By now it is a well-known fact that successful platform businesses enjoy faster growth and (much) greater valuations than more conventional product companies. The most successful players today – Apple, Microsoft, Alphabet, Amazon, and Tesla (“AMAAT” for short) – have recently become trillion-dollar businesses. Two more recent players that arose from the ashes of the global financial crisis, AirBnB and Uber, are well on their way to similar status, with market caps at around the $100bn mark.
An increasing number of B2B startups and scale-ups are aiming to emulate this success in different industry sectors including finance, energy, transportation and logistics, grocery retail, healthcare, agribusiness, and other sectors where they have identified inefficiencies that a digital platform could eliminate, alongside opportunities to create new value.
Among other factors, successful platform business models leverage several key technologies of the past two decades: the internet, smartphone, GPS mapping and navigation, cloud computing, social networking (for identity verification), mobile payment systems, recommendation engines (for reviews and ratings), and big data algorithms to facilitate instant matchmaking of buyers and sellers. But building a successful platform business model requires much more than “just” leveraging modern digital technologies. It’s taken the best part of two decades for most of the mega players to build out their platforms as viable businesses, not without a fair amount of pain in various cases.
For example, some including Facebook, Twitter, AirBnB and Uber have tried to avoid accountability for content-related, compliance or security/safety problems occurring on their sites or apps by arguing that they are “just” product companies. Sooner or later, they have been forced by regulators and by media pressure to comply with common sense as well as with prevailing market practices and/or regulations in their respective ecosystems. Thus, in a few cases (notably including Apple, Facebook, and Google) they’ve had to assume their role as ecosystem disruptors. They’ve also had to learn to resist their natural urge to bully their customers, users, and partners, and instead learn the vital skills of orchestration – meeting the needs of different stakeholders in the ecosystem, facilitating partnerships, curating sensitive elements of their networks such as user-generated content or user/advertiser behavior, and learning to deal with regulators on compliance issues.
Based on my recent work with a number of fast-growing scaleups that aim to establish their platform credentials, I’ve noted considerable gaps in their understanding of the specific ecosystem that they are attempting to re-intermediate, as well as a worrying naivete about how to build increasing engagement among buyers and sellers, as well as other important players. My conclusion is that these young pretenders are hampered by a strategic, possibly fatal, design flaw: they still think and act as “linear” product companies. Without adjusting to the characteristics of a multi-sided platform business, and learning the skills of orchestration, many of these companies will fail as platform businesses even if they achieve some measure of success in their (limited) product business.
Simple Taxonomy for Platforms
Acknowledging that “platform” has become an over-used buzzword, it’s probably worth establishing a basic taxonomy to distinguish between different types of digital platform. Michael Cusumano, Annabelle Gawer and David Yoffie, the authors of “The Business of Platforms” (©2019), define two basic types of platform – innovation platforms such as Microsoft Windows or Google Android, and transaction platforms, such as Amazon Marketplace or Facebook Social Network. Whereas innovation platforms set out to make their innovative offerings ubiquitous by achieving dominance in specific target markets, and thereby attract third parties to develop products to run on their platform, state that transaction platforms are, as they state, “largely intermediaries or online marketplaces that make it possible for people and organizations to share information or to buy, sell, or access a variety of goods and services.”
Alex Moazed and Nicholas Johnson, co-authors of another useful book, “Modern Monopolies” (©2016), chose different names for these two types of platform, though the distinction they make is very similar: maker (= innovation) platforms, and exchange (= transaction) platforms. Here’s their main definition: “A platform is a business model that creates value by facilitating exchanges between two or more interdependent groups, usually consumers and producers.”
Thus maker/innovation platforms attract third parties to develop products on the platform due to their wide adoption, while exchange/transaction platforms facilitate matchmaking transactions between buyers and sellers (eBay) or producers and consumers (Youtube). Maker platforms tend to monetize mainly via subscriptions, whereas exchange platforms tend to monetize mainly via transaction fees.
Setting the maker/innovation platforms aside for a moment, Messrs. Moazed and Johnson describe seven different classes of exchange/transaction platforms:
- Services marketplaces – AirBnB, Uber, etc.
- Product marketplaces – Amazon, eBay, etc.
- Payment platforms – Paypal, Square, etc.
