New business networks are unlocking the ability for companies to extend
processes and insights broadly and affordably to customers, suppliers,
and other partners. As a result, data-savvy B2B participants in these networks are better able to engage with their communities in new and innovative ways.
The latest
BriefingsDirect discussion therefore explores the role and impact of
business networks,
the often virtual assemblages of interrelated business services,
processes, and data that are transforming how companies and consumers
conduct commerce.
We examine the ways that open markets and communities are
rapidly becoming business platforms. And we'll see how today's consumer
business models -- exemplified by
Amazon,
Uber, and
Airbnb -- are extending to
business-to-business (B2B)
commerce, allowing buyers and sellers to find and know each other
openly -- and accelerate B2B transactions and commerce efficiencies.
To
learn more about the trends that are making business networks more
powerful and more important than ever, BriefingsDirect recently sat down with
Marshall Van Alstyne,
Professor at
Boston University School of Management and Research
Scientist at the
MIT Center for Digital Business, and also
Tim Minahan, Chief Marketing Officer SAP Cloud and Line of Business. The panel is moderated by me,
Dana Gardner, Principal Analyst at
Interarbor Solutions.
Here are some excerpts:
Gardner:
Professor Van Alstyne, this is a tricky time for companies. It seems
that they want to retain what works, the business models that have been
tried and proven for them. They like having big margins, of course, but
in order to grow and to be part of the future they need to expose
themselves to these networks, take some risks, maybe lose margin in the
process, but perhaps get scale and automation as a payback.
How
do you view that? How do you see companies adjusting? Is this a
cultural thing where some companies will take this plunge and others
don't? It does seem to be a perilous time for companies. I hope they're
not just freezing in the headlights.
Van Alstyne:
It’s a great question. There are a couple of elements and they vary
based on the where the company is currently. If it’s a relatively virgin
market, then it’s fairly straightforward for them to invite others in,
create the platform, and expand out in that direction. If it’s an
existing market for them, they really have to worry about managing the
cannibalization question.
I know SAP has also had a very interesting example of that, as you
move from on-premise services to
hosted services. They're doing a nice job of managing that migration. It’s a
little bit tricky in terms of how much you expand the market, but you
really need to. You have to realize that the scale, the innovation, the
customer engagement happens on these business platforms. Long-term, one
really doesn't have a choice.
Platforms vs. products
One
of the
arguments that we typically make is that even weak platforms
tend to beat very strong products. You can look at any number of
examples, whether you take a look at the
Blackberry, the
Sony Personal PlayStation gaming device, or the
Garmin device for
GPS.
All
of these functions are effectively absorbed into the platform. If you
manage a platform ecosystem, where third parties can add value on your
behalf, you'll grow faster. The platforms almost always will be
products. So, in the long-term, companies don't have a choice. They have
to move in this direction.
Gardner: So if it’s
inevitable that you have to change, it sounds to me from what I've seen
at SAP, that they're recognizing this. They're dealing with it
themselves as a company, but they're trying to put together a safe path
for enterprises to expand into the
networked economy.
At the same time, they can have trusted partners for automating a lot
of the behind-the-scenes activity and allowing them to still function
within their business verticals to know what their intellectual property
is and to extend to it.
Let’s go back to Tim. Am I
reading that right, Tim, that SAP is trying to be, in a sense, the
arbiter between risk and exploration when it comes to the networked
economy?
Minahan: That’s an accurate depiction, Dana. Think about our personal lives. Whether we're engaging family and friends on
Facebook,
buying a book or a blender on Amazon, or trying to capture
transportation services to get downtown during rush hour on Uber, we're
experiencing the scale and simplicity and convenience of personal
networks.
At SAP, we believe that solving this
inter-enterprise collaboration challenge is one of the biggest
opportunities of our era.
We run our daily lives on them now.
Unfortunately the business world traditionally has been optimized within
the four walls of the enterprise. Companies have invested billions over
the past 20 to 30 years in
re-engineering their processes and investing
in systems to really automate those internal processes and information
flows.
