Research is Sold, It Is Not Bought – Part 1


New York, NY – A recurring theme that we at Integrity Research have communicated over the past seven years has been that all investment research — whether it originates from sell-side investment banks or from the growing ranks of independent research firms — is sold, it is not bought.  We have never believed in the “Field of Dreams” model for research,  that is build it and they will come. 

Over the past nine months, a number of independent research firms have come to a similar realization as they have tried to rebuild their businesses in the wake of the market turmoil in 2008 and 2009.  Consequently, many indies have recently been looking for ways to solve their sales and distribution problems.  The following blog discusses this topic in more details.

Building Your Own Research Sales Staff

There are two obvious ways that research firms can deal with their research sales issues — buy it or build it themselves.  Unfortunately, most independent research firms that are looking to address this issue is, by definition, either small, or they have experienced a deterioration in their business that they are trying to reverse.  Consequently, building their own research sales capability seems to be out of the question. 

We think that research firms should think about this option more seriously for a number of reasons.  First, is economics.  Our analysis indicates that over the first three years, hiring and supporting a single research sales person could cost a research firm $200,000 to $300,000 per year.  Of course, hiring a larger team would cost multiples of this total.

On a cumulative basis, this investment represents between 30% to 80% of the cumulative revenue this salesperson should be able to bring in over this period.  However, over the first five years, the cumulative cost of a salesperson should drop to a much more reasonable 20% of the revenue that he or she has generated.  

Another reason we think that independent research firms should consider building their own research sales staff is dedication and focus.  An employee is able to dedicate themselves completely to selling the firm’s research services, and if their compensation plan is structured appropriately, their primary income is derived from helping the firm grow the business. 

Unfortunately, many independent research firms cannot afford the $200,000 to $300,000 per year per salesperson that it costs to hire their own staff.  In addition, some of the founders of research businesses don’t have the expertise or the inclination to hire and manage their own sales staff — and believe me it takes considerable management to maximize the return from a sales force.  Consequently, many independent research firms are left with the option of outsourcing their sales function to outside parties.

Buying or Outsourcing Research Sales

There are three different types of firms that typically provide external research sales capabilities to firms looking to outsource the sales of their research products to the buy-side.  This includes investment banks, agency brokers, and independent sales agents.  We will discuss more about the specific strengths and weaknesses of each of these types of players in next week’s blog article on this topic.

The benefit of most external research sales partners is that the research firm does not have to invest the $200,000 to $300,000 per year per salesperson that they would have to spend to build their own staffs.  Instead, the research firm pays a sales commission on each dollar of revenue they have generated for the research firm. 

In addition, most external research sales partners have considerable expertise in selling independent research as this is all they do.  Most research firms don’t have this skill.  Also, most external research sales partners have developed customer relationships they can leverage to market new research products to.  Another value that some third-party sales partners bring to independent research providers is related to product development, positioning, and pricing.

The primary negative of external research sales partners is that, over time, the sales commission they receive can greatly exceed the amount a research firm would have paid out to their own sales staff.  This is particularly the case the higher a commission rate the third-party receives, or the length of time the third-party receives this commission.  Most third-party sales partners charge between 25% to 50% of the revenue they generate, for a period ranging from 3 years to the life of the client.  Thus, over 5 years, a firm that charges 30% for the life of a contract would be considerably more expense than the 20% effective rate that firm would pay by hiring their own salesperson.

Another negative of many third-party research sales partners is that they are not terribly committed to or focused on the success of any one research firm.  They naturally focus on selling whatever sells.  This is particularly a problem with sales agents that market a large number of research products.  Often sales agents lose interest in the research firms they have been selling for awhile in comparison to new more exciting research products.  Unfortunately,  research firms take a large risk if they rely on distribution partners that are not completely committed to their growth.

Next week we will discuss the strengths and weaknesses of specific types of third-party research sales partners, and the factors that are critical in finding a good partner.


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