Digital Business Models: What’s in it for you?

There seems to be something in the air: ‘digital’ seems to be everywhere in the business world, and yet at the same time many people aren’t really aware of what it means. ‘Digital’ doesn’t just mean shiny new tech; it’s not ‘IT’ dressed up in a modish word. No – ‘digital’ really refers to your business model. So how ‘digital’ is your business model – and if you’re not engaging with digital, is this a problem?

Let’s start by understanding what we mean by ‘digital’, therefore. Think of many of the most discussed businesses around: Peer-to-peer lending sites; Spotify; Skyscanner; eBay; Tripadvisor; Rightmove; Jobsite; Uber; Apple’s iphone; Amazon; Google; AirB&B. All of these have a digital business model. They are all mediators between those that supply goods and services, and those that consume them. Importantly, they are able to do this because they use a commonly available, web-based infrastructure that is easily accessible to everybody. And because it is easily accessible to consumers, it attracts lots of interest from providers. In short, they are all digital platforms whose critical mass is capable of attracting ecosystems of innovators and investors, like flies around a honeypot.

So why is this digital business model important? Well, maybe ask the record industry, traditional travel agents, estate agents, recruitment consultants, taxi drivers, bookshops, and hoteliers. In short, digital platforms disintermediate traditionally-organised bureaucracies that extract value from brokering any sort of transaction because they are able to offer consumers far greater choice, for far lower overheads and therefore at far lower margins than traditionally-organised businesses. As these business models take hold, any industry dealing in goods and services for which there is widespread demand, almost regardless of what they are, is in the firing line for a disruptive digital play that could send them out of business.

And the danger doesn’t extend just to the front office: back office jobs are similarly at risk. Emerging digital platforms that are able to standardise HR, payroll, finance, legal, etc are all starting to emerge – one or two of them are even free. Any organisation that is able to standardise the way it does things in the back office can start to take advantage of these applications and save a fortune. Nor is the private sector the only area affected. Consider the example of NHS Jobs, the UK NHS’ e-recruitment portal. Prior to 2003, there was no central platform for recruitment in the NHS; health workers enjoyed very limited choice of jobs that was restricted primarily to their own region, and the 600+ NHS employers each operated their own HR recruitment processes and offices. Between 2003 and 2012, these organisations standardised on a single recruitment platform that gave workers the choice of the entire UK market, and saved the UK in excess of £1bn in previously duplicated, redundant bureaucracy. Suppliers now compete to run the e-recruitment service ever more cheaply – because of the opportunity it affords to offer innovative new services on the platform. And just think of the possibilities of this sort of model for local government: in the UK, we have 400+ of these organisations, all of whom do almost exactly the same things in different ways!

For chief executives therefore, whatever your business, and whichever sector you are located in, it may not yet be important to understand much of the underlying technology, but it has already become essential to understand what digital business models are, whether or not they will eventually threaten your business, and what you can do about it. Here are some handy tips to get started:

  • Is your business a brokerage? If so, you should look seriously at your overheads, margins, and consider how a digital platform might undercut these.
  • Does your business do anything for which there is widespread demand that could be commoditiseable by someone else? If so, your relationship with your customers might be similarly disintermediated, and you might want to move first.
  • Is your business structured using traditional ‘stovepipe’ silos, with lots of potentially duplicated back office processes? If so, you are potentially squandering a fat proportion of your potential bottom line on redundant process.
  • Does your business collect and use data in an intelligent way to understand its customers? If not, you may be ‘running blind’ in comparison with others that may similarly disintermediate you.

If any of these things worry you, you should start to think seriously about digital business models, and what the journey to such a way of organising might take. You will probably need to get your own house in order first – that means information sharing, horizontal platforms, standardising processes, consuming services rather than doing everything in-house – before you start to try and build platforms with the capability of disrupting your industry.  You will need to think about the skills that you will require, and the sort of roadmap you will need to guide your route.  You are likely to end up as a very different organisation by the time you have finished your journey.  Better, perhaps though, to do this than end up as a footnote to someone else’s.

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