First, what does the information firm of 2010 look like? Today, firms are focused on delivering content through proprietary desktops and APIs, using proprietary standards and technologies. They build walled gardens around their content, with an attempt to draw customers through exclusion not inclusion. Most have built a substantive business around two or more market segments and have applications that, although highly sophisticated and targeted for specific user groups, aren't well suited for broader appeal into new segments or in some cases even new users groups within their core segments. Those that do have broader appeal do so mainly due to a 'one-size fits all' technology platform and broad content assets that draw customers from many segments and markets. A few 'dabble' in the consumer space but really have tried to drive institutional solutions into a very different market with varying success and results. Finally, they have a very well established culture of build and/or buy with little to no interest in partners except where either tactically convenient or where the partnerships fills a hole in their technology stack.
From a commercial /revenue standpoint, these firms are primarily subscription based licensing for their services with this revenue supplemented by limited one-off revenue from 'consulting' (primarily customer set up and integration), or transaction-based revenue (trades, order flow, etc). Some license their content through other information companies to gain broader access to markets and customers for their data although this model is shifting to smaller niche players as larger firms retrench their content behind their walled gardens.
There are some specific differences to each firm and my description might not be exact but generally I believe this describes the players generally.
But as we’ve seen in other industries impacted by technology and customer behavior changes, firms need to ‘reinvent’ themselves to stay viable. I believe by 2015 information providers will need to change their current operating model to adapt to and take advantage of structural changes in the industry that are just starting to impact them now. Those that don't will be acquired by the new leaders, will fall into a niche market or will die.
So, here’s my take on what information vendor’s need to do to adapt and survive:
- Decide if you are a software company or a data company. Many of the top firms (and some tier two firms) offer both proprietary data and proprietary applications. This is unsustainable for a number of reasons: 1) technology costs are lowering allowing new entrants into markets easier; 2) these new entrants offer more sophisticated and more functional products than the incumbents can offer; 3) cost of ‘catching up’ is higher for an incumbent due to legacy, highly customized and proprietary product stacks; 4) proliferation of cloud/mobile computing creates further complexity (and higher support costs) as incumbents build new software offerings on these platforms; 5) niche data providers that have historically used large vendors as a distribution channel now have easier means to market through leveraging cloud and other newer technologies and can go directly to customers and not through large vendors. And I could go on. The net is: costs are rising, revenues are flat or declining and margins are shrinking and size isn’t the factor it once was. Supporting hundreds of developers building sophisticated applications as well as investing in content aggregation increases the chance of both falling short of customer needs. Pick one and be better at it than anyone else – you can’t be best at both, no one is
- Change your business models, before they change you. Being predominately subscription based is good, but customers are increasingly looking at the ROI of their spend with you. As a result, it’s time to get creative. Related to the above and the next point below, information firms need to start looking at how they contribute to ROI of a firm – particularly if they offer both content and software solutions. Increased use of utility models is a good place to start. By nature of the complexity and size of a business, each customer gets differing returns on the spend with you. Content, is a pretty constant and very specific item that can be usage based. Some firms have enterprise data licenses for their larger customers, whereby they pay 10s of millions for broad and intensive use of certain content for the firm. This model has never trickled down to the larger or mid-size firms which could benefit of not feeling ‘nickled and dimed’ by vendors. Usage/utility models are good since most customers probably don’t realize how much data they use – that can lead to revenue upside especially if that use made or saved millions of dollars in a year through investments and transactions in financial markets
- Focus on providing services, not just data or software. One great advantage these firms often have over their own customers is they have hundreds if not thousands of experts on running complex database systems - data collection , data mapping, maintenance and distribution networks. Why an information provider doesn't establish a cloud-based, database management service, applying the best practices itself employs for its own information and take the cost of running these massive infrastructures and subsequent head-count costs off customer hands (particularly the smaller hedge funds, asset management, boutique banks and corporate customers) escapes me. Consulting firms around the world make millions providing these services - and it’s something information vendors already do. For some, their brand is such they would have instant credibility with their customers. There are other ‘services’ firms can offer. Means they need to re-think their business models but shouldn’t every firm do this?
- Build an ecosystem, a real one – now. As Microsoft first proved and others have proven, creating a vibrant ecosystem of partners and hangers on only increases your stickiness and generates more revenue. Apple’s iTunes and App Store generate billions for the firm through simply getting a piece of each song or app sold. Vendors are obsessed with the view they need to ‘hold the desktop’ to be sticky, which results in keeping any possible partner at arms-length, or worse, see potential partners as a purely hostile invader to be crushed. The net is customers pay more, get less and see vendors as suppliers not business partners. Tell me, which is the more sticky situation for a vendor – a customer which uses 3 different vendors offering 3 or more different data sets, sometimes duplicating data sets for different parts of their business since each application doesn’t cover the functionality needs for all the business and the data isn’t covered in all the applications; or, a customer that uses 3 different software packages but all the content needed from one data supplier that seamlessly operates with all 3 applications. Well, given the option 2 likely saves customers money through reduced data integration costs, reduced data discrepancies and lower operational risk not to mention better ROI through leveraging best in class software and data, I’m guessing number 2. Need more proof: people don’t buy the iPhone because it’s a great phone – they buy it for the 100,000 plus apps. If you have a vibrant, thriving ecosystem with partners that actually like working with you, they tell customers that and provide free marketing and sales leads as a result. And besides – it’s always better have others touting your benefits than you doing it yourself.
- Look to new distribution/paths to market. Similar to my point with new models, there are new channels of content distribution that are popping up all over the place which are ripe for an information vendor to capitalize. For example, the ecosystem of nearly 80,000 customers and nearly 2 million users built by Salesforce.com is a money field ready for harvest. Think of it this way – if a well-positioned information company can get $1 a month from every user on the SFDC platform, that’s over $20 million in top line revenue. And really all they have to do is plug their information into that network and allow customers to use it – no product builds, no infrastructure builds, no complex integration costs. The Apple ecosystem, the Microsoft Azure platform, Google’s Android/App platform and even Amazon’s Web Services stack is possible new channels to market without building new products and infrastructure to serve them. There are delivery, support and commercial considerations to work through, yes, but far less complex ones than building a whole new infrastructure or product stack. This dove tails with the ecosystem point above. With happy partners ‘selling’ your services for you, a firm has increased its sales coverage without adding headcount – and lowered costs of sales as well.
So there you have it. The winning firms in 2015 will be focused on what they do best and shed the rest; leverage a partner ecosystem to offer a full suite of solutions and/or data; offer services in addition to the software and/or data they offer already; adapt new commercial models to meet customer ROI scrutiny; and leverage multiple channels to market.
There are other clear benefits to my suggestions which I skipped due to space considerations. Should readers have some other thoughts on my proposed changes, I’d appreciate the input.