Brekiri is working on solving this problem by providing a clear, simple set of metadata to help you get your bearings on a company you’re researching, whether it’s a potential customer, competitor, or partner.  We show you the business unit structure, categorize those units into more specific industry segments than other sources, and give you a jumping off point for searching for financials, people, or other topics.

We’re still fine-tuning the application, but you can already take a look at a few examples of the company profiles we’re putting together:

• Johnson & Johnson
• Medtronic
• Boston Scientific
• Zimmer
• Oracle
• Microsoft
• Google
• Apple

As you can see, we’re focusing on the life sciences and information technology sectors initially.

The full Brekiri application combines this information with financial filings search, web search, and industry data to create an integrated starting point for all your company research projects.  We want you to be able to spend less time searching through Google, finance sources, and SEC filings, and more time getting your actual work done.

Check it out and let us know what you think.  What’s your biggest pain point when researching companies?

The wrong way

Probably 95% of investor relations departments don’t have this kind of mandate. To pick on a recent example, let’s consider Strabag, one of Europe’s leading construction companies. The firm recently shut down its communications Twitter account because no one was tweeting them. Of course, the company didn’t use the account for anything except for relaying analyst ratings and the status of its order backlog – not exactly captivating.

Strabag made a variety of mistakes. All marketing, but especially social marketing, is a content-driven activity. If you don’t have interesting things to say, no one will listen. You don’t have to be in a sexy business to come up with meaningful content (look at Zappo’s in shoe retailing), but you do have to think about what your audience wants to hear. Strabag could have engaged in a dialog with analysts, better understanding their information needs and perceptions of the company. A primer for investors unfamiliar with the construction market would have been even better. I won’t belabor all the usual social media points beyond that.

Tactically, Twitter is an awful channel for arbitrary data points (output is up 6%!) lacking context. Even order backlog is probably interesting to investors and equity analysts, but it should at least link back to a chart and spreadsheet showing the trend over time, comparisons with competitors, and implications. There’s no reason for online communications to mimic the dry facts of a stock ticker. Help people draw conclusions!

The right way

In contrast, I was blown away by the exchange between Reed Hastings from Netflix and a hedge fund short seller on Seeking Alpha (brilliant site, by the way). The hedge fund manager lays out his concerns about Netflix’s valuation, new competition, the costs and quality of licensed streaming content, and a few other reasons for his short position. Hastings addresses them all openly and dismantles most of them. Finally, the short seller posts again to say that he’s covered his position and why. For a business geek like me, their dueling analyses are such fun to read, and they do an excellent job of illuminating the company’s strategy, the industry landscape, and possible risks and upsides. I probably could have read Netflix’s entire 10-K filing and come away with much less understanding of their business than after reading those posts. It’s also brilliant investor relations, and Hastings and his team eliminated a potential stock performance issue, thus allowing them to stay focused on the core business. Now, this kind of response requires that your company actually have a very well thought-out strategy and evidence to back it up. Most firms probably couldn’t hack it, but it is something to aspire to.

Expand your mandate

Various corporate functions have been transformed from rote work to strategic assets over the last few decades. Human resources used to be about job postings and benefits management. Now, ideally, it’s about selecting, recruiting, and retaining the best possible talent. Traditionally, purchasing was probably one of the dullest jobs imaginable (no offense). However, in the context of strategic sourcing, the job is more about partnering with suppliers, understanding their impact on product quality and strategy, and forecasting the evolution of your industry value chain than just about issuing purchase orders.

The same thing needs to happen with investor relations. Investors are critical stakeholders in public companies, and we’ve seen various examples of firms crippled by short sellers over the last few years. Investor relations should be a strategic communication channel to cultivate a supportive investor base and to funnel market information back to management. It’s time to go beyond conference calls and financial filings.

