Ecosystems: when digital transformation grows up

With more companies changing the way they do business in order to adapt to the new digital world, phrases like “digital transformation” are starting to feel too abstract. I’ve been expecting these generalities to give way to more specific advice: practices based on industry leaders’ patterns for success.

Gartner’s 2017 CIO Agenda report is a case in point. Its headline? “Seize the Digital Ecosystem Opportunity.”

Indeed, ecosystem strategies are emerging as a more specific and robust take on the digital transformation narratives we’ve all grown used to. In the report, Gartner notes that “in digital ecosystems, 79% of the survey’s top performers indicate they participate in a digital ecosystem vs. 49% and 24% for typical and trailing performers, respectively.” In another article, “Ecosystems are the future of digital,” Gartner Research SVP Peter Sondegaard doesn’t mince words, stating, “Avoiding participation is not an option.”

Is this boldness justified? In my view, yes.

Consider Ticketmaster, which is a customer of my employer, Google. Ticketmaster has been online for a long time—but until recently, its interactions with customers were funneled through relatively limited channels. Going online gave Ticketmaster scale beyond physical ticket booths, but its business still essentially operated according to old models of supply and demand. The company was bearing the cost of building channels—whether those were booths, websites, or apps—and the cost of marketing and promotion to drive customers to them.

That’s no longer the case. Ticketmaster established an API platform to make its core business services, such as ticket purchasing and event discovery, more easily available for partners—which now include Facebook, Broadway.com, Costco and Fox Sports. By converting its business into pieces of software that developers—including those beyond the walls of the firm—can easily build into apps and services, Ticketmaster benefits from demand generated by third parties and transactions fulfilled in channels it didn’t have to build.

Removing friction from the combining and recombining of software and data (not just a business’s proprietary assets, but also those of partners and even competitors) creates the conditions for an ecosystem to emerge. Sharing the value generated among its participants creates the conditions for ecosystems to thrive. APIs are the enabling technology—but there’s more to success than “build it and they will come.”

Ecosystems, API platforms and network effects

Eager to understand how your organization can build or join ecosystems? Here’s a cheat sheet on the key terms and concepts.

Digital business tips the economic scales toward an external mindset. There is a good reason why most businesses have traditionally operated a linear value chain, adding value in carefully planned steps and opening up only to a relatively few vetted partners: scarcity.  

Physical (and even analog) resources can only go so far. They get filled up (e.g., labs), they get used up (e.g., raw materials) or they degrade. In contrast, digital assets can be replicated infinitely, at virtually no marginal cost.

An API platform facilitates this infinite replication by enabling developers—potentially tens of thousands of them, in the case of an open API—to access a business’s assets to create new apps and digital experiences.  Data—whether a digital representation of a machine or a customer experience—can be shared and recombined over and over again. In a healthy ecosystem, developers create value from those assets or data generated by their use in ways a business never would have conceived on its own. 

The trick is creating the conditions for this to occur as a “win-win” for your business and a network of complementors. Let’s start with something close to the wheelhouse of most technology leaders: your digital platform starts with your codebase.

Walgreens, another Google customer, exemplifies this concept of leveraging an API platform to enter ecosystems with partners. Put simply, the ecosystem approach lets Walgreens extend its brand into new customer interactions and experiences while also providing partners with proprietary services that make their apps more appealing. 

The Heart Partner app from Novartis, for instance, helps heart failure patients coordinate care and monitor vital signs, medication, compliance, and activity—all while awarding them Walgreens reward points for their activity through the Balance Rewards API.

The Walgreens Photo Prints API and Prescription Refill/Transfer API provide similar benefits, making it easy for developers to create apps that let users place photo printing orders or fill prescriptions from mobile devices. This in turn makes it possible for Walgreens services to permeate various ecosystems, such as those created by mobile devices and operating systems.

What powers up a digital platform from symbiosis to the explosive growth curves characteristic of the most successful ecosystem participants are demand side economies of scale or network effects. In a nutshell, network effects mean: something becomes more valuable as more users use it. Or put another way, as more users engage with the platform, the platform becomes more attractive to more users.

Understanding network effects: types and participants

Ecosystems can engender three types of network effects. Some platforms catalyze one, two, or all three:

• Same-side means more of one type of user attracts more of that same type of user. If I  join Facebook because my friends are there, that’s a same-side network effect.
• Cross-side means more of one type of user attracts more of another type of user. Many app developers build on Facebook because there are lots of end users, and many end users join Facebook because there are a lot of apps (and so on)—a cross-side network effect.
• Data means digital signals make the platform more valuable. Facebook can generate data network effects because it harvests and analyzes data on how users interact with the ads it surfaces, which allows its platform to get smarter at matching users to ads.  

There are two major plays for unleashing network effects: facilitating transactions, a model often called a “multi-sided market”; or facilitating complementary products or services from third parties, a model often called an “innovation platform.” Some companies run and chew gum at the same time as platform players: for example, Apple’s iOS is an innovation platform for app developers, and iTunes is a transaction platform for music producers and consumers.

The ecosystem is made up of all the “players” critical to powering the network effects:

• Owner: An owner controls who has access to a platform and how they can use it.
• Provider: A provider makes interfaces for interacting with a platform.
• Producers: A producer creates a platform’s offerings.
• Consumers: A consumer buys or uses the platform’s offerings.

The same individual or organization can occupy more than one role, and a role may be played by more than one organization or type of individual, but these roles are key. So is a crystal-clear understanding that while mastering strategic use of APIs is one side of the coin for seizing the ecosystem opportunity, excellence orchestrating interactions across all of these roles is the other.

Profound rewards

For most businesses, participation in digital ecosystems will require an overhaul of their organizational models—not merely the creation of APIs but also a culture that recognizes and is aligned to capitalize on their strategic potential. Achieving this change demands top-down support from both business and technical leaders, as well new funding models, new metrics for success, a stronger openness to outside feedback and competitors, and a host of other deliberate adaptations. But for the companies that get it right, the rewards could be profound.