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Vol. 29 No. 5 — Sep/Oct 2005

The flat market translates into tougher sales for the suppliers, which must contend with customers’ fixed or reduced budgets and their demand that suppliers give more for the same investment while continuing to offer new innovative solutions. In summary, senior management is pressuring customers to lower costs, while suppliers are having a harder time retaining their current book of business. 

Due to increasing business requirements—and given that the dollars spent for information and market data within many industries make up the second-highest company cost next to people—it struck me that an interesting exercise would be to research how customers and suppliers are “weathering the storm.”

Contradictions

While researching how customers continue to meet their firm’s market data requirements and how suppliers either maintain or increase revenue, I attended two well-known conferences that specifically covered both the information and the market data: Buying and Selling eContent [www.buy-sell-econtent.com], sponsored by Information Today, Inc., and Inside Market Data, sponsored by Incisive Media [www.incisivemedia.com].

It’s helpful to differentiate between the terms information and market data. Information refers to non-real-time data, information that is not time-sensitive. Examples are historical data, fundamental data, reference data, and research data. Market data refers to real-time data, data that is extremely time-sensitive, with a shelf life of 15 to 30 minutes. Examples are pricing feeds from stock exchanges, streaming news products, and economic and financial forecasts. 

The distinction between information and market data products is increasingly blurred due to the consolidation of information suppliers and their product offerings. Further, an information product can start out being market data and then transition to information, because of its usage and life cycle 

At the Buying and Selling eContent conference, Chuck Richard, VP & Lead Analyst of Outsell, Inc., a leading information industry research and advisory firm, presented Outsell’s estimate of the worldwide information industry spend/revenue. Outsell, which for the past 4 years has done a combination phone and Web survey of approximately 10,000 U.S.-based corporate users, as well as ongoing market size and share research, reported that in 2004, the market size for information spending had grown by 9.8 percent—from $239.5 million to $263.0 million—compared against 2003. Its growth chart shows a steady rate of increase from the middle of 2002, an optimistic outlook for the industry.

At the Inside Market Data (IMD) conference, David Anderson, editor of Inside Market Data Reference, presented his version of the state of the industry, including statistics for spending trends and commentary about the major players (the large real-time information suppliers). David’s commentary included the statement “there is some cause for optimism,” since according to IMD the financial sector spent $6,917 million on real-time data in 2004, a 4.5 percent increase over 2003. A majority of the spend (81 percent) was attributed to Bloomberg and Reuters; the remainder was spent with Thomson (their real-time data only), Telerate, Interactive Data Corp., and other, smaller suppliers. David further suggested that suppliers should look beyond real-time data. IMD estimates that Reuters gets only 60 percent of its revenue from the sale of real-time products; for Thomson that number is 30 percent. This mix is interesting and indicative of the current range of products offered by large information suppliers. Similar numbers for 5 to 7 years ago would show the Reuters’ revenue percentage for real-time products much higher and have no mention of Thomson as a real-time data provider.

It is worth noting that these two surveys, even in combination, do not capture the entire industry. The IMD survey captures real-time usage in the financial sector but does not include any usage outside of the trading room environment, thus excluding information for mid- and back-office processing, research department and information center services, products on the desktop of various end users, as well as information products required to service Web and online client support. The cost of these other services can be material, often between 25 percent to 33 percent of the total information expenditure. The Outsell study captures the usage habits and preferences of survey participants, but only for those products that it uses directly. 

I can think of a number of suppliers whose products would not be captured in whole, or perhaps in part, by either the IMD or the Outsell surveys. Examples that come to mind are Standard and Poor’s, Moody’s, Interactive Data Corporation, Factset, Alacra, and Barra MSCI.

However, even accepting that neither provides a complete picture, the IMD and Outsell information provide reasonably good insights into the information and market data usage trends in the industry. The survey results paint a positive and optimistic picture. For the sake of argument, averaging out the numbers assumes an industry growth rate of 5.5 percent to 6.0 percent by today’s standards, not a bad result. It may not be the double-digit growth numbers seen in the 1990s, but it is bigger than the growth in GNP and probably bigger than the annual increase of the salary of a number of readers of this magazine. Obviously, this observation is in significant contrast to the messages we are hearing from the customers and suppliers themselves. 

So what is the problem?

This brings me to the crux of the issue and the real question that I want to ask. If the industry growth rate is between 5.5 percent and 6.0 percent, then why is everyone complaining? 

Regardless of the growth numbers supported by the information provided at the two conferences, buyers for large firms and suppliers of data consistently referred to the “tough” market. Growth numbers aside, the problem for both sides is real enough. In fact, user budgets are flat or being reduced, while user requirements are not diminishing. Data suppliers insist that it continues to be difficult to retain current business, let alone grow and expand usage levels. 

