Platform Economy

Hello and welcome to Leading Digital Transformation with Rob Llewellyn and the Digital Transformation People. In this podcast series, Rob interviews experienced practitioners, authors and thought leaders whose stories and experiences provide valuable insights for digital transformation success.

Hi and welcome to another episode. Number one in the Face Thinkers 360 list for digital transformation and digital disruption is Hayden Shaughnessy. And he pioneers new ways to practice business agility. Hayden is a founder of Flow Academy where his role is to help companies sort out problematic transformations or design them with a strong chance of success. As well as being featured by HBR and Forbes and and a published author of no fewer than four books. Together with his partner Finn Golding, Hayden has developed methods for assessing value and directing innovation more effectively. His book Shift is a leader's guide to the platform and ecosystem economy and was described by Forbes as everything you need to know about digital transformation. His clients include the likes of Swift, Fujifilm, the Swiss stock Exchange, JP Morgan and many others. Let's hear what Hayden has to say about platforms, ecosystems and the challenge of transformation.

Hayden, welcome.

Thank you. Good to be here.

Hayden, let's talk about transformations failing and succeeding. Do you think that the fact that consultants scaring clients by saying that if they don't do this or that their transformations will fail is a really fair comment for them to make?

I think that consultants are often responsible for the failure. I think that in the past consultants have had a really important role. So if you take something like AI, it's actually quite difficult for an organization to take AI on board. The skills aren't there. But consultancy can go and do three or four AI projects, learning along the way and become very, very proficient at that. I think the problem with transformations is that there's no model to apply and there's no model to generate that you can apply as a consultancy. You've got to be very, very situational and very much in the circumstances that the company faces. So it's very difficult to do the kind of division of labor type thing where a consultancy becomes an expert in a transformation. So my sense is I'm talking to the companies that hire in these, especially the big four, that the big four try to create a model, they try to apply it, they often fail and they are part of the story of why transformations fail.

So, okay, we've focused in on the big consultants and the role that they might play in transformation failure. What can organizations do themselves to increase their chances of success and to avoid the typical pitfalls that we're seeing?

Well, I think that a lot of transformations in the end, come down to how free can teams be to co create the new conditions of work. And very often what happens inside an organization is that there's very little focus on the communication. So we talk about things like culture or divisions between it and business, the business of trying to impose requirements on it. Because of course, most companies rely on software for their products these days. So I think we have this situation where there's a need for a massive amount of communication. That doesn't really happen because we focus on the problem rather than on how we communicate about the problem. In the work that I've been doing, we very much focus on social interaction. So we try to say good decisions in work stem from good social interaction. Most organizations limit social interaction to things like meetings. Meetings are the kit of death, of course. So we try to create visualizations of work processes and we try to encourage people to have these visualizations readily available on the walls of the building so that people can actually have conversations about what they're doing. And believe it or not, that's actually very, very powerful.

Hayden, you talk about new market dynamics. Can you explain what you mean by that?

I think there are a number of new dynamics in the marketplace that are forcing companies to not just transform, but to create new organizational forms. And we see those new organizational forms in the platform and ecosystem movement. I think now for about, well, perhaps in the App Store, Apple App Store 2008, companies have become increasingly aware that they need some kind of platform. I think that idea is a bit oversold because it's not that difficult to create a platform. What's more difficult is to create this ecosystem of participants in your economic activity and that ecosystem. The idea of the ecosystem and ecosystem thinking is very, very underdeveloped. But it is extremely important. And it's at the root of the new market dynamics that I think companies are facing. They're also facing though things like those ecosystems or ecosystem ways of doing business have been harnessed very quickly by Chinese companies. So if you look at a company like Alibaba, its ecosystem is vast. Its own companies, the companies that actually own span things like the Amazon type product platform to sell goods to people, logistics on a global scale, payments on a global scale, insurance, medical technology, cloud services, cloud platform, even football teams, retail shops, auto, you know, the connected car. Those types of very modern ideas about automated cities, smart cities. So here's one company, the company and its owner, that has an ecosystem that spans most areas of economic activity in the west. That would be called antitrust or it would be called A cartel, it would be seen as very dangerous. In China, it's not seen that way. But I think what the lesson is in there is that unless you start to think about an ecosystem, unless you challenge your ideas about core competency, the limitations that we impose on ourselves in the west, then we're going to lose out to these massive Chinese ecosystems. So that's another aspect of the new market dynamics. And I think that the final part is these Asian companies address markets of billions. So if you're Chinese, you've got 1.4 billion. But if you look around Chinese influence in Asia and Africa, you're looking at a market around about 2030, 2040 of somewhere in the region of 5 to 6 billion people. So the kind of scale benefits that Asian companies are going to get from that are creating new market dynamics over here and will create more. So I'm creating a huge amount of price pressure.

