Platform companies may be the sexy new way of doing business. (Who doesn’t want to be the next Uber?) But according to Sangeet Paul Choudary, founder of the advisory firm Platformation Labs, sexy doesn’t mean easy.
Platform businesses, which use cloud computing and data science to connect consumers and producers of goods and services, will bring a mix of old and new challenges to IT departments. They’ll require strong organizational support and the right culture — two must-haves that likely come as no surprise to CIOs who have worked on business transformation projects.And they’ll also require a level of integration that likely doesn’t exist in most traditional organizations today, not to mention unique business model challenges, such as how fast to
A platform business will also require a level of integration that likely doesn’t exist in most traditional organizations today, not to mention unique business model challenges, such as how fast to scale out the platform.
Choudary outlines three platform business model challenges that CIOs at traditional companies will likely encounter when trying to stand up platform businesses.
What hurdles will CIOs have to overcome when trying to build a platform business?
Sangeet Paul Choudary: The challenges, especially for non-platform-native companies, or platform migrants, if you will, are, first of all, cultural and organizational. Very often, traditional pipeline companies built organizations to manage what is scarce. If you think of traditional media companies, distribution and good content were scarce, so they ended up creating organizations that would manage these two. If you look at traditional [fast-moving consumer goods] companies, the access to distribution was scarce.
With the move to platforms, companies are moving in the direction where the attention and participation of the ecosystem is scarce. So when building an organization, you want to have skill sets that are well catered toward encouraging ecosystem participation. As an organizational shift, this is a big shift. You’ve always managed a certain kind of scarcity, and now you’re looking at something totally different. Pipeline companies that manage this transition well are the ones that are moving in this direction in the right way.
Challenge #1: Single view of the customer
The second big element that’s involved is the infrastructural shift that’s required. In a traditional company, especially when you were selling products or services, you didn’t need the whole organization to be close to the customer. You just needed one part of the organization to be close to the customer, and so there was no inherent need to drive integration.
What’s important in a platform company is that the whole organization needs to interface with the ecosystem in some way and data needs to flow uniformly across all of this, so you need a single view of the customer. To me, that’s the first step toward moving in the direction of a platform business model — the idea of creating a porous organization where a single view of the customer exists.
Challenge #2: Data acquisition
Once companies move past this hurdle, then you start encountering [platform] business model challenges. When you’re looking at a platform, you may start with no data. How do you get that initial data in? You may start with no ecosystem. How do you get that ecosystem to come in? So, there’s that chicken-and-egg problem. Without data, without participation, you don’t have value, and without value, you won’t have participation.
Even if you get past this hurdle, you start seeing other kinds of issues. You might end up scaling too fast, and so you might see a fall in quality. How do you manage quality as you scale? That’s a significant challenge.
Challenge #3: Monetization
A third significant challenge is how do you create a monetization model that strengthens the network effect — that makes the platform more useful? Because, typically, if you charge the ecosystem to participate, you’re going to reduce the value in the platform — because the value comes from ecosystem participation. How do you ensure that the ecosystem participates but at the same time that you have a way to capture value from the platform?