CEOs Need to Ask the Right Questions About Their Digital Businesses

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Companies everywhere are making investments to build their digital businesses. Decisions about digital platforms can make the difference between high growth and high margins or limited growth with declining margins. Unlike other technology and business investments, the digital business gets to the core economics of the company: revenue, growth, and margins. The right digital business investments are of paramount interest to the CEO, who is charged with asking the right questions and guiding the right decisions.

Leaders should know that two critical economic factors get locked in by early decisions: the cost to add a customer to the platform and the cost of changing the platform to accommodate changes in regulations, user preferences, or technology. A good digital business minimizes these costs and protects the platform against changes in the user base, technology, and regulatory environments.

So how can a CEO protect the economic viability of his or her business while also making sure to explore the areas of greatest risk and change? Start with these five questions:

How broad is the scope of customers, devices, or third-party users, envisioned to be supported by the digital business? A common failure is to build the digital business to support a set of requirements and users which come from the traditional or legacy business. Over time, new users will need to be added to this digital ecosystem and they may arrive from new and different sources. A good digital business and platform will be able to accommodate new users with no increase in cost per user. Therefore, the company needs a vision of different paths that the market can take. Based on this vision, the company should assure the digital business and platform can support a reasonable assortment of scenarios. Lacking this capability “freezes” the ability to enlarge the audience, increases the costs of staying competitive, and ultimately degrades the economies of scale of the platform.

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What is the cost of responding to a business or regulatory change? Digital platforms often contain sensitive information that is subject to regulations that change over time, or changing user preferences. Some of the changes may only be applicable to certain segments of your users and defined based on device, location, or user preferences. A good digital platform architecture will ensure that it is possible to make necessary changes once for all users in the applicable segment, whereas a poor architecture will require repeating the change at multiple points throughout the platform. This will determine the cost of responding to a change, and ultimately the long-term viability of the digital business. If responding to such changes results in unmanageable costs and complexity, the scope of users that can be supported will shrink to make them more homogeneous. This may make the business simpler but it will hobble the ability to expand and grow.

How can third parties partner with the digital business to create incremental value? Unless the company is one of a small handful that can truly afford to quickly supply all emerging innovations on their platforms, it is faced with opening its platform to third parties or taking the riskier path of providing just enough innovation to keep customers engaged. Two popular third-party integration models on digital platforms right now are providing an “app store” where outside developers can offer integrations with your product and offering “APIs.” APIs, Application Programming Interface, allow third-party developers to interact with your platform, share services, and build complimentary products.

Some of the most well-known app stores are Apple’s and SalesForce.com’s. Good examples of APIs are Twitter and Facebook, and those companies derive significant portions of their revenues through monetizing access to the platform through APIs. Finding the right “open” model requires introspection on how the platform creates and distributes value, and what modes of “openness” provide a fair and sustainable distribution of value. This, in turn, needs to be reflected in the technology platform and the practices of the digital business. And it’s different from the conversation over open source, which I’ll cover in the next point.

How is the digital business positioned in relationship to current and up-and-coming open standards and open source? Competition on digital platforms is often asymmetric. One way this happens is through the ecosystem of open standards and open source contributors that can allow competitors to pursue your customers. While this may result in less control and less margins for the competitor, the reduced overall costs, the ability to scale, and the increased rate of innovation afforded by open source can outweigh the benefits of a proprietary platform. A good example for this is how Google has created an open source platform with its Android operating system as compared to Apple’s more proprietary and closely controlled iOS. Both have pros and cons. CEOs need to understand the implications of electing to build a technology platform as part of an open source and open standards community. This critical decision requires an in-depth understanding of the open standards and open source landscape, and forecasting its likely evolution into the future, and envisioning how the digital business will fare in different scenarios.

How does the digital business derive value from information flowing through it? Platforms facilitate the interchange of large volumes of information that characterizes usage patterns, preferences, and the intent of users. The value of this information can be tremendous, and a coherent strategy to mine it or monetize it needs to be part of the digital business plan. A smart platform architecture will allow retention and aggregation of the most valuable attributes of that information. It will turn that information into insights that continually increase the value of the platform to its constituents, and will enable monetization of the information through selling of anonymized aggregate information, better targeting of customers, and sharing of the value created by third-party innovations that leverage the data in the platform.

The five questions above explore the business and technology decisions and risks that underlie the digital business and are critical to its long-term agility and margins. While questions about revenue, viral growth, and privacy receive attention, it is the agility and margins that ultimately determine the success of most digital businesses.

Assuring nimbleness and agility is paramount, as is strategic vision and subject matter expertise. Beware of simply spreading the decision making among the different business functions charged with making the various parts of a digital business run. CEOs need to be aware that “future-proofing” these decisions to technology, market, regulatory, and customer changes is their responsibility.

Author’s note: The opinions herein are my own and do not reflect any views of my employer.

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