They have created what have become islands of
efficiency that work very well, and continue to work well, for those
that are highly vertically integrated, but very few are, as we talked
about earlier.
At SAP, we believe that solving this
inter-enterprise collaboration challenge is one of the biggest
opportunities of our era. We feel that we're well positioned to do that
and have been assembling some of these business networks. We've had the
acquisition of Ariba and
Fieldglass in the area of contingent workforce and, with
Concur, now in
the area of travel and expense.
We're
complementing that with network extensions of our own, both through the
addition of things like the product sustainability network, which
leverages the existing connections within the network to help companies
better perform tracing and tracking of their products, and the
financial services network, which really facilitates and aids payment.
What
we're looking at is an opportunity to extend existing IT infrastructure
and business process outside the four walls of the enterprise in the
most scalable and efficient way possible, no matter what systems a
particular company or their trading partners use, all through a single
integration point.
Integration adapters
Think
about Amazon in your personal lives. You don’t worry about integrating
tier trading partners or how you are going to sell that. Amazon takes
care of that for you. That’s the same metaphor that we're attempting to
carry through into the business world by providing single standard
integration adapters or on-ramps to the network that allow you to manage
this virtual enterprise in a highly transparent and highly efficient
manner.
Gardner:
Professor Van Alstyne, we've seen a great deal of
network effects in business over the past decades. Yet nowadays, the confluence of
cloud,
mobile, and
social
and an emphasis on data-driven business processes seems to be
accelerating and empowering these shifts. Some organizations call this
the
Third Platform.
How does your research define business platforms, and how are the
impacts from these Third Platform technology advancements newly
impacting businesses?
Van Alstyne: I emphasize the network effect as one of the driving forces. Indeed, if we can create a positive
feedback loop throughout the network effects, that’s where you see the efficiency in the scale happening so quickly.
In terms of a definition, we focus on two elements of the platform. The first is an
open architecture that third parties can build upon.
The second is the
governance
rules. How is it that people can participate? Why would they
participate? How do you share the profits? How do you resolve conflict?
You think about it as a nexus of rules and architecture. If you can put
those two things together, you can probably grow an ecosystem that helps
to foster and stimulate some of those network effects.
Gardner: Tim Minahan,
SAP has been a pioneer inside the four walls of the enterprise over the years with
enterprise resource planning (ERP)
and other business applications. Now, it seems as if you're recognizing
what Professor Van Alstyne has been describing with these network
effects and extending your value and business insight and processes
across multiple boundaries, outside the four walls of any given
enterprise into entire ecosystems.
Next productivity wave
Minahan: We truly believe that the next wave of
business productivity is not going to come just within enterprises, but
between them. Forty years ago, when SAP arguably invented the whole
concept of
ERP, businesses were operating much, much differently.
We
showed them a new way to automate their internal information and
process flows, but they were organized in a much more vertically
oriented fashion. The employees would graduate from college, spend 40
years with the company, get the gold watch, and retire.
Companies
owned most of their infrastructure, their manufacturing facilities,
their inventory, their shipping fleets, but certainly this is not your
father's business environment anymore. In part, this was accelerated by
the recession that we're still emerging from. Companies are less
vertically integrated than they were in the past.
They've
adopted more variable operating models. They've outsourced everything
from manufacturing to customer service, and they need to reach and
compete with companies across the street and on the other side of the
world. And this is creating new opportunities, as well as new
challenges, for businesses today, and it’s increasing demands and
expectations on individual functions of their teams.
You're seeing it everywhere. If you have an
iPhone, look on the back. It’s designed in California by
Apple,
but it's built, shipped, and serviced by someone else entirely. Even
beyond the physical device, Apple makes most of its revenue from
network-based services.
iTunes relies heavily on an ecosystem of mobile carriers and artists and studios.
