prevent an unscrupulous analyst from quietly shorting that stock before his negative report appears?
All the analyst companies say they would fire anyone caught committing such an unscrupulous manoeuvre. But most companies seem to feel they should stay out of their analysts' personal investments. "To tell our employees that they couldn't own stock in the companies they cover is ridiculous," says Friscia. A stock ban, he says, is unenforceable. "We tell our employees, 'By virtue of being an AMR analyst you have information that you can use to break the law, and if you do, we will not protect you.' I believe that is enforceable, and our employees clearly understand that line because they deal with it every day."
Told of Gartner's official ban on stock ownership, Friscia replies, "I can guarantee you that the number of employees they have is the number of violations they have against that policy." He points out that financial analysts are all allowed to take stock positions in the companies they cover. "They have much more power to move a stock than we do," he says.
Friscia and other analyst company leaders also won't prevent their analysts from accepting "friends and family" deals from software vendors they have covered that offer them stock in an IPO before it goes public. "There are times when an analyst has worked with a small vendor that becomes successful and wants to thanks the analyst," he says. "If the analyst has moved into a new coverage area and the vendor offers friends and family stock, we would say sure," says Friscia. "In cases where the analyst is actively working with the vendor or Wall Street and can be influential, we would say no."
There are other, smaller practices that also raise questions. Analysts speak for fees at conferences sponsored by vendors that the analysts cover in their research. Vendors can also hire analysts to go on multiday press and customer tours, with vendors covering all the expenses and paying a fee to the analysts. Finally, salary bonus structures at some analyst companies are based on the growth of revenues of subscription and consulting services. Trouble is, vendors are major customers of these services, further tightening the analyst-vendor bond.
Vendor influence over the words analysts write is unquestioned in one particular type of research: the white paper. These reports go out under the analyst company's name but are paid for and approved by the vendor covered in the report. Among analysts, the white paper is considered the most egregious example of what one analyst, who asked not to be identified, called "vendor whoring."
Vendors that hire analyst companies to write about them are determined to come off looking good and will demand revisions if they don't like what they read, according to Patricia Seybold, CEO of the Patricia Seybold Group, a small technology analyst and consulting company in Framingham, Mass. That's why Seybold decided to drop the practice, she says. "The analysts were in agony over them," she says. "The vendors hired us to explain what their technology did and the problems it would solve. But it was difficult to write them in an unbiased way because the vendors kept pressuring us and trying to put words in our mouths. They would get very upset if we didn't write it the way they wanted us to. In the last 18 months it became smarmy, and we took a look and said we could afford to walk away from that business."
The day after the interview, Seybold's public relations manager called to acknowledge that after a hiatus, the company had in fact begun to do white papers again.
Ironically, the companies that make their living almost entirely from vendor-sponsored research and white papers - companies like Aberdeen Group and Zona Research - come off looking better than those companies, like Seybold and IDC, that sell white papers to vendors and then write about those same vendors in "objective" research that goes to technology buyers. At least the Aberdeens and Zonas don't try to work both sides of the street.
Rigorous peer review is the best tool for keeping analysts honest, says Friscia and other analyst company leaders. Analysts can sniff a biased report a mile away, they say, and the proud lone wolves will not hesitate to shred the weaker analysts. "We have a self-policing mechanism for objectivity here," says Meta Group's DeBoever. "Anything you write is reviewed by [your peers and managers], and if you are leaning toward one vendor you will get pummelled."
Yet DeBoever acknowledges that maintaining objectivity in an industry that serves both vendors and users is a "slippery slope." "In your corporate culture, if you haven't built values around objectivity you will get on that slope and slide right off," he says.
Buyers of technology analysis will have to do their own policing too. The industry is rife with inherent conflicts of interest, and many of the analyst companies seem to prefer relying on the individual integrity of the analysts, rather than organisational standards and rules, to keep their reports honest. Buyers need to carefully vet the analyst companies they hire and question the research they receive.
"We do not accept at face value what we hear from any of the analysts," says Stan Land, vice president of enterprise services for Duke Energy. "As a manager, I have the obligation to go validate the information I get from them myself."