- Investment platforms – AngelList, LendingClub, etc.
- Social network platforms – Facebook, Tinder, etc.
- Communication platforms – Slack, Zoom, etc.
- Social gaming platforms – Minecraft, FanDuel, etc.
While we are reviewing definitions, it’s also important to note, as stated in “The Business of Platforms”, that there is a third type of platform company – hybrids – that combine innovation and transaction platforms under one corporate roof. All of today’s mega players named in the AMAAT group are hybrids, though they all started life as one or other of the two first types.
Two B2B Platform Companies – Upwork and “FlexWork”
For the purposes of this article, I’m using an example of “FlexWork”, a hypothetical services marketplace platform modeled loosely on a real-life company, Upwork. First, a few words about Upwork.
Upwork grew out of two separate dotcoms founded in the late 1990s and early 2000s, e-Lance and oDesk. In 2018, Upwork went public and as the world’s largest freelancer marketplace, generates revenues of around $500m today, with a market cap that has reached $6bn. Now based in Silicon Valley, Upwork connects freelance professionals (the sellers or producers) in fields such as graphic design, sales & marketing, writing & translation, and customer support with businesses (the buyer or consumers) that seek external resources to augment their internal or agency-sourced resources for in-house projects.
Consider FlexWork to be a new competitor to Upwork, the idea being to design this transaction (or exchange) platform company from scratch, as it were.
Most B2B platform businesses have only really got going in the past decade. Many consumer tech platforms, such as Amazon e-commerce, Facebook, LinkedIn, and Twitter, preceded them during the 2000-2010 decade. These were closely followed by platforms such as AirBnB, Uber, Pinterest and others, that grew out of the smartphone boom. Besides LinkedIn and Salesforce Exchange, most B2B platforms have only really got going in the past decade, and they naturally lag the rapid growth of “winner-takes-most” B2C platforms.
Besides this time lag, as I mentioned in my introduction, I believe that by their “de facto” design, many B2B platform pretenders today operate like conventional linear (or “pipeline”) businesses – i.e., build a product and sell it to a determined set of end-customers. Without the mindset and organizational design of a diligent orchestrator, needed particularly in a business setting, I believe their chances of success as transaction platforms are significantly at risk.
“I’ve seen too many platform startups and scale-ups today that can point to an impressive list of household-name customers, none of which have yet made a major commitment to the platform because they don’t yet see sufficient value in doing so. This is not a sustainable model.”
Why Orchestration is Crucial to Success
Think about it: If your aim is to re-arrange the relationships between buyers and sellers in an existing industry, you can’t afford to jump in without understanding the ins and outs of the ecosystem that surrounds these business buyers and their providers. The existing participants won’t necessarily welcome you with open arms, particularly if you come across as a typical Silicon Valley disruptor – arrogant, full of your own sense of importance, and probably lacking the collective EQ and structure to engage different participants differently, based on their respective agendas and requirements.
Besides the core participants in your chosen industry ecosystem – the buyers and sellers – you need to deal with solution complementors, as well as critical entities such as trade associations and regulatory bodies – whether they be neighborhood associations, chambers of commerce, city councils, or state, local and/or federal government agencies. You can’t afford to ignore the relationships, protocols, and habits that enable the ecosystem to operate today, however (in)efficiently. You don’t have the advantage of authority or power over the different players, so you need to listen, enlist, persuade rather than drive, run, micro-manage. Consumer markets may at times follow the leader slavishly – look at how users follow Apple or Facebook even when they resent certain policies or practices – but B2B customers and users don’t appreciate being pushed around, and sooner or later they exact their revenge on the cocky interloper.
What Might FlexWork’s Ecosystem Look Like?
By definition it’s not sufficient for an exchange or transaction platform to focus on just one potential buyer, or “side”. It’s crucial for FlexWork’s new leadership team to solve what is known as the “chicken and egg dilemma” – deciding who your buyers and sellers are and how to match one with the other – who’s going to be an actual customer (i.e., pay you money in exchange for value delivered) versus who will be (just) a user? You never know, it might even be feasible to charge both sides for different services that you provide to them – provided that they see value in your offerings.
