Expert Networks and Financial Turmoil

New York, NY – In recent months, Integrity Research has written a number of articles discussing how the current turmoil in the financial markets is likely to impact various segments of the investment research industry, including the sell-side, buy-side, and the ranks of the independents.  As we have mentioned, the plunge in the stock market last year, huge outflows from both mutual funds and hedge funds, and the resulting layoffs at both sell-side and buy-side firms could have a huge negative impact on the research business.  However, these factors are likely to be exacerbated by the shutdown of many hedge funds in 2008 and 2009, as well as the plunge in equity commissions in 2009.

One of the fastest growing sectors of the research industry in recent years has been the expert network business, as investors have become convinced that access to primary sources of research are instrument in getting an informational edge.  This is consistent with the fact that the number of expert network providers has surged by close to 370% since 2000 – from 9 firms to 42 firms today.  Of course, this rise in the number of firms belies the actual concentration of revenues, as the top five firms generates close to 90% of all sales.

However, it is highly likely that even the high flying expert network segment will not be immune to the impact of falling equity commissions, shuttered hedge funds, and buy-side layoffs.  One industry expert who has definite views on this topic is Jonathan Glick, former Global Director of Research Operations for Gerson Lehrman Group.  Mr. Glick left GLG last year and has since embarked on various entrepreneurial endeavors.  Jonathan will be writing occasionally on ResearchWatch on various financial technology issues.  The following is an editorial written by Mr. Glick on how expert networks might fare in the current market turmoil.      

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Have a tough question? Ask someone who knows the answer.

It sounds simple enough, but it was only in the past decade that an innovative new business model — the expert network — emerged to help researchers and analysts with specific questions find and learn from experts with highly specialized experience and knowledge.

The earliest versions of expert networks, launched by pioneers Gerson Lehrman Group and Leerink Swann, were focused on helping hedge funds better understand health sciences by connecting them with leading scientists and practitioners. These services were simple to use: after understanding the client’s specific question, a “research manager” would use workflow technology to screen potential experts for availability, conflicts and knowledge, and then directly connect the best ‘matches’ with the client, usually for a phone call.  Within days, and sometimes hours, a client would have engaged with a diverse set of deeply knowledgeable contacts.  Since these experts were often the same contacts that market research and consulting firms would tap for expert data and opinion inputs, many aggressive clients favorably viewed this model as disrupting and disintermediating those traditional firms, to their benefit in time and cost saved.

The model quickly spread to other subject areas (technology, energy, politics), other knowledge-hungry customer segments (mutual funds, private equity, corporate strategy departments), and across geographic boundaries.  Early leader Gerson Lehrman Group leapt ahead to become the dominant ‘supermarket of expertise,’ while dozens of small boutiques popped up, promising higher-touch service and more specialized networks. Every year, use of expert networks in the increasingly competitive investment community continued to grow as (and perhaps because) the quality and relevance of traditional sell-side research declined.  To those working in expert networks, there was a strong sense that this faster, cheaper, technology-enabled model might just be the future of research.

So what happens to expert networks now, as investment banks, institutional investors, and corporations struggle in the wake of one of the most severe market and economic downturns in generations?  We can certainly expect them to suffer as their core market, investment and strategy professionals, face evaporating budgets, but how badly?

One theory argues that in turbulent times research consumers will retreat to the traditional ‘synthesized’ market research and professional consulting models. The notion is that premium-branded third-party perspectives are increasingly valuable in uncertain times, especially if those traditional firms are forced to reduce their rates.

The counter-argument is that customers faced with a need to cut costs will accelerate their use of expert networks, favoring its micro-chunked cost structure and more flexible engagement model.  Adherents point to the analogous success of Web-based aggregators (e.g. Amazon.com) and other low-cost models during lean times. They argue that this protracted downturn may be precisely the tipping point when customers definitively abandoned the classic research firm, inadvertently echoing consumer media pundits predicting the imminent demise of the traditional editorial model.

For their part, many large customers including the largest mutual funds, hedge funds and consulting firms have begun talking more seriously about building their own proprietary networks. Whether that would actually be more cost-efficient than negotiating even cheaper arrangements with existing networks is unclear. To make matters more confusing still, traditional professional services firms have formed strategic relationships with expert networks; with some now claiming that they have built their own expert networks.

One positive implication of this challenging period is that it may force expert networks to address some of the lingering issues that have tugged at the model since its inception.

• First of these issues is the lack of an industry-wide compliance standard that clearly outlines what sort of people should be allowed to become experts. Should current or recent employees of companies be allowed to participate, and if so, on what terms? Gerson Lehrman Group has led the way on this issue, but the rest of the industry lags.
• Second is the pressing need for data standards. Clients have large investments in internal contact and content management systems and need a simple framework for ingesting and sharing expert profiles throughout the enterprise. Since most clients use several expert networks, the current information management problem is acute, but it can be solved.
• Lastly, there is a strong need for some form of background checking of experts, at least of the best-utilized contacts. At present most networks rely on the expert to provide truthful educational, credential and professional information. In a model where information-seeker and information-provider will rarely meet face to face, fraud is too easy and therefore too likely.

Over the past decade, expert networks have grown from a niche service to become an intriguing alternative, compliment and partner to traditional market research and consulting firms.  Faced with a drastic economic downturn in their core market, they hurtle towards their first major challenge.  Can they position themselves as the more cost-effective approach to research, and gain market share over traditional providers?

Are expert network enthusiasts correct in predicting that this recession will be remembered as the moment when the ‘disruptive’ expert network model became the dominant method for obtaining specialized expertise within the investment and strategy community?

The most likely outcome is a more diverse and interconnected ecosystem of providers: expert networks working with each other and new third-party services to elevate their young industry through prudent standards, and working with traditional providers to offer clients with richer services on even better terms.

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Jonathan Glick
Edge Ideas
212-630-5080
10 E. 53rd Street, 31st Floor
New York, NY 10022