You know, that's really interesting what you said about the Chinese market and platform. So I guess what we've got here, correct me if I'm wrong, we've got this terrific model, this platform model, which any country and industry could take advantage of. But am I right in saying that because of policies and laws, countries other than the likes of China are not able to take full advantage of platforms?

I think that's going to be the case. I would emphasize the ecosystem more than the platform because the ecosystem is really the organizational form which breaks some of the rules that we impose on ourselves in the West. I think, yes. I think ultimately, unless we address antitrust issues, unless we start to look again at how cartels perform and find ways in which we can allow companies to grow in scale, then we're in trouble economically. Of course, when you start to get these kinds of companies, when you start to get cartels, right now a platform summit in Germany, Platform Europe, it's called Platform Summit Europe. You know, the history of Germany is to some extent before 1945, the history of the kind of damage that cartels can do. So we're straying into quite significant political and economic risk with the way platforms and ecosystems are evolving. But we have to address it.

A lot of different people are talking about platforms in different ways at the moment. Do you think platform transformation is being talked about enough and in the right ways?

I don't think it's talked about in the right ways. I think that where people talk about platforms at the moment, they tend to think in terms of two sided markets like Airbnb and Uber or dating sites and the pricing mechanisms that attract people into platform activity. But I think that's actually quite a narrow academic concern. What's really happening out there is that the platform is a technology. So the platform is things like transaction engine. So if you look at the great innovations in the early part of the web, Google Ad Search and AdWords, a transaction engine that can manage many millions of very small transactions, sometimes down around 25 to 50 cents. If you look at Amazon right now, the big innovation in Amazon marketing is being able to advertise your books on Amazon's platform. It's kind of crazy in a way, but again, you're bidding something like 30, 40 cents for having your book advert, your book advert receive a click. And it's extraordinary. In a way, it's paradoxical. Something in this very highly scaled world that we live in relies very much on micro consumption, and in this particular case, the micro payment transactions. So I think that that's what the platform is. So the platform actually allows you to do these things that we were never able to do before because the cost was too high. So it's a great sort of cost reduction device, if you like. I think that the real economic energy lies in the ecosystem. And a lot of companies think that they can plan an ecosystem. I'll give one example of an ecosystem that's totally unplanned, but it's nonetheless interesting. I think that the Amazon book platform has many elements to it that Amazon does not control and can't control. So Amazon has a very poor search engine. And one of the things that happens on Amazon is that entrepreneurs go and find books that are buried away in the Amazon search engine. They then buy those books, maybe for 20 cents or a dollar, then create a new product page for that book and they resell it at 20, 30, $40. And that's actually external entrepreneurs managing the long tail. Of course, Amazon depends on the long tail of products that somebody out there somewhere want. So actually, what you see in that particular instance is an ecosystem activity. People who have no relationship with Amazon going on buying and reselling books at 10 times the value, actually creating value, because once they do the new product page, people can find that book much more easily. So Effectively, they're paying $18, $19 for easier searchability. But the interesting part about it is that that company has no real relationship with Amazon. And if you look at the Airbnb ecosystem, you see something similar, that most of the activity in the Airbnb ecosystem is not controlled by Airbnb. So access control service providers, conferences or cleaning companies or Tenancy management software have nothing to do with Airbnb, but they proliferated around Airbnb. I think the lesson is, for many of the managers out there, you can create your platform, but there's something quite different in the way ecosystems evolve around those platforms. Having the platform strategy is only one half of it and not even half of it. Having the sensibilities to help ecosystems to grow around you is a totally different management and totally new management skill.

So how do you relate ecosystems to new ways to work?

