The Myth of Technology Analyst Independence

  • 21-Dec-2015

Coming up on Real Story Group's 15th anniversary next year caused me to reflect: as far as I know we are the only technology analyst firm in the world that works exclusively on the buy side.

If you had asked me 15 years ago -- when the world was reeling from an equities collapse aggravated in part by conflict-of-interest shenanigans on Wall Street -- I would have predicted that the tech analyst community would split neatly between sell-side research and buy-side research.

But that has not happened, and you the customer are the worse off for it.

The Financial Industry Analyst Model

In financial research, the industry makes a clear distinction between "sell-side" and "buy-side" analysis. A sell-side financial analyst relies on information often spoon-fed from public companies to drive activity to trading desks (i.e., works primarily on behalf of sellers), while a buy-side specialist strives to inform better investor performance (i.e., works primarily on behalf of buyers). The same advisory or investment firm can employ both buy- and sell-side analysts, but they must isolate themselves behind "Chinese Firewalls," designed to prevent buy- and sell-side specialists from even talking to each other without a lawyer present.

That firewall gets breached with some regularity. Former top Salomon Smith Barney research analyst Jack Grubman famously declared in 2000 that, "What used to be a conflict is now a synergy," and, "Objectivity? The other word for it is uninformed." The US Security and Exchanges Commission declared otherwise and banned him in perpetuity from financial services for gross ethical misconduct.

The Technology Industry Analyst Model

A technology analyst community that fails to distinguish between buy- and sell-side is essentially channeling Jack Grubman. In the tech analyst community, the incentive to advise both buyers and suppliers is not perceived as a conflict, but a synergy. Analyst firms get rated by potential vendor sponsors according to how much influence they have over buyers.

Analysts walking both sides of the street can feel like gods. "I'm sculpting the industry," bragged Grubman, "I get feedback from [buyer] institutions and [seller] CEOs. It feeds on itself. It's a virtuous circle." Except the SEC concluded it was a vicious circle for investors. Technology analyst firms similarly tout their ability to advise customers based on insider knowledge of vendor plans -- plans the analyst firm often devised on the vendor's behalf for a lucrative consulting fee.

This system creates dilemmas for tech suppliers, but even more so for customers. If the analyst firm advised a vendor on their roadmap and execution, will that same firm ever dare to criticize the vendor who acted on those plans? In the analyst industry this scenario sometimes gets laughed off as "calling your own children ugly," and unsurprisingly, it doesn't happen often.

Individuals at major tech analyst firms consistently protest that they follow a rigorous personal ethical code. I believe them. But the system is corrupt. Those Magic Quadrants you download for free? The reprint rights are purchased by vendors who reside in the upper right.

The Impact on You the Customer

Let's review how these conflicts skew analyst firm vendor evaluations. Major analyst firms tend to pay more attention to the vendors that also have business relationships with them. This means that technology evaluations tend to favor larger vendors over smaller vendors, and commercial players over open source. Major analyst firms almost universally overweight vendors' marketing acumen and roadmap powerpoints -- which have no bearing on customer success -- and underweight things like vendor technical support and implementation resources.

As a result, you get a distorted view of the marketplace. How else would you account for CMS vendor Ektron ascending to a Leaders Quadrant just as the firm started visibly declining, or HP TeamSite's persistently high Forrester and Gartner ratings despite mass customer defections?

RSG's research is far from perfect. We deliberately emphasize implementation experience and vendor/product ecosystems, and that will bias our results. But this bias stems from wanting to serve a particular enterprise buyer profile, and not from the need to generate vendor advisory business or "sculpt an industry."

What Is to Be Done?

Alas, there is no SEC-like body to oversee the technology analyst industry. You can understand why not....we're not that important. But as enterprises turn ever-greater attention and budgets to digital transformation, the stakes have gotten higher and the conflicts of interest become all that more heightened.

Change will come when customers demand it. As a customer you should insist on greater transparency rather than platitudes. You can request that analyst firms either focus on sell- or buy-side exclusively, or implement "Chinese Firewalls" to separate buy and sell sides, with the same rigor as their financial analyst firm brethren.

In the meantime, let's call the mainstream tech analyst industry what it truly is: a conflicted buy/sell-side operation masquerading under the guise of independence.

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