]]> http://www.brekiri.com/blog/477/the-new-paradigm-of-investor-relations/feed/ 5 http://www.brekiri.com/blog/461/why-is-good-business-information-so-scarce/ http://www.brekiri.com/blog/461/why-is-good-business-information-so-scarce/#comments Wed, 02 Mar 2011 14:35:16 +0000 Greg http://www.brekiri.com/blog/?p=461 I recently came across this O’Reilly post about CrunchBase, the open database of information on startup companies, asking whether CrunchBase will remain free in the long term.  While the post itself is interesting, the part that puzzles me is why there is so little business-oriented information freely available out there.  Data as a service has been [...]]]>

I recently came across this O’Reilly post about CrunchBase, the open database of information on startup companies, asking whether CrunchBase will remain free in the long term.  While the post itself is interesting, the part that puzzles me is why there is so little business-oriented information freely available out there.  Data as a service has been generating a lot of excitement recently, and I think it’s well warranted.  However, the only prominent sources of open business information are the SEC’s Edgar database, LinkedIn, and CrunchBase.  After that, the field gets very thin.  Considering how much effort companies put into business intelligence and competitive intelligence, it seems like there should be a great profit motive for someone to provide a deeper business information layer.  So I don’t really understand why we’re in this situation, but it does seem like a big opportunity.

These days, most companies are still creating expensive in-house data sets for purposes like market analysis and competitive intelligence. Data providers like Thomson Reuters and CapitalIQ do the same thing and charge through the nose for it.  As a result, big companies end up paying a lot for often not very impressive information. Meanwhile, the rest of the market makes do with sources like Google that just aren’t intended for business research.

The open source analogy

The current landscape reminds me of the days when every big company did custom development for its own IT applications, even though each company’s payroll or data processing system did basically the same thing. That’s good for consultants and developers, but it makes process improvement very expensive for corporations. Similar walled gardens still dominate the business information market.  We need to move to a mindset closer to the open source world. In the last ten years, open source software has become a very competitive option compared to commercial software.  While the core movement is still based on developers writing code based on their personal interests, an important catalyst for the movement has been the rise of companies that add a layer of support and commercialization on top of the core technology. Open source is now a lively market, not just a movement. What’s interesting is that users of open source, from Google and Facebook to NASA, probably contribute more to it now than the companies that sprung up to commercialize it, like Red Hat.  The crowd is contributing to tools that would often be prohibitively time-consuming to build internally or too expensive to license from a vendor.  All the users benefit as a result.

The Wikipedia of business?

Wikipedia and other crowdsourced sites like Wikinvest (a wiki for public company information for investors) are a bit analogous to the open source movement. People make contributions for fun or or to burnish their reputations, not for monetary incentives. The results have been amazing – the English language Wikipedia alone has over 3 million articles. But there are also limits to the phenomenon. Growth in articles is estimated to have peaked in 2006, and you can tell that sometimes articles of marginal interest to the community languish or are even deleted. And as the base of articles becomes more static, it will be interesting to see whether the relatively mundane task of updating all those articles still motivates people.

Wikinvest is another amazing tool, but also one with limits. Interesting companies are updated frequently, but articles on, say, pulp and paper companies tend to be out of date. (As an aside, I get the impression that contributors to Wikinvest are overwhelmingly undergraduate business majors. I wonder what the incentive is. Do corporate recruiters look at the site?)

So there are limits to the open source model for data, particularly commercial data like company information. Somehow writing up a stock analysis doesn’t have the same craft appeal as working on a piece of software.

The commercial data layer

But I do think there’s potential for a real commercial data layer, crowdsourced but with profit and cost savings motives as a driver. There are myriads of players who need information on topics like companies and industries (or who want to sell it), and right now they’re all creating expensive, in-house data sets.  Moreover, much of the data is inaccurate or rapidly goes out of date because maintaining that volume of information requires massive scale. It’s a lot like the software world before first off the shelf and then open source became prevalent.  There are huge economies of scale to be realized with a more consolidated data layer.

Facebook owns the social graph. FourSquare or Yelp will likely do the same with local business information (although Groupon could be well positioned to horn in on it). Right now, no one has claimed pole position in creating this data layer for commercial purposes. There are also lots of aspirants to that position: Thomson Reuters, Capital IQ, Bloomberg, and on and on. I just don’t think any of them are taking the right approach. We need a platform, not a silo.

