CognizantiAn annual journal produced by Cognizant VOLUME 9 • ISSUE 1 2016 Part III Digital Business 2020: Getting there from here! Commentary Making Dollars & Sense of the Platform Economy Commentary Making Dollars & Sense of the Platform Economy By Anand Chandramouli As market dynamics change, the digital economy. Consider the argument made by economist Ronald Coase in his organizations must figure out seminal article “The Nature of the Firm,”2 how and where to plug and in which he examines the primary driver for forming partnerships and companies instead play with emerging platforms of trading bilaterally. In an inefficient market, that create economies of he argues, it makes more sense to conduct business through a centralized company scale and new forms of value. because it helps minimize transaction costs (hiring, negotiating, contract enforcement) for value creation. Platforms are proliferating across industries at the speed of digital. Underpinned by the Now, what if the market rigidities3 and Internet, and powered by social, mobile, inefficiencies that made those economics analytics and cloud technologies (aka, the compelling were to change? What happens SMAC Stack), platforms are upending when the transaction costs of exchanging long-held conventional wisdom about how value, outside the company, decline to markets work, the role of intermediation and below the company’s in-house costs? In transparency, and the variety of interactions such a scenario, the economic rationale for and transactions they enable. the company ceases to exist. That’s exactly what’s happening amid the unfolding Code Platforms vary widely in their focus; while HaloTM economy and the emergence of open some support broad, horizontal markets, application programming interfaces (APIs) others target specific business functions or powering more transparent and digital industry sectors. As they grow in stature, markets. In this environment, the market is they empower both business professionals unbundling – and the centralized company and consumers, and amplify trust by reducing concept is under siege. informational asymmetry between market participants. Platforms also deliver a rich customer experience through digital tech- A Micro-Platform nologies that immediately recognize market Economy Emerges participants via their Code Halos,1 and drive down the cost of service intermediation. In This reality is fully apparent in the short, platforms are ushering in an economic financial services industry, where sweeping shift, in which market participants win with changes (i.e., increased regulatory scrutiny, scale and ubiquitous reach. tightening profit pressures and inroads made by insurgent, nonbanking competitors) The growing popularity of platforms is tied underscore the disruption of businesses with to shifting economic assumptions caused by high in-house transaction costs. Industry Cognizanti • 2 segments such as payments, peer-to-peer Platform Disruption lending, trading and personal wealth management are all being transformed by the As platforms proliferate, they are disrupting dynamics of the platform economy. long-held assumptions about how businesses and markets operate. Fidor, a German bank that originated after the 2008 financial crisis, is a textbook case of Here are a few areas experiencing the most a bank-led suite of componentized financial change. Beyond financial services, business functions such as human resources and related services are similarly becoming componentized through modern business platforms. services. By developing a core platform and Periphery Becomes the Core a series of APIs, the mobile-only bank has Platforms are changing traditional notions generated a modular bank offering. While of businesses’ core value propositions, often Fidor manages the customer interface, it elevating formerly peripheral services and partners with online loans company Smava under-utilized assets to a central role. For to provide peer-to-peer lending; distributed example, Uber doesn’t employ drivers or financial technology provider Ripple Labs, own cars, nor does fellow platform economy Inc. to provide a cryptocurrency payment forefather Airbnb own rooms; both connect acceptance capability; and portal provider consumers with assets, bringing to market the Sharewise to provide an equity investing and untapped social, economic and environmen- trading platform. tal value of idle/under-utilized assets.4 Beyond financial services, business functions Additionally, platforms make a virtue of such as human resources and related services non-core, peripheral activities. Consider the are similarly becoming componentized list of services Uber offers that traditional through modern business platforms. Services taxi services don’t: such as recruiting, benefits administra- tion, payroll, contract staffing, workforce OO Payment infrastructure that enables analytics and even culture management are efficient transactions. all being altered by platform approaches. For OO Identity infrastructure, to screen out example, companies can blend the platform customers with negative credentials. services of RealMatch Ltd. (recruitment), OO Sensors that trace customers and cars in Zenefits (benefits management), ShiftGig real time. (on-demand staffing), SyncHR (real-time HR operations data), CultureIQ (culture surveys OO A self-governing system in which riders and reporting tools) and Visier (workforce and drivers who fall below a predeter- analytics) to devise an HR function. mined rating are reviewed, and corrective actions are initiated. 3 As digital technologies take root, the agency of the traditional company will give way to the agency of the individual. With the advent of digital technologies, to distort free markets and buyer behavior, these services have become central to eventually leading to market failure. In “The offering a rich service experience, making Market for Lemons,”6 economist George the traditional classification of core/non-core Akerlof describes how information asym- functions obsolete. metries prevent the efficient exchange of mutually beneficial goods and services, using Atomization of Company the example of used car markets. Structure In a used car market, buyers lack adequate Platforms also empower individuals to do information to distinguish the lemons (bad what it used to take an entire enterprise cars) from the plums (good cars), leading to accomplish. As technology drives down them to view every car with suspicion and transaction costs, platforms are delivering decreasing their willingness to transact. This, physical services by atomizing company in turn, distorts the seller’s behavior, who is operations (i.e., deconstructing organiza- discouraged from selling higher quality cars. tions into their smallest elements). Today, Over time, information asymmetry leads the individual can and has supplanted the to an adverse selection process, driving out company, thanks to the operating efficiencies the plums and leaving the market with a enabled by the digital ecosystem. profusion of lemons. Platforms augment individual capacity with Likewise, information asymmetry also leads appropriate tools, making a “franchise of to moral hazards. In an asymmetric field, the one”5 an operating reality. Consider Zopa, better-informed party would exploit asymme- a peer-to-peer lending platform on which tries to profit in a dishonest way. Asymmetry individuals are financiers, and Kickstarter, a of information ultimately scorches the crowd-funding platform for new projects, on market, forcing governments to enact which individuals are the angel investors. consumer protection regulations. As digital technologies take root, the agency Successful platforms, aided by digital tech- of the traditional company will give way to nologies, have to a large extent overcome the agency of the individual. An atomized the problem of information asymmetry by company is a logical extension of an atomized increasing information transparency, and society, mirroring individual aspirations, one building in reputational mechanisms (such in harmony with the other. as rating systems, feedback opportunities and provider profiles) to create trust.Such reputational mechanisms are not perfect, of Democratization of course; coarse or biased reputation measures Information can prevent buyers from making proper inferences, or buyers may form opinions based Platforms also overturn another long- on a single transaction experience.7 In other standing problem of inefficient markets: cases, sellers may manipulate their reputa- unequal access to information. Information tions by underpricing.8 On balance, however, asymmetry between buyers and sellers tends the use of reputational mechanisms can help Cognizanti • 4 Successful platforms, aided by digital technologies, have to a large extent overcome the problem of information asymmetry. platforms identify and promote quality sellers,9 Look out for areas in which non-core and well-designed reputation mechanisms can services can be turned into delighters with substantially improve transaction efficiency.10 digital technology. As platforms begin to make inroads into deliv- OO Atomize the company. Reducing the ering sensitive and critical services, informa- entry barriers for suppliers will result in tion asymmetry in business processes present atomization of operations. Through atomi- an opportunity for digital entrepreneurs. zation, organizations give agency to the individual and unleash the flexibility and dynamism of the “franchise of one,” while