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4 Points to Consider with a Open Source Business Model

May 18, 2008

1: Look for a Change to the current private System

It implies that simply reading a book about more open business models is unlikely to get you from where you are to where you want to go. There are tremendous sources of inertia inside all companies, and successful companies develop even greater inertia because of their previous success. A significant shock to the system seems to be required to overcome the inertia that develops inside large, successful companies.

What to do? If you are heading into a period of crisis, there may be opportunity amid all the pain and difficulty of coping with the crisis. Such conditions do allow managers in companies to suspend their usual defense of the status quo, and at least some leaders within the organization may be eager for a path that might lead to improved performance. Opening your business model may be such a path.

If you are not heading into a crisis, there needs to be clear commitment and support from the top of the organization. When the inevitable organizational resistance comes, such as the “not invented here” mentality, support from the top can be critical to overcoming that resistance.

If top management support is not forthcoming, a carefulapproach provides a more subtle way to effect change. Start small, to stay off the corporate radar screen, and give yourself time to learn. And keep the expectations (and the budget) modest at this early stage. Wait until you have some clear, demonstrable evidence of your approach before calling attention to yourself.

Shocks to the status quo unfreeze the habits of the existing business and the existing business model. However, shocks alone are not enough. To continue to change, there must be evidence that supports the change and shows that the company is heading in the right direction. This brings us to the next phase.

2: Construct Pilots to Search for New Revenue Streams

Many companies encounter shocks and make drastic adjustments (such as cutting back on people and expenses) to deal with them. Fewer of those companies engage in the breadth of experimentation that open source innovators did when they were searching for a new business model. It takes courage and vision to experiment with new ideas during a time of financial difficulty. Yet without these experiments, companies could easily fall into a vicious cycle of slowing business revenues, leading to head count and expense reductions, which trigger further business declines and lead to still more cuts.

Instead, companies that experiment with alternative sources of revenue and business value begin to collect critical information from the market about the potential value of some of their ideas, technologies, and markets through these experiments. The results of their efforts formed the seeds of the shift toward a new approach to their respective businesses.

Testing and experimenting are critical inputs to the process of transforming the business model, for it is they that create the information needed to chart the course ahead. However, they too are insufficient to achieve lasting change unless a deeper understanding of a new business model emerges to connect the disparate results of individual tests into a larger, more coherent whole.

3: Identify New Business Model from Successful Pilots

Conducting experiments only yields value if a company is able and willing to act on the information generated by those experiments. While the impetus for the changes often come from the short-term imperatives of its individual businesses to get profitable, it is very much to credit that others in the company took note of these changes and began to consider whether there was an underlying logic that connected the results of these experiments.

In building a new business model, companies must also decide what to do about the current business model. Praising a new business model can inadvertently suggest that the current model is somehow obsolete. In all three of the companies profiled here, the current model continues to play an important role in the business of the firm.

These companies must manage the coexistence of the current business model and the new business model within their organization. In each case, senior managers were tasked with managing the new business model, while other senior managers maintained responsibility for the current model. A delicate balance must be achieved between these two models. As competition, maturing markets, and globalization catch up to businesses with models, though, the new business models will help point the way toward continued growth.

4: Scale Up the Successes, and Proclaim the New Open Business Model

As successful experiments begin to point the way toward a new and more effective business model, the company must face a final phase in its transformation. In this final phase, the company must scale up the model to bring it into high volume across the company and the company’s customers.

There are at least two essential elements in scaling up a new business model. First, the business model itself must be constructed or adjusted so that it can handle significant new volume. Business models that work when there are a small number of highly trained people to pay close attention can break down when new layers of administration are required to manage a much larger number of more general workers. If the processes cannot be more automated or standardized, they may not be able to handle large increases in activity without severely degrading the quality of the result.

The second element is building a winning coalition within the company to gain the ability to roll out the model across the company. Building scale requires much more funding and much greater organizational commitment to the new model. These resources must come from somewhere. The rise of the new model can create “losers” in the organization, at whose expense some of those budgets may be obtained. There can be significant costs in persuading the company to make these changes in the face of resistance from the losers.

It is ironic but true: companies blessed with significant internal R&D capabilities, which routinely conduct tremendously complex experiments that can run into many millions of dollars, have little or no capability to conduct even simple experiments on the business model supporting that internal R&D. If more companies became more adept at experimenting with their business models on a routine basis, there would be less need for a crisis to trigger the experiments that companies like IBM or P&G conducted.

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