Networks: The New Model for Business
Transcript of a sponsored podcast on how business networks are fast emerging as trusted,
efﬁcient hubs for cloud-based commerce.
Listen to the podcast. Find it on iTunes. Sponsor: SAP
Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you're
listening to BrieﬁngsDirect. Our podcast today explores the role and impact of business
networks, the often virtual assemblages of interrelated business services,
processes, and data that are transforming how companies and consumers
These business networks are unlocking the ability for companies to extend
processes and insights broadly and affordably to customers, suppliers, and
other partners. Therefore, they're better able to engage with the participants
across these networks in new and innovative ways.
We'll look at the historical record for how open markets and communities are rapidly changing
business platforms. We'll see how today's consumer business models -- exempliﬁed by Amazon,
Uber, and Airbnb -- are extending to business-to-business (B2B) commerce, allowing buyers and
sellers to ﬁnd and know each other openly and accelerate B2B transactions and commerce
To learn more about the trends that are making business networks more powerful and more
important than ever, please join me now in welcoming our guests.
We're here with Marshall Van Alstyne, Professor at Boston University
School of Management and Research Scientist at the MIT Center for
Digital Business. Welcome to BrieﬁngsDirect, Marshall.
Marshall Van Alstyne: It’s a pleasure to be here, thanks for having us onboard.
Gardner: We're also here with Tim Minahan, Chief Marketing Ofﬁcer SAP Cloud and Line of
Business. Welcome back, Tim.
Tim Minahan: Thanks, Dana, it’s great to be here.
Gardner: Professor Van Alstyne, we've seen a great deal of network effects in business over the
past decades. Yet nowadays, the conﬂuence of cloud, mobile, and social and an emphasis on
data-driven business processes seems to be accelerating and empowering these shifts. Some
organizations call this the Third Platform. How does your research deﬁne business platforms, and
how are the impacts from these Third Platform technology advancements newly impacting
Van Alstyne: I emphasize the network effect as one of the driving forces. Indeed, if we can
create a positive feedback loop throughout the network effects, that’s where you
see the efﬁciency in the scale happening so quickly.
In terms of a deﬁnition, we focus on two elements of the platform. The ﬁrst is
an open architecture that third parties can build upon.
The second is the governance rules. How is it that people can participate? Why
would they participate? How do you share the proﬁts? How do you resolve
conﬂict? You think about it as a nexus of rules and architecture. If you can put
those two things together, you can probably grow an ecosystem that helps to
foster and stimulate some of those network effects.
Gardner: Tim Minahan, SAP has been a pioneer inside the four walls of the enterprise over the
years with enterprise resource planning (ERP) and other business applications. Now, it seems as
if you're recognizing what Professor Van Alstyne has been describing with these network effects
and extending your value and business insight and processes across multiple boundaries, outside
the four walls of any given enterprise into entire ecosystems.
Next productivity wave
Minahan: Absolutely, Dana. At SAP, we truly believe that the next wave of business
productivity is not going to come just within enterprises, but between them. Forty years ago,
when SAP arguably invented the whole concept of ERP, businesses were
operating much, much differently.
We showed them a new way to automate their internal information and process
ﬂows, but they were organized in a much more vertically oriented fashion. The
employees would graduate from college, spend 40 years with the company, get
the gold watch, and retire.
Companies owned most of their infrastructure, their manufacturing facilities,
their inventory, their shipping ﬂeets, but certainly this is not your father's business environment
anymore. In part, this was accelerated by the recession that we're still emerging from. Companies
are less vertically integrated than they were in the past.
They've adopted more variable operating models. They've outsourced everything from
manufacturing to customer service, and they need to reach and compete with companies across
the street and on the other side of the world. And this is creating new opportunities, as well as
new challenges, for businesses today, and it’s increasing demands and expectations on individual
functions of their teams.
You're seeing it everywhere. If you have an iPhone, look on the back. It’s designed in California
by Apple, but it's built, shipped, and serviced by someone else entirely. Even beyond the physical
device, Apple makes most of its revenue from network-based services. iTunes relies heavily on
an ecosystem of mobile carriers and artists and studios.