Once commodity information on companies becomes more widely available, it will be interesting to see what kinds of applications people can build on that information.  Tools like Google Finance, which is quite amazing for a free service, are just the tip of the iceberg. Imagine if you never had to do another bubble chart yourself again! Freeing people from basic research will make it much easier to do deep, thoughtful business analysis instead of spending your time trolling for information online. Basic business information needs to become an open commodity.

Unfortunately, research reports almost never live up to the hype, for a number of reasons.

Black Box Numbers

One of the most sought-after aspects of market reports is the market sizing numbers.  Everyone wants a supposedly reliable source for that information, and companies like Forrester, Gartner, and IDC are particularly happy to oblige.  Of course, estimates vary widely across sources and from year to year, and there’s no way to reconcile them because you usually don’t know how they were calculated.  Most of these market sizing figures are the equivalent of sticking your finger in the wind, so take them with a grain of salt.

Fluff

Most market research reports are written for length rather than utility, and they’re stuffed with long-winded descriptions of the methodology, company profiles that repackage annual report information, and a variety of other boilerplate.  You can expect perhaps one out of every four pages to contain something useful.  For example, a recent report on business information markets (think Thomson Reuters and Bloomberg) fills quite a few pages describing Google’s acquisition of DoubleClick and AOL’s acquisition of Bebo, despite the fact that neither has anything to do with B2B information markets.

Different Market Definition­s

You would think people define markets the same ways and that there’s little room for confusion, but quite the contrary.  I’ve had all sorts of odd experiences where the report I thought was perfect turned out to be about a related but entirely different market.  For example, I was doing research on blood serum products used in pre-clinical pharmaceutical testing and found a 400 page report on blood products.  Perfect!  The only problem was that it was about blood bank products –whoops!  I’ve had similar experiences with other areas from packaging to industrial machinery.

Shallow Analysis

Often, report writers also take the easy way out by overly simplifying their analysis or failing to thoroughly vet it.  One example might be defining industry scope and size by NAICS codes, which often fail to capture some nuances of what should be considered part of an industry.  Some analysts also pull a bait and switch.  One firm is fond of analyzing “latent demand,” which bears little resemblance to actual demand.  But then, it’s not supposed to – it’s latent.  Finally, the same business information report I cited earlier claims that advertising revenue for subscription, business-oriented services will go up with increasing broadband penetration.  That conclusion just doesn’t make sense, considering that most information-intensive firms already have broadband connections.  Consumer broadband penetration won’t make any difference.

Packaged research reports are still a necessary evil.  It’s useful to have a third-party estimate of market size and to take advantage of the information distilled in these documents.  Just be aware of their shortcomings and set your expectations very low.  If you need more than a few numbers and a few factoids, go in knowing you’ll need to do more legwork on your own.

First, let’s be more precise in our definition.  Primary research technically refers to all research conducted by gathering information that is not already collected in a document, including interviews, customer surveys, focus groups, and analysis of raw information like construction projects started.  For our purposes, let’s call surveys and focus groups primary market research.  I’m referring only to individual interviews when I say primary research.  Interviews are typically conducted by phone, but in-person or email exchanges are also sometimes involved.

Why primary research?

Why am I so focused on individual interviews?  It’s because they’re one of the best ways to get a deeper and more nuanced understanding of a topic.  Primary research can be applied to analyzing customers, competitors, distribution channels, suppliers, and your overall industry.  It’s a useful tool for answering questions with a high degree of qualitative clarity.  You can get:

• Information from knowledgeable sources that’s impossible or impractical to get online or in research reports
  • In our landscaping example, is the local commercial landscaping market growing right now?  Are there particular plant categories that are “hot”?
• A degree of specificity unavailable in secondary sources
  • If the market is growing, is it primarily due to big projects?  Or are there also enough smaller projects going on to allow the nursery owner to start small and then invest in greater scale as the business grows?
• Qualitative information or context that’s too subtle to get from secondary sources
  • What are commercial landscapers’ top priorities for their suppliers?  What do current plant suppliers do well or poorly?  Are there innovative ways our nursery owner can run the business to create differentiation or cost advantage?

What it doesn’t accomplish

Primary research is a great qualitative tool, but it’s difficult to get reliable quantitative answers out of it.  Driving more quantitative results is possible but requires a significantly higher budget to conduct more interviews, cross-check results, and do additional analysis.

