Business Modelling NextGRID Business Units workshop II Paul Mckee IT Futures Centre BT Acknowledgements Business Modelling Challenges No agreed real world definition of the term “Business Model” Effective evaluation requires confidential information
NextGRID Business Units workshop II
IT Futures Centre BT
We investigated the concept of business models
What they actually constitute
Why they are important
What factors they should address
We have defined what we understand by the term “business model”
Based on extensive literature survey and NextGRID experience
We also provided analysis “tools” that will assist in the evaluation of a prospective business model
Business models themselves are complex and not well understood – they lack any formal basis that would facilitate both description and comparison.
Linder and Cantrell assert that:
“executives can't even articulate their business models. Everyone talks about business models but 99 percent have no clear framework for describing their model.”
The business model articulates how the business makes money
Linder, J.C., Cantrell, S. (2000): "Changing business models: surveying the landscape", White Paper, Institute for Strategic Change, Accenture
Chesborough, Henry; Rosenbloom, Richard: The role of the business model in capturing value from innovation: evidence from Xerox Corporation’s technology spin-off companies, Industrial and Corporate Change, Volume 11, Number 3 pp529-555.
When business models don't work, it's because they fail either the narrative test (the story doesn't make sense) or the numbers test (the P&L [profit and loss] doesn't add up).
Magretta, J: Why Business Models Matter, Harvard Business Review 2002, Vol 80; Part 5, ISSN 0017-8012, pages 86-93.
The most common format for the business model is a single page of narrative text
A business model does not explicitly include implementation technologies
it is driven by business requirements and simply enabled by technology
Articulation of a business model is no guarantee of its success
only implementation will tell if the model works or not
New business models are increasingly viewed as key intellectual property, and often attempts are made to protect them by patent
Business model evaluation questionnaire
Asks a prospective operator of a Grid business model pertinent questions
Acts as a checklist for important issues: ensures that they are considered when creating “The Story”
A number of candidate business models have been identified and analysed in detail using the questionnaire
Risk & Reward “Balance Sheet” analysis
Risks and rewards represented as assets and liabilities on a balance sheet: uses standard business accounting practice
Can identify business decision points, value exchange and risks
What is the offering to the customer?
This is what the customer will pay for. Here there must be enough value in the eyes of the customer that they will be prepared to pay for it.
The business model must provide a description of what the offering is to the customers, in terms that they will understand and be interested in.
Why should customers be interested? There must be a convincing justification of why the customers will want your offering.
This is essentially: why are you in business? What is the value added proposition of your model?
How do you transform the “raw materials” you buy in into products or services that your customers want?
Why should customers come to you and not your competitors?
What is your unique selling point?
Is the added value you provide clear to your customers?
What is required to make your offering – i.e. what are your raw materials?
Who are the suppliers? What do you purchase from them?
How much raw materials are required?
What is your sensitivity to supply disruption?
How are prices set?
What are your costs?
How much profit do you want to make?
What will the market stand?
How is the service priced?
What are the “units of consumption”?
What payment models?
Utility computing where customers pay for what they use
Subscription where customers pay a fixed amount regularly for a set amount of capacity
How is a service provisioned for?
If you operate finite resources, how can you determine which of your customers gets to use them and when?
How are you sure you can answer the requests made on your service?
What are your relationships with all the actors you need to deal with?
Where are you in the value chain? Who are the suppliers? Who are the customers?
What are the market characteristics?
What is the market sector? Is there a specific good or service type that the market you are targeting is concerned with?
How big is the market?
Who is in it? What characterises them?
How mature is the market?
How can this determine the prices you can set?
Who is the target audience?
How can we reach them?
How can we make them want to buy our service?
What are the risks in this business model?
Describe the risks of this business model. For example:
Do you have a lot of machines that could potentially be unutilised?
Are you dependent on one supplier?
Are there elements of QoS in an SLA beyond your control?
What are the countermeasures to these risks?
The value proposition needs to be clear and of significant value to justify the expense of offering a Grid service.
The target market needs to clearly understand the value proposition.
Value-add is mainly based on the provision of service
using the definition that a “service” is work done for the benefit of another party
as opposed to more commoditised resources such as low-level computing
The greater the level of added value in the eyes of the customer, the greater the chances of success.
There is considerably more customer value in application codes than CPU cycles alone
Application codes are a means of solving customers’ problems, and gives the customers clearest value.
Licensing of application codes and enforcement of licensing terms is critical to achieving this value-add.
Represent risks as liabilities and rewards quantified as assets on a balance sheet
Use standard business accounting practice
Identify business decision points
Identify value exchange and risks
Risks and rewards should balance for
Third parties (application vendors, etc)
Role of SLAs
Define commitments, rewards and penalties
Relate QoS to business risk and value
Support business decision processes
> Price >
FINANCIAL VALUE (X)
(discovery, workflow, invocation, etc)
Base standards (http, wsdl, soap, naming,
notification, addressing, policy, security…)
NextGRID Business Units workshop II
IT Futures Centre BT
Software market has some unique characteristics
The buyer gains ownership of nothing, only a right to use under certain conditions.
High degree of lock-in
Little market competition after a purchase
High cost of switching
No secondary market in software
Reduced pressure on original sales
Single source maintenance, confidential source code
Confidentiality clauses abound inhibiting free flow of information on prices etc
One off payment
No maintenance included
Most preferred license by volume of licenses sold
Fixed term license (e.g. yearly)
Often includes maintenance element
Includes updates and some technical support
Linked to hardware supplied by the same vendor
Most popular enterprise model is up front license + maintenance
Hosted model is increasingly popular based on subscription fee
Usage based or run time pricing (software tools world)
Software as a Service (SaaS) increasingly important
January 2008 “Trends 2008: Applications Licensing And Pricing”
Hosting can generate as much revenue as license sales
but there are fewer opportunities for consulting and training
real losers from hosting could be system integrators not software vendors
Success depends on critical mass:
traditional license + maintenance model generates earlier revenue but level off
subscription services grow more slowly but are more resistant to levelling off
“pay as you go disconnect” vendors expect more revenue
customers expect reduced costs
one of them must be wrong
In mature sectors vendors can afford to discount license costs steeply
The application code provides the means to solve the customers’ problems and is a key component of tomorrow’s Grid, but:
Licensing remains a key barrier to full realisation of GRID technologies
Lack of flexible licensing and a secondary market inhibits potential business models
Flexible software licensing that permits application codes to be offered as services is critical to the success of the Grid
Value must be made apparent for both the software vendor and the end user
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© British Telecommunications plc 2008 & partners of the NextGRID consortium