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Digital Transformation: Real Options to Win in the Digitization Game

Jul 22, 2013

Our recent Apigee Institute report “Three ROI Criteria to Drive Digital Success” explains that executives are more confident in decision-making about digital investments when a company uses these criteria:

  • Efficiency goals, such as time to market or re-use of assets
  • Customer satisfaction or brand reinforcement
  • Financial measures—specifically, real options valuation (ROV)

So what's behind this pattern in the data? What are the strategic implications for digital transformations right now at every company? What are real-world ways an API monetization service can offer a distinctive and important advantage when executing a successful digital strategy?

Last week my wife took the bus each morning to get to an event downtown.  (If you clicked the link you understand why she didn’t want to be late.)  A decisive factor in her decision to take the bus was a great app called OneBusAway that gave her confidence she could either count on getting there on time via bus—or know she couldn’t do so well enough in advance to call a cab or run home and take a car.

Stepping back, there is surely a case to be made for the bus system to equip its vehicles with GPS sensors solely on the basis of efficiency: the data must be valuable for planning and optimizing routing and staffing. I expect it also reduces emergency response time and helps better manage maintenance.  

These benefits come into play even if data were never shared beyond the agency and other government entities, but on their own they don’t fully encompass the value of embracing digital. There’s also value in projecting this data through APIs for customer satisfaction and brand reinforcement.

As a county IT director said announcing its open data program, in 2010:

"We're looking to make raw data available to citizens and innovators in the area so they can develop apps that frankly, we don't have the money to develop ourselves."

One way to react to his statement is to worry about the risk of investment with no return:

“What if we invest in projecting this data, but no one writes any apps?”

Another way to react is to seriously assess the downside risk of inaction:

  • Given the certainty that more and more great apps will be built using open public data, what could it cost us to be left behind a rising tide of innovation—and customer expectations?
  • Given that providing open public data has become a minimum qualification for any modern government, could failing to stay competitive damage our brand when it comes to public support and economic development?

(Staying in the transportation space, but heading to Europe, Samtrafiken, a non-profit organization jointly owned by 34 public transport operators and authorities in Sweden is a great example of an organization that has achieved both efficiency and customer satisfaction through digital transformation.)

". . .it became clear that sharing your data and information with third-parties who could deliver good services and innovative apps was the obvious thing to do"
~ Elias Arnestrand, Innovation Manager, SAMTRAFIKEN

Freemium API Models

Consistent with catalyzing new apps and fulfilling the promise of open government, to date the King County Metro APIs are free to use. I’d encourage them to hold to that as a general principle, but let’s consider a few new scenarios that take us into financial criteria.

The conditions that make new revenue sources compelling—including the entry of new car service players and new cuts in funding (and, by extension, reductions in service) for the bus system despite the fact that the local economy is doing better—are not things anyone could have predicted with certainty a few years ago.  But core digital capabilities lay the groundwork for new ways to address them:1

Lately Uber and Lyft have started operating in the Seattle area.  If I were them - or a savvy cab company looking for an edge - what app would I build?

  • An app that tells the user the time until the next bus arrives at their stop and how quickly a car can pick them up if they click to call. Especially compelling and attractive if a bus is running late and the weather is bad - things a good app will understand.  The King Count Metro agency could set revenue sharing (revshare) terms for any app that facilitates a transaction.
  • Or thinking more expansively, an app that helps you find “the best way to get from point a to point b” now or at a specific time specific could have potential on its own or as a “freemium” offer on top of basic bus tracking. 

Amping up the Opportunity

The agency and other agencies such as the city’s department of transportation could make some datasets including road closure, service change, or historical analysis of the impact of both available at a premium to app developers.

There’s further revshare or fee per API call opportunity if one imagines the app becoming a bidding platform. Imagine the user has just queried going from point a to point b tomorrow morning - the public transit times are displayed, and n private transport services submit bids for time and cost.

This brings me to something I think is unique about Apigee Monetization Services. For a single API—or a set of APIs that you define—you can easily set, test, and refine a range of terms including

  • opening up to a threshold to encourage adoption
  • fee-based but declining after thresholds to incent volume, or
  • revenue sharing to take advantage of new transactional opportunities enabled by apps

Real Options for Flexible . . Experimental . . Fast

In contrast to traditional financial systems or negotiated contracts, API monetization services make it possible to be flexible, experimental, and fast.  More than just practically useful, this is strategic because you can count on three things about creating value using any given API: the optimal approach for doing so will evolve, change happens fast, and—on balance—the range of opportunities and the stakes for being in a position to seize them will only increase.

Dow Jones 1900 - 2010

Which brings us to the big picture and the implications for every large enterprise: the fact is that while one can debate the details, we do know some things with certainty: when it comes to the digitization of enterprise value chains and the commercial and social environment as a whole, (1) it will only increase and (2) it will happen “pretty fast.” 

Real Options Value

There is an empirically proven model for investing under conditions of local uncertainty in the context of a known long-term trend: investing in the stock market.

Three principles have been validated as optimal over the long run:

  • Start investing as soon as possible
  • Don’t stop investing
  • Invest in a portfolio, rather than trying to pick a “magic bullet,” with the expectation that some assets will underperform, while others will strongly outperform

These principles are all the more relevant to your digital investment strategy.  Taking the chart of the Dow’s long-term performance above as a jumping off point for envisioning the extent of digitization in your sector, two things specific to digital magnify the imperative to “get in the game.”

  • While the rate of increase may vary, unlike the Dow, digitization is never going to decrease (barring some sort of truly epic global disaster); and 
  • “Spikes” that are an opportunity or threat relevant to your company’s competitive position are a possibility—for example, if Amazon or a digital native start-up were to enter your market.

During periods of rapid change, traditional financial approaches like Net Present Value (NPV) that in effect treat any uncertainty as a reason not to act can create a bias toward either paralysis or timid steps that prove inadequate to either countering disruptive threats or fully exploiting new opportunities. 

Without resorting to complex formulas, the principle of real-options thinking that helps set enterprises up for long-term success in such environments is projecting the value of an investment across different market scenarios. For digital investments, this should take into account the march toward greater digitization, the possibility of disruption, or new opportunities made possible by digitization (for example, a growing ecosystem of app-based car services, to return to our story).

The strategic implications are as follows:

  • Increased Digitization: Embrace increasing digitalization; make the best possible estimate of time- and industry-specific changes ahead, but don’t lose sight of the fact that the overall trend is toward more.
  • Risk of Inaction: Take into account both the potential benefits across efficiency, customer satisfaction, and revenue and the downside risks from inaction across these same areas.
  • Fast Fail & Max Reuse: Make a strategic decision that across the portfolio of investments you might make, that doing nothing is not an option: pick the most promising, structure as much as possible for fast failure and maximum reuse, and keep pushing forward rather than standing still. 

A few capabilities, well implemented, are likely to be assets that keep you in the game—even if in ways that weren’t originally planned.

1One objection that could be made to these ideas for monetization is that each new revenue opportunity above implies losing a customer paying at the fare box.   This gets to the heart of digital transformation:

  • Because of it, you know as a system where your busses are and the implications or riders, what you can fix now and what you can’t; and
  • You also know that the worst possible scenario for the long-term health of your system is a customer for whom paying five-to-10 times the fare price in order to get somewhere on time would be worth it to them subsequently being late getting to their destination.

 Going digital enables you to do something about this—and generate new revenue streams to boot.

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