And forget about statistically significant findings.  In order to get valid statistics, you typically have to use a survey-based approach, where questions and answer choices are carefully planned in advance.  While that approach is useful in its own right, it doesn’t provide the opportunity to identify the most important trends on the fly and address them in subsequent interviews.  Primary research interviews tend to be somewhat free-form in order to address the highest-priority topics related to each interviewee’s experience.  Essentially, an interview-based approach trades off statistical significance for qualitative insight.  If statistical significance is an important requirement, use a survey instead.

So what are the implications?  In our nursery owner’s case, he should avoid setting prices or estimating costs solely based on primary research because it’s difficult to control for all the variables involved in prices that interviewees might have mentioned.  Similarly, you wouldn’t want to set growth targets based on a market growth rate determined through primary research.  While the estimate is likely to be in the right ballpark, it could be a few percentage points off in either direction.

Who do you talk to?

The list of people you might make calls to would depend on the project.  If you’re trying to understand how the market perceives your company and products, you would primarily contact current customers, prospects, and former customers.  You might also throw in some industry analysts and competitor salespeople.  If you’re examining distribution channels, you would primarily talk to salespeople, store managers, and so on.  For each project, you need to come up with a list of all the potential sources that might be relevant.

Sources of potential contacts run the gamut from LinkedIn, company sites, job boards, and conference proceedings to personal network contacts and referrals.  I’ll go into more detail on the process of finding contacts in a later post.

Who does it?

Most primary research projects are conducted by outside consultants rather than someone within the company.  There are a few good reasons for this:

• More objectivity on the part of interviewers
• Less temptation for interviewees to skew answers to suit their objectives, especially if the identity of the client and/or the purpose of the project are not disclosed
• Consultants more practiced and skilled at managing and conducting primary interviews

Time and budget

The downside to having an outside firm do your research is of course cost.  Projects range in scope but often run around 4-12 weeks in length and involve 30-100 interviews.  Depending on the scope, the price of an engagement often runs $30-150k.  Outliers could run up to $500k, $1 million, or more, depending on the scope of the work.  Larger projects could involve hundreds of interviews and substantial analysis of the results.  Top-tier consultants like McKinsey and Bain are of course priced at a premium as well compared to smaller firms.  On the lower end of the scale, individual contractors can often accomplish the same work with a much smaller budget.

For our nursery owner, the budget would likely be slim both based on the available budget, the fact that the research is restricted to one geography, and the size of the business opportunity being investigated.  An independent contractor might be able to complete the work for as little as $10-20k and provide very actionable information for planning the business expansion (or canceling it if it turns out to be unattractive).

So that’s primary (interview) research in a nutshell, based on my experience.  How have you seen it applied?  Any questions I should answer in further posts on the topic?

Next up: How to make your primary research  project successful

Profiles

People and company profiles are where the action is.  Here are my thoughts on what to look for:

• I tend to use LinkedIn to find fairly senior people in the company (VP and above), and I then add them to my general background searches.  You can often find much more specific search engine results by including the names of senior management, and LinkedIn can be a good way to go beyond the leadership teams named on most companies’ sites.
• Another useful piece of information is the titles and connections between people.  You can get pretty far constructing an org chart based on LinkedIn.
• Some people have started showing their blog and Twitter information on their profiles as well, so LinkedIn is a good jumping-off point for taking a look at those and seeing if the topics are relevant.
• If you’re planning on doing primary research, LinkedIn can be a great place to find sources.  You may want to try calling them rather than using LinkedIn’s introductions, which take forever and require a common contact.  The LinkedIn messages you get with a business subscription ($25, $50, or $500 a month, if you really want to break the bank) work fairly well, but the response rate is still somewhat lower than simply calling.
• In general, don’t expect to find any quantitative information.  A few users may mention the number of employees or amount of revenue for which they are responsible, but in general everyone has the expectation that LinkedIn is a public venue.  So don’t expect to find the same level of detail you would find on resume sites.
• LinkedIn is a good resource for employee counting on smaller or private companies, although clearly the number of employees on LinkedIn can only be directionally (consulting speak for not very accurately) associated with the total number.  This approach can be useful for market sizing or competitive intelligence.
• Using the basic search box and entering a company name will get you a mish-mash of results – employees, vendors, customers, consultants, and whatnot.  For more fine-tuned results, go to the advanced people search and enter the company name and search separately for current and “past but not current” employees (the latter avoids returning people who have past and current positions at the company).
• Company profiles are not typically very useful except for employee numbers and some basic statistics like the geographic breakdown of employees.  They’re worth a quick look, but that’s it.

