“Quality in a service or product is not what you put into it. It is what the customer gets out of it.” — Peter Drucker

Challenging established infrastructure

Most of the innovations studied in this five-part series have a relatively concrete quality to them. Industry professionals are familiar with the growing role of data, machine learning, platforms, and social networks in financial services. Business models are more abstract concepts, but they may represent the most profound upheaval of all. As we discussed in 2016’s The Upside of Disruption, firms such as Lyft, Uber, and Airbnb rethought and deconstructed the traditional value chains in their industries to create new technology-enabled business models centered on enlisting the capabilities, assets, or knowledge of others. Using the term Uberization, we showed how subversive startups had the potential to obliterate established infrastructure, leaving an army of individuals ready and willing to take up the slack by offering their services.

We are witnessing the atomization of business, where the technological latticework that connects all of us is now robust enough that specific tasks can be farmed out across a vast network. This is not to imply that vertically integrated incumbents are fated to be vaporized. Some will prove to be adept at orchestrating vast webs of consumers and the myriad others who service them. Nevertheless, the ongoing upheaval marks a major departure from business as usual across multiple industries. Targeted by companies including Uber, Lyft, DiDi (China) and Ola (India), taxis are the most visible casualties. They are hardly alone. The hospitality industry was similarly upended by Airbnb and others.

In order to accurately gauge how vulnerable the financial services industry is to this type of disruption, it helps to examine the pain that is being addressed. The ride-hailing business used to suffer from poor information flow, inconsistent experiences, questionable hygiene, high costs, uncertainty, and long waits. Hotels suffered from some of the same problems, with some also being seen as offering poor value for money or lacking any personality.

Any one of these vulnerabilities should theoretically attract ambitious new market entrants, but the taxi business was traditionally protected by a bevy of regulation while the hotel industry was shielded by its massive investments in real estate as well as by municipalities, counties, and states that extracted layers of tax on hotel rooms. Seemingly impenetrable, these markets were suddenly exposed by the connectivity provided by mobile apps. With that technology in place, it was simply a matter of some bold thinking to connect consumers with individuals in possession of underutilized resources in the form of cars and rooms.

Despite some bumps along the way, consumers have enjoyed lower prices, improved service, ease of use, personalized experiences, greater control, and a more thorough commitment to cleanliness. Life is simpler and less stressful when instead of hailing a random car you can expect a clean Uber at a specified time, driven by someone whose car and personal headshot photo you’ve seen. Similarly, life is more interesting when you can spend a long weekend in a historic downtown loft rather than a drab hotel in the suburbs.

A superior customer experience at a lower cost is a nifty trick, but this new business model goes further by benefiting suppliers who enjoy the low cost of entry, flexible hours, productive use of an already owned resource, and the ability to control their own brand to a certain degree. Surging share prices have validated what is expected to be the enduring appeal of these businesses: Even after a COVID-strained 2020 made even more challenging by regulatory scrutiny, management hiccups, and tax pressure, Uber and Airbnb both still sport market capitalizations in excess of $100 billion.1

It remains to be seen how many other sectors will be disrupted by similar models. Can the “network orchestrators”2 described in the Harvard Business Review spark the delivery of higher quality experiences at lower cost in industries such as financial services? Asset management, after all, is a more complex proposition than a car ride or a roof over one’s head. There are significant regulatory barriers, deeply rooted relationships, and the inertia inherent in the bulk of assets already being managed. The necessary skill sets are also varied and probably less fungible. Talent has always played a central role in asset management, and despite growing automation and the success of index-tracking portfolios, it remains an open question to what extent humans can successfully be replaced by technology or untethered from larger corporate entities.

In a 2013 study from Oxford University titled The Future of Employment: How Susceptible are Jobs to Computerization?,3 the authors make a number of prescient observations about the vulnerability of knowledge workers to more sophisticated technology increasingly capable of handling nuanced tasks. They concluded that despite the presence of many bottlenecks, “sophisticated algorithms could substitute for approximately 140 million full-time knowledge workers worldwide.”