Being mindful of what motivations drive the behavior of each core participant when thinking about the type of value-adding services that might facilitate and even accelerate adoption. For example, it will not be sufficient for FlexWork to provide freelancers in quantity to their customers if they can’t deliver the quality of service required. Particularly in a B2B context, there’s no point, and no ROI, in being one-hit wonders with each buyer – it’s essential to create a repeat business and to grow the commitments of key customers consistently. I’ve seen too many platform startups and scale-ups today that can point to an impressive list of household-name customers, none of which have yet made a major commitment to the platform because they don’t yet see sufficient value in doing so. This is not a sustainable model.
Here’s how Rich Pearson, SVP of Marketing, Communities & International, describes Upwork’s approach to solving the dilemma: “…Starting those communities was a classic example of a ‘chicken and egg’ dilemma — we needed to try to balance marketing our website to both clients and freelancers. We built out both sides at the same time, knowing that clients wouldn’t join a network without freelancers and freelancers wouldn’t join a network without clients.”
Sellers/Buyers: The first most basic task for the FlexWork management team is to identify the buyers they need to engage – say, fast-growing tech scale-ups or maybe large established companies undertaking digital transformation initiatives – and what kind of sellers – freelance workers – they need most – maybe translators to turn website information from English into other languages, or marketers in different verticals, or software developers in offshore countries. FlexWork’s marketing and salespeople will need understand the staffing needs of these buyers, the roles and responsibilities of the positions they most need to fill, the degree of client service experience required, among other factors. Freelancers in different countries will need to be able to adapt to different technical and client service expectations of a buyer in the U.S. versus, say, Israel or France, or of a larger software company versus a startup, and so on.
The company will need to understand critical trends in how freelance professionals work, what motivates them to remain independent rather than pursue full-time jobs. Rich Pearson relates how Upwork spotted the emerging trend toward online work of all kinds a decade and a half ago: “The concept of online work was quite new in 2005 and it attracted a lot of press, which we took advantage of to build our initial freelance customer base. At that stage, we individually reviewed every freelancer, which gave everyone a good chance of finding clients. We started a customer referral program early on and, to those freelancers that were successful, we offered a reward if they referred other successful freelancers. This gave our website another burst of highly-qualified freelancers, after which word of mouth drove increases in the number of freelancers.”
Complementors: Besides attracting the core participants (seller and buyer “sides”) that the platform needs to engage, the FlexWork team needs to identify relevant complementors such as training and certification providers, staffing agencies, possibly universities and business schools, and other relevant entities to help identify suitable professionals to target as freelancers. Each of these complementors will probably require different types of partnership agreement, involving different financial incentives.
Critical Affiliations: Thirdly, they need to identify other entities that interact with, influence, or regulate the business organizations as well as freelance professionals, such as state and local government authorities, regulatory agencies, educational institutions, or tax authorities. Having identified these different entities, FlexWork would be advised to include them in communications about its role and activities, enlisting them as allies where appropriate to head off any bureaucratic problems. They would need to learn what demands they might make of any members of the proposed FlexWork-mediated ecosystem – whether the buyers, sellers, or complementors. The platform company should not act surprised that these agencies exist or that they might wish to influence ground-rules in the new more digitized ecosystem.
Just thinking about these different ecosystem players, it shouldn’t be hard to appreciate that, as the new “driver of change”, FlexWork will need to deploy considerable skills in orchestration to manage all the moving parts and dynamics between them. In case readers of this piece have any doubts about what the term orchestration implies, just pick from synonyms you can find in any dictionary: Organize, arrange, adapt, compose, mobilize, stage-manage, choreograph, coordinate, put together – these are all words that convey influence, thought leadership, in a situation where you undertake the challenge of making things happen in a complex environment without having authority, per se, over any of the participants.
How Might FlexWork Drive Increased Engagement in its Marketplace Platform?
Without too much elaboration, there are three main areas where FlexWork would most likely need to provide value-adding services.
The first is to host and curate an online Community. This Community might contain three or more sections: one for the freelance professionals, another for the businesses, and a third to combine the two, and also invite the participation of complementors as well as official bodies.
The Freelancer section would host announcements, news, tips on how to work effectively within the platform, best practices sharing, feedback to Upwork, special interest groups (SIGs), recognition and awards, and maybe a “FlexWork Club”. Important to stress here that once again, FlexWork would not direct the community, but would facilitate its activities, including establishing protocols and standards to ensure respectful and effective communication.