Now that I’ve clearly stated the problem, what are both the buyers and sellers of information and market data products doing—how are they approaching this problem and what practices are being used to resolve both side of the dilemma?

Customer-Proven Negotiation Techniques

During my career, I worked for two global financial institutions, where I was responsible for sourcing information and market data products worldwide. A large part of my job was to control and reduce expenditures across the board. What follows is a list of some of the approaches I used, singly or in combination, to meet my firm’s objectives:

Come to the table prepared. Gather all pertinent information before you start to negotiate, including past contracts, usage reports, list of current users, feedback from users on the level of satisfaction or issues with the product, ongoing and future usage requirements, etc. Only if you are fully prepared can you identify your opportunities and maximize your contract negotiations. 

Leverage your total spend levels. Make it your business to know how much you spend with the supplier. Understand and obtain an inventory of all of the products/services used throughout your entire organization. This will define how important you and the supplier are to each other. The higher your spend level, the more you can use it to leverage your position in the negotiation and the harder the supplier will work to meet your requirements and retain your business.

Maximize the client/supplier loyalty and long-term relationship level. We all have favorites; there are companies and people we like to work with and trust. If you have this level of loyalty with a supplier, use it as negotiation tool (in an appropriate manner). For example, ask for some short give back because you have a long-term relationship, both past and future. If you are realistic and fair, you will gain positive results.

Work on nonmoney “value” factors. Identify other ways to increase the value of the supplier’s products. Examples are expanding usage level, widening access rights, and broadening distribution rules. Negotiate these values with minimal or no increase in expenses. Besides increasing the value of the suppliers’ offerings, it may enable you to downsize other suppliers.

Give the supplier other value factors. In return for concessions, try to give other value factors to the supplier, such as a longer commitment; make them a “premium” vendor, giving them a first pass on proposing new products in the future, or become a “partner” in the supplier’s product development and testing.

Remix usage of information products/services to reduce your overall information expenditure level. Where appropriate, and assuming that an alternative information product meets the business requirement of the user, remix your usage of services. This can be an actual or implied action. It will get the attention of your current supplier, who will go to almost any lengths to retain and grow your level of business.

Be assertive; mandate change where possible. Another approach, which, when used judiciously, can be very effective, is to “share the pain.” If you have a long and good relationship with a supplier (or even a short and painful one), you can motivate the supplier to do a give-back for the short term. This will help meet your business and budget objectives with the promise of long terms benefits. When you use this approach, make certain to be fair and follow up on your promises.

Be ready to walk. This item is last deliberately. It should be the last on your list of actions to use with your suppliers. Used properly, it is an extremely effective negotiating tool. Before taking this approach, consult with your users to assure that the information product from this particular supplier is not a critical requirement for your firm. When you have a case in which the product can be replaced by another supplier, this is the ultimate negotiation tool. Suppliers will go to almost any means to maintain current business. They may not believe you at first, but when they realize that you are serious, a whole range of options will suddenly appear on how to price the products/services. Remember, you have to use this approach in a timely and selective manner.

Supporting Data FROM CustomerS

To research this article, I contacted a number people in the industry, half of whom work for large information user firms and/or consultants; the others are senior sales and management staff at large and midsized information suppliers. I asked each of them to discuss their approach to difficulties in purchasing or selling information products. Interestingly, I received some answers I was not expecting.

First, I spoke with senior staff at global banks and legal, consulting, and pharmaceutical firms who are responsible for managing the sourcing and usage of information products. In addition, I talked with people at several large consulting firms with market data consultancy practices who assist their clients in sourcing the appropriate information tools in a high-value and cost-effective manner. One of my respondents replied, “Congratulations on tackling a very important subject that has certainly been my reality on a daily basis.” 

Doug Dworkin, managing consultant, IBM Business Consulting Services, stated, “There’s no question that market data budgets are under constant scrutiny. Market data is among the largest noncompensation expense for our financial services clients. It’s always a huge blip on the budget-cutting radar.” A senior manager of a global information center told me, “We’re deep in the throes of a number of painful discussions with key providers that are sensitive and highly contentious.” This was followed by an additional comment: “Right now I see no examples of any vendor being prepared to have innovative and cost-effective discussions. However, I do see vendors trying to cling onto their revenue stream … insisting the best they can do is to keep prices flat.” 

The following is a summary of common themes from information users that deal with the question of how to meet the firm’s requirements with fixed or diminishing budgets:

Take charge of the process. Put yourself in the driver’s seat, use the proper tools, and manage the supplier and the negotiation process. For example, Alan L. Paris, director at PricewaterhouseCoopers Consulting, discussed how a large Canadian financial institution installed a market data inventory system in order to obtain in-depth knowledge about its information requirements and usage habits. The installation further resulted in the elimination of redundancies and the ability to negotiate better pricing. 

Develop partnership relationships with your suppliers. Offer your suppliers opportunities to expand and grow the size of the account in return for short-term concessions. Base this on potential for additional business not firm promises.

