Japan’s technology analyst business turns the corner

The technology analyst business in Japan – long constrained by weak economic & IT spending growth as well as some cultural challenges related to the use of external advisors – appears to be enjoying its most positive period in several years.

During a visit to Tokyo last month, I met with senior executives from the major global IT analyst firms, Gartner and IDC, as well as local advisory firm ITR, and found them all positive about business growth as the economy continues its recovery, although sentiment did vary from bullish to cautiously optimistic.

This is in stark contrast to previous visits over the past couple of decades, when the analyst business seemed weighed down by the weak performance of the Japanese economy and the challenges of adapting a “western” concept of external advisory to a culture much more reliant on peer networks & hierarchies.

Situation analysis

Japan is, was & always will be a complex technology market. It is huge – only last year surpassed as the second largest country market by a fast-growing China, according to IDC – and has a strong cohort of domestic technology vendors which have tended to dictate technology adoption much more than the large group of global multinationals which have operated in Japan for decades.

Native language support, the ability to innovate to meet the needs of the Japanese business & consumer markets, and tight relationships between local suppliers and end-user organisations have all shaped technology adoption & behaviour in Japan, and impacted on how analyst firms with “western” business models have engaged with Japanese clients, whether they are vendors or users.

Notwithstanding their enthusiastic reliance on technology, Japanese companies have not tended to see IT as strategic, or to elevate its role as a business driver or differentiator. According to analysts I spoke to recently and over previous years, no more than 20 to 30 per cent of Japanese enterprises employ a CIO, and very few of those have an IT background, coming mostly from HR and finance, so they tend to be heavily influenced by their suppliers, including the local SIs.

And while Japanese IT vendors have a voracious appetite for data – market size, market share & forecasts, not to mention any number of segmentations – Japanese market taxonomies don’t always map neatly to those defined by the global players such as IDC & Gartner, so this has represented a barrier to penetration of those accounts – in some cases requiring duplicate products to meet local & global requirements.

For their part, most analyst firms in Japan have maintained their investment in the market and are starting to see the dividends. IDC Japan is the oldest player, established in 1975, while Gartner ended its agency representation to establish a subsidiary in the late 1990s. That agency – ITR – has had information-sharing arrangements with Meta, Forrester and Constellation Research since, but has mostly relied on its local services to drive its business.

There are other local players, most of which are focused on providing local market share data to Japanese vendors. Some are technology specific, such as MIC Research, MM Research & Techno Systems Research while others are generic market research firms which cover technology segments along with other vertical markets, such as Fuji Chimera, Mitsubishi Research & Yano Research.

Forrester has maintained a sales office in Japan for many years, but has had no resident analysts in the country since the departure of its one representative earlier this year, while Frost & Sullivan has a good presence in some vertical markets, but a relatively low focus on IT.

But there are many signs that things are changing. Following is a snapshot of the state of play, based on my recent discussions.

Gartner Japan

Gartner has been investing steadily in the Japan business for the past few years with the addition of significant sales & support resources, evolving it from a sell-side market sizing organisation to one which now derives more than 60 per cent of its revenues from end-user organisations. According to Gartner’s Japan country head of research, Satoshi Yamanoi, the penetration of end-users remains quite small, particularly when compared with the US and EMEA, so the market opportunity is considerable.

Gartner now offers a complete portfolio of services in Japan, including research; consulting – which competes with likes of Boston Consulting & McKinsey; events – including Symposium/ITxpo & five summit events; and the EXP CIO peer networking program. The EXP program is approaching a critical mass, but Gartner hopes to increase this over the next couple of years.

Like other analyst firms in Japan, Gartner has very strong analyst retention, with many analysts having worked with the firm for several years. Headcount has remained stable at about 30 analysts for the past few years, but the research teams are now more tightly integrated with the global organisation, with the team leaders for infrastructure, applications & sourcing/IT management now reporting into global peers rather than working in isolation.

According to Yamanoi, Japanese CIOs and other executives are increasingly looking to understand global best practices for technology & business adoption and integration, so are more open to external guidance than previously. As well, other countries are looking to engage more closely with Japan, with Gartner working with government & business customers from China, India, Brazil & Japan.

IDC Japan

Similarly, IDC Japan has been enjoying some solid business growth without increasing its analyst headcount, which remains at about 35. Analyst retention rates are high, and according to managing director, Masato Takeuchi, it is difficult to recruit quality analysts due to the specific mix of skills required.