Now, we're seeing this move into the business world, in which companies need to rapidly
organize this virtual enterprise, all these resources of employees, manufacturing capacity,
logistics, delivery capacity, and customer service to take advantage of certain market opportunity.
Or, they need to adapt very quickly to certain market changes, and the only real way to do that is
through a digitally connected network of partners, customers, and supply chain.
Gardner: Professor Van Alstyne, this is a tricky time for companies. It seems that they want to
retain what works, the business models that have been tried and proven for them. They like
having big margins, of course, but in order to grow and to be part of the future they need to
expose themselves to these networks, take some risks, maybe lose margin in the process, but
perhaps get scale and automation as a payback.
How do you view that? How do you see companies adjusting? Is this a cultural thing where some
companies will take this plunge and others don't? It does seem to be a perilous time for
companies. I hope they're not just freezing in the headlights.
Van Alstyne: It’s a great question. There are a couple of elements and they vary based on the
where the company is currently. If it’s a relatively virgin market, then it’s fairly straightforward
for them to invite others in, create the platform, and expand out in that direction. If it’s an
existing market for them, they really have to worry about managing the cannibalization question.
I know SAP has also had a very interesting example of that, as you move from on-premise
services to hosted services. Maybe they're doing a nice job of managing that migration. It’s a
little bit tricky in terms of how much you expand the market, but you really need to. You have to
realize that the scale, the innovation, the customer engagement happens on these business
platforms. Long-term, one really doesn't have a choice.
Platforms vs. products
One of the arguments that we typically make is that even weak platforms tend to beat very
strong products. You can look at any number of examples, whether you take a look at the
Blackberry, the Sony Personal PlayStation gaming device, or the Garmin device for GPS.
All of these functions are effectively absorbed into the platform. If you manage a platform
ecosystem, where third parties can add value on your behalf, you'll grow faster. The platforms
almost always will be products. So, in the long-term, companies don't have a choice. They have
to move in this direction.
Gardner: So if it’s inevitable that you have to change, it sounds to me from what I've seen at
SAP, that they're recognizing this. They're dealing with it themselves as a company, but they're
trying to put together a safe path for enterprises to expand into the networked economy. At the
same time, they can have trusted partners for automating a lot of the behind-the-scenes activity
and allowing them to still function within their business verticals to know what their intellectual
property is and to extend to it.
Let’s go back to Tim. Am I reading that right, Tim, that SAP is trying to be, in a sense, the arbiter
between risk and exploration when it comes to the networked economy?
Minahan: That’s an accurate depiction, Dana. Think about our personal lives. Whether we're
engaging family and friends on Facebook, buying a book or a blender on Amazon, or trying to
capture transportation services to get downtown during rush hour on Uber, we're experiencing
the scale and simplicity and convenience of personal networks.
We run our daily lives on them now. Unfortunately the business world traditionally has been
optimized within the four walls of the enterprise. Companies have invested billions over the past
20 to 30 years in reengineering their processes and investing in systems to really automate those
internal processes and information ﬂows.
They have created what have become islands of efﬁciency that work very well, and continue to
work well, for those that are highly vertically integrated, but very few are, as we talked about
At SAP, we believe that solving this inter-enterprise collaboration challenge is one of the biggest
opportunities of our era. We feel that we're well positioned to do that and have been assembling
some of these business networks. We've had the acquisition of Ariba and Fieldglass in the area of
contingent workforce and, with Concur, now in the area of travel and expense.
We're complementing that with network extensions of our own, both through the addition of
things like the product sustainability network, which leverages the existing connections within
the network to help companies better perform tracing and trackability of their products, and the
ﬁnancial services network, which really facilitates and aids payment.
What we're looking at is an opportunity to extend existing IT infrastructure and business process
outside the four walls of the enterprise in the most scalable and efﬁcient way possible, no matter
what systems a particular company or their trading partners use, all through a single integration
Think about Amazon in your personal lives. You don’t worry about integrating tier trading
partners or how you are going to sell that. Amazon takes care of that for you. That’s the same
metaphor that we're attempting to carry through into the business world by providing single
standard integration adapters or on-ramps to the network that allow you to manage this virtual
enterprise in a highly transparent and highly efﬁcient manner.