Groups and answers

In a nutshell, I find most of the group discussions and answers posted on the site not very useful, and I avoid them unless I am scraping the bottom of the barrel for information.  The only real incentive people have to participate in groups or answers is either networking or to promote their company, so you will find that information is either biased towards a certain company or just not very useful.  LinkedIn just hasn’t quite figured out how to motivate people to provide anything particularly worth reading.  Your mileage may vary.  In fact, let me know if your experience is different.

Jobs

To be honest, I haven’t used the jobs feature much.  It seems like a good way to research hiring, but in my mind it basically duplicates more comprehensive resources like Indeed.  Again, I would love to hear any stories of getting value out of this stuff.

Overall takeaway

LinkedIn should definitely be one stop when you’re starting out a new research project, but don’t get your hopes up too much.  Focus on people and organizational structure since that’s the information that’s native to the LinkedIn application, not the other features that have sort of been bolted on.  If you’re pressed for time and organizational information isn’t of the essence, I’d skip it and go back to the basic background sources.

US Census – Statistics of US Businesses

The Statistics of US Businesses is a fairly exhaustive look at firms, locations, employment, and payroll by industry.  The data tend to be released with a 3-4 year lag (e.g., 2006 data became available in 2009), but for more industries this is not a big problem since the data will not have changed too drastically in that time.

NAICS (North American Industry Classification System) codes are used to categorize firms by industry.  The codes can be a bit confusing, but there is a reference.  The NAICS codes form a hierarchy, so for example Professional, Scientific, and Technical Services (54) includes Management Consulting Services (5416) and Scientific Research and Development Services (5417) among others, with more detailed levels below those.

One challenge using this data is that NAICS codes may not correspond directly to the industry you’re analyzing, in which case you will need to do some creative slicing and dicing.

There are also great geographical breakdowns available by state, metropolitan statistical area (MSA), or county.

While there is no time series data directly available, you can construct your own time series from the historical data.

US Census – Population

Everyone is familiar with the herculean efforts of the US Census to measure the population every 10 years.  This process results in detailed demographic information that can be quite useful for business analysis.  In addition, the Census provides annual estimates based on smaller population samples every year to bridge the gaps between the more accurate official counts every ten years.

There are a multitude of different ways to access this information, which can actually be quite confusing.  The best place to start is by looking at breakdowns by specific topics, which include variables like age, education, income, and occupation.

Bureau of Labor Statistics

The BLS, which is part of the Department of Labor, is the agency in charge of providing information on labor economics and statistics.  As the description suggests, the agency is a favorite of economists and public policy analysts, but it can also be a valuable market sizing resource, especially for consumer spending and time use.

The Consumer Expenditure Survey is the premier BLS resource in my opinion.  It tracks consumer spending by income distribution, other demographic information, and spending category.  It’s great information, but I must admit that formulating the right queries can be a chore.  I’m not an expert, but I’ll provide some examples in a later post.

The American Time Use Survey can also be useful for thinking about how people divide their time among various activities.  Unfortunately, the data is available either in summary PDF tables or in raw data files which work best with statistical software like SPSS or SAS, so it can be a bit difficult to manipulate as desired.

These sources offer a huge amount of data but as a result can be a bit painful to use at first.  I’ll discuss some more detailed examples shortly, but in the meantime, I’d be interested in your comments as to which of these sources you find useful and how you prefer to access them.

So what’s my beef with business news?  In a nutshell, most articles focus on short-term stock movements, earnings per share, quarterly numbers, and a variety of other data points that are essentially meaningless from a business analysis perspective.  Even more in-depth pieces tend to lack context and often dwell on controversy or slavish praise rather than the most salient points of business strategy.

