beyond pricing decisions:

1

BEYOND PRICING DECISIONS:

07.24.2014

PREPARED FOR: Open And User Innovation Workshop, Harvard

BUSINESS MODEL INNOVATION IN THE TWO SIDED MARKET OF AN OPEN INNOVATION INTERMEDIARY

Professor Dr. Frank PillerDr. Dirk LüttgensAndy Zynga

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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, 20062Jeppesen, L.B., Lakhani, K.R., Marginality and problem solving effectiveness in broadcast search. Organization Science, 21:5, 1016-1033, 20103Holzmann, T., Sailera, K., Katzy, B.R., Matchmaking as multi-sided market for open innovation. Technology Analysis & Strategic Management, 26:6, 601-615, 20144Eisenmann, T., Parker, G., Van Alstyne, M.W., Strategies for two-sided markets. Harvard Business Review, 92-101, October 20065Kouris, 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

http://aisel.aisnet.org/icmb2012/22

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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?

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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!

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THE TWO SIDED MARKET OF AN OI INTERMEDIARY

Klassischer Transfer von Wissen aus der Grundlagenforschung

Transfer-Datenbank

Plattform fürOpen

Innovation

Ansatz des Open Innovation / Broadcast of Search

11 2 3Wissenschaftler Unternehmen

stellen Wissen ein

Suche nach Bestandteilen der Lösung

Broadcastingder Probleme

Broadcast of search

Motivation durch:

• Externe “Zwänge“

• Erwartungswert einer potentiellen Abfrage der Informationen durch ein Unternehmen

• Reputationserhöhung

Annahme über einen Lösungsweg:

• Zugriff nur auf bekannte Wissensbasis

• Unterliegt „local search bias“ bei Suche / Evaluation

• Motivation durch „Not Invented Here“ begrenzt

• Wissenschaftler screenen Probleme

• Reaktion nur wenn Lösung bekannt oder Lösungsweg “einfach“

• Übermittlung konkreter Lösungen

• Unternehmen übermitteln Fragestellung an Plattform

• Screening und Bewertung der Lösungen

• Belohnung des besten Beitragenden



Transfer-Datenbank

Plattform fürOpen

Innovation



stellen Wissen ein



Broadcast of search

Motivation durch:
















Transfer-Datenbank

Plattform fürOpen

Innovation



stellen Wissen ein



Broadcast of search

Motivation durch:















Adapted from:Piller, F.T., From technology market places to problem places. Quebec Seeks Solutions. Quebec City, Canada, December 14, 2010

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NINESIGMA IN TWO-SIDED MARKET

Innovation

Seekers(Clients)

Global InnovationCommunity

NineSigmaOI

Proposal Proposal

Contract RFP

Transfer Agreement (IP)

$» Client contract fees

changed

» Project selection step introduced

» Solution Provider evaluation introduced

$

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EVOLUTION OF THE TECHNOLOGY SEARCH PROCESS AT NINESIGMA

2000 2005 2006-present

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DATA EXTRACTION & ANALYSIS OVERVIEW

Data Source How Used Specifics Results

Project Data (from database)

Extract deal rates for selected clients

Project Selection: 128 projects / 5years

SP Evaluation: 93 projects / 5 years

Correlation between service changes and deal rates

Staff Interviews Understand timing and extent of service changes

Management Team & Founder

Correlation between service changes and deal rates

Staff InterviewsDetermine 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 – 2011Checked timing and impact of decisions on selected clients

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2009 2010 2011 2012 20130

20

40

60

80

100

120

140

160

Trans Fees # RFPs Overall Revenue

% o

f va

lue

wrt

20

09

TREND IN TRANSACTION FEE VOLUME VS OVERALL REVENUE

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INDICATIVE EFFECT OF PROJECT SELECTION STEP OF ONE CLIENT

2001 2002 2003 2004 2005 2006 2007 200805

101520253035404550

0

10

20

30

40

50

No of projects % deal closed

Num

ber o

f Pro

ject

s

% d

eals

clos

ed

Introduced project selection

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Increase in average number of proposals per search INTRODUCTION OF PROJECT SELECTION

2005 2006 2007 2008 20090

5

10

15

20

25

Ave

rag

e N

um

be

r o

f Pro

po

sals

R

ece

ive

d

12

SOLUTION PROVIDER EVALUATION SUPPORT PROCESS

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EFFECT OF SOLUTION PROVIDER EVALUATION STEP ON PROJECT SUCCESS AS ONE CLIENT

2005 2006 2007 2009 20110

5

10

15

20

25

30

35

Deals

Clo

sed

(%

)

Introduced evaluation support

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BUSINESS MODEL CHANGES & IMPACT ON ALL SIDES

Business Model Change Impact on Seeker SideImpact on Solution

Provider Side Impact on NineSigma

Elimination of Transaction Fee

• Easier budgeting of projects due to fixed price

• More new clients

• More interest in submitting due to higher possible asking prices (no additional fees)

• More Solution Providers due to more clients

• Better cash flow due to higher fees early on

• Higher overall fees per RFP

• More revenue overall due to more clients

Introduction of Project Selection

• Fewer projects overall, but more fully funded RFPs

• Higher close rates increase interest in submitting, and more Solution Providers will sign up

• Better credibility with clients leads to higher client satisfaction and repeat clients

Introduction of Solution Provider Evaluation Support

• Faster process leads to higher client satisfaction/repeat clients

• NineSigma value addition more visible

• Faster process leads to higher satisfaction

• More touch points with NineSigma, better understanding of value, better reputation, more Solution Providers signing up

• More deals closed, more repeat clients, more revenues

• Higher fees per RFP, more revenue

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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

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LEARNINGS

» Service/Process changes are relevant to both research on two-sided 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.

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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 two-sided 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

beyond pricing decisions:

Documents

sided market success

multisided market

technology market places

business model changes2001

business model innovation4

business models

mobile business

user innovation workshop