Now,
we're seeing this move into the business world, in which companies need
to rapidly organize this virtual enterprise, all these resources of
employees, manufacturing capacity, logistics, delivery capacity, and
customer service to take advantage of certain market opportunity. Or,
they need to adapt very quickly to certain market changes, and the only
real way to do that is through a digitally connected network of
partners, customers, and supply chain.
Gardner: As
the very nature of corporations change, it's really about relationships,
data, and feedback loops. The data-driven organization, is it really
about that. Are we losing something, are we gaining something, or both,
Tim, as we seek this new definition of a corporation?
Minahan: We're entering an age
where the borders between enterprises are being taken down. Companies
are moving toward a model where they're managing pools of resources,
whether that’s pools of talent around expertise, as you just indicated
Dana.
A third of a typical workforce is no longer on the company payroll. It's contingent,
statement of work (SOW)
workers. In some industries, it’s already more than half. This is
fastest growing part of the workforce. HR executives, and I talk with
many of them, are beginning to rethink what constitutes the workforce
and are looking at pools of talent.
A third of a typical workforce is no longer on the company payroll. It's contingent, statement of work (SOW)
workers.
They need to
understand where the skill sets lie, not necessarily what roles someone
plays today, what skills they have had in the past and be able to, when a
particular opportunity or project arises, assemble that expertise very
quickly to address that particular project, and disassemble them just as
fast, but retain the knowledge within the enterprise for the next time
that comes up.
The same thing is true if you're
organizing a supply chain and need to be able to serve a new market like
China. Where do you put your manufacturing? How do you address
distribution, value-added taxes, and customer support. Traditionally,
the model would have been to go and establish your own manufacturing
facilities, build your own local agents, but no longer.
Now
you can quickly assemble and address, or test, a particular market or
test a particular product in any given market. Should it work, scale it
up. Should it not, scale it down and move on. Networks allow you to
achieve this.
I wanted to go back to something that
Professor Van Alstyne said that's critically important. I fully agree
that the networks go through phases. The first phase is to connect all
the various parties, whether they be people, businesses, merchants,
banks or all of the above.
The second part is to
automate their existing processes. What gets really exciting, once
you've automated these processes, once you have these parties
collaborating or transacting its scale, are the new insights and
entirely new services you could enable.
Transactional information
Once
you have these millions of companies or people transacting at scale,
you can see the transactional or relationship information. It could be
the generated content that helps all members of the community make more
informed decisions whether it's about buying or whether it’s about,
should I bid on a particular bit of business as a seller or as a bank,
mitigating risk in lending to allow them to understated who the buyer
is, who the seller is and what their traditional history is.
That
is the ultimate big data opportunity, when you have these networks
operating at scale. We're beginning to deliver this networked
intelligence in the form of insight services to help our members of the
communities make important buying, selling, and financing decisions in
ways that they couldn’t before.
Van Alstyne:
Dana, let me jump in for a second. One of the things that Tim just said
is quite important. One of the most interesting elements of the platform
is the extent for new business services and new products to emerge. One
of the Silicon Valley descriptions of the platform is that you know you
have one when your community takes it in a direction you didn't expect.
One of the most interesting elements of the platform
is the extent for new business services and new products to emerge.
You need to have made it possible for that. The
underlying architecture needs the support the ability to develop
something new that wasn't expected, but that’s one of the ways the
platform adapts to create new value.
The communities
start to add new value and new services in ways that the platform meets
the needs of the ecosystem, so it’s this ability to turn out new sources
of value based on the underlying architecture. This is one of the key
distinctions of platforms that really do add value.
Minahan:
I totally agree with that. We've only just entered it into this
networked economy or networked era. One of the most exciting things is
that it allows you to begin to entirely rethink traditional business
models that were organized in an era where, to use an economic term,
transaction costs were extremely high.
Look at Uber,
what Uber has done, and the challenges we're now seeing around
challenging the traditional medallion livery service. That was organized
out of a very real concern around safety and issues, but over time,
that model matured and unfortunately got very costly.
