BEYOND PRICING
DECISIONS:
BUSINESS MODEL INNOVATION IN THE TWO SIDED
MARKET OF AN OPEN INNOVATION INTERMEDIARY
07.24.2014
PREPARED FOR: Open And User Innovation Workshop, Harvard
Professor Dr. Frank Piller
Dr. Dirk Lüttgens
Andy Zynga
WHY THIS TOPIC?
»
The market for Intermediaries has become very competitive globally,
forcing the established players to “reinvent” themselves
»
Current literature on internal functioning of Intermediaries is light1,
and Broadcast Search2 is looked at as a “black box”
»
OI Intermediaries operate in two-sided markets3, and literature sees
pricing as the primary variable for business model innovation4,5
»
This essay is an opportunity to open the “black box” of
Intermediaries and show how service quality is a MAJOR variable for
success
1Howells,
J., Intermediation and the role of intermediaries in innovation. Research Policy Journal, 35: 715-728, 2006
L.B., Lakhani, K.R., Marginality and problem solving effectiveness in broadcast search. Organization Science, 21:5, 1016-1033, 2010
3Holzmann, T., Sailera, K., Katzy, B.R., Matchmaking as multi-sided market for open innovation. Technology Analysis & Strategic Management, 26:6,
601-615, 2014
4Eisenmann, T., Parker, G., Van Alstyne, M.W., Strategies for two-sided markets. Harvard Business Review, 92-101, October 2006
5Kouris, I., Kleer, R., Business models in two-sided markets: an assessment of strategies for app platforms. International Conference on Mobile
Business. Paper 22. http://aisel.aisnet.org/icmb2012/22. 2012
2Jeppesen,
THE RESEARCH QUESTION
How do business model changes impact
the success of different market sides of an
open innovation intermediary that
operates in a two sided market?
RESEARCH IMPLICATIONS
»
Two Sided Market Success a function of
Price AND service quality / process
»
“Success” with Broadcast Search influenced
by changes INSIDE the Intermediary – should
not be seen as static!
• Erwartungswert einer potentiellen Abfrage
der
Informationen durch ein Unternehmen
Wissenschaftler
Ansatz des Open3Innovation /
• Unterliegt „local search bias“ bei Suche /
Unternehmen
2Evaluation of Search
1
Broadcast
• Motivation durch „Not Invented Here“
begrenzt
• Reputationserhöhung
THE
TWO SIDED MARKET OF AN
Wissenschaftler
Unternehmen
3
2Plattform für
1Broadcasting
OI INTERMEDIARY
Broadcast of search
Open / Broadcast of Search
Ansatz des Open Innovation
der Probleme
Innovation
Plattform
für
Broadcasting
Broadcast of search 3 rmittelt ag
Wissenschaftler
2
l
Open
e
h
b
c
der Probleme 1
Ü
ors
v
s
g
n
Lösu
Innovation
ttel
Unternehmen
t
für
rmi chlag ProblemePlattform
• Wissenschaftler
• Unternehmen
übermitteln Fragestellung an
Übe screenen
Broadcasting
ors of search
v
Broadcast
s
g
n
Lösuwenn Lösung bekannt oderOpenPlattform
der Probleme
• Reaktion nur
Innovation
Lösungsweg “einfach“
• Screening und Bewertung der Lösungen
• Wissenschaftler screenen Probleme lt
• Unternehmen übermitteln Fragestellung an
• Übermittlung konkreter Lösungen
• Belohnung des besten Beitragenden
itte
Plattform
erm rschlag
b
Ü
• Reaktion nur wenn Lösung bekannt
o oder
ngsv
Lösu
Lösungsweg “einfach“
• Screening und Bewertung der Lösungen
• Übermittlung konkreter Lösungen
• Belohnung des besten Beitragenden
• Wissenschaftler screenen Probleme
• Unternehmen übermitteln Fragestellung an
Plattform
• Reaktion nur wenn Lösung bekannt oder
Lösungsweg “einfach“
• Screening und Bewertung der Lösungen
• Übermittlung konkreter Lösungen
• Belohnung des besten Beitragenden
Adapted from:
Piller, F.T., From technology market places to problem places. Quebec Seeks Solutions. Quebec City, Canada, December 14, 2010
NINESIGMA IN TWO-SIDED MARKET
Proposal
Innovation Seekers
(Clients)
Contract
$
Proposal
NineSigma
OI
RFP
Transfer Agreement (IP)
$
»
Client contract fees changed
»
Project selection step introduced
»
Solution Provider evaluation introduced
Global Innovation
Community
EVOLUTION OF THE TECHNOLOGY SEARCH
PROCESS AT NINESIGMA
2000
2005
2006-present
DATA EXTRACTION & ANALYSIS OVERVIEW
Data Source
How Used
Specifics
Project Selection:
128 projects / 5years
Results
Project Data (from
database)
Extract deal rates for selected
clients
Staff Interviews
