The Ecosystem IQ

Unlocking the ecosystem paradox to drive business model innovation and digital growth

Senior leadership teams expect ecosystems to be central to unlocking significant growth and new digital revenue in the future. However, our research shows that just a handful of organizations are going to realize their ambitions. Most are still trying to address the future with the mindset and the tools of yesterday. Not enough is being done to seize the opportunity, with the paradox being that many are ‘talking the talk’ but few are ‘walking the walk’. Drawing on our unique ecosystem diagnostic, we provide industry-specific insights on how companies can accelerate ecosystem progress and turn their high ambitions into concrete results.

Organizations are mistakenly trying to achieve new growth aims by essentially doing the same thing they always were, but expecting things to be different this time.

The ecoystem paradox

In our previous report, Re-thinking the European Business Model Portfolio for the Digital Age, we spelt out why many companies will miss out on their digital growth ambitions.¹ With many focused on incremental operational improvement, they miss the opportunity to create new and more compelling products and services, backed by an attractive new business model that maximizes value to the end customer.

In this follow-up report, we take a close look at the central role that effective ecosystem management plays in companies achieving their digital growth ambitions. New digital business models require the connectivity and collaboration provided by ecosystems to create sophisticated products and services that competitors cannot copy. However, simply bolting on ecosystems to an existing business model will not accomplish the digital business growth that organizations are aspiring to.

This tendency to take a bolt-on approach is one reason why a gaping chasm exists between leaders’ ambitions and their willingness to take the actions to deliver. This chasm is the heart of the ecosystem paradox. As we have seen, companies have high hopes for their ecosystems, with over two-thirds of senior executives (67%) saying that they expect ecosystems to help their organization grow its revenue by between 11% and 25% over the next two years.² However, many organizations will not achieve this ambitious goal and are failing to harness ecosystems’ considerable power. Examples of companies who have taken this bolt-on approach are too numerous to mention.
However, our research indicates that some organizations are starting to think outside the box completely. One example is Maersk, the world’s largest container shipping line, that has teamed up with Alibaba, owner of China's largest e-commerce platform,  to allow customers to reserve space on its vessels via Alibaba’s OneTouch booking website, illustrating growing cooperation between e-commerce and logistics firms. They are able to offer many digital services to customers while at the same time creating a launchpad for building, partnering and investing in the future stars of trade.⁷

Business model reinvention and digital business growth depends on effective ecosystem management that maximizes value for the end customer. However, the pursuit of this goal is being undermined, for a number of reasons:

1. Failing to break the status quo.
   Organizations are mistakenly trying to achieve new growth aims by essentially doing the same thing they always were, but expecting things to be different this time. They are simply adding partner ecosystems to the existing (and linear) business model that served them so well in the past, but which is not fit-for-purpose in a digital age. As a result, they are not creating a diversified, portfolio-based business model that introduces new revenue streams while also creating synergies with the core business model.
2. Developing shallow customer value propositions.
   Organizations are failing to draw on rich and deep customer insight to develop new and innovative products and services that offer the best solution to real customer problems. Many are failing to shift their focus away from simply selling products to selling outcomes and tailored experiences. Unless you are going to create a richer experience at a competitive price, there is little reason for customers to switch and limited value in participating in an ecosystem.
3. Failing to prioritize the future over the immediate.
   Organizations struggle to prioritize between allocating resources to meet the demands of today’s immediate performance goals and the urgent strategic need to drive new revenue streams in the future. Meeting immediate performance targets, and servicing legacy businesses, end up consuming most resources. The changes required for effective ecosystem management are being blocked by protecting existing business models and short-term financial performance.

Many mid-sized European organizations are challenging the status quo to achieve new growth potential. Industrie 4.0 originated as a German governmental initiative, aimed at combining digitalization, regional and industry components. This initiative, now being adopted in other countries, has spurred significant innovation. Mid-sized organizations such as Kärcher have leveraged sensors in many of their products to be more ecologically-efficient and to introduce new types of services.³
Another example is The Schaeffler Group, a global automotive and industrial supplier. Schaeffler has taken full advantage of digitalization and created innovative new products and solutions for the automotive industry.^.4

To address these issues, we recommend that company leaders:

• Invest in engaging and managing ecosystems that are not linked to existing linear business models as a key enabler for digital business growth and abandoning linear modes of thinking in favor of multi-sided business models that enjoy a network effect.
• Leverage ecosystems to create compelling products and services driven by genuine customer insight, using the rich data the organization has at its disposal, even if the best view that can be developed is only partial.
• Manage internal conflicts between satisfying near-term performance goals and building major new revenue streams by focusing on the desired business outcomes.

To guide organizations as they tackle these issues, in the following section we outline a unique diagnostic tool that assesses how organizations are progressing in terms of effective ecosystem management.

Platform owners fail to get their orchestrator role right, where their role is to maximize value for all participants (on all sides) – for producers, providers and customers – as distinct from maximizing value for themselves.

Ecosystem evolution: what we learn from our ecosystem diagnostic

To understand how advanced organizations are in leveraging ecosystems to innovate their business models, we developed a diagnostic tool that assesses ecosystem progress against a number of dimensions (see Figure 1):

Figure 1: Ecosystem Intelligence: BearingPoint ecosystem diagnostic

Source: BearingPoint analysis based on Ecosystem survey, 2018

• Strategy, which is critical because the rules of the game have changed from the pre-digital era. In the digital era, the product, business model and the platform are all indistinguishable. The more developed your strategy, the more developed your approach to partner ecosystems and your ability to collaborate on co-innovation and coinvestment.
• Execution and enablers, which are critical because the further advanced you are in delivering new products and services, the greater the impact on the business model, and the more your ecosystem will be built out.