What
you saw were the medallions being aggregated in the hands of a small
few who could afford them. That obviously had some implications on the
level of service and cost of service to employers. Now we've removed all
of the transaction costs and could add up efficiently match demand --
i.e. you as the traveler -- and supply literally anyone that is a
card-carrying member of the Uber service.
That’s an
entirely new business model that is fundamentally challenging hundreds
of old rules and thoughts about what it means to hail a cab. So let me
toss in one additional principle that’s often used for design. I'm
thinking exactly of the Uber example.
One of the best
ways to view a platform is that you have the best platform and the
transaction cost are the lowest. If you can get those lowest
transactions, you're going to get more business taking place on that
platform. So do whatever you can to see if you can lower those
transaction costs to get the business going.
Looking for signs
Gardner: So we've taken a look at the inevitability of these networks. We've seen them already very prominent in the
business to consumer (B2C)
space, consumer activities, and commerce. We’ve recognized that
openness is important. So we have innovation. We also recognized the
importance of governance and management.
So how do we
know when we've done this correctly? Is there a sign? Professor Alstyne,
you've mentioned a few that describe powerful and successful networks.
Do enterprises have to view themselves differently? Do they need to look
at participants in their network as a metric rather than just margin
and net in gross revenues and incomes? Is there a way to be successful?
Van Alstyne:
Platform businesses behave differently than traditional businesses.
Silicon Valley had been using lot of these metrics for engagement. How
many new users do you get, and how engaged are they with the platform?
It’s a wonderful place to start. Let me give you three rules that we
like to use for platform design that actually help get the system
running smoothly.
One of them is "frictionless entry."
You would like to make it as easy as possible for people to get onboard
your platform. It doesn’t matter if that user is on the developer side.
You want folks to be able to enter the platform as easily as possible.
If you're bringing in apps in your ecosystem, your
users are going to get a bad experience if they are low-quality apps.
The
next one is that you need to manage "riskless quality." If anyone can
participate, there's a danger that folks who actually get onto the
platform don't necessarily add value or they may try to siphon off
value. You may worry about lower quality. Atari fell apart as a platform
when it got low-quality games on it. Uber has to worry about
low-quality drivers. If you're bringing in apps in your ecosystem, your
users are going to get a bad experience if they are low-quality apps. So
you still need to have riskless quality.
The first principle is frictionless entry, and you need to manage riskless quality from the users on that side.
The
third one is "permissionless innovation." You don't want your
developers to necessarily have to come to you to get permission. There
is always this danger because you own the platform. You have enormous
power over them and you could simply take that idea and run with it. You
need the ecosystem partners to be able to run with an idea and create
something novel on their own and let them have that value. They don’t
need to get permission first.
These are three rules
that we use for design -- frictionless entry, riskless quality, and
permissionless innovation. Those are really good guidelines and are
helping to get these ecosystems to grow quickly, get more users onboard,
and get your value add from third party participation.
Gardner:
Tim Minahan at SAP Cloud, tell us a bit about what you're doing at SAP,
some of your acquisitions, besides your cloud, this ability to be
frictionless and help people come on the network easily. You recently
finished up the Concur acquisition, one of your largest ever. Explain
how you're growing the size of your network?
Application agnostic
Minahan:
What Professor Van Alstyne just talked about are
principles that we subscribe to. In a business network sense, it also
requires you to be open and application agnostic and largely agnostic to
the on-ramps. That’s part of the frictionless entry.
So regardless of what system you are using, whether it’s SAP, Ariba, Concur,
Oracle,
PeopleSoft Info,
etc., you need to be able to attach the systems to the network, those
demand systems that allow you to connect and collaborate through the
network to extend that business process and engage with your customers,
suppliers, and other partners.
Think about our
personal lives, whether it’s Uber or Amazon, those networks that are
most powerful and most impactful on our personal lives allow a seamless
process. You don’t even think about the process, but it is end to end.
