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Management's Next Frontier - The Digital Ecosystem

Posted by Mathew French

28 May 2019

According to research reported by MIT's Sloan Review, the term 'ecosystem' occurs 13 times more frequently now than it did a decade ago. Now, we all know that buzzwords and jargon tend to get overused and aren't always included in the appropriate context. In the modern business lexicon, the word 'ecosystem' has been used to refer to support functions, product portfolios, service bundles (the list goes on). Behind these linguistic applications however, there is a bona-fide new phenomenon evolving in the marketplace. That is the rise of dynamic, multi-company (eco)systems that provide the foundation for new ways of doing business. These digital ecosystems are comprised of companies, people, data and processes that are connected by the shared use of and intersection between digital platforms. In building these ecosystems, businesses foster collaboration and provide mutually beneficial relationships between all parties involved. If it is true that mastering digital ecosystems are one of management's next frontiers, how can HR professionals take the lead on managing these ecosystems as part of the digital transformation of HR?

The Essential Characteristics of Digital Ecosystems

The Sloan Review defines the essential characteristics of business ecosystems as follows:

  • They are multi-entity, made up of groups of companies or platforms (owned by different companies) and therefore do not belong to, nor are they owned by a single organisation.
  • They involve networks of shifting, semi-permanent relationships, linked by flows of data, services, and money.
  • The relationships between ecosystem partners combine aspects of competition and collaboration, often incorporating complementarity between different products and capabilities (for instance, smartphones and apps).
  • Ecosystem participants co-evolve as they redefine their capabilities and relations to each other / others over time.

The Digital Ecosystem Approach

The digital ecosystems of the 21st century are made possible by the proliferation of digital platforms, all of which are built on the ultimate platform: the internet. The internet and new technology platforms are the foundation of the digital transformation taking place across business, and within HR. Tom Hardin at G2 illustrates that the shift of on-premise and proprietary systems to cloud-based software solutions resulted in a departure from siloed IT architecture and rigid business processes. The development of new ecosystems precipitated by the digital revolution allows businesses to be more agile and adaptive, with the burden of infrastructure management and other IT responsibilities often being removed from internal operational responsibilities. That means organisational resources - including employees and budgets, can be deployed to build better strategies, as well as to shift focus from short-term profitability to long-term growth and value creation.

However, the digital partnerships facilitated by these new ecosystems can make or break a business. It is therefore critical for management to understand not just the digital product/s being included in an ecosystem, but also how to select and nurture the right digital partnerships with the right business partners.

The purpose of creating a digital ecosystem is to produce a network effect in which the platforms and services included result in an end-product that is greater than the sum of its individual parts. Ultimately, that means providing the best possible user experience for the customer. When businesses embark on a digital transformation, managing the transition from siloed self-reliant systems to distributed digital ecosystems, the transition requires dedicated strategic planning and selection of partners based on fully informed assessments of those partners.

Covsint Digital Ecosystem Diagram

Ten Principles of Ecosystem Management

Participants in today’s digital ecosystems collaborate in ways that are fundamentally different from collaborations of the past. In historically traditional supplier relationships, companies often focus on maximising their own profits while squeezing the margins of their vendors. However, today's integrated business ecosystems required that companies reassess how they interact with ecosystem partners and ensure that benefits are shared by all. Even if those partners are technically competitors.

Today's CEOs, HR business leaders and managers must decide which type of ecosystem is best suited to their strategic objectives and their company’s capabilities. They must also make the same types of decisions about the systems used in that ecosystem and the providers of those systems to create win-win-win relationships. That is, they benefit you, they benefit your partners and they benefit the end users.

The Boston Consulting Group has developed a framework for ecosystem development and management that enables leaders to apply strategic rigour to the process. Drawing on their research into more than 40 ecosystems across eight industries, BCG has distilled ten guiding principles that increase the odds of 'ecosystem' success.

