Why the optimal organizational form of the fund industry is changing
The fund industry is currently discussing artificial intelligence, data platforms and new regulatory requirements intensively. These topics are often considered in isolation.
In fact, they are an expression of the same development: companies do not organize themselves along organizational charts. They organize themselves along costs.
As long as analysis is expensive and coordination is favorable, division of labor is worthwhile. If analyses become cheaper and coordination more expensive, the optimal form of organization shifts.
It is precisely this development that can currently be observed in the fund industry.
For a long time, the division of labor was almost taken for granted. Specialized providers have emerged for each function. Asset managers, fund advisors, property managers, data providers, research houses and ESG specialists each took over part of the value chain.
This was no coincidence, because analysis was time-consuming. Information was scarce. Special knowledge was of great value.
The shift in the cost ratio
Today, the framework conditions are changing:
- Technology and regulation work in the same direction.
- Technology reduces the benefits of division of labor.
- Regulation increases the costs of the division of labor.
Many analytics services are becoming cheaper, faster, and more scalable. At the same time, regulation continues to accept division of labor, but accepts less and less ambiguity about responsibility.
The consequence can be summed up in three sentences:
- Analyzing becomes cheaper.
- Coordination is becoming more important.
- Responsibility is becoming scarcer.
The debate about artificial intelligence is often conducted as a technology debate. In fact, it is at least as much an organizational debate.
The shift is not only evident at the company level, but increasingly also in role profiles. Many organizations today are not primarily looking for additional analytical capacity. They are looking for people who can connect information, decisions and responsibilities.
In other words, the value shifts from analysis to coordination.
Four functions instead of many institutions
If you brutally simplify the fund industry, there are really only four things left.
- Analysis
- Decision
- Responsibility
- Execution
Each fund structure is ultimately only one organizational form for these four functions.
The crucial organizational question is which of these functions are organized separately and which are organized together.
The new organizational question
The past twenty years have been marked by an ever-increasing separation of these functions:
- Analysis has been specialized.
- Execution was outsourced.
- Decisions were distributed.
- Responsibility was secured organizationally.
Technology and regulation, on the other hand, operate in different ways in today’s world .
- The technology meets the analysis.
- Regulation falls on responsibility.
- This is precisely why the distribution of weight within the value chain is shifting.
- Analysis becomes a commodity.
- Responsibility becomes a scarce commodity.
As the scarcity of analysis decreases, so does the focus of value creation: In the future, the competitive advantage lies less in the analysis itself than in the ability to organize analysis, decision-making, responsibility and execution consistently.
This does not mean that division of labor will disappear. The recent trend in the industry towards portfolio outsourcing in real estate funds shows that specialisation will continue to play an important role in the future.
In the future, it will be less decisive whether a function is performed internally or externally. The decisive factor will be whether analysis, decision-making, responsibility and execution are organized consistently.
Technology and regulation therefore do not speak against the division of labor.
But they speak a very clear language against an unclear division of labor! The development outlined here will also affect organizational issues in other industries, where analysis will become cheaper and responsibility more important.
📌 Result:
- The future belongs neither to full integration nor to maximum outsourcing. It belongs to Organizational forms that skillfully combine responsibility and coordination.
- The past twenty years have been characterized by specialization. The next twenty years could be marked by the reorganization of this specialization.
- The fund industry will have to reorganize its division of labor.