As in most other countries, IDC’s revenues are heavily dependent on quarterly market share trackers (which are often purchased at a corporate level by US & European vendors), but IDC Japan is also able to generate local language reports to meet the needs of Japanese vendors at both local & global levels.

The strong position of Japanese vendors in some technology segments means that IDC Japan is more actively involved in driving IDC’s global research agenda than most country offices. Several of the world’s leading printer vendors are Japanese, for example, while Japan’s strong manufacturing base across many segments means that IDC Japan is providing considerable input into defining the methodology around IDC’s research into the Internet of things (IoT).

According to Takeuchi, Japanese CIOs recognise that their role needs to change to one which acts more as a strategic advisor to the CEO, which opens up buy-side opportunities in some vertical markets, although IDC has not yet put significant focus on developing the Insights business in Japan. Retailers starting to explore the implementation of big data as they move to omni-channel is just one example of how IDC might leverage its global expertise for Japanese end-users.

ITR

Established 20 years ago, ITR has carved out a comfortable niche in the Japanese research & advisory market. With a comparatively small roster of 10 fulltime analysts plus about half a dozen contractors, it services about 300 clients, about one-quarter of which are end-user organisations and the balance are Japanese & multinational IT vendors.

ITR delivers buy-side advisory services to end-users through its subscription-based Strategic Partnership Service (SPS), plus undertakes short-term consulting engagements to help clients with vendor selection, IT strategy and IT architecture development. At the same time, it works the sell-side by producing market sizing reports for local vendors, primarily focusing on segments which aren’t addressed well by the bigger firms.

Originally a data-gathering partner for Gartner, ITR has a long history of partnering with global research firms, often translating selected content into Japanese to share with its local clients. Having also worked with Meta Group & Forrester, ITR is now aligned to US-based Constellation Research, which focuses largely on disruptive technologies.

According to ITR general manager, Hiroshi Yamamura, Japanese companies are slower to adopt disruptive technologies than their counterparts in the US, but there is a trend to technology purchasing moving away from the IT department to lines of business. Interest certainly seems to be growing – an ITR conference in May keynoted by Constellation founder & principal analyst R “Ray” Wang attracted 1,200 attendees.

Bottom line

There is growth at many levels in the Japanese analyst business. While revenues from existing services look healthy, there are new opportunities opening up as end-users more actively engage with external advisors, which means that the influence of Japanese analysts working for both local and global firms is increasing.

Japanese analysts rarely have influence outside of Japan, but they are significantly more influential in the domestic market than any foreign analysts will ever be. While IT spending growth remains moribund, Japan remains a huge market for multinational IT vendors, who would be well-advised to review & upgrade their level of engagement with analysts in the world’s third-largest market.

Cheers,

Dave

 

Crunching the analyst firm numbers – what do they tell us about Gartner, Forrester, IDC & others?

Not all IT research is about numbers, but the IT analyst business definitely is. It’s a business after all, and if you don’t make the numbers, you don’t have a business. But what’s interesting is how many different ways there are to make the numbers stack up.

It’s somewhat ironic that while IT analyst firms often rely on public – and private – disclosure of information from both vendors and end-user organisations to make their prognostications, they often don’t like to reveal too much about their own businesses. The big public firms, Gartner & Forrester, disclose good detail about their revenues to meet their statutory requirements, and perhaps a little more, while the private firms tend to be fairly vague.

As a former analyst, I’ve always been intrigued about the insights you can gain by breaking down the numbers. Topline and bottom line figures tell you one thing, but there’s often a more interesting story when you dig a bit deeper – you can see this in my recent post analysing the 2012 financial results for Gartner & Forrester.

I’ve long considered analyst headcount a good indicator of the health of analyst firm. If the headcount is growing, then that’s a reasonable sign that the business is also growing – or has good prospects of growth. Analysts are a product, and typically you don’t hire more of them if the ones you’ve already got aren’t selling.

But it’s not as simple as that. If you can increase revenue without adding analyst headcount ie adding costs, then you’re going to increase the profit margin, which is also a positive indicator. So you need to look at the relationship between analyst headcount, total headcount and revenue to get a better idea of how a firm is performing.

This is where it gets tricky. Not all of these data points are available for all firms, nor are they necessarily comparable. But by poking around the websites of a few of the leading firms and asking questions of their PR folks, I’ve come up with some insights.

