The Board of Directors and Platform Business Models: a risk management perspective

The Board of Directors and Platform Business Models: a perspective of risk management.

 [Portuguese version @ Revista RI]

CONTEXT

The phenomenon of Digital Transformation (DT) is manifested in organizational processes and business models driven by companies and people exposed to nine domains of the corporate environment: global and local economic structure; sector conjuncture; corporate strategies; objectives and goals; structure of assets and legacy information systems; internal and external processes; organizational structure and knowledge; technological mix available; and data strategy.

The discipline of Governance is in the domain of Corporate Strategies. In this context,  it is up to the Board of Directors (BoD) to formulate strategic guidelines and plans, as well as to ensure the risk management practices that assist the directors during the implementation of the strategies. This article proposes a reflection on the role of the BoD in the face of some of the elements of risks that appear in the context of DT.

Take the scenario when the CA establishes the Strategic Guideline of engagement on the DT journey. One way to incorporate such guideline into the strategic agenda is through the business models based on digital platforms (DPM), which produce and distribute value through interactions (Network Effects) between their stakeholders, facilitating the exchange of goods, services or some type of social currency. In this case, the BoD must have the necessary knowledge for diligent and timely monitoring and control.

CORPORATE RISKS

In the scope of designing, launching and implementing a DPM, there are at least ten risks that deserve the attention of the BoD:

(i) Value: the perpetuity of DPM is subject to continued production of value for all stakeholders. In the case of the ERP company, SAP, the DPM has non-mutually exclusive categories that bring together customers (large, small, traditional, innovative, strategic) and partner companies (software solutions, channel partners, integrators and technology developers). Each group generates value for the DPM by producing relevant Network Effects. On the other hand, they also have specific demands to meet. The identification of the Value Proposition for each stakeholder requires engagement with internal and external parties. The attentive BoD will identify imperfections in this process, requiring whenever necessary, studies that support the suggested value propositions.

(ii) Access: the definition of who should participate in the ecosystem is a central decision in the design of the DPM. For example, when deliberating to develop a marketplace, it is necessary to decide on the participation of competitors, which can be vital to the attraction of consumers. In addition, the presence of competitors will give visibility, among others, of the details of the portfolio of competitors, their pricing strategies and demand trends. The process of choosing stakeholders who will participate in the DPM, as well as the potential risks and conflicts arising, should be carefully monitored by the BoD.

(iii) Network Effects: Every DPM should encourage the interactions between stakeholders that generate value, and mitigate undesirable interactions. For example, when an UBER passenger requests a vehicle, (s)he should be found by the driver. With the increase in trips cancelled by the non-location of the passenger, UBER has deployed the feature that allows the exchange of messages between driver and passenger. It is up to the BoD to recognize the main Network Effects and monitor its performance.

(iv) Value Distribution: the value generated in the DPM should be distributed in proportion to the contribution and expectations of each stakeholder. In the case of an application in waterway transport of cargo, it is possible to reduce maintenance costs by connecting the suppliers involved in the services performed on barges anchored in river ports far from large urban centres. Demands for services are fed in the digital platform and the suppliers coordinate themselves to the point of sending a single team for all maintenance – the resulting economy is shared among stakeholders. The value distribution process created can affect the relationship with suppliers, customers, sales channels, investors and shareholders. It is up to the BoD to scrutinize the structure of the DPM and evaluate the impact in its perpetuity.

(v) Behaviors: interactions between stakeholders in DBM are of five types, two of them mandatory: access and engagement. The platform should always be available, simply and quickly. As this access, usually via the Internet, occurs through the sharing of personal data, there are legal and regulatory implications, which can expose the company to reputational and financial risks. Additionally, mechanisms to stimulate the production of the first Network Effects encourage emotional and transactional engagement among stakeholders. The other behaviours (customization, connection and collaboration) are stimulated as needed. Customization is typical of B2C relationships when looking for the personalization of experiences. The connection is promoted when there is direct contact between DBM stakeholders, as in the case of the driver and passenger of UBER. In collaboration, the data generated by stakeholders is fundamental to the functioning of DBM - this is the case of Waze. When the directors detail the Action Plan, the combination of these behaviours will impact internal and external processes, exposing the brand and influencing the relationship with consumers, investors, owners and other market agents. It is up to the BoD to understand the impact on the business of fostering digital behaviours, as well as monitoring its proper execution.