There is no question that the issue of machines replacing people is important, but it can obscure the other revolution happening in parallel: The atomization of the labor force. Machines, after all, will certainly do more going forward, but people who can pull the right levers will succeed wherever they work. Michael Spence, winner of the Nobel Prize for economics, said “information technologies that automate, disintermediate, and reduce the costs of remoteness are also enabling the construction of increasingly complex and geographically diverse global supply chains and networks.”4 He goes on to observe that the move toward more atomized global supply chains causes more competition in sectors that previously enjoyed a degree of protection.

“The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.” — Adam Smith

Each of these trends alone represents a significant break from the past, but combined they promise a revolutionary approach to doing business. Employment is not a zero-sum game, and throughout human history, other jobs have often been created even as various forms of technology eliminated certain tasks. This means that while knowledge workers themselves are not necessarily in the line of fire, flexibility will become an even more becomes a question mark. The economics of work are likely to be radically reinvented and “the calculus changes when jobs are broken apart and atomized through Internet-enabled technologies. What is the future of work when micro-tasks are farmed out to disparate people and groups globally?”5

jobs are distributed in micro-tasks and farmed out to disparate groups

Recent developments

Criticism and regulation

Disruptive innovations are rarely greeted with universal acclaim. Any threat to the traditional ways of doing things typically attracts some scrutiny, but its potential for wholesale change means Uberization seems to attract more suspicion than most.

One of the primary criticisms leveled against this new business model involves the perceived mistreatment of workers who do not benefit from being classified as full-time employees. The issue of contract labor has been simmering for many years, but it came to a head in 2020 amid emerging stories of overworked and underpaid drivers without health insurance or retirement benefits. Charges of exploitation are countered with the observation that drivers work willingly and seem to enjoy many aspects of their job, not least of all the flexibility afforded by this arrangement.

Safety and standards are another topic of debate. Potential hurdles such as driver certification and rules governing the operation of hotels were largely sidestepped by startups.

Yet another development under the microscope is the ability of new business models to distort markets. The lure of substantially higher revenue promised by short-term rentals means the Airbnb phenomenon has driven up costs and severely constrained the stock of long-term residential rentals available in some locales, aggravating the affordable housing crisis already testing many communities worldwide.

All these concerns are exacerbated by the loss of tax and licensing revenue. Eager to revitalize their tax base and address the unease of (at least some) constituents, local jurisdictions have taken a variety of steps to mitigate the impact of new business models. Short-term rental companies have been challenged in many locales by statutes mandating minimum rental terms, growing regulatory requirements, and increased taxation. Ride-sharing startups have been shut out of some markets and were most recently threatened in California by Proposition 22, the most expensive initiative in the state’s history, which pitted companies like Uber and Lyft against a powerful alliance of politicians and labor groups.6

The resounding defeat of Prop 22 was widely viewed as validating these new business models, but efforts to regulate them will inevitably continue. A more recent ruling by the UK Supreme Court, for example, affirmed that Uber must treat drivers as workers rather than contractors, potentially threatening the growing array of businesses that depend on gig workers.7 Untangling the benefits and disadvantages will take time and probably result in a patchwork of new regulations, but the result will almost certainly be industries that look very different from their immediate predecessors and offer an upgraded customer experience.

COVID-19 changes everything

Mating the asset management sector with the gig economy seemed like the most speculative position we staked out five years ago, but COVID-19 has changed that. The pandemic accelerated everything, particularly with regard to the previously widespread assumption that businesses required physical offices, dedicated infrastructure, and permanent employees. When most of the world’s office workers suddenly started working via the cloud and VPNs, most financial firms experienced a surprisingly smooth transition. Widely available technical infrastructure means it is clearly possible to run complex businesses with geographically scattered workforces. Even better, eliminating commutes means that productivity can be improved.