I think it's this extreme flexibility that you need. We tend to call that flexibility agile or agility. So, first of all, on a managerial scale, leave me aside agile for a moment. On the managerial side of things, you have to have a way of creating economic activity and nurturing economic activity that does not directly reward you. If you look at what the CEO at Tencent says, it's absolutely that what he looks to do with his strategy is, is to promote the good of the ecosystem. You'd invest in the benefit of the ecosystem going to everybody within it. So the pure profit driver that we've been used to now for a couple hundred years doesn't work with ecosystems very well. And you have to start rethinking how you invest in a kind of indirect benefit to your business. So I think that's a whole host of things that senior management need to think about, and they don't think about it. It's very difficult for them to contemplate it. But in another sense, in execution terms, what you see with these platform ecosystem businesses is that there's a huge amount of innovation, and Amazon is obviously a great example of that, but I think they're all the same. Now you can manage a lot of that innovation. You might assume you can manage a lot of that innovation internally, because Apple seems to do a lot of that. But if you look at Apple's work, the Apple Watch, the health industry, Apple sits at the center of a very wide range of companies who are doing analytics around what does it mean when you capture certain patterns in the heartbeat? How do you best define heart rate variability? What value does an ECG taken by WATCH really have? And so a lot of people in the medical field, I think, starting to gravitate towards the data that the watch creates. But Apple can't control any of that. It has to interact with it. And I think that's again, even a kind of control. Freaky company like Apple has to accept that when it gets into some of these situations with its products, it's relating to the people around it, not managing them.

I guess this is a massive mindset shift that leaders need to take if they're to take four full advantage of the kind of ecosystems you've just been talking about. Correct. You just give a really good example of Tencent about their CEO wanting to provide value. It's a big mindset shift, isn't it, Hayden?

I think it is a big mindset change. I think actually Tim Cook at Apple isn't too bad at making that change. And Tencent and Alibaba course lead in this area. If you look at what Alibaba did in 2016, I think it might have been 2017, but 2016, 2017, they trained 1 million young Chinese people in the countryside in how to set up and run a business. Now, there's a clear advantage to Alibaba if a million new businesses are set up in rural island because they're going to sell to the Alibaba platform. But leave that aside or compare it to the role that Alibaba is taking on there. It's actually taking on an economic development role. And Tencent similarly takes on an economic development role. I don't think we quite grasp the responsibility for things like economic policy is gravitating towards these platforms and ecosystems. And in China, where you have a strong state control mechanism, you're probably better off adopting that economic development role sooner rather than later and actually showing how well it can work, showing how important you are to the economy. I think we are avoiding that in the west at the moment. I think it's part of the whole transformation journey that we need to go on, which is to say, okay, well, between, I think around about 2013 and 2016, it was estimated that Apple created something like three and a half million new jobs in Europe through the Apps platform and probably 5 million in the United States. Well, let's grab hold of that. Let's start to work with that because basically a lot of the responsibility for job creation passed to the private sector at that point, and the private sector succeeded in a way that government simply can't succeed. So we need to work with that rather than ignore it.

Now, we've talked about some of the superstars in this digital economy, such as Amazon, Tencent, Alibaba, et cetera. But we've got a lot of organizations out there wanting to get on this journey of transformation that you just referred to.

Let's focus on how do they begin.

These transformations, Hayden, when a lot of them have no experience of transformation. They've been ticking over operationally for many years, how do they begin a transformation?