Understand timing and extent of
Management Team & Founder
service changes
Correlation between service
changes and deal rates
Staff Interviews
Determine which client
examples to choose for review
Service Delivery VP
Selected two major client cases
Internal Memos
Follow decision making on
business model changes
2001 – 2011
Established decision timing
NineSigma P&L
Determine transaction fee
revenues evolution
2009 – 2013
Understand timing of fee decline
Client
communication
documents
Determine basis for business
model change decisions
2001 – 2011
Checked timing and impact of
decisions on selected clients
SP Evaluation:
93 projects / 5 years
Correlation between service
changes and deal rates
TREND IN TRANSACTION FEE VOLUME VS OVERALL
REVENUE
160
% of value wrt 2009
140
120
100
80
60
40
20
0
2009
2010
Trans Fees
2011
# RFPs
Overall Revenue
2012
2013
50
45
40
35
30
25
20
15
10
5
0
50
Introduced project selection
40
30
20
10
0
2001
2002
2003
2004
No of projects
2005
2006
% deal closed
2007
2008
% deals closed
Number of Projects
INDICATIVE EFFECT OF PROJECT SELECTION
STEP OF ONE CLIENT
Increase in average number of proposals per search
INTRODUCTION OF PROJECT SELECTION
Average Number of Proposals Received
25
20
15
10
5
0
2005
2006
2007
2008
2009
SOLUTION PROVIDER EVALUATION
SUPPORT PROCESS
EFFECT OF SOLUTION PROVIDER EVALUATION STEP
ON PROJECT SUCCESS AS ONE CLIENT
35
Deals Closed (%)
30
Introduced evaluation support
25
20
15
10
5
0
2005
2006
2007
2009
2011
BUSINESS MODEL CHANGES & IMPACT
ON ALL SIDES
Business Model Change
Impact on Seeker Side
• Easier budgeting of projects
due to fixed price
Elimination of Transaction Fee
Introduction of Project Selection
Introduction of Solution Provider
Evaluation Support
Impact on Solution Provider Side
• More interest in submitting due to
higher possible asking prices (no
additional fees)
• More new clients
• More Solution Providers due to
more clients
• Fewer projects overall, but
more fully funded RFPs
Impact on NineSigma
• Better cash flow due to higher
fees early on
• Higher overall fees per RFP
• More revenue overall due to
more clients
• Higher close rates increase interest • Better credibility with clients
leads to higher client satisfaction
in submitting, and more Solution
and repeat clients
Providers will sign up
•
Faster process leads to higher
• Faster process leads to higher
client satisfaction/repeat clients
satisfaction
•
NineSigma value addition more
visible
• More deals closed, more repeat
clients, more revenues
• More touch points with NineSigma, • Higher fees per RFP, more
better understanding of value,
revenue
better reputation, more Solution
Providers signing up
RESULTS HIGHLIGHTS
RESULT
IMPACT
• Fee (price) changes on Seeker side. Has impact
on Solution Providers & OI Intermediary
• Confirms existing literature –
pricing = major variable of business model
changes
• Service/Process changes impact all sides
• Service quality = MAJOR additional variable
to be considered in two-sided markets
• Service/Process changes influence Broadcast
Search success
• Studies on Broadcast Search success need to
consider changes INTERNAL to OI
Intermediary for comparison of results
LEARNINGS
»
Service/Process changes are relevant to both research on twosided markets as well as success with Broadcast Search.
»
OI Intermediaries are not static, due to pressures both external
AND internal they tend to evolve, and with them the entire
business model.
»
Findings may not be representative for other OI Intermediaries,
especially for those who do not practice Broadcast Search.
KEY REFERENCES
»
Boudreau, K. J., Lakhani K. R., How to manage outside innovation.
MIT Sloan Management Review, 50: 69-76, 2009
»
Chesbrough, H.W. A better way to innovate. Harvard Business
Review, July 2003
»
Chesbrough, H.W., Open Innovation: The New Imperative for
Creating and Profiting from Technology. Harvard Business School
Press, 2003
»
Eisenmann, T., Parker, G., Van Alstyne, M.W., Strategies for twosided markets. Harvard Business Review, 92-101, October 2006
»
Jeppesen, L.B., Lakhani, K.R., Marginality and problem solving
effectiveness in broadcast search. Organization Science, 21:5,
1016-1033, 2010