Ventana Research Analyst Perspectives

The Promise and Perils of a Platform Strategy

Posted by Robert Kugel on Aug 6, 2019 7:00:00 AM

“Platform,” as used in the world of technology, originally referred to an operating system on which one could construct software applications. More recently, its usage has been expanded to apply to two types of business models. One enables third parties to create products and services that are complementary to a company’s core technology. For instance, both Apple and Salesforce have attracted a wide array of third-party software developers whose offerings greatly increase the value of each software vendor’s platform to its customers. The second, such as Amazon’s marketplace, Facebook, Twitter and Uber, facilitates transactions and interactions. This latter type adds value by reducing transaction frictions and increasing efficiency and, in attracting large numbers of people to the platform, enables innovative business offerings to take advantage of Metcalf’s law — the “network effect.”

In contrast to the go-it-alone vertical integration strategies common in the 19th and early 20th centuries or more recent brand extension strategies, platforms assemble a constellation of independent entities in a mutually beneficial way. Each participant expects to increase revenue or profits faster by being part of a larger whole. The platform vendor itself expects to accrue benefits such as incremental profits or “stickiness” by being the hub of a commercial ecosystem.

In the case of the first mentioned business model, a platform approach to software generally and business software specifically has become feasible as a result of the evolution of software application architecture, in enabling interoperability and data and process connectivity through devices such as APIs and microservices.

Like many technology terms, the definition of a platform has grown fuzzier with age. So in the interest of clarity I’ll narrow the definition a bit.

In referring to software, I use the term platform to mean an application or a unified set of applications from a single vendor that offers broad functionality to a business and includes at least three characteristics. One is that the software has a single sign-on capability and a consistent user interface. It also must enable corporate and third-party developers to easily extend the features and functionality of the software in a loosely coupled fashion, so that updates and new releases of the platform software will not disable the extensions or make them obsolete. Third-party applications often provide vertical (industry-specific) functionality not provided by the platform provider.

Third, the software enables full process and data integration across business functions in a way that complements or extends business processes across business silos, such as connecting front office, operations and back office business units. Internally developed applications often extend the platform vendor’s core functionality upstream and downstream from the core processes to suit its specific business or business process requirements — for instance, a mobile application used in a store or warehouse that automates a set of steps and associated data collection or certifications. A platform enables company-specific customizations that look and perform very much (or exactly) like the core platform and that will not “break” when the platform is updated or a new release is issued.

Customers benefit from use of a platform in at least three respects. First, it can reduce the total cost of ownership by making the task of maintaining connections between the core application and vertical or customized offerings less expensive. By enabling straight-through processing of data associated with a process, a platform can substantially enhance data quality and therefore significantly reduce errors that would otherwise be created when data is re-keyed or moved from one system to another using a spreadsheet. Third, by automating handoffs within as well as across business functions, a platform can reduce the time and effort required to complete a business process.

A platform offered by a vendor must provide three characteristics that support a platform strategy. First, it must have been built using a software architecture and providing a set of technical capabilities that facilitate the creation and maintenance of applications and the full integration of software from third-party developers. Second, it must have a business model and internal capabilities that encourage third parties to work with the platform — having an applications marketplace, for example, especially where the applications are vetted by the vendor and rated by customers. Third, the platform vendor must actively promote the use of the applications that can reside on it and facilitate the creation of application development skills by internal developers.

Ensuring the presence of these three characteristics requires a mindset and culture that are likely to be a considerable change for most software companies. Those that haven’t traditionally had a partner channel must acquire the people, skills and attitudes that promote mutually beneficial relationships. Additionally, in the past vendors defined customer success at the point where the initial application was implemented correctly and to the customer’s satisfaction. However, as the software industry transitions from perpetual licenses to a subscription business model, customer success ceases to be a fixed point and customer engagement becomes more important to a vendor’s long-term competitiveness. As the saying goes, this is easier said than done. Customers have different preferences on how they wish to interact with a vendor. Divining what these preferences might be and assigning the appropriate personnel to manage the relationship is an ongoing challenge.

So while many software companies are adopting or claiming to adopt a “platform” strategy, some are offering a platform in name only. Others have a platform but must ensure that they have the right architecture, development organization, product roadmap, partner organization and customer success organization to maximize the value of their platform. I recommend that companies that are assessing a business relationship with a vendor that claims a platform strategy explore the full range of the vendor’s capabilities, organization, strategy and timelines before making commitments.

Where it would be useful, this is an area in which Ventana Research can help.

Regards,
Robert Kugel
SVP & Research Director

Topics: Human Capital Management, Marketing, Office of Finance, Voice of the Customer, Continuous Planning, Information Management, Internet of Things, Workforce Management, Financial Performance Management, Price and Revenue Management, Digital Marketing, Digital Commerce, Operations & Supply Chain, Enterprise Resource Planning, ERP and Continuous Accounting, robotic finance, Predictive Planning, revenue and lease accounting, collaborative computing, mobile computing, subscription management

Robert Kugel

Written by Robert Kugel

Rob heads up the CFO and business research focusing on the intersection of information technology with the finance organization and business. The financial performance management (FPM) research agenda includes the application of IT to financial process optimization and collaborative systems; control systems and analytics; and advanced budgeting and planning. Prior to joining Ventana Research he was an equity research analyst at several firms including First Albany Corporation, Morgan Stanley, and Drexel Burnham, and a consultant with McKinsey and Company. Rob was an Institutional Investor All-American Team member and on the Wall Street Journal All-Star list. Rob has experience in aerospace and defense, banking, manufacturing and retail and consumer services. Rob earned his BA in Economics/Finance at Hampshire College, an MBA in Finance/Accounting at Columbia University, and is a CFA charter holder.