Gardner: Professor, you mentioned something about the very nature or deﬁnition of an
enterprise changing. As we look to cloud computing and to these network effects, the ability to
outsource so much of what a company does is based on the best value. If doing it internally
makes more sense, you do it internally. If going external makes the most sense, you go external.
We see this with computing. Hybrid cloud is pretty much about that.
We're also seeing a change in the workforce with contingency and part-time work. What is the
new corporation about? It seems it’s mostly rules, relationships, collaboration and management.
Let’s go to Tim ﬁrst. As the very nature of corporations change, it's really about relationships,
data, and feedback loops. The data-driven organization, is it really about that. Are we losing
something, are we gaining something, or both, Tim, as we seek this new deﬁnition of a
Minahan: Yeah, I think as Professor Van Alstyne said, we're entering an age where the borders
between enterprises are being taken down. Companies are moving towards a model where they're
managing pools of resources, whether that’s pools of talent around expertise, as you just
A third of a typical workforce is no longer on the company payroll. It's contingent, statement of
work (SOW) workers. In some industries, it’s already more than half. This is fastest growing part
of the workforce. HR executives, and I talk with many of them, are beginning to rethink what
constitutes the workforce and are looking at pools of talent.
They need to understand where the skill sets lie, not necessarily what roles someone plays today,
what skills they have had in the past and be able to, when a particular opportunity or project
arises, assemble that expertise very quickly to address that particular project, and disassemble
them just as fast, but retain the knowledge within the enterprise for the next time that comes up.
The same thing is true if you're organizing a supply chain and need to be able to serve a new
market like China. Where do you put your manufacturing? How do you address distribution,
value-added taxes, and customer support. Traditionally, the model would have been to go and
establish your own manufacturing facilities, build your own local agents, but no longer.
Now you can quickly assemble and address, or test, a particular market or test a particular
product in any given market. Should it work, scale it up. Should it not, scale it down and move
on. Networks allow you to achieve this.
I wanted to go back to something that Professor Van Alstyne said that's critically important. I
fully agree that the networks go through phases. The ﬁrst phase is to connect all the various
parties, whether they be people, businesses, merchants, banks or all of the above.
The second part is to automate their existing processes. What gets really exciting, once you've
automated these processes, once you have these parties collaborating or transacting its scale, are
the new insights and entirely new services you could enable.
Once you have these millions of companies or people transacting at scale, you can see the
transactional or relationship information. It could be the generated content that helps all members
of the community make more informed decisions whether it's about buying or whether it’s about,
should I bid on a particular bit of business as a seller or as a bank, mitigating risk in lending to
allow them to understated who the buyer is, who the seller is and what their traditional history is.
That is the ultimate big data opportunity, when you have these networks operating at scale. We're
beginning to deliver this networked intelligence in the form of insight services to help our
members of the communities make important buying, selling, and ﬁnancing decisions in ways
that they couldn’t before.
Van Alstyne: Dana, let me jump in for a second. One of the things that Tim just said is quite
important. One of the most interesting elements of the platform is the extent for new business
services and new products to emerge. One of the Silicon Valley descriptions of the platform is
that you know you have one when your community takes it in a direction you didn't expect.
You need to have made it possible for that. The underlying architecture needs the support the
ability to develop something new that wasn't expected, but that’s one of the ways the platform
adapts to create new value.
The communities start to add new value and new services in ways that the platform meets the
needs of the ecosystem, so it’s this ability to turn out new sources of value based on the
underlying architecture. This is one of the key distinctions of platforms that really do add value.
Minahan: I totally agree with that. We've only just entered it into this networked economy or
networked era. One of the most exciting things is that it allows you to begin to entirely rethink
traditional business models that were organized in an era where, to use an economic term,
transaction costs were extremely high.
Look at Uber, what Uber has done, and the challenges we're now seeing around challenging the
traditional medallion livery service. That was organized out of a very real concern around safety
and issues, but over time, that model matured and unfortunately got very costly.
What you saw were the medallions being aggregated in the hands of a small few who could
afford them. That obviously had some implications on the level of service and cost of service to
employers. Now we've removed all of the transaction costs and could add up efﬁciently match
demand -- i.e. you as the traveler -- and supply literally anyone that is a card-carrying member of
the Uber service.