Analyst headcounts

For simplicity’s sake, I’m going to use the term “analyst” a little loosely because of the different way that each firm categorises their staff, combining analysts & consultants, because these roles are sometimes shared.

According to Gartner’s website, it has 902 analysts and 500 consultants (total 1,402), an increase of just under 10% from a year earlier, while Forrester employs 432 “research professionals”, a decline of 4% from last year. IDC told me it employs 1,075 analysts, which is higher than the 1,000 stated on its website, although that latter figure has been unchanged for some time.

Ovum advised me that it currently employs 102 analysts and consultants, which is lower than I’d estimated from the analyst bios listed on its website, but those include management. This figure seems largely unchanged from a year ago. Frost & Sullivan confirmed that it employs 1,800 analysts and consultants worldwide, and while this figure seems relatively unchanged, it is unclear how many of these are focused primarily on IT & communications, as is the case for the other firms.

Looking at analysts as a percentage of total employees, Gartner has the lowest ratio – just over 25% – while IDC has the highest, at 63%. Forrester – at 35% – and Ovum – 55% – sit in between these two extremes, and all appear to have drifted downwards slightly in the past couple of years. Of course, these firms have quite different business models, research services, analyst types and client bases, so it is not unusual that the ratios should vary, but it is interesting how starkly different they are.

Unfortunately, we don’t have accurate data for sales headcount for these firms (except Ovum, which is about 25% of its total), but we do know that Gartner has invested heavily in its salesforce over recent years, particularly in Asia/Pacific, but elsewhere as well. Forrester and IDC have also increased their sales hires in the past year, evidenced by total headcount growing at a greater rate than analyst headcount.

Mapping headcount to revenue

The headcount figures become more interesting when we map them against revenues. Forrester and IDC have similar revenue per employee figures – about $US236,000 – but Gartner’s is about 25% higher, just under $US300,000.

The differences become even more dramatic when we compare revenue per “analyst.” Gartner is generating more than $1.1 million per analyst, some 70% higher than Forrester, and more than 200% higher than IDC! Granted, the different business models don’t make this an apples-for-apples comparison, but the deltas are large enough to demonstrate the point.

So what does this tell us? Certainly, Gartner has optimised its sales-to-analyst ratio in recent years, but can it still make gains from pushing this approach further? At what point does reducing the analyst percentage of headcount start to have a negative impact?

Forrester blamed poor sales execution for its weak financial performance last year, and has indicated a greater focus on sales to turn the business around. But does it need to match Gartner to make that happen? Forrester is about one-fifth the size of Gartner, so does scale change the equation?

IDC obviously has a different client base to these two firms, and the analyst workloads are quite different, but can it benefit from adopting this approach, driving analyst percentages down and sales ratios up to increase revenues & margins?

And what does this mean for other, smaller firms, where the sales ratios tend to be lower? Can they learn and benefit from Gartner’s approach?

On the surface, this doesn’t look like a good trend for the analyst business, from an AR perspective. But on deeper assessment, fewer analysts with greater impact & influence are much easier to engage with than lots of analysts with less impact. In other words, simply increasing analyst headcount is probably less effective than improving the penetration of existing analysts by putting more sales resources behind them.

This is one of those areas where I don’t have all the answers, but I find the questions intriguing. What do you think? How important are these ratios to the performance of an analyst firm, to the health of the analyst business overall, to the execution of a vendor AR program? What else can we learn from this analysis?

Cheers,

Dave

There’s still plenty of upside for the analyst business in Asia/Pacific…

At first glance, the technology analyst business in Asia/Pacific looks pretty mature – the first global firms established their beachheads in the late 1970s, there are many analysts now who can measure their tenure in decades rather than years, and there has been an ongoing process of consolidation which is typical of maturing industries.

But when you look more closely, it seems that the analyst business in this part of the world is still under-penetrated. And by a fair degree….

The Asia/Pacific region is all about growth – everybody knows that. Not just for technology, but for everything – consumer goods, manufacturing, professional and personal services, airlines, you name it… Due to their sheer population size and rate of growth, China and India attract most of the attention, but there are plenty of smaller economies in Asia which are belting along while the US and Europe try to figure out whether they can pay their bills.