  1. Choose the right type of ecosystem: BCG's research identifies three main types of ecosystem: digitiser network, platform, and super platform. The right choice depends on your company’s starting point, strategic objective(s), and capabilities. You may need more than one type of ecosystem if there is a need to apply them for different purposes.
  2. Set up a governance model: Every ecosystem must have an 'orchestrator'. They are the lead company, department or individual that organises and manages the ecosystem, defines the strategy, identifies potential participants, and clearly defines all roles, responsibilities, contributions, and interactions upfront, so that all partners know what to expect. The most effective governance model will depend on the type of ecosystem you choose.
  3. Develop a monetisation strategy: Consider how the ecosystem will create value and generate income or an internal ROI in your organisation from the outset. For instance, a smart, connected product commands a higher price and can generate income streams from services; platforms may take a portion of transaction value, earn ad revenue, or charge usage or subscriptions fees; and super platforms usually make money from adjacent, data-based businesses.
  4. Focus on mutual value creation: A strong, attractive ecosystem is beneficial to all participants and focuses on sharing the value that accrues. A combined margin system, profit pooling, revenue sharing, stakes in the venture, or an open API for developers are commonly used tools to ensure that all partners’ goals are met.
  5. Make high-value partnerships a priority: Given their many roles and responsibilities, orchestrators should focus whenever possible on partners with the greatest commercial potential and/or strategic importance to maximise value creation within the ecosystem.
  6. Maintain fluidity and flexibility: Set up agile, flexible partnership arrangements so the ecosystem can respond quickly to changes in the business landscape, and form new partnerships or exit existing ones more quickly.
  7. Build trust among partners: IP protection mechanisms—such as limiting access to IP and building a local IP organisation are essential. Similarly, contractual commitments regarding data-sharing agreements and IP contributions must be carefully established. Setting up local data storage facilities and adding advanced privacy settings are other steps than can build trust among partners.
  8. Build a sense of community: Organise meetings or conferences with partners to obtain feedback, co-innovate, discuss planned changes, and create a sense of community and cohesiveness. Some companies host annual conferences to bring together partners, users, and developers.
  9. Set and track clear performance targets: Set performance metrics related to revenue, profitability, and service levels for each partner and for the ecosystem as a whole. Review these with partners during monthly or quarterly business meetings and adjust as needed.
  10. Separate ecosystems from legacy businesses: To ensure that ecosystems remain agile and aren’t restricted by the policies and procedures of the legacy corporate environment, set them up within separate entities or have them report directly to top management.

Choosing Ecosystem Partners

According to McKinsey, developing an effective ecosystem strategy depends on understanding where the value is. That comes from calculating the value of your assets such as customer relationships and proprietary data, your existing capabilities, and where market opportunities are emerging.

Equipped with that baseline, you can evaluate collaboration opportunities with an eye to finding capabilities, markets, and technologies that complement and support your company’s strategic ambitions. McKinsey believes that the optimal approach is to systematically map ecosystem partners across industries, identify key criteria (such as access to new customers or capabilities), and consider likely trade-offs.

They suggest companies follow a simple four-step process to assess potential partners:

  1. Evaluate the market in which your potential partner operates and its level of competition: The most promising ecosystems involve market leaders with complementary skill sets and value propositions.
  2. Consider the company’s business model: Is it fit for purpose and future-proof? What products and services does the company produce? How nimble, innovative, and customer-focused is it? Can it keep pace with you and the external environment?
  3. Weigh the human factor: How strong is the company’s management team? How effective are its employees?
  4. Look at the culture: How does your potential partner do business? How does its way of working fit with your own company’s culture?

This advice can be applied at multiple levels and is important to the future of work, and workplaces. Some of the above principles may be more applicable to organisations which have developed products or services and are looking for mutually beneficial alliances that will result in a community that is great than the sum of individual parts. However, all of the above is also relevant, and can therefore be applied within organisations that use multiple third-party systems to create digital business ecosystems to operate at maximum efficiencies internally. 

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Topics: Digital transformation, HR blog, Digital transformation of HR, Digital ecosystem

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