That’s an entirely new business model that is fundamentally challenging hundreds of old rules
and thoughts about what it means to hail a cab. So let me toss in one additional principle that’s
often used for design. I'm thinking exactly of the Uber example.
One of the best ways to view a platform is that you have the best platform and the transaction
cost are the lowest. If you can get those lowest transactions, you're going to get more business
taking place on that platform. So do whatever you can to see if you can lower those transaction
costs to get the business going.
Looking for signs
Gardner: So we've taken a look at the inevitability of these networks. We've seen them
already very prominent in the business to consumer (B2C) space, consumer activities, and
commerce. We’ve recognized that openness is important. So we have innovation. We also
recognized the importance of governance and management.
So how do we know when we've done this correctly? Is there a sign? Professor Alstyne, you've
mentioned a few that describe powerful and successful networks. Do enterprises have to view
themselves differently? Do they need to look at participants in their network as a metric rather
than just margin and net in gross revenues and incomes? Is there a way to be successful?
Van Alstyne: Platform businesses behave differently than traditional businesses. Silicon Valley
had been using lot of these metrics for engagement. How many new users do you get, and how
engaged are they with the platform? It’s a wonderful place to start. Let me give you three rules
that we like to use for platform design that actually help get the system running smoothly.
One of them is "frictionless entry." You would like to make it as easy as possible for people to
get onboard your platform. It doesn’t matter if that user is on the developer side. You want folks
to be able to enter the platform as easily as possible.
The next one is that you need to manage "riskless quality." If anyone can participate, there's a
danger that folks who actually get onto the platform don't necessarily add value or they may try
to siphon off value. You may worry about lower quality. Atari fell apart as a platform when it got
low-quality games on it. Uber has to worry about low-quality drivers. If you're bringing in apps
in your ecosystem, your users are going to get a bad experience if they are low-quality apps. So
you still need to have riskless quality.
The ﬁrst principle is frictionless entry, and you need to manage riskless quality from the users on
The third one is "permissionless innovation." You don't want your developers to necessarily have
to come to you to get permission. There is always this danger because you own the platform. You
have enormous power over them and you could simply take that idea and run with it. You need
the ecosystem partners to be able to run with an idea and create something novel on their own
and let them have that value. They don’t need to get permission ﬁrst.
These are three rules that we use for design -- frictionless entry, riskless quality, and
permissionless innovation. Those are really good guidelines and are helping to get these
ecosystems to grow quickly, get more users onboard, and get your value add from third party
Gardner: Tim Minahan at SAP Cloud, tell us a bit about what you're doing at SAP, some of your
acquisitions, besides your cloud, this ability to be frictionless and help people come on the
network easily. You just ﬁnished up the Concur acquisition, one of your largest ever. Explain
how you're growing the size of your network?
Minahan: Absolutely Dana. What Professor Van Alstyne just talked about are principles that
we subscribe to. In a business network sense, it also requires you to be open and application
agnostic and largely agnostic to the on-ramps. That’s part of the frictionless entry.
So regardless of what system you are using, whether it’s SAP, Ariba, Concur, Oracle, PeopleSoft
Info, etc., you need to be able to attach the systems to the network, those demand systems that
allow you to connect and collaborate through the network to extend that business process and
engage with your customers, suppliers, and other partners.
Think about our personal lives, whether it’s Uber or Amazon, those networks that are most
powerful and most impactful on our personal lives allow a seamless process. You don’t even
think about the process, but it is end to end.
In the case of Amazon you don’t think about the buying process -- how am I going to connect to
those individual merchants? They're already connected for you. Ultimately, you believe you're
buying from Amazon, but you might be buying from an independent provider and they are still
delivering to you.
Likewise, you don't think about, gee, now that I have placed the order, do I have to call my bank
to settle out? No, that’s handled for you, SAP has been using these guiding principles to go out
and make sure that we're building the network appropriately, both in our organic means through
innovation and the introduction of new services, like payments, ﬁnancing, and dynamic
discounting, both independently with other members and ﬁnancial institutions of the network, as
well as inorganically through acquisitions.
