By Jens Lansing, Klaas Ole Kürtz, and Matthias Redlich
Big tech giants operate on a platform-based business model, which if done well can significantly increase the value delivered to customers while offering a variety of integrated products and services. Consequently, a majority of the most valuable companies in the world are built on a platform-based business model, leading to significant market power and higher margins. Now, more companies are adopting a platform-based approach to business to keep pace with innovation and competitors that operate like tech companies.
Having a platform-based business, however, isn’t the only way to improve performance. Companies can apply “platform thinking”—an approach that focuses on increasing flexibility and services while providing more value to customers—to transform their business. In fact, organizations can use platform thinking to restructure their tech foundations or optimize their operating model. Yet most attempts at a platform transformation1 fail to reach their full potential. In large part this is because many companies don’t take a strategic and comprehensive view of how building, integrating, or partnering with a platform will affect the business and its technology.
To help organizations successfully adopt a platform approach, we’ve identified eight best practices for building platform-based business models, creating tech platforms, and adopting platform operating models. Some organizations might need to implement all of these practices, while others may need only a few.
Build successful platform-based business models
For organizations that want to transform their entire business to be platform based, three approaches can help:
Decide whether you’ll be an orchestrator or a provider. Companies can be involved in platforms either as an orchestrator—by organizing the structure and operations of a platform—or as a provider in the ecosystem. Orchestrators are often larger companies with higher profit margins, as this role requires significant market power, flexibility, and investment, and a high appetite for risk. Orchestrators must also decide what key ingredients differentiate their platforms from competitors, how and when to compete or collaborate within an ecosystem, and how to increase participation, adoption, and innovation. Doing these things well requires a superb understanding of the market, its dynamics, and its participants. In contrast, providers can plug into a platform and can gain profits, exposure, and an increased customer base without worrying about the platform’s overarching strategy. Providers should, however, be careful of becoming too dependent on the orchestrator.
Provide the right incentives to get a balance of value. Platforms create value only if enough players engage, which is why many successful platform companies provide incentives. Incentives may be monetary, or they may take the form of increased access to customers or their data, improved usability, or better back-end services for developers. One retail company—an orchestrator—calculated the value of a customer and saw that those who selected a prepaid option accounted for 25 percent higher sales. The organization thus decided to reward customers with rebates on prepaid sales. As a result, the retailer received more customer data and a greater commitment from customers to stay on the platform, and providers experienced a higher spend per customer.
Clarify the strategic control points, and know when and how to open the platform. A successful platform-based business model needs a clear view of strategic control points—the strong activities that help a company focus its efforts, prioritize its product backlog, and guide important design choices during a build. Critical control points along the customer journey, such as the technical interfaces available to apps on smartphone operating systems, can also help orchestrators decide how and when to monetize the platform to ensure stability and scalability, balancing near-term adoption with long-term value.
Create a flexible, scalable digital technology platform
Companies need the flexibility and modularity of a modern digital technology platform to quickly bring new business features into production. These platforms use modern architecture principles such as application programming interfaces (APIs), microservices, and containers, and run on an elastic cloud infrastructure, which can help teams rapidly develop, integrate, and deploy new capabilities and support exhaustive reusability.
Three practices can help companies improve their technology:
Operate like a software-as-a-service (SaaS) business. The enterprise SaaS market is growing at a double-digit rate every year. Incumbent organizations can adopt several principles from successful SaaS companies as they build their own technology platforms. First, the platform should be delivered “as a service” and operate on a cloud infrastructure. Platform services must be easily consumable, with simple, clearly documented APIs so that customers can seamlessly integrate them into their business processes. Ideally, every customer uses the same version of the platform core and receives updates on a weekly or even daily basis. Lastly, powerful configuration mechanisms allow customers to tailor the platform to their specific business needs, with little or no customization. Real software development can minimize maintenance costs and enable seamless upgrades of the platform core.
Use a digital technology platform to address technical debt. Once modern platforms can support core business capabilities, multiple legacy systems typically can and should be decommissioned. In addition, the right technology platform can help organizations better manage their legacy connections to any remaining systems. The new platform can act as an overlay that separates digital innovations from the legacy architecture below, effectively decoupling the new and the old systems. This enables core IT teams to significantly clean up the existing application portfolio.
Automate delivery as much as possible. Automation can help shorten time to market for new features—an important competitive differentiator. Adopting a DevOps operating model can help organizations automate operations by integrating software development and operations, thus fostering a culture of collaboration. Increased employee satisfaction is an added benefit of this model. Leading DevOps organizations can, for instance, release new features every day instead of every quarter, increase team productivity by more than 30 percent, and improve system stability by reducing the number of critical outages by half.
Implementing a continuous integration and continuous deployment (CI/CD) pipeline can help companies achieve these benefits by allowing them to fully automate testing, integration, and application deployment. Teams can also rapidly install new product features using this system.
Find flexibility with platform operating models
Some organizations may choose to evolve their IT function into a platform operating model—a set of independent, agile teams consisting of business and IT—enabling the company to move quickly on decisions and capture opportunity. However, companies often find it challenging to build a model that can scale from a pilot or attacker phase to a set of platforms and products that can transform company operations. Two actions can help:
Invest in and nurture top talent and engineering excellence. Numerous companies stress the importance of attracting and retaining top talent in tech. McKinsey research suggests that great developers are eight times more productive than average ones. Yet many organizations demand work from knowledge experts that goes beyond their core responsibilities. Senior software engineers, for instance, are sometimes tasked with bureaucratic managerial tasks in addition to writing code, thus making it harder for them to reach their full productivity potential. Companies need to develop career paths that enable deep experts to advance without deviating too far from their core responsibilities or ending up leading a large team. This kind of talent strategy not only makes top talent more productive but also enables experts to lead platform designs and work collaboratively, all of which are critical to operating-model success.
Establish the right kind of partnerships. Some companies might pursue partnerships to gain access to platform technology or services that they cannot build themselves. Selecting the right partners is important—and so is the structure of the partnership. One large insurance company decided to build an ecosystem around its own insurance platform to offer its core insurance system and value-added elements “as a service” to other insurers. To achieve this, the company established a strategic partnership with a big cloud player, which helped the insurer migrate its insurance solution to the cloud and fully capitalize on cloud services.
Developing a vision of how and where to leverage the power of platforms is a prerequisite to a focused strategic approach. Businesses should investigate the possibilities, limitations, and success factors of platforms in all areas—business model, operating model, and technology—before deciding how to approach a transformation. Executed well, platforms can help companies operate more efficiently, disrupt and outsmart competitors—and provide more value and services to customers.
Jens Lansing is a partner in McKinsey’s Düsseldorf office, Klaas Ole Kürtz is a practice manager for McKinsey Digital in the Hamburg office, and Matthias Redlich is an associate partner in the Frankfurt office.
1 In this piece, the concept of “platform transformation” refers to several different activities: building a new platform as a business model or participating in an external one, reshaping your IT operating model, or offering a technology platform. The IT operating model and tech foundations can be “platform based” even if your business model has nothing to do with platforms.