The gig economy is more prominent than ever, with apps and social networks empowering individuals in myriad ways. Demand for drivers has slumped, but there has been a concurrent spike in demand for deliveries of everything from dinner to drugs. Demand is so strong that there is remarkable price elasticity: The cost of food delivery has risen from 5% to closer to 30% of the total price.8 Consumers adapt quickly. As they interact with increasingly sophisticated technology and platforms, people’s expectations shifted quickly, raising the baseline. Businesses cannot be complacent, at the risk of being displaced by a more innovative interloper.

Talent management challenges

The transition to remote work has not been entirely seamless. While some employees have thrived and become more productive, others have proven harder to motivate. Morale is inconsistent and can be challenging to shore up, although managers continue to search for novel ways to boost team spirit. Productivity gains can also be undermined by sub-optimal workspaces, the presence of children, or other distractions.9 Ideation and collaboration are clear challenges, and it requires creativity to exhibit leadership and effectively mentor younger employees from a home office. Mental health is being taken more seriously as the isolation associated with the pandemic drags on.

The nuts and bolts of talent management may be even more challenging. Recruiting has slowed in the face of reluctance to make remote hires, and compensation plans are being revisited as performance metrics are adapted to the new reality. Paid Time Off (PTO) policies are being revisited because homebound employees have nowhere to go. It is also not clear whether employees working from home should be compensated on par with their colleagues in the office. There doesn’t appear to be much correlation between overall productivity and working from home, but anecdotal evidence suggests a growing gulf between over- and under-achievers.

Central to this transition is the issue of culture.

There is widespread stoicism, but some companies are choosing to view the current environment as an opportunity to reexamine their business models. Some have concluded that they can significantly reduce overhead by reducing their physical footprint. Conversely, others are finding it necessary to expand their footprint in order to accommodate additional space between, and safety among, employees. Others have observed that their frustrated attempts to build more diverse workforces in situ are more attainable if workforces are geographically dispersed. Working from home may even prove to be a boon for efforts to integrate more neurodiverse individuals who offer unique skills but can find it challenging to function in traditional office environments. As meaningful distinctions between remote employees and independent contractors fade, others may go further by choosing to become something more akin to network orchestrators.

Central to this transition is the issue of culture, a prized and carefully guarded trait of most financial firms. As tasks are distributed more broadly, will culture continue to matter? Will mercenary attitudes undermine carefully cultivated collegiality? Can culture thrive in the absence of physical space? How important are conference rooms and cafeterias? How will a company’s ethos evolve in the absence of the proverbial water cooler?

Read Next Section
1 NYSE, January 22, 2021.
2 Megan Beck Fenley, Yoram (Jerry) Wind, Megan Beck, Barry Libert. “What Airbnb, Uber, and Alibaba Have in Common,” Harvard Business Review, November 20, 2014.
3 Carl Benedikt Frey and Michael A. Osborne, “The Future of Employment: How Susceptible are Jobs to Computerisation?” Oxford University, 2013.
4 Michael Spence, “Technology and the Employment Challenge,” Project Syndicate, January 15, 2013.
5 Stefanie Knoll and John Wihbey, “Computerization, atomization, crowdsourcing and the new economics of employment,” Journalist’s Resource, February 17, 2015.
6 Kate Conger, “Uber and Lyft Drivers in California Will Remain Contractors,” New York Times, November 7, 2020.
7 Andrew Woodman, “Uber’s UK ruling could have implications for gig economy startups,” Pitchbook, February 19, 2021.
8 Deepti Sharma, “The True Cost of Convenience,” Eater, January 22, 2021.
9 Nicholas A. Bloom, James Liang, John Roberts, Zhichun Jenny Ying, “Does Working from Home Work? Evidence from a Chinese Experiment,” Stanford Graduate School of Business working paper No. 3109, March 2013.

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