The fact that the financial services industry is changing is on the front pages of news sites and newspapers every day. Banks being closed down by regulators or acquired by other banks are shrinking the market. Other financial institutions are slamming their checkbooks shut as they try to conserve capital. This turmoil is obviously impacting technology vendors that sell software, hardware, and outsourcing to banks, insurance companies, and other financial firms. In addition to the tech vendors, this changed landscape also impacts analyst firms, especially those that focus on the financial services vertical.
A case in point is illustrated by our post TowerGroup experiences layoffs. TowerGroup specializes in the financial services vertical market so it is not surprising the market turmoil would impact it. To get the details behind the job action, SageCircle was briefed on July 14th by Bob Egan, TowerGroup’s Global Head of Research & Chief Analyst (Twitter, bio).
TowerGroup invested heavily in the mid-2000’s to support the rapidly growing financial services market and the tech vendors that sell into that market. This worked out well with 30% annual growth in 2006 and 2007. Even when growth tapered off in 2008 and 2009, TowerGroup was doing “ok.” However, Egan said that the anticipation of an extended recovery and a shrunken set of companies meant that TowerGroup needed to proactively rightsize its operations to reflect the changing realities of the market rather than hang onto the existing strategy too long and be forced to make more drastic cuts later.
The July layoffs were based on what research services were the most relevant to clients in the current economic environment. TowerGroup then thinned certain research teams to what was thought to be the appropriate level of coverage without cutting any complete services like other firms have (e.g., Yankee Group). The sales force is being similarly resized and realigned.
However, according to Egan, TowerGroup will continue to add resources to those services that are growing (e.g., sustainability, mobility and risk management). This continued investment reflects TowerGroup’s analysis that that there will a “flight to quality,” where it can take market share from smaller competitors. This is a common tactic in a recession by relatively stronger (e.g., financials, brand, size or go-to-market resources) companies regardless of industry. This strategy is to take advantage of smaller, weaker competition hunkering down and doing deeper cuts. The tricky part for TowerGroup will be making sure that the cuts they make do not significantly impact the ability to deliver the acceptable level of client service, that their investments truly address growing needs in prospects and clients, and that the sales force can effectively communicate the changes to reassure prospects and clients coming up for renewal. While all three of these tasks are not easy, the most difficult one will be preparing the the sales force with the messaging, training and supporting marketing content to convince prospects that TowerGroup is truly “quality” even after the cuts.
Bottom Line: During recessions, analyst firms like other companies make adjustments to their business models and staff. What occurred at TowerGroup is not atypical. Research consumers will need to review the changes at TowerGroup to determine how the changes impact how they get information from the remaining analysts. For vendor AR teams, the changes at TowerGroup should flow through their analyst lists, interactions calendars, and investment decisions.