The myth of technology analyst independence

Unlike the financial analyst community, technology analyst firms make scant distinction between buy- and sell-side analysis, a conflict of interest that leaves customers worse off

The myth of technology analyst independence
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Recently passing my 15th anniversary as a technology industry analyst caused me to reflect on the evolution of our business, and I'm disappointed to share that amid some positive developments, one significant ethical shortcoming still persists.

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 analysis 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, "What used to be a conflict is now a synergy." He added, "Objective? The other word for it is uninformed." The U.S. Security and Exchanges Commission found otherwise and banned Grubman in perpetuity from financial services for gross ethical misconduct.

The technology industry analyst model

The technology analyst community almost uniformly fails to distinguish between buy-side research and sell-side research, and to that extent, is essentially channeling 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.

Vendors have to play the game

This system creates dilemmas for technology suppliers. Either they play what can become a very dirty analyst relations game, or get ignored at their peril. Check out this candid advice that an analyst relations professional gives to his vendor clients: Become a paid subscriber if you want the analyst firm to take your calls regularly—or even just remember your name.

mysticalquadrant Real Story Group

Vendors typically can’t buy their way into ratings charts, but if they are a client of that analyst firm they obtain crucial access to lobby for better placement—often yielding mystical results

One of the conceits of analyst relations is that it's just like PR: A firm invests to get attention. There's actually a big difference. In countries with a free press, reporters don't get paid to take weekly briefings with the newspaper's largest advertisers. So, analyst relations is less like PR and more like government lobbying—and just as greasy. Vendors pay analyst firms for access.

Vendors pay analyst firms year after year only because those fees bring a return on investment, in terms of greater visibility and presumably higher sales. But then by definition, this warps the market.

The real losers are customers

Unfortunately, the technology analyst industry has no formal legal or ethical frameworks like you would see in most open countries when it comes to lobbyists and campaign donations, so it's impossible for customers to ever really know how the analysis was influenced.

For example, 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, every time. 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 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 diagrams—which have trivial bearing on customer success—and underweight things such as scalability, technical debt and support.
  • Major analyst firms consistently lag the market in identifying declining products if those offerings come from important vendor customers (e.g., the particularly ugly demise of the former Autonomy/Interwoven toolset).

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. Vendors are clear about where they need to spend analyst relations budgets, but as a customer you have many choices about where you get technology advice.

When you pay an analyst firm for research and advisory, you should insist on two things:

  1. That the firm focuses on sell- or buy-side exclusively (not both) or implements Chinese Firewalls to separate buy and sell sides with the same rigor as their financial analyst firm brethren.
  2. That their published research is designed to serve your particular enterprise buyer profile and not issued to generate vendor advisory business or "sculpt an industry."

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

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