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July 19, 1999

Decision Support:
Value For Your Advice Dollar

When used efficiently, the value of knowledge received from advisory services is far more than the cost of the knowledge

By Gideon I. Gartner

Gideon I. Gartner 've recently fielded questions on the apparent slowdown in the growth rate of the major IT information providers. One questioner called it possible "market saturation." A bit of research to quantify the claim showed that 1998 represented the first decline in net orders of the leading providers in recent history. Aggregate net orders of Forrester Research, Gartner Group, Giga Group, and Meta Group declined 12% in 1998. Orders went from $66 million in 1994 to a whopping $165 million in 1997, but then declined to $146 million in 1998. The question is: Are we seeing a drop in the growth rate of fundamental demand for "parcels of usable knowledge," or is the growth rate decline explained by a drop (if not collapse) in the inherent price per parcel of knowledge? Is the one-year decline just an aberration, or, if it's a combination of the above, which dominates?

In the mainframe days, you could apply a trivial arithmetic formula to the issue of demand, pricing, and the resulting growth in costs to the user and revenue to the vendor. This formula was millions of instructions per second times cost (or price) per Mips equals total cost (or total revenue). This was then applied to the PC and other hardware industry segments. When Giga was formed, we played with the formula to see if it could explain the economics of the information industry. It did--although accurately measuring the value of the independent variables is difficult in this early stage of the information industry's evolution.

So, say IT information customers are paying $40,000 annually to a provider and receive 400 information parcels of decision-support knowledge in a year. The formula shows that the cost per parcel received is 40,000/400, or $100. That's the price/performance ratio analogous to dollars per Mips or dollars per megabyte in the hardware arena.

Note however, that if we plug in the total number of information parcels that are used by the customer--instead of the number shipped--the cost per parcel goes up substantially. If only 100 units of the 400 available are used, then the unit price goes up to $400. This observation should encourage clients to make more efficient use of the knowledge they get.

The formula might also be used to calculate ratios between points in time. Say the price paid to the information provider increases to $50,000 (vs. $40,000 in the prior year, a ratio of 1.25), and the number of parcels received from the vendor grows to 440 (vs. 400, a ratio of 1.1). Dividing 1.25 by 1.1, one gets growth in the price per parcel of almost 14%. What's going on here--the price per parcel increased?

Yes. Unlike the hardware business, in which one is conditioned to expect improvements in price/performance, we see a decline. This is what's been happening the past 10 years. But different business models among information providers lead inexorably to different trend lines in price/performance. Some models tend to lead to deterioration in price/performance, while more recent innovations tend to lead to price/performance improvements. It remains to be seen whether overall pricing will be rationalized by the recent increase in competition.

When used efficiently, the inherent value of knowledge can far exceed the cost. Examples of the components of value for users include asset management, strategic training, and second opinions. Attributing some value to each component is one method of estimating the total potential value received.

Earlier in my career, I hypothesized that such value should exceed five times the cost. But this may have been self-serving, and applicable only to the most enlightened users. Perhaps a more realistic expected-ratio range is two to four times cost. But what if the ratio approaches or even falls short of one-time cost? Then either value received is too low, pricing is too high, or both. With information spending at unprecedented levels, these issues have real ramifications to all consumers of information services.

Gideon I. Gartner is chairman and founder of Giga Information Group. He can be reached at decisionsupport@cmp.com.

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