By the title, you might be wondering how this post could be in keeping with the stated goal of this blog: to be “A business resource for entrepreneurs and inventors. ” But I thought it might be useful to prompt a discussion around the definition of an “analyst.” Perhaps more accurately, I should say “types” of analysts. The reason this is important is that, if you have an idea or an invention, and you decide to seek outside investment to build a company around your idea, at some point in the conversation you will be asked the question, “How big is the market for your solution?” So who do you ask? Sorry: “Whom do you ask?” The only logical answer, in my opinion, is a “market analyst.” By the way, that’s what I was for eleven years, so you need to consider that, when you evaluate the credibility of my statements.

The first job of a market analyst is to create a taxonomy. My partner hates that term and equates it to industry-speak, but here’s a link to the most popular document at IDC, my former employer. The document, which is coordinated and authored by Dick Heiman, is nothing more and nothing less than a comprehensive taxonomy, which explains how IDC segments the software market into mutually-exclusive, collectively-exhaustive segments. You want to know how big a market is? Start with a good taxonomy that tells you what is and what is not included in the market.

The next step is to decide relevant measures: units, sales, and some product-specific segmentation, such as initial license fees and maintenance fees, in the case of software. Throw in another taxonomy for size of company, and another for geographic region, and another for vertical industry, and you’ve got yourself a pretty good start. Then the fun stuff starts. There are a number of machinations and estimations needed to resolve to a market view of the world. How do you count revenue, when the company that developed the product sold it:

  • Under an operating lease?
  • Under a finance lease?
  • Under a multi-year license?
  • As part of an multi-year outsourcing contract?
  • As part of a services engagement that lasted over a period of months?
  • As a rebranded product through an OEM?
  • Through a direct reseller?
  • Through a distributor?

You get the idea. And it’s not easy.

Financial analysts are very different from market analysts, though they may use market analysts’ data in forecasting company performance. A financial analyst is responsible for analyzing the current financial performance of companies in the context of accounting and financial reporting rules, and for forecasting the financial performance of companies and or collections of companies (sectors). Though related, this is very, very different from market analysis. One of the most obvious differences, even to the novice, is that expenses usually have a financial benefit as it relates to tax liabilities. The more the expenses, the lower the tax liability.

This brings me to the catalyst for today’s post, which was an article in the Boston Globe regarding TJX, their well-publicized security breach, and the Globe’s reporting that a market analyst estimated the breach could “cost” more than $1 Billion. I applaud Ross Kerber at The Globe, for providing alternate viewpoints and balancing market-analyst estimates of a $1 billion cost to TJX, with clarifying or alternate viewpoints from financial analysts, who pointed out the tax benefits of the potential cost (this isn’t a $1B hit to earnings), the offsetting insurance coverage, and other factors that might reduce the negative impact to earnings.

Personally, I would like to see more careful tagging of analysts as financial analysts or market analysts. Using the term “analyst” interchangeably for market and financial analysts is both wrong and harmful. And market analysts need to be careful to resist the desire to comment on the financial impact of events. Finally, if you are a start-up looking for funding and you quote an analyst, you’d be well-advised to know whether the analyst that you quote is a market analyst or a financial analyst.

No doubt, the experience by TJX will spur companies to re-evalute data security practices, and may lead to additional spending in security products down the road. From a PR standpoint, the event was “not good.” And from a market viewpoint, the event could spur growth. I’ll leave that to market analysts to estimate the impact. There will be substantial costs to TJX, no doubt. But leave it to financial analysts, not market analysts, to estimate the impact on current and future revenue and earnings at TJX.