(vi) Data: digital platforms always generate, capture, process and use data in decisions at various levels of the organisation. Data come from processes, products, services, or people. Sensors in industrial equipment capture process data so that Artificial Intelligence algorithms predict operation stops. Agricultural equipment (products) generate data during the operation in the field and feed the development of future models. Sales (services) records in marketplaces are handled to identify rules for linking the items in an order, operating dynamic pricing models, and suggesting additional items just before the consumer completes the purchase. People generate data in their digital interactions, such as during internet use, in the consumer profile on a marketplace, or by the mobile geolocation signal. The data strategy, combined with the DPM architecture, the technological solutions and the stakeholder culture, largely defines the degree of exposure to cybersecurity risks. By understanding that the data strategy can point the company in different directions and perceive its nuances, the BoD contributes to the board's deliberations being in line with the Strategic Guidelines. 

(vii) Architecture: the DPM design is crucial to the composition of a business environment capable of delivering value to stakeholders. The architecture of the platform has to do with "how" the model will work. In the case of iTunes, the multihoming format brings together multiple vendors -  other strategies include piggybacking (WhatsApp), functional integration (Google), diversity (AppleStore), or recommendation systems (Netflix). Each choice involves technological, legal, cyber, competition, and people risks, and it is up to the BoD to monitor them and, at the limit, to decide on the approval of the strategy recommended by the directors.

(viii) Conflicts: the operation of a DPM houses stakeholders with complementary interests and, often, conflicting and even antagonistic expectations. This is the case of the simultaneous presence of representatives of different marketing channels: commercial representatives, distributors and direct sales channels. The ability to foresee conflicts and establish rules of mitigation, contingency and resolution is among the duties of the BoD, which has to ensure the existence and application of such governance.

(ix) Technological Solutions: The attentive BoD will observe whether the directors burn steps and acquire solutions before defining the value proposition that should be delivered. Technology emerges as an enabler that enables the business model and its adherence to the value proposition is vital to the success of the execution of the strategy. In addition, the BoD should encourage minimal organizational knowledge about the main benefits and applications of the most mature market solutions. While the directors select the tools that instrument the DPM, the BoD follows the process, with the support of the advisory bodies. For example, in large RPA (Robotic Process Automation) projects, it is recommended to follow up with the People's Committee. Other initiatives that are part of the Action Plan prepared by the directors, such as DeFi (Decentralized Finance), Blockchain, Metaverse, Digital Twins, Cryptocurrencies, CyberSecurity, Augmented Reality or omnichannel retail, in a non-exhaustive list, may be convenient to engage the Risk Management, Finance, Strategy, Innovation or Audit committees. 

(x) Launching: The institutional relationship can offer a strategically advantageous path when planning the launch of a DPM, such as when Adobe got the U.S. income tax return forms to be submitted in PDF format, accompanied by an Acrobat Reader plugin. This approach called seeding, allowed to reach millions of people quickly, with the credibility of a federal institution (IRS). Different launch formats include tactics such as micro-market, producer evangelism, big-bang and marquee-user, among others. It is up to the BoD and its advisory bodies to master the digital fluency necessary to interpret the impact of these decisions and, eventually, contribute to the maturation of the selected scenario.

CONCLUSIONS AND REFLECTIONS

Faced with the imperative of the formulation of Strategic Guidelines that address the challenges of Digital Transformation (DT), business models based on Digital Platforms stand out in the composition of the Strategic Plan. In this context, new risk management implications threaten the organizations and the board of directors (BoD) must diligently deal with decisions at the frontier of knowledge.

More broadly, not limited to the format of the platforms, DT  promotes access to data for the principal, agent and related parties - but does not mitigate the vices underlying the Agency Theory. The circumstantial suppression of information asymmetry empowers the principal, redesigns the power games, and only modifies the paradoxes of agency conflict.  The zealous and responsible BoD will take care to acquire the digital fluency necessary to exercise its role of preservation and creation of value for the company, overcoming the apparent strategic challenges and those covered by organizational structure and policy.