Part 4. Uncovering key issues and challenges related to establishing digital ecosystem partnerships

Hello everyone – welcome back to this multi-part series that I am publishing on digital partnerships and ecosystems to shed light on the practical considerations that partnership and business development practitioners need to take into account to establish sustainable long-term value accretive partnerships.?

Ecosystems, platforms, marketplaces and digital partnerships are unquestionably trendy in all strategy discussions, as well as on LinkedIn! However, notwithstanding the recent market correction, there is still strong market evidence that companies that are able to establish ecosystem partnerships to create value for customers are building strong competitive moats and generating higher shareholder returns. Hence, the ability to collaborate and build ecosystems through digital partnerships with a broad range of other participants is an increasingly critical organisational capability.?

However, establishing sustainable value accretive digital partnerships, let alone ecosystems, remains a challenging endeavour for most organisations, especially “true commercial partnerships” (rather than the capability based partnerships where one organisation buys or licenses the capability of other organisation). As soon as the initial high level discussions are over and the parties sit down to discuss the practical considerations, there are some really thorny issues that start to crop up. The purpose of this article is to really uncover these potentially deal breakers and suggest some potential ways to overcome these.?

Before we go further, it might be helpful to skim through to my earlier articles in this series for more background context on this topic.

Part 1: Shaping digital partnerships and ecosystems canvas:?https://www.dhirubhai.net/pulse/part-1-shaping-digital-partnerships-ecosystems-canvas-rajesh-singh

Part 2: Decoding Digital Partnerships vis-à-vis Ecosystems:?https://www.dhirubhai.net/pulse/part-2-decoding-digital-partnerships-vis-%C3%A0-vis-ecosystems-singh

Platforms vs. Eco-systems vs. Marketplaces:?https://www.dhirubhai.net/posts/rajesh7singh_platforms-ecosystems-marketplaces-activity-6978645724339048448-VSdM?utm_source=share&utm_medium=member_desktop

Based on my experience of having established several large and complex digital partnerships and ecosystems, I believe there are eight key challenges that come-up again and again (there are a whole range of other issues but these I believe are the most difficult to solve). Whilst I will primarily discuss these in the context of a “Bank vs. Fintech” partnership, I believe these issues are also equally relevant for other sectors. Also note that here I am covering the concrete content related issues and challenges. I will cover the softer organisational and mindset issues and challenges in the next part of this series.?

So let’s dive into these issues (after the long context setting!). The five key recurring challenges are:??Customer Ownership Rights, Data Sharing, Economic Value Sharing, Varied Regulatory Backdrop, and Exit Management.?

1.?????Customer Ownership Rights:?In commercial partnerships, there are various permutation and combination of how end-customers flow into the partnership value proposition. In most scenarios one partner might be the primary acquirer of “new” customers who then has to pass it on to the other partner for the whole value proposition to be delivered. It is also possible that one partner shares its “existing” base of customers with the other partner. This creates a huge issue of who really owns the end-customers and more importantly what each partner can or cannot do with these customers. This especially becomes an issue when both partners are in the same sector (Banks vs. Fintechs!) and might have overlapping offering (less of an issue if partners are from different sectors and their customer offerings do not overlap).?

Potential options:?There is no easy solution! For example, in a complex multi-market partnership that I led, a relatively new Fintech was acquiring and passing the customers the Bank. However, they were extremely paranoid (and rightly so) in terms of whether the Bank would start to cross-sell other overlapping products and in future displace the Fintech. After a lot of painful negotiations both parties agreed on a set of customer “rules of engagement” that codified the customer rights of both parties and agreed to revisit it time-to-time. As I mentioned above this issue is less severe if the partners are from different sectors (E.g., Bank vs. Insurance or Logistics). So the way to overcome this issue and build trust is to agree on a detailed set of rules of engagement (it can be tricky and painful discussion at times!).?