Let’s take earnings per share (EPS) as a particular example.  I consider these numbers pretty much useless for my purposes, for a few reasons.  Earnings, or net income, do not necessarily indicate how well the company is operating.  Those numbers incorporate taxes, interest, and various accounting treatments that can obscure the true economic performance of a company.  Dividing earnings by the number of shares is even worse.  I’m left with a number that is completely arbitrary based on the number of shares outstanding, and it’s often very difficult to compare across quarters because share numbers change.  The company may have issued more shares, it may have done a stock split, or it could be buying back shares.  In an ideal world, I would like to know the free cash flow of the company, but in practice I typically look at operating income (i.e., before taxes, interest, and special items).  That gives me a much better idea of how the company is performing as a business, not considering how much they managed to write off in taxes or other arbitrary items.  M&A people often focus on EBITDA (a mouthful: earnings before interest, taxes, depreciation, and amortization), which somewhat more closely mirrors free cash flow, but I’m usually too lazy to back out the D and A.

The same is true of stock prices, which seem to make up the other half of the typical business section.  In the short term, stock price movements reveal nothing about a company’s health, but the business press devotes reams of writing to them.  Finance sites have a similar problem, with their focus on stock charts.  Why can’t I have a market capitalization chart instead of a stock price chart?  Even better, how about an enterprise value chart, including debt as well as equity?  If I really want to start dreaming, how about a chart where I can download a spreadsheet of the data if I want to?  Whatever analysis business journalists actually do, which sometimes doesn’t seem like much, is locked on their computers, and all I have to show for it is an article.  Give me the numbers.

The writing itself is problematic because of the constant search for a good headline or hook to grab readers.  I recently read an article claiming that Cisco was going to start competing with Google Apps.  Despite Cisco’s overwhelming focus on networking infrastructure, the article went through various contortions to highlight potential competition in SaaS applications some time down the road.  This is a market which currently makes up 0% of Cisco’s business and a tiny fraction of Google’s and is nothing but a distraction from a true understanding of Cisco’s current business and future plans.  It was painful to read.  In the end, many stories either devolve into manufactured controversy like this or into a puff piece on a company being covered.

More generally, nothing gets put in context.  Few articles appear to have the space (and few writers the time and energy) to contextualize the latest company announcement in the industry, discuss how it might play out in terms of company strengths and weaknesses, and come to a truly novel conclusion.  Also, to go back to grinding my earnings axe, the fact that earnings are up 50% this quarter means nothing unless we know how the year-ago quarter looked compared to the long-term trend.

Business magazines and especially trade publications do a better job, of course.  Trade publications in particular provide more in-depth analyses of their industries and specific companies.  Unfortunately, I’m pretty much a generalist, so I can’t necessarily spend the time to keep track of these resources.  I also tend to avoid subscribing to specific sources unless I need them for a current client project.

In the end, we get the information, like the government, that we deserve.  There’s simply no mass market for better business information, so in a way I can’t really hold the business press responsible for a certain striving for the lowest common denominator.  Consider the fact that the Wall Street Journal, since being purchased by News Corp and slowly evolving towards a business tabloid, is perhaps the only major US newspaper with increasing circulation.  In a way, this is a “it’s not you, it’s me” type of problem.  I’m simply out of synch with the type of content and writing that drives mass media markets, such as they are.  Depth and utility don’t sell (much).

However, the issue I find truly frustrating is the puzzling lack of blogs in this space.  Blogs by definition can go after more esoteric topics and niche audiences.  Financial markets, mergers & acquisitions, technology, public policy, and entrepreneurship all attract incisive blog writing that manages to combine thoughtful analysis with a good dose of wit and style.  Perhaps I’m missing something, but I see a huge gap in coverage of business strategy and analysis that some enterprising blogger should be filling.

I hope to see a business journalism upstart along the lines of Politico reinvent the genre.  In the meantime, if any editors or writers are reading this, please spare me another update on quarterly earnings.  Oh, and could a few of you writing brilliant disquisitions on the Greek debt crisis or the failure to effectively regulate Wall Street show some love for plain old microeconomic strategy?

Update:

• How’s this for fair?  I’ve also written a bit more on my issues with business blogging.