2nd February 2004 "The matrix is just around the corner"

By AMIN RAJAN

On the back of a raging bull market in the 1990s, profits were an arithmetic certainty. Even major acquisitions could not force fund managers to integrate their operations across functions or geography. The bear market has changed all that. Even Amvescap, hitherto a strong believer in decentralisation, has had to reverse its enthusiasm.

Its original stance was based on the widely held view that size is the enemy of alpha. Hence, it made sense to run businesses in each country as separate profit and loss units - with their own front, mid and back office platforms all supported by their own overhead functions. But in the bear market, one in every three fund managers on both sides of the Atlantic has been forced to jettison this independence, with just as many likely to do so over the next three years, according to estimates produced by Create and KPMG, the accountancy firm.

Now, if the business model is about client focus, then the operating model is about minimising duplication in all parts of the value chain. That means concentrating core activities in marketing, distribution, investment and administration in fewer locations. Notably active in this context have been the global companies such as Merrill Lynch Investment Management, Morgan Stanley and UBS. Under a single brand, each is seeking to integrate corporate governance, merge investment platforms and centralise distribution.

In the process, each has created centres of excellence that draw together specialist expertise in fewer platforms and locations in order to deliver value propositions to clients on the one hand and cost synergies on the other. In part, they reflect the trend towards specialist mandates. Allianz Dresdner Asset Management has shied away from such a high degree of formal integration. Yet, it seeks to achieve the same results by retaining its established brands, leveraging its distribution channels and co-ordinating individual businesses.

This form of geographical integration is evident mainly among large players. There is another form which is emerging across the industry.

It is driven by banks and insurance companies, which own nine in every ten fund managers in Europe and two in every three in the US. They are forcing their subsidiaries to share services in generic functions such as finance, marketing and human resources. Again, their aim is to create centres of excellence that support core operations across the parent group.

Either way, complex matrix structures are emerging. Under them, firms are increasingly becoming organised along product lines and shared services that transcend national boundaries.

But there are problems with this business model. In many companies, the newly created multiple reporting lines are perceived as stifling innovation and delaying decisions. As the chief executive of a global firm put it: "Our matrix is too political. It's testing my ingenuity. To cope with it, I need a blend of strong business skills and a touch of Machiavellian diplomacy. I can't believe that this is the future."

There are three reasons why early experiences have not been favourable.

First, the job losses resulting from the integration have undermined staff morale to the point where many have become semi-detached and would leave their current employers if new opportunities arose elsewhere.

Second, front office staff find it hard to defer to the hierarchy and etiquette of these new structures. They value autonomy and space. Their gut instincts remain tuned to a boutique environment.

Third, these mini bureaucracies are perceived as a kiss of death for the strategic opportunism of the fund business. They require a leadership style akin to that of a lead trumpeter in a jazz band: strong on improvising and strong on influencing.

A large majority of fund managers have yet to develop this style. In at least three global houses, for example, initial attempts at creating a matrix organisation failed. It took a while for their top teams to recognise that redrawing the organogram does not change behaviour.

Yet, it would be naive to write off matrix structures as a cosmetic device to appease the parent companies. "They're for grown-up organisations, reflecting the increasing maturity of the fund management industry," observed one chief executive. They are a seed-bed for nurturing expertise that makes for successful alliances within and between businesses.

The structures also underline the point that widely admired national or global brands are exposed to huge reputational risks: for them, product excellence has to be underpinned by a high degree of process control. The best brands in the world - HSBC, Microsoft, GE and Nestle - have all managed to ignite entrepreneurial spirit in complex work environments through a strong culture of leadership. Their structures, too, had a painful gestation.

Amin Rajan is CEO of Create, a research consultancy specialising in new business models in financial services: amin.rajan@create-research.co.uk.