2.?????Data Sharing:?I think we are all saturated of hearing how critical customer data, especially transaction data (vis-à-vis static data) is in this digital and tech world (I was going to write data is the new oil but it has become such a cliché). There is no doubt that customer transactional data can generate very valuable insights that can be leveraged to improve the proposition or offer new services. For example, customer transaction data in Banking is critical for credit and collection decisions.??Similar to customer acquisition the data generation and flow will also happen on one Partner’s platform and the contentious issue then is how much of this data will be shared with the other Partner. In highly regulated sectors like Banking, there are very strict requirements on how customer static and transactional data should be stored and managed by the Banks (and this starts to get into the issue of varied regulatory backdrop). There are also specific regulations on customer data privacy that varies by jurisdiction (e.g. GDPR) and personally identifiable information is always very sensitive (as opposed to anonymous data).?

Potential options:?Just like customer ownership, there is no cookie cutter solution. Addressing this issue requires a very detailed piece of work to create a overall data map and then factor in various regulatory considerations. This will start to lay some ground rules on data ownership and sharing. But again there is no shying away from difficult iterative negotiations to find a common ground.?

3.?????Economic Value Sharing:?In most industries the margins are already thin so it invariably becomes a challenge to agree on an economic value sharing arrangement that will be value accretive for both partners. There are questions related to which variable and more importantly fixed costs (or existing legacy costs) should be shared in the partnership business case. There is also capital cost which could be very asymmetric in the partnership. Value creation is also not static and could evolve over medium and long term horizons. There is also secondary and tertiary value accretion that can happen (e.g., future cross-sells, referral fees etc.) so there is also a key question of where to draw the boundaries of the partnership business case.?

Potential options:?I broadly recommend two general guiding principles. First, as far as possible design the economic sharing at the lowest level of P&L. So ideal would be EVA, if that is not possible then Net Profit including Risks, if that is not possible then Gross Profit and so on and so forth. This will ensure that both parties have skin in the game for all aspects of the P&L (e.g., costs, risks, capital etc.). Second, draw the boundaries of the business case relatively tightly around the core partnership proposition and not get too distracted with “potential” second and third degree financial benefits / costs (because it may or may not materialise and if it has been accounted for and doesn’t materialise then it can leave the economic sharing arrangement very lopsided).?

4.?????Varied Regulatory Backdrop:?The regulatory requirements can vary significantly across sectors (for example, Banking vs. Logistics). Even within a sector, for example, financial services, the regulatory requirements can be very different for well established Universal 1Bank vis-à-vis a new Fintech, which might be operating in a sandboxed regulatory environment or just a different licensing framework (e.g., Payments Provider). For example, Banks have strict requirements on KYC and CDD for new customer on-boarding and the requirements for full digital onboarding have also been laid out. However, a unregulated or differently regulated Fintech might have less stringent requirements. Similarly the info and cyber security requirements can be very different. This can create a lot of strain in the partnership arrangement as no partner wants to do more or get constrained by what is required beyond their primary regulatory requirements.??

Potential options:?Both parties need to be very clear on what is absolute must (and non-negotiable) vis-à-vis what is “good to have”. The problem arises because sometimes both parties might infer the regulatory requirements differently and this can lead to contention. Getting and external regulatory legal opinion is one option although this can get expensive. There is also a question of which external agency will be used and if that agency already has a relationship with either of the Partner entities.?

5.?????Exit Management:?Whilst this is a taboo topic to discuss in the initial partnerships negotiation stage it is still very important to be clear on how the separation would happen if it comes down to that. How long will the exclusivity remain in place? How long will the customer rules of engagement remain in force? What happens to the data that has been generated as part of the partnerships? How long will be the transition period and what happens in the transition period? For example, in Banking there are specific regulatory requirements on how long the customer data has to be stored for etc.?

Potential options:?Think through each of the key aspects of the partnership, both the transition phase and the final separation, and codify how these will be managed upfront in the partnership agreement. It is always best to be sensitive to each other’s requirements because just like in real life you don’t want to leave your partner high and dry!

As mentioned before this is not an exhaustive list. There are several other issues and challenges in partnership, for example, Audit Rights, Indemnities, Info and Cyber Security, Exclusivity, Non-compete, Intellectual Property, Governance …

However, I am confident that many of these issues would resonate with people who are at the forefront of trying to establish digital ecosystems. I keen be keen to hear your thoughts on these issues and any other critical issues that I might have overlooked.?

In the next part, I aim to share the softer and organisational side of issues and challenges because overcoming ecosystem partnership issues is as much art as science.

PS: I have not yet written the third part of this series and aim to write it in the end).??

Until then ... adios!?

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