In the ongoing saga of digital transformation since the 1980s, companies have undergone a metamorphosis, shifting from analog to digital processes. This evolution involved coordinating, automating, and outsourcing activities, resulting in significant changes in supply chains and a move towards decentralization. Notable shifts include the transition from mainframes to client-server architectures and the advent of ERP, CRM systems, and, more recently, cloud and SaaS solutions.
Value Creation Dynamics:
Amidst this transformation, a profound shift has emerged – companies are creating more value from external partners than internal processes. Termed an “inverted firm,” this new production model challenges traditional organizational structures and impacts both technology and managerial governance.
Platform Giants Leading the Way:
Leading this trend are platform giants like Google, Apple, Facebook, Amazon, and Microsoft. Their scale economies in revenues per employee surpass historical benchmarks, showcasing the efficacy of external value creation. Even smaller firms adopting platform models demonstrate higher market values, margins, and lower employee counts compared to industry controls.
Firm Inversion Unveiled:
Unlike past transformations driven by automation and capital-intensive operations, today’s inverted firms achieve higher market capitalization per employee by orchestrating external value creation. This strategic shift goes beyond mere automation, emphasizing the coordination of resources beyond the firm’s control.
Digital Transformation’s Apex:
The pinnacle of digital transformation lies in firm inversion, where value creation transitions from the firm alone to a collaborative orchestration. Successful platforms provide tools and markets, enabling partners to grow, emphasizing value creation over traditional value capture.
Creating Value through Partnerships:
Inverted firms thrive by engaging external contributors, fostering an ecosystem where partners contribute ideas, resources, and effort. The management mindset shifts from control to enablement, and from capturing value to rewarding it. Successful platforms abide by a simple rule: “Create more value than you take,” ensuring partners actively contribute to the ecosystem.
The Evidence in API Adoption:
A study of 179 firms adopting APIs as interface technology reveals a stark contrast in results. Firms focusing on internal efficiency showed inconclusive gains, while those adopting external platform models, becoming inverted firms, experienced a remarkable 38% growth over sixteen years.
Network Effects and Intangible Assets:
Inverted firms leverage network effects, where partners create value for each other, leading to substantial growth in intangible assets. Traditionally tied to tangible assets, firm values have shifted dramatically, with intangible assets constituting 90% of S&P 500 firms’ valuation in 2020, emphasizing the importance of coordinating external value creation.
Managing Risks and Responsibilities:
While firm inversion introduces risks of partner interference and negligence, successful platforms actively curate partner offerings and swiftly address issues. Openness to outsiders enhances the risk of cyberattacks, demanding responsible data stewardship. The benefits outweigh the risks, with firms embracing openness significantly outperforming closed counterparts.
Implications for Executives:
Executives navigating this shift must embrace partner relationship management, partner data management, platform governance, and platform strategy. The demand for professionals in these areas is evident across diverse industries, including Barclays Bank, Nike, John Deere, Ambev, Siemens, and Albertsons, with numerous job openings reflecting the urgency of understanding and mastering the orchestration of third-party value in an increasingly inverted firm landscape.
Credit to hbr