Defer any price increases. Negotiate a deferment of price increases or suggest spacing them over a number of years.

Review usage and reduce users. Work with internal user groups to reduce the number of users due to either a low volume of usage or the product not being critical to the user.

Maximize aggregate spend level. Negotiate based on the total spend level with a supplier. Barbara Hirsh, director at Information Resources, NERA Economic Consulting, described a past experience where she was able to consolidate two user
licenses of 50 users each into a single license for 250 users.

Remix usage of suppliers and products. Several of the people interviewed cited examples of changing their mix of suppliers, thereby reducing their overall costs.

Mandate competitive bidding to force stable or reduced pricing. This concept can be very effective with suppliers if your firm has a large spend level. It’s also effective with products that can be sourced from other suppliers. Send the message that a price reduction is necessary to maintain the account.

Negotiate reduced pricing for long-term commitments. If your company policy allows long-term contracts, this can be a very effective negotiation ploy. I was given an example in which the client was able to negotiate an unusually high level of discount for a 5-year commitment. It was clearly a win-win situation for both parties. 

Negotiate other value factors. Identify ways to improve the total value of your contract. Examples
include increasing the number of IDs or widening access and distribution rules without increasing the price. One respondent told me that by taking this approach she was able to downsize another supplier, thereby reducing her overall spend level.

Offset cost increases by service reductions. Two information managers talked about their company’s strict policy: If a business community’s requirements result in higher costs, then they must offset this cost by reducing or canceling other less-critical services, thereby keeping total costs flat.

As you might expect, I heard many war stories about the difficulties in negotiations with suppliers. However, I am pleased to say there were also stories about successes. One supplier that was complimented several times was Alacra. One of its clients stated, “[Alacra] has usage models that reflect current information habits and requirements.” Moreover, it has “innovative and focused pricing schedules.”

Supporting DATA FROM SupplierS

From the supplier point of view, there was general agreement that the current marketplace is tough, clients have budgetary problems, and price and contract concessions are continuously requested. Each of them had their own approach on how to deal with their clients, but all agreed that new approaches are required. The challenge for the suppliers may be similar but are also varied based on the spend level of their client and how critical the information is to the user. 

Most of the suppliers were positive, stating that if you work hard with a client, a solution can be reached. Denise Slifer, head of sales North America, Perfect Information, said, “The important thing is to get the clients’ time and their end-user input on the product and solution. If they can explain their business requirements and budgetary challenges, we will always deliver a workable solution.”

Here is a summary of common themes from information suppliers that deal with the question of how to retain and expand current business in the face of their clients’ fixed or diminishing budgets:

Show value through ROI calculations. Where possible, calculate the benefit to the client for the information product, including revenue generation, impact on operations, data collection, and workflow. Focus on operational efficiencies. 

Create additional value. Give the client other value, without incremental fees, to maintain the account. A popular example is to increase the number of users or offer enterprise open access agreements.

Grow the userbase; sell from the bottom up. Work directly with the end users to convince them of the value and importance of the product and let them sell it to their manager. 

Increase discount levels. Several suppliers told me that their clients are requiring higher discounts as part of new contracts. 

Give price and contract concessions for multiyear contracts. Negotiate flat or lower pricing for long-term contracts.

Replace other information suppliers and their information products. This “eat what you kill” is a common approach to gain new business while keeping the client’s total spend level flat.

Find new usage for information products. Work with your clients and find new purposes or usage for your services, such as products that meet compliance or due diligence needs. 

Change payment methods. Revise the timing of invoices and terms of payment. Offer a period of “no pay” as an incentive for increased or new product usage.

Work with both the sourcing group and the end users. Include all of the appropriate parties in the negotiation process to show maximum value.

Revise rate cards and pricing models. Through innovative pricing, share the risk with the client; give them value in return for product loyalty.

UNDERSTAND THE CUSTOMER

Most of the sales executives that I interviewed told me how important it is to be flexible, understand your client’s requirements, and continuously demonstrate the value of your products. Most told me that they have to work much harder to keep their current book of business. One seasoned sales executive stated that he has always uses the POP principle—Professionalism, Organization, and Persistence—although lately there is more focus on persistence. 

It is obvious to me that both buyers and sellers of information have taken a new approach within the last few years. Yes, the marketplace is tough, but both sides seem to be working with each other to find workable solutions. All indications are that the size of the marketplace is growing. When I asked the sales staff at suppliers if their annual sales were up, down, or flat, those that were able to answer the question admitted that the numbers were up.

Is the information business between a rock and hard place? Yes, more so than it was 5 to 7 years ago. However, as we have seen, it is workable and moving forward. It will evolve, change, and grow over time to reflect the importance and new requirements of this information age. 

Comments? E-mail letters to the editor to marydee@xmission.com.