Imagine you work at a private equity firm and are considering investing in company X, a niche player in industry Y, operating in country Z. As part of the due diligence, your PE firm needs to better understand industry Y, the operating environment in country Z, and basically establish whether X would be a good investment. While some of this information can be gleaned from analyst research, your PE firm needs a nuanced perspective from a subject matter expert.
That’s where GLG comes in. GLG (i.e. Gerson Lehrman Group) is an expert network firm that allows its clients to tap into the expertise of GLG’s experts, which include consultants, lawyers, current and former C-suite executives, and former members of government. GLG’s experts are usually drawn to the high profile that being a GLG expert provides, as well as the opportunity to share their knowledge. As such, GLG is able to capitalize on some of the ego of its experts. Furthermore, the compensation for being a GLG expert is very rewarding. For instance, GLG’s experts have been known to command fees of over $1,000 an hour! GLG pays the experts directly, usually on a per consultation basis.
GLG is able to create substantial value for its clients, which include investors, consulting firms, and increasingly, corporations. Rather than spending time and resources searching for experts, clients can simply have a single point of contact with GLG, which has an extensive network of over 425,000 experts that can address clients’ questions. GLG essentially acts as a middleman by facilitating the contact between clients and experts. Clients benefit from the insights they are able to obtain from experts, which then helps to inform a particular investment decision or strategic shift etc.
Of course, this expertise comes at a price and a hefty one at that. GLG captures value by charging its clients either on a subscription basis or on a “pay per use” basis. In the latter model, GLG marks up its experts’ hourly rates in order to take its cut. GLG’s two pricing structures resulted in estimated revenues of over $300 million for the firm in 2014. Pretty lucrative.
There is, of course, a dark side to the expert network business. GLG has been at the center of a few controversies, highlighting some of the risks faced by expert networks. For instance, in 2006 GLG was one of the defendants in a case brought by Biovail, a pharmaceutical company that claimed that its share price had been manipulated. GLG, along with other defendants, was accused of paying two doctors to give false information to journalists that insinuated that Biovail had set up a program to bribe the doctors into prescribing a Biovail drug. GLG experts have also been implicated in insider trading investigations.
These events highlight the importance for GLG to police its own expert networks. GLG has an extensive compliance framework that tries to mitigate some of this risk by educating its experts on the type of information that they can and cannot share with GLG clients. Clients are also required to refrain from asking the experts any dubious questions that could reveal confidential information and therefore venture into the realm of insider trading. In some ways, GLG has very cleverly placed the onus for complying with insider trading laws on its clients and experts. However, there are questions regarding whether GLG has gone far enough, given that it does not for instance listen in on client calls in order to actively determine whether there has been an exchange of privileged information.
GLG’s continued growth could be curtailed by the emergence of strong competitor expert networks such as AlphaSights, Cognolink and Guidepoint, as well as other sites such as Quora. In addition, while perhaps it may have been difficult for client firms to find experts in 1998 when GLG was first established, these days the Internet provides different avenues for clients to find their own experts or do their own research. Nevertheless, GLG continues to be the reference firm for (crowd)sourcing expertise.