Sat here writing this article in one of London’s many coffee shops there are at least half a dozen others tapping away on their MacBooks. By 2020, it is estimated that 40 to 50 per cent of the global workforce will work for themselves, in a freelance or independent consultant capacity, collaborating with people on platforms to deliver a particular service or solution.
Welcome to the gig economy, or sharing economy, that has seemingly been defined overnight by the incredible success of Airbnb and Uber, the e-hailing company.
These two companies, in particular, have completely changed the natural order of things, building platform models where they neither own hotels nor taxis, preferring instead to put power in the hands of the individual to monetise the cars and properties that they own.
It has been an extraordinary shift in the way that people interact and make use of services. In a recent article in the Harvard Business Review, the authors coined the term ‘network orchestrator’ for companies that “create a network of peers in which the participants interact and share in the value creation.” Using S&P 500 index data going back to 1972, the authors found that compared to asset builders, service providers and technology creators, network orchestrators have enjoyed better growth rates and profit margins, among other performance metrics.
What does this mean, then for asset managers? How can they become network orchestrators and re-engineer their businesses? One way is to move away from the old model of vertical integration and start to think more horizontally.
“Using Uber as an example, asset managers might want to look at their business model and reinvent their value chain. This might not be easy for the biggest, most successful fund managers. They will likely have the best infrastructure and be able to add the next best technology solution to improve it, but even so, it’s necessary every now and then to sit down, and think, ‘Did that solution actually add value, and did it add value to something that the client cared about?’
“Uber didn’t create the demand for taxi hailing, they flipped the focus of the business model on its head and looked at it from the user’s perspective. If I’m a user, a consumer, how could I improve this? They totally rethought the value chain and made it better. In today’s gig economy, being vertically integrated is no longer necessarily an advantage,” says Ross Ellis, (pictured), Vice President and Managing Director of the Knowledge Partnership in the Investment Manager Services division at SEI.
The network orchestrator is one who has full confidence in their business model and who is not scared to outsource key functions that might once have been viewed as central to their value proposition. This is what the gig economy is fostering. Take SEI’s operational platform. It uses a network of talent, infrastructure and technology to bring value to its clients. More often than not, these clients don’t care if the fund administration engine is SEI’s or not; they just want it done, and done right.
Specialised turnkey asset management platforms have gained popularity with investment managers. Take the mutual fund series trust solution that SEI, UMB Fund Services and others, provide. Bringing a mutual fund to market could not be easier. By outsourcing everything to SEI, for example, the fund manager does not have to worry about any part of the value chain other than portfolio management, and raising assets. The turnkey operator sits in the centre, bringing together the fund administrator, custodian, transfer agent and other key functions, acting as the network orchestrator.
That is how you move from vertical to horizontal integration – and let others do core tasks on your behalf.
Amazon have now increasingly started to do the same with Amazon Web Services, using their industrial-grade IT cloud architecture to enable hedge funds and any other business venture, to build entrepreneurial businesses without the hassle. Just as Uber gives you a personalised taxi service, Amazon gives you a cloud environment to run your hedge fund with the cyber security protection one would struggle to find in a billion dollar hedge fund.
Uber has thrown down the gauntlet. Inertia will be the enemy to the perceived biggest and best asset managers struggling with the Innovator’s Dilemma on whether to strip back the value chain (or not).
“Look at pharmaceuticals. They are now outsourcing research,” says Ellis. “That used to be their core IP, but there is now a mindset developing along the lines of, ‘This might involve 15 years of extensive research, I’m going to buy the research from someone that is already five years down the line’. They are paying for others’ research and using the power of their distribution and marketing. In a similar way this is how mutual funds platforms like Schwab OneSource work.”
Whether it is outsourcing research, outsourcing fund distribution or taxi drivers, the network model approach is becoming a key feature of the gig economy.
In some respects, European fund managers are ahead of their US counterparts in that they have, for decades, happily outsourced their fund administration and accounting to third party administrators. What Uberisation does is present a challenge (or opportunity depending on your viewpoint) for how asset managers can take that idea and run with it; to become their own network orchestrator.
As for how asset managers might shift more of their value chain to others, one way could be to better harness a global pool of talent and move away from thinking they have to hire local (or national) talent to work across their offices.
“At some point in the future, it might be conceivable that asset management groups don’t even do the asset management. Maybe they hire external talent to run the money; they could act as the head of the orchestra and simply hire the portfolio managers. At the end of the day, under this scenario, it is about using technology and talent to deliver an investment outcome that the investor wants without the “asset manager” having to actually do anything themselves,” posits Ellis.
A good example of this is New York-based Quantopian, a platform that over the last five years has built a global network of more than 85,000 members in the pursuit of creating institutional-quality investment algorithms. Recently, Steve Cohen’s venture capital arm, Point72 Ventures, LLC entered into an agreement with Quantopian to manage up to USD250 million of investment capital. The plan is for the best algorithms on Quantopian to manage a portion of Point72’s assets, with each author receiving a royalty based on their strategy’s performance.
“Quantopian has become a magnet for talented people who are really passionate about quantitative finance. As we’ve gotten to critical mass, people in the funds industry have started to take notice and those ripples made their way to Steve Cohen. He is very articulate about the challenges that the fund industry faces in relation to finding talent,” says Quantopian’s CEO, John “Fawce” Fawcett.
As mentioned earlier, more people want to work for themselves. More than 53 million Americans work as freelancers and independent contractors; that’s one third of its total workforce. This is a trend that will continue in the gig economy and will therefore require asset managers to re-think the way they access and harness talent.
As SEI points out in their white paper, “There’s no doubt that a ‘distributed’ workforce can significantly cut labour costs, which often equate to as much as 40 per cent to 50 per cent of total asset management revenues.”
Passive funds are becoming a direct threat to active managers and if one considers the rise of robo-advisers, the implication is clear: investors can simply allocate to algorithms based on pre-defined investment preferences and have a direct link to managing their portfolio with no intermediary needed.
But that doesn’t mean the end of active management. There are innovative platforms like Instavest, a social media platform on which users can share stock analyses and create custom feeds of investment ideas, which have the potential of subverting the classic hedge fund model.
There are huge opportunities for asset managers to become network orchestrators and extend their lateral capabilities through greater outsourcing, from distribution to research to sourcing talent.
“Start with the fundamental questions: What are we really good at? What is it that investors really want? Make that your core business, then leverage the networks for everything else,” concludes Ellis.