All this growth creates an appetite for technology, which is why so many global vendors have a strong focus on APJ. Many of them get their best growth figures from this region, quarter after quarter, and they don’t see that changing – Symantec’s regional senior VP, Bernard Kwok, was quoted today as saying that the company would double its business in the next five years.

Some big vendors aren’t even really here yet! Analysts tweeting out of Dreamforce today quoted Salesforce.com CEO Marc Benioff as saying that the company hadn’t entered China yet (although its website lists offices in Shanghai and Beijing). However you look at it, though, that vendor has hardly scratched the surface in APJ.

And then there are the local vendors…. Software and services suppliers from India, communications equipment vendors from China, the established hardware manufacturers from Japan and South Korea, and lots of start-ups right across the region developing applications, tools and solutions for their local markets.

Every analyst firm I talk to in this part of the world says business is good – they’re sharing in this growth, but not at the same levels as their clients. And when you break down the numbers around the analyst business in APJ, you get the feeling that there’s still plenty of upside, and those firms that ratchet up their level of investment are going to reap the benefits.

So let’s look at the numbers.

I’ve consolidated these from analyst firm websites and my own databases, and I regard them as good estimates, but they may not be 100% accurate. Indeed, the total analyst workforce numbers quoted on the firm websites appear to be “rounded” and may in fact understate the case, and some of them use vague terminology so it’s difficult to make exact comparisons.

IDC

There’s no doubt that IDC is the biggest technology analyst firm in APJ. It employs approximately 230 analysts who are located in 14 countries, accounting for something like 23 per cent of the “more than 1,000 analysts” that its website says it employs worldwide. Interestingly, IDC employs the same number of analysts in China – 45 – as it does in its Singapore regional headquarters, with Japan the next largest office, followed by Malaysia, then India.

 Gartner

Gartner established its first Asia/Pacific office in Australia in the late 1970s, just after IDC, and expanded progressively across the region. It added significant headcount with the acquisition of Dataquest in 1995, and the majority of its analyst hires more recently have been in China and India. Gartner employs approximately 120 analysts in APJ – out of a global total of 800, or 15 per cent – in offices in 10 countries. Japan is its largest office by analyst numbers, followed by Australia and India, with China still relatively small.

Forrester

Until its acquisition of Singapore-based Springboard Research in May last year, Forrester had very little presence in APJ – a couple of analysts in Australia, and one in Japan. There are now about 40 analysts & researchers employed by the firm in APJ, the majority of them in India, although it also has reasonable presence in Singapore, Australia and China. But this figure is just 9 per cent of its worldwide headcount of 450 “research professionals.”

 Ovum

Ovum employs the largest percentage of its analysts in APJ – just over one-quarter – but as a European firm, it doesn’t have a large number of analysts in North America. Its website says it employs 140 analysts and consultants worldwide, and about 36 are in APJ – primarily in India and Australia.

Frost & Sullivan

Frost’s website says it employs 1,800 analysts and consultants worldwide, but getting any insight on how many of those actually focus on technology – as opposed to the other industries Frost also researches – is pretty hard. In APJ, Frost’s technology focus is primarily on telecommunications, contact centre and some other specific segments such as information security, but the regional organisational structure is a little complex, and in some countries, analysts don’t specialise in a single industry or topic. I’d estimate about 70 fulltime technology analysts in APJ, but the number could be higher.

Apart from those five global firms, there are probably another 30 or so firms with some sort of analyst presence in APJ. As well as US and European firms which employ a handful of analysts in the region, this group includes advisory firms in Australia such as IBRS and Longhaus; Japanese “numbers houses” such as Yano and MIC; and the intriguing Chinese players such as CCID and Analysys International.

According to my friends at KCG, there are about 350 “real” analyst firms worldwide, which means that just 10 per cent of them have some sort of analyst presence in APJ. Granted, many of those firms are quite small, but that doesn’t mean they couldn’t or shouldn’t be investing in the real growth opportunities that exist in this region.

There are plenty of gaps in the research portfolios of the larger firms too. For example, deep focus on technology in specific industries is limited, and very little attention is paid to non-traditional purchasers of technology. There are huge provincial markets in China for which there is very little good market intelligence, while coverage of emerging markets such as Vietnam has barely scratched the surface.

APJ is one of the major growth engines of the global economy for the foreseeable future, so you would think the analyst firms would be throwing resources at this region to cash in. That doesn’t seem to be the case, but maybe that will change – after all, it’s all upside.

Cheers,

Dave