In the venture economy a constant flux of innovations is hitting the marketplace at an increasing pace. No longer corporations can rely on their existing cashflows from products and services. A three-year forecast horizon is challeging, if not impossible. Yet, despite the rapidly changing business environment, most organisations remain very financially driven. Business cases are required to have a positive return on investment (ROI) and KPI’s are alligned with shareholder returns.
It is common practise that business plans need executive approval. Consequently, the execution leaves little room for flexibility. Current corporate governance models implicitly require a business plan to address specifically how to create value. In ecosystems, however, participants contribute and create value together. This happens step by step in multiple iterations. No business plan, no upfront approvals. Most companies struggle to actively participate in ecosystems. Partnerships, co-creation or open source development don’t fit the current governance models. That’s why corporations rely on corporate venturing and acquisitions to develop new growth areas. Even partnerships are mostly transactional.
To adapt for successful participation value in ecosystems, corporations need to rethink their corporate governance. This blog builds on the ideas presented in my articles ‘The venturing operating model’ and ‘Ecosystems. Driving the core or developing the edge‘, both published on H17.co.
New value creation takes place in ecosystems
I cannot underpin this statement with figures, but my guess is that already today more value is being created in ecosystems than by companies on its own. I am not aware of any newly defined growth area these days that is not ecosystem centric. You only need to take a look at developments in ehealth, tech finance, connected driving, smart cities, or internet of things and you will realise that corporations, knowledge institutions, governments and start-ups are work intensively together. Collaboration is the new business imperative with new emerging business concepts that cover rules of engagement, platforms, contribution & reward and open versus closed.
In the new ecosystems its participants are creating value together. This is very different compared to the traditional supplychain and BPO driven ecosystems whereby transactional value is created by operational optimisation and efficiency.
Ecosystems require a new definition of succes
Assuming that value will be created in ecosystems, companies that take the leap to learn how to navigate in ecosystems will be the winners of tomorrow. Not surprisingly, companies that successfully shape ecosystems have adopted a different definition of success. Let me explain this by setting out five notions that illustrate the point but also give direction to a solution:
I The ability to contribute effectively to winning ecosystems
The traditional corporate finance view is that success of a business is ultimately measured by the returns to the equity holders set off against a perceived risk profile. From a financial investment perspective this makes sense in an asset based economy. Yet, as organisational goodwill is by large the bigger part of today’s business valuations (versus assets in the past), I am arguing that the key value creation KPI will become the ability of organisations to contribute effectively to winning ecosystems.
II Contribution and reward go hand in hand
A participant may capture a part of the value created for as long as she continues contributing postively to the ecostem. Contribution and reward go hand in hand. If no one contributes to the ecostem, no value will be created and no rewards will be earned. The open source movement illustrates the power of this principle.
A growing number of technology companies embrace open source software development. They have learned that participating in open source software communities is important to keep up with the latest technology developments. However, more important is that an active open source strategy pulls new talent and ideas to the company.
III Ecosystem rewards go beyond financial KPIs
In ecosystems, there is a correlation between the rewards and the role & contribution of the respective participants. A reward can be anything that is valued positively by a participant. Financial rewards cover this to only some extend. A useful approach to identify and map ecosystem rewards is the Open Incubation Reward Framework. I have developed this framework for early stage venture teams but the approach can be applied to ecosystem collaboration as well.
Rewards can be anything from learning, speeding-up, access to talent, knowledge, IP, distribution or capacity sharing. According to the Open Incubation Reward framework, most rewards can be grouped in 4 categories. These categories are: Leadership (rewards such as purpose, involvement, influence or decision making); In Kind (rewards such as free products or services, IP, shared capacity, access or learning); Cash (rewards such as payments, fees, salary or royalties), and Equity (such as vesting* shares, options or warrents).
In my experience setting up a similar framework for orchestrating ecosystem participation can be very helpful as it facilitates a transparent discussion on the roles, contributions & rewards of the participants. Transparency is a key enabler of trust in ecosystems … and trust in it self is the enabler of high energetic collaboration.
IV Contributions & rewards need to be ‘in balance’
In order for a participant in an ecosystem to continue participating, it is required that its contributions and rewards are balanced and fair. Yet, the sum of the rewards may ad up differently for the participants. A fair balance is not only required for the individual participant. It is also important for the participants accross the ecosystem. This makes the governance of effective ecosystem architecture more complex than conventional management & control practices.
V Accomomdate for different roles and levels of contributions over time
As always in developing new products or services, the needed skillsets and capabilities may vary over time. Moreover, as the development may shift in unforeseen directions, other skillsets need to be added, whilst other may become obsolete. A well-designed ecosystem governance model needs to accomomdate for different requirements regarding roles and levels of contributions over time. Again transparency is hugely important to cope with time differences.
As more companies are making ecosystems part of their core strategies, a well thought through developed view on ecosystem governance is needed. Both internally as well as in relation to collaboration partners. Most advanced ecosystem strategies take an integrated approach to IP management, talent development, innovation, venturing, mergers & acquisitions and partnerships. Often it is the ecosystem that implicitly sets the rules of engagement to its participants. Companies that have learned how to navigate in ecostems will be the winners of tomorrow.
* A “vesting period” is a period of time an investor or other person holding a right to something must wait until they are capable of fully exercising their rights and until those rights may not be taken away.