Our diagnostic shows that advanced ecosystem progress is rare. None of the sectors in our survey achieve the leadership position that is the result of strong progress against all dimensions (see Figure 2)^.5 Execution of effective ecosystems management is faltering. While many organizations have made progress in terms of the first phase – defining their ecosystem strategy – we see significantly less progress in terms of execution and ecosystem deployment, particularly in terms of the IT investment required.

Figure 2: No sector displays the ecosystem leadership to dominate their segment

Source: BearingPoint analysis based on Ecosystem survey, 2018

Of course, the six industries in our diagnostic will contain ecosystem leaders. For example, the automotive industry contains high-profile ecosystem and market leaders, such as Tesla. This is because this electric car pioneer has a strong champion and owner at the helm who drives the leadership vision for change down through the organization. As an average, however, most still have some way to go and areas where they need to improve, either in terms of strategy or execution/enablers. In terms of what is undermining organizations’ efforts, we would highlight the following reasons:

1. Falling prey to technical failings. We see a range of technical issues that limit the openness of ecosystems: from failing to invest in a digital business platform to ease of integration via API, which means ecosystem partners are reluctant to join or quickly leave.
2. Failing to orchestrate properly. Platform owners fail to get their orchestrator role right, where their role is to maximise value for all participants (on all sides) – for producers, providers and customers – as distinct from maximizing value for themselves. Without the right dynamic, you will never generate network effect. Amazon, for example, plays a facilitation role, where it charges an economic rent to participants and provides key services, such as customer experience and fulfilment. This creates a flywheel effect, where customers get choice, low prices and security of mind, while producers get fast on-boarding and access to a large customer base. Amazon’s fixed costs are spread over increasing volumes securing economies of scale. Amazon’s role is to drive volume, constantly reduce friction, remove technology blockers, increase convenience and ease of use, and maintain governance and business rules so everyone contributes positively to the ecosystem whilst maintaining legal and regulatory compliance.
3. Lacking transparency in terms of measuring results and value. We often find that communication and transparency on ecosystem results, and the value generated, are lacking.

To address these issues, we recommend that company leaders:

• Design their ecosystem technology strategy to ensure they make the right tech choices over the months and years ahead. This will include investing in putting in place the technology platform that allows them to orchestrate relationships between multiple partners, enabling all parties to co-invent, sell and monetize joint offerings in a seamless way.
• Act as a facilitator to make the ecosystem work. This means clarifying the new “rules of the game” to explain business strategy and execution and how it is realized in the digital era for their entire organization. Manage diverse partner relationships by creating key performance measures, such as the time it takes to create minimum viable products (MVP) to create new sources of value.
• Create performance transparency, measuring the effectiveness of ecosystems in terms of their ability to coinnovate and co-invest to create the products that are more difficult to copy. Put in place effective reporting for the thirdparties in an ecosystem and provide data-related services.

Resolving these issues is a matter of urgency. In the last section, we look in more detail at the performance of our key sectors, so that organizations can begin to build a picture of the key issues to be addressed.

Conclusion: Resolve the organizational, cultural, and technology barriers

In today’s business environment, the traditional barriers that separated companies from each other can now be opportunities to create effective ecosystems leading to new opportunities. Ecosystem intelligence will be vital for innovating business models and create compelling products and services that lead to increased customer satisfaction.

In summary, the most important way to innovate business models is to gain closer understanding and insights from the customer and use this insight to drive product and service innovation. It involves integrating and synthesizing all the internal silos in an organization and to leverage an effective ecosystem that focuses on solving genuine customer problems while anticipating their future needs and desires. One objective is frictionless execution to satisfy customers. Another objective is to create a scalable operating model that leverages an effective ecosystem with a very low cost of experimentation. The ultimate goal is to own the customer relationship and to be the chosen provider with products and services that cannot be easily replicated.

CEOs who want new revenue streams and stronger digital business growth should:

• Champion digital business growth by appointing an individual who will create and manage effective ecosystems with clear metrics and performance measurements.
• Sponsor the necessary technology investments required to support effective ecosystems.
• Set the tone in your organization by advocating non-linear thinking and encouraging ecosystem development outside your organization’s core competency.

COOs who support the CEO's vision and expectations for digital growth should:

• Clearly understand the impact of the change to the operating model as new products and services are introduced into the market. Take action to continually adjust the operating model to best support the new and existing products and services.
• Ensure performance transparency from the individual responsible for ecosystems with regards to the results, challenges, and actions required for continually managing the effective ecosystem.

CIOs who leverage technology to support effective ecosystems should:

• Design the ecosystem technology carefully with a focus on the months and years ahead to enable an effective ecosystem where roles will evolve in the future.
• Justify ecosystem technology investments by explaining how these investments will prepare the organization for the future while meeting current demands.

Ecosystem Intelligence: industries in the spotlight

It is clear that in every industry – just as there are market leaders, fast followers and more cautious adopters lagging the pack – there will be clear ecosystem leaders who are moving ahead. Likewise, some industries are moving faster, opening the opportunity to learn from their experience.
For this reason, we have assessed the performance of each sector in turn.

Please find attached an analysis and examples for the following industries: Insurance, Transport, Telcos, Automotive, Banks and Tech&IT