Gardner: As we close out, we've determined that the number of participants and the value of the
commerce is super important in these networks. Several times we've also touched on this
feedback loop in the data. So as we look to the future, we might have competing networks. If we
assume that those networks are going to have some frictionless ability to move on and off of
them, then the best network is where people will go.
Is the best network the one that provides the best insights in data? Can we close out our
discussion by looking at the importance of shared data and analysis and the ability to counter that
analysis up from these transactions as a differentiator going forward that will pick winners and
losers in open commerce network environment, if you will.
Let’s go to Professor Van Alstyne ﬁrst. Who is going to win in this network environment and is
the data and openness and availability of analytics going to be a major determinant of that?
Van Alstyne: I am going to argue the best platform is the one that creates the most value over
time and that probably means that the data analytics, those that can use the data to create these
data driven feedback loops, will be the winners.
One of the things that I want to emphasize is that frictionless entry and the ability of the
movement of data doesn’t necessarily mean that switching costs are going to be low or that it’s
going to be easy to necessarily change networks. Network effects do create winner-take-all
markets, they do create these behemoths. Google Search has 67 percent market share in the US
and 90 percent in Europe. Facebook has 1.3 billion users. I think Amazon web services has a
huge proportion of the cloud services.
We need to be careful if we think we're going to be able to switch networks easily. There are
going to be some very substantial winner-take-all networks and some concentration at the top.
Cloud and data is going to be an integral part of that, as the data creates these data-driven
feedback loops that support these network effects.
Data and analytics
Gardner: Tim, our last word to you on the role of data and analytics as the determinant of the
most valuable network.
Minahan: I agree with the professor that the key litmus test of who wins is the platform or the
network that creates the most value, and I think value comes in a few ﬂavors.
Number one is relevancy. Are my trading partners there? At SAP, typically about half of any
given company's trading partners are already connected in transacting. That makes the
frictionless entry that much easier. Think about Facebook. Why would you join any other
personal network when most of your friends and family are already there.
The second is the aspect of value. Can I manage most of my collaborations in a single
environment or do I need to join multiple networks in order to complete a transactional process?
The more capabilities you can layer in to make it more convenient for all members of the
network to collaborate, the more value add.
And third, I believe that we've only scratched the surface on these insights. I wouldn’t even say
that it’s a two-sided model. It’s a multi-sided model, where once you get these parties
collaborating at scale, the transactional relationship and community-generated content can
deliver new insights to help folks make more informed decisions, whether it's, which trading
partners to do business with or which areas of your existing supply chain might be presented
with risk in the future and you need to adapt quickly or which ﬁnancial settlement options you
have to settle out to help you optimize cash ﬂow.
These are new insights that were previously impossible with traditional on-premise and point-to-
point integration models and it can only be accomplished in a network model.
Gardner: Very good. I'm afraid we'll have to leave it there. You've been listening to a sponsored
BrieﬁngsDirect podcast discussion on business networks. You've heard how open markets and
communities are rapidly changing business platforms, allowing sellers and buyers to ﬁnd and
know each other openly and therefore accelerating B2B transactions and commerce efﬁciencies.
And we have heard how companies can exploit business networks to automate and analyze how
they transact commerce in new innovative ways.
So a big thank you to our guests. We've been joined by Marshall Van Alstyne, Professor at
Boston University School of Management and Research Scientist at the MIT Center for Digital
Business. Thank you so much, Marshall.
Van Alstyne: Dana, thanks so much for allowing us to participate.
Gardner: We also like to remind our listeners that there will be a new book called "Platform
Strategies" out in 2015 from Professor Alstyne and co-authors.
Also a big thank you to Tim Minahan, Chief Marketing Ofﬁcer, SAP Cloud and Line of
Business. Thank you, Tim.
Minahan: Thank you, Dana, a great conversation.
Gardner: And a thanks to our audience as well for joining us for this discussion today.
I'm Dana Gardner, Principal Analyst at Interarbor Solutions. Don't forget to come back next time
for more BrieﬁngsDirect.
Listen to the podcast. Find it on iTunes. Sponsor: SAP
Transcript of a sponsored podcast on how business networks are fast emerging as trusted,
eﬁicient hubs for cloud-based commerce. Copyright Interarbor Solutions, LLC, 2005-2015. All
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