How ecosystem 2.0 helps companies compete with tech giants
A gold rush for digital transformation is sweeping the corporate world. The rapid mainstream uptake of online services accelerated by the Covid-19 pandemic has pushed the launch and upgrade of existing digital provisions up the priority ladder of many companies.
Sensing that companies did not want a repeat of their first forays into creating digital ecosystems, 100 companies to see how they might better replicate the success of the world’s most valuable companies – almost all of which are specialists in digital ecosystems.
The consultant labels traditional companies’ previous efforts as Ecosystem 1.0, and the coming wave of development twinning superior technology with better understanding as Ecosystem 2.0.
McKinsey argues that the ubiquity of digitisation and the improvement in analytical tools means the playing field between tech giants who started as technology companies and traditional companies challenging for digital land has been levelled to some extent.
An ecosystem is defined as a digital platform that intersects the consolidation of customers with strengthening or dominating customer journey touch points, even if some of the ecosystem is delivered via partnerships. An example is the UK’s Zoopla Property Group, which spans search and comparison engines for property, mortgages, household moving, utilities and home improvement. Other sectors including mobility, travel and hospitality, health and housing are also developing potential as ecosystems.
The magnetism of the one-stop shop combined with cost efficiencies is relentlessly attractive to customers; McKinsey estimates these networks could deliver a $60tn boost to the economy by 2025.
And the wind in the sails of this evolving economy is a panoply of tools and services, advanced database management and the emergence of hyper reliable communications such as 5G. Industry regulators are also helping. More than than, there is a collective will: 60 percent of banks surveyed by McKinsey said they were likely to form or join an ecosystem.
What went wrong with Ecosystem 1.0?
The research showed that, of 100 traditional companies which had launched digital ecosystem strategies, few saw significant financial returns.
Mistake #1: underinvestment in the digital ecosystem
Companies underinvested. While no one expects traditional players to bet the farm on a digital ecosystem, companies were too cautious about protecting their existing revenue streams to think big. This was driven by a lack of deep strategic thinking about customer journeys.
Mistake #2: underthinking migration to the digital ecosystem
Chasing existing revenue streams via a different format is a recipe for stalling. McKinsey gives the example of a bank that jazzed up its online lending app and relied on a marketing push to migrate customers. Few bothered, because the drive was not supported by lower borrowing costs or ease of use.
Mistake #3: lack of understanding on partnership barriers in the digital ecosystem
On the project board, partnerships can look exciting, progressive and frequently come with the additional kudos of a ‘sexier’ brand. But failure to nail down the ownership of value points in the digital ecosystem causes friction or rejection. Both partners must have a clear and sustainable vision for input and collection of revenue in the long term.
Mistake #4: failure to implement the right organisational model for a digital ecosystem
Failure to communicate the importance and benefits of a digital ecosystem project clearly lead to resistance from internal business units and failure to adapt incentives and databases that are fit for purpose. Strong change leadership is needed to implement careful design and governance planning.
How to succeed with Ecosystem 2.0
Given the scale of investment and potential losses from previous digitisation efforts, it’s important to get things right the next time around. Begin by mapping the digital ecosystem plans to the existing business model to see where the overlap is, and where the friction is. The overlap highlights ‘control points’ where companies can maximise impact on the value chain. You can use these to identify where you might focus your ecosystem, or (if there is no overlap) to identify partnership opportunities.
Having identified the focal point of your digital ecosystem you must create value by investing in building or reworking, or attracting partners. Advanced digital skills (AI, digital marketing, high-level supply chain, logistics, innovation) are frequently missing from traditional companies. On the plus side, these are skills that are increasingly easy to find quality partners in.
Finally, you must design at scale. Aim to win market gains and create value for all participants. Investors will demand it. But be cautious of extremes of vision. A serious play for success in Ecosystem 2.0 will demand reworking the organisational model. At one extreme, a company will silo the digital ecosystem in a single department rather than aiming for more holistic change. At the other, companies invest in companies they think are necessary for the transformation, then struggle to integrate the acquisition. The right model is somewhere in between, cut to the needs of both the company and the external market.
With boards and investors looking closely at digital ecosystem opportunities, it’s never been more important to gauge the market, communicate the benefit and – perhaps most importantly – learn from past mistakes.
'Doing digitalisation wrong and risk being left behind'
Research has shown that 55% of bank executives view non-traditional players as a threat to traditional banks. The fear is justified, as digital banks could have a cost base approximately 60-70% lower than theirs. If this looming threat from innovative and digital-minded industry disruptors has not been enough to trigger a digital rebirth of legacy financial institutions, surely the biggest disruptor of them all – the pandemic – would force change?
It seems that despite studies showing COVID-19's long-lasting effects on the global economy to be of the likes of a substantial one-year reduction in worldwide GDP of more than 6%, the necessity of cost-cutting in 2021 is still not a stake high enough to steer legacy financial service CFOs in the same digital direction that the world is heading to.
Modern living now operates online, both professionally and personally. Distributed working, retail, and socialising are all the ‘new normal’, and the financial services sector is no different; the pandemic has resulted in 71% of global consumers now using digital-banking channels weekly – with contactless and digital payments at the forefront of this shift.
Due to this demand, many banks are experiencing a 50% increase in the use of their digital services. Research has shown that accelerated consumer adoption of digital banking tools has led to the growth of new digital banking users by approximately 20% over the last year alone. The decision-makers at legacy banks now have a choice to make: understand and adapt to the modern consumer’s needs and lifestyle or watch them leave.
This is different from the threat legacy banks saw in the 1990s with the rise in internet banking or even the financial crisis of 2008. Consumers now have a plethora of options available to them with a click of a touchscreen button in the palm of their hands. In order to remain a noticeable competitor in the industry, legacy financial institutions will have to cut costs by 25-50% in the next 3-5 years, which simply won’t happen. A lot needs to change.
Transformation in various forms
This transformation can materialise in various forms, from introducing operational efficiencies and superior customer experience by leveraging AI, modernising legacy systems and processes to allow for cloud-native end-to-end experiences, to building digital onboarding, quick loan disbursements, and real-time payments. With studies finding that firms could digitise many activities 20-25 times faster than previously thought possible, it’s a convenience simply waiting to happen.
It would be wrong to imply that all legacy financial institutions have not thought about accelerating their digitisation. Research has shown that 45% of banking executives are keen on transforming their existing business models into digital ecosystems right now. So, if sentiment and plans to pivot are beginning to take shape, where are legacy banks going wrong and why are changes not being made?
It’s simple. They have their priorities all wrong. Data looking at the top banking priorities for post-pandemic FS shows the three lowest priorities mentioned are instrumental to achieving digital transformation success: innovation, operational excellence, and culture development. This lack of focus on technology, operations and culture will ultimately derail most digital banking transformation efforts, rendering these legacy banks obsolete.
Changes need to be made for these institutions to stand a chance of surviving against their disruptor counterparts. As Jack McCullogh, founder of the CFO Leadership Council, astutely said: “Few, if any, investments can give an organization a sustainable competitive advantage like an investment in technology”.
In every crisis there is an opportunity, and the pandemic is a perfect time for legacy banking to reassert themselves as a viable option for consumers and as noticeable competition in the industry. The world has been forced into digital, and these legacy firms are no exception. It is now or never.