So I think there are different dimensions to it, aren't there? And we hear about digital transformation a lot. So how do you start to digitize some of your workflow? That's probably paper based at the moment, and even that's problematic. Then there is this other piece of transformation where you're trying to transform to something that's more central to how a market operates. And I think that you see that happening or you see the conditions for that to happen in different industries. It varies, of course, but if you look at something like the transport industry, we are now thinking about mobility rather than the train or the bus or the car. So there is something that is happening in transport that will lend itself to a platform and ecosystem play and is lending itself. If you look at the whole electrification of business, so going from pure carbon to electrically powered business, I mean, in the sense that you might have a mine that converts from its equipment being run on diesel to being run on electricity. So there is this other part of the economy quite closely related to transport, which is all about electrification. The players that are in that market would tend to be the players that have been in the traditional transport industry. So you get people like BP and Shell, you get some of the car manufacturers, and you get a generation of new players that have electricity saving devices or energy saving devices. So I think that very often what you're faced with are the conditions to do platform and ecosystem plays. And I think that those conditions are quite extensive. If you look at the medical field, you'll probably see something similar. You see it in banking. The banks want to relate to more closely to fintechs. They have difficulty in doing that. And it's not clear that the fintech industry is the right ecosystem for them or that their strategies are right. But first of all, I want to say that the conditions are there for doing business differently. The mindset change comes, I think, to a certain extent from scale. So say I'm a bank and I'm looking at my conditions, the conditions of finance and payments and the delivery of goods. Because I think there's a case for saying that anybody who's financing things should also be in logistics. So if I'm a bank and I'm looking at the market out there, incidentally, Barclays Bank CEO was at the MIT Platform Summit about a month ago and declared that Barclays is a platform. The problem with that claim and also with how banks think, is that really what you need is to have say, 4 or 500 million customers. That's the name of the game as Barclays, you might have 20 million, you might not even have that many. And the first problem I think they hit against is that they just don't think in terms of the right scale. They also tend to think of the complexity of the product range and service range that they have. Whereas, in fact, what they need to do is simplify that down and go to a kind of mono product mindset, because online and globally you can sell single focus products very easily, whereas you can't sell complexity at all. So if I was a Barclays, right now I'd be saying, how do I see the road to 300 million customers, 400 million customers by say, 2030? Actually by 2025, but 2025 and scaling about that. So you'd be looking at saying, what product can I focus in on that's going to give me access to 2, 3, 400 million people? 3. And what kind of pricing policy do I adopt that means that I'll get that kind of uptake and that I can compete against an Alipay or other Asian payment mechanisms that come to market. So I think it's a bit about that. I think it's also in electrification, you might be saying something similar like, okay, how do I provide the solution for charging in high density urban areas? I'm certainly not going to be able to do it on my own. What does it mean to be a charging company when half of the world's car fleet is switched over to electricity? You've got to start thinking that that's probably going to affect the lives of hundreds of millions of people. So again, it's about how do I operate, how do I do that at scale? And most companies will start off by saying, how do I do that at high margin? And I think that's the wrong approach. How do we do it at scale at very low margin, but very low margin, over 400 or 500 million customers? So my answer is, first of all, you have the conditions for platform and ecosystem businesses out there, but you need to have the right mindset. And the right mindset is this kind of exponential scale. And I think once you start to think in terms of the right scale, you need to narrow your focus down to a very small range of products, or even a mono focal point at the early stages, and grow from that. And from there adopt the kind of mindset that you see becoming more and more common, which is actually, I don't focus on a core range of products. Ultimately, I have the broadest possible range of products and services. But of course, you've got to take time to get there. So a number of new things that are happening. Ignore core competency, think about the range of adjacencies you can build in your business. Forget about your domestic market and think about this global market and the kind of scale that you can reach. Forget about margin, go to near zero margin scaled over 4 or 500 million people. Those are the types of mindset changes I think that senior leaders need.

Hayden, you talk about end to end flow. What do you mean by that?

So I probably didn't answer fully the question you asked earlier, which is why do you need new ways to work? And I think you need new ways to work because you're going to break a lot of rules. We have to see companies breaking the rules of business that they've grown up with and their managers have been educated in. And that applies to people that are doing delivery work. So basically what we need are people who are able to generate small businesses within a large business and to generate a lot of these over time. So we don't want people that are going to follow a prescription for what they need to do. We need people that are going to be much more creative and much more entrepreneurial inside companies. Once you start to do that, I think that you have the opportunity to say, actually most businesses right now stall a lot of creativity in progress because they have reporting lines. So work begins, a report goes up, it gets signed off, permission to continue comes down or doesn't come down and people sit around for a long time. Actually, if you move to a kind of a higher type model where you think of your business as being thousands of micro businesses, then you start to eliminate those reporting lines and you eliminate this really tedious drag on people of always having to seek permission for the next move that they make. People can go end to end so they can start with an idea, a team can work with that all the way to delivery. And as far as acquiring the customer feedback in order to improve the product or improve the service or improve the processes that create the product service.

Hayden, we're going to have to wrap it up there. But before we do that, where can listeners go to learn more about the concepts you've been talking to us about today? New market dynamics, ecosystems, etc.

Well, there is a book called Flow A Handbook for Change Makers which is available on Amazon. It's a good starting point. There is the Flow Academy website, flow academy.org and both good places to start to think about these types of things. And there's Another book called 12 Steps to Flow, which is more of a practical guide on how to start doing end to end flow.

Excellent. We'll put links to those in the show. Notes Hayden, thank you so much for your time today.

Thanks. It's been a pleasure.

We hope you enjoyed this episode of Leading Digital Transformation with Rob Llewellyn and the Digital transformation people. Visit thedigitaltransformationpeople.com to secure the knowledge, talent and services you need for digital transformation success. To continue your journey as a Certified Transformation professional, visit rob llewellyn.com be sure to subscribe to the podcast and follow us on Twitter hedigitaltp and obertlewellyn.