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Palmisano: Benefits and challenges of a platform-based business model

A platform-based business model -- an approach that is characterized by a cloud-based common support system -- is essential for competing in a global economy. That was the message from Sam Palmisano, former CEO at IBM and current chairman at The Center for Global Enterprise, a nonprofit research institution. But traditional companies, burdened with complex webs of legacy systems and legacy ways of working, will not find the platform approach an easy shift -- technically or culturally, Palmisano said at the recent MIT Platform Strategy Summit in Cambridge, Mass.

In this video interview he addresses those challenges and explains why service organizations in particular -- despite the difficulties of adopting a platform-based business model -- should make the switch. One piece of advice: Take it in chunks.

Why is it important for traditional businesses to make this transformation to a platform-based business model?

Sam Palmisano: There are great benefits to the platform business model that they could adopt; for example, if you think about a traditional company that's operating [globally] -- [my old company IBM] [operating] in 170 countries. If you had one common support system around the world, it gives you lots of speed and agility. The way it works today is -- as you launch products ... in India or China or what have you -- you have to re-create all these old legacy systems and you have to connect everything back to your original manufacturing systems, your billing, accounting, payroll et cetera. Right? It just takes time. It's a lot of time. We have to put data centers around the world and things like that. Again, it takes time. If you have one common, ubiquitous, support system for those kinds of functions, sure your go-to-markets' going to be different in those [countries], your sales are going to be different in those countries, but all the other support systems are the same. So you just free up a lot of time and a lot of resources to just focus on growing the business.

The hard part is getting there from where you are, because you have all these existing systems that are probably 20, 30 years old -- maybe 50 years old -- that haven't been touched in a long time. They weren't designed or architected to operate in this cloud-like horizontal infrastructure. That's the technical challenge associated with building that platform. And then there's the cultural challenge of getting everybody to use the platform. The bigger one I think is less technology and more culture, but you have to solve both problems to take advantage of it. But it's a tremendous opportunity for your existing company.

How would they go about solving the problems of shifting to a platform-based business model?

I think the first thing, if I was running [a] company today of some scale, a midsize or some established company like I had been, I'd start with picking an area where we could put in a platform base. I wouldn't start with everything because it's just too hard to do everything. So take a common thing, let's make it finance and HR. You can use a cloud provider like Workday, or you can do it yourself. If you're a large company, you have the resources to do it yourself. I'd start to learn in those kinds of areas. I wouldn't touch the product in the first phase because there's more risk in product -- that's your revenue. Start with the back-office kinds of things like finance and HR. Learn as much as you can and then, in time, once you have the expertise and you are comfortable with it -- whether you use a service provider or not -- then go to, 'I'll call the product side of the house' or your service offerings and your product offerings. But that's where I would begin. It's a learning curve. It's going to take time, but, certainly, I think the returns are going to be great for the company if you could conquer that.

What is the risk of not becoming a platform business?

I mean, I think it depends. You know, it's like a lot of situations. If you have an alternative -- if there's a competitor that enters that is platform-based, they have an inherent advantage; they have a cost advantage relative to your cost structure; they have a speed advantage. It just depends where you are. Now, if you're in industries that are heavily asset-intensive [like] PetroCap -- big refineries, finding oil, doing chemicals -- it's hard to create a platform model that's going to replace a refinery or your chemical processes and those kinds of things. But if you're offering services -- I mean good examples are lodgings. Airbnb versus traditional lodging, they have a tremendous advantage. They have a lower cost point of service proposition that's convenient and high quality -- that's something you have to think about when you look at those kinds of things.

A lot of media companies are faced with these alternatives, besides people no longer doing traditional media versus digital type media. They are all platform-based business models. I mean, Google is a huge platform company and it's also a huge advertising company. So you know the line that [Google's] source of revenue and profits comes out of their advertising model. Facebook is very similar. Again, it's the monetization of the advertising that drives their wonderful earnings streams. You have to look at it depending on where you are in your industry and see if you would be affected by that. But if you see this as a potential, I'd encourage people to take advantage of it before they are threatened by a competitor.

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Does it make sense for your company to adopt a platform-based business model? Why or why not?
The culture problem of getting people to use the cloud can often be more easily addressed when you’re operating globally and acquiring new systems or products. Those systems have evolved completely independently from your existing systems to address completely different situations that are unique to those areas. In that case, a platform-based business model can be much easier extended to accommodate those acquired systems and their idiosyncrasies.