In
the case of Amazon you don’t think about the buying process -- how am I
going to connect to those individual merchants? They're already
connected for you. Ultimately, you believe you're buying from Amazon,
but you might be buying from an independent provider and they are still
delivering to you.
Those networks that are
most powerful and most impactful on our personal lives allow a seamless
process.
Likewise, you don't think about,
gee, now that I have placed the order, do I have to call my bank to
settle out? No, that’s handled for you, SAP has been using these guiding
principles to go out and make sure that we're building the network
appropriately, both in our organic means through innovation and the
introduction of new services, like payments, financing, and dynamic
discounting, both independently with other members and financial
institutions of the network, as well as inorganically through
acquisitions.
Gardner: As we close out, we've
determined that the number of participants and the value of the commerce
is super important in these networks. Several times we've also touched
on this feedback loop in the data. So as we look to the future, we might
have competing networks. If we assume that those networks are going to
have some frictionless ability to move on and off of them, then the
best network is where people will go.
Is the best
network the one that provides the best insights in data? Can we close
out our discussion by looking at the importance of shared data and
analysis
and the ability to counter that analysis up from these transactions as a
differentiator going forward that will pick winners and losers in open
commerce network environment, if you will.
Let’s go to
Professor Van Alstyne first. Who is going to win in this network
environment and is the data and openness and availability of analytics
going to be a major determinant of that?
Van Alstyne:
I am going to argue the best platform is the one that creates the most
value over time and that probably means that the data analytics, those
that can use the data to create these data-driven feedback loops, will
be the winners.
One of the things that I want to
emphasize is that frictionless entry and the ability of the movement of
data doesn’t necessarily mean that switching costs are going to be low
or that it’s going to be easy to necessarily change networks. Network
effects do create winner-take-all markets, they do create these
behemoths. Google Search has 67 percent market share in the US and 90
percent in Europe. Facebook has 1.3 billion users. I think Amazon web
services has a huge proportion of the cloud services.
We
need to be careful if we think we're going to be able to switch
networks easily. There are going to be some very substantial
winner-take-all networks and some concentration at the top. Cloud and
data is going to be an integral part of that, as the data creates these
data-driven feedback loops that support these network effects.
Data and analytics
Minahan:
I agree with the professor that the key litmus test of who wins is the
platform or the network that creates the most value, and I think value
comes in a few flavors.
Number one is relevancy. Are
my trading partners there? At SAP, typically about half of any given
company's trading partners are already connected in transacting. That
makes the frictionless entry that much easier. Think about Facebook. Why
would you join any other personal network when most of your friends and
family are already there.
The second is the aspect of
value. Can I manage most of my collaborations in a single environment
or do I need to join multiple networks in order to complete a
transactional process? The more capabilities you can layer in to make it
more convenient for all members of the network to collaborate, the more
value add.
The more capabilities you can layer in to make it
more convenient for all members of the network to collaborate, the more
value add.
And third, I believe that we've only
scratched the surface on these insights. I wouldn’t even say that it’s a
two-sided model. It’s a multi-sided model, where once you get these
parties collaborating at scale, the transactional relationship and
community-generated content can deliver new insights to help folks make
more informed decisions, whether it's, which trading partners to do
business with or which areas of your existing supply chain might be
presented with risk in the future and you need to adapt quickly or which
financial settlement options you have to settle out to help you
optimize cash flow.
These are new insights that were
previously impossible with traditional on-premise and point-to-point
integration models and it can only be accomplished in a network model.
Gardner: I'd like to thank out panel, Marshall Van Alstyne, Professor at
Boston University School of Management and Research Scientist at the MIT
Center for Digital Business. And I'll alert our readers that there will soon be a new book called
"Platform Strategies" out in 2015
from Professor Alstyne and co-authors. Also a big thank you to Tim Minahan, Chief Marketing Officer, SAP Cloud and Line of Business.
Listen to the podcast. Find it on iTunes. Read a full transcript or download a copy. Sponsor: SAP.
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