The facts point to Gartner not relying on consulting revenues

There was a recent comment to a rather old (August of last year) post. Because it is about something that we hear periodically, we decided to elevate to a full post to bring the comment and our response to everybody attention.

 The comment is from the reader who called himself “Me” and referred to the post Are the vendor-centric analyst firms heading for tough times? Will end-user centric analyst firms do fine?

 “Me, on April 20th, 2009 at 5:33 pm Said:

 From what we’ve seen, vendors are more willing to spend than end-user firms. End-user firms are retrenching, eliminating anyone but Gartner, or even their entire budget while many vendors are seeing the recession as an opportunity to gain on weaker competitors, so they are looking to research firms to help with marketing plans, strategy assessments, and the like.

 End user focused firms are having to become consultants to survive, changing from retainer-based pricing to per-project pricing because end-user companies can’t get budgetary approval for research licenses.”

 This is an interesting opinion, and one many vendor personnel – especially executives – would love to come true because it implies that advisory firms are losing their influence. Frankly this is wishful thinking because the facts do not support this position. Here are data from Gartner’s financial reports. We start with 2004 because Gene Hall was appointed CEO in August 2004 and made a number of important strategic decisions that put more emphasis on syndicated research.

  • 2004
    • research was $480m or 55% of total
    • consulting was $259m or 30% of total
  • 2005
    • research was $523m or 54% of total
    • consulting was $301m or 31% of total
  • 2006
    • research was $571m or 55% of total
    • consulting was $305m or 29% of total
  • 2007
    • research was $683m or 58% of total
    • consulting was $325m or 28% of total
  • 2008
    • research was $773m or 60% of total
    • consulting was $347m or 27% of total

2005 saw consulting’s percentage of total revenue grow to 31% but that was because of the META acquisition. META had a higher mix of consulting to research. Since then, consulting as a percentage of total revenue has consistently dropped year over year.

Many people expect 2009 to be quite ugly due to the recession. According to Gartner’s guidance for 2009 projected revenues (FX neutral) shows Research being relatively flat (1% to -2%) while consulting drops considerably (-12% to -20%).

While revenue is an important indicator, research contract value provides another insight. Mostly double digit growth shows that the retainer-based model is quite robust.

  •  2004     $509.2m
  • 2005     $592.6m            16% growth
  • 2006     $640.3m              8% growth
  • 2007     $752.5m            18% growth
  • 2008     $834.3m            11% growth

 Another of “Me”’s points is not supported by the numbers and that is “end-user companies can’t get budgetary approval for research licenses.” Sure they can and are signing up for Gartner services. According to SEC filings, Gartner added 249 enterprise (aka end user) clients in Q1 2009. Why? A Gartner contract for a large enterprise – Gartner’s primary end user target since 2004 – is a rounding error in the overall IT budget. In many cases, smart end users leveraging Gartner advice can save multiples of the contract cost through negotiating better deals with vendors. Another point to take into consideration is that IT managers become even more risk adverse in a recession so they look to outside advice to avoid bad (aka career limiting) decisions and to provide a handy scapegoat in case something does go wrong.

Another point by “Me” that we disagree with is “vendors are more willing to spend”. We do not have extensive hard research on this point, but the many conversations we have had recently with vendors on their analyst spending indicate that analyst spending will be flat or cut. That is because most analyst contracts reside in the marketing budget and marketing is one of the first things that gets cut in a recession.

We do not know who “Me” is, but we invite him or her to leave a comment with their supporting facts. We would love to see their argument more extensively supported than what was in their original comment.

Bottom Line: Rather than wish that a well-run advisory firm like Gartner is shrinking in end-user revenues, smart vendors are planning and executing their AR strategies based on the facts that indicate Gartner’s influence with end users is growing.

Question: Have you heard people say that the advisory analysts’ business model is broken? Do these people provide facts or opinions?