This is how Rich Pearson describes the Upwork community: “We have a very active community forum in which freelancers can seek business advice from other freelancers and communicate with Upwork. Nothing beats face-to-face interactions, so we host meetups around the world on a regular basis. In fact, our local reps and other community members hosted more than 60 meetups in 22 cities around the globe over the last three months.”
The Companies section of the community would host a similar set of activities suitable for their interests as buyers of freelancer services.
Finally, an “All-Comers” community might provide a forum for all Ecosystem participants to debate best practices, share perspectives on existing as well as desired value-adding services, for the Upwork management team to consider. Pearson states that over the years Upwork has experimented with and set up many different programs: “Today we have a cool program called “Upworkers around the world”. When Upwork employees go on vacation or travel, they’re able to request and get funds and swag to host their own meetup in the city of their choice.”
Alongside hosting a thriving community, FlexWork will inevitably need to provide value-adding services (VAS) to each of their two main stakeholders, if not also for one or more of the other participants.
VAS for Buyers: For hiring companies, FlexWork will most likely need to streamline the onboarding of newly hired freelancers, provide references and background checks, proof of training and certification, track records of work assignments completed for other clients, and possibly public liability and professional indemnity insurance – and probably much more. Most or all of these services would be available online, but actively enabled and supported by customer success teams.
Here’s another quote from Pearson on Upwork’s approach to engaging with buyers/hiring companies: “We actively engage with startups to help them use Upwork. Freelancers are a secret weapon to help early-stage companies find product/market fit cost-effectively, then scale their success once they have found that fit. In fact, at the three companies I worked at prior to joining Upwork, we used freelancers to help scale our marketing, engineering and customer support teams.”
VAS for Sellers: For freelance professionals, FlexWork could offer resume revision, accounting and tax prep, recognition and awards for top performance, and loyalty programs possibly including reduced fees paid on each assignment above a certain number or value, and liability insurance if/s required in the country in which they work.
Reviews & ratings: Across the board a comprehensive review and ratings program will be an important baseline service to provide. Contractors will review and rate their client on effective management of assignments, availability of technology to facilitate their work, punctual payment of fees, exchange of feedback, etc. In reverse, clients will review and rate the techs on their work performance, how flexible they are regarding deadlines, new requests, referrals to other companies, etc.
Orchestration and Curation – Achilles Heel or Core Competence?
No one can forget how Twitter and Facebook needed to be dragged screaming to hire editors to curate the more immoderate or incendiary of their users’ opinions; nor how tricky it has been to get Uber to check the backgrounds of their drivers or treat their drivers more like employees; nor for AirBnb to understand the need to make sure that their hosts paid their taxes and that their guests didn’t mistreat the property or shatter the peace of the local neighborhood.
Curation may not always be something a vendor wants or is set up to do, but if you as a platform company really expect to successfully disrupt a fusty industry by eliminating its many inefficiencies without creating new problems, you need to be ready to attack the task with the patience and tenacity of a curator in a museum who is preparing for a new exhibition. Think carefully about the ins and outs of why things work the way they do today, the full import of regulatory obstacles, who the key players in the current ecosystem really are, the problems that the different participants need to solve, and thus how to materially improve the effectiveness of the ecosystem going forward.
Clearly, a transaction platform business model requires a different organizational/operational model compared to a classic product company – but this is a topic for another day.
Trust – All-Important Ingredient for Platform Success
At the end of the day, diligent, savvy orchestration and curation generate trust among its many participants, the precious commodity without which no B2B platform can be successful. As a final quote from Upwork, here’s how Pearson describes his company’s approach to this crucial topic:
“Ensuring trust is one of the most important functions a company running a marketplace, like Upwork, can do. It’s critically important, and we have a large team dedicated to keeping the marketplace safe for both freelancers and clients. Our feedback system quickly became crucial: anyone hiring on Upwork can view a profile of the freelancer, which includes their education and work experience, skill level, feedback score and reviews. We have tried to make it easier by generating a Job Success Score for freelancers, which is a great way for skilled freelancers to stand out in our marketplace.”
Translation: Without diligent orchestration and curation, no platform can succeed because it won’t generate the requisite trust for all parties to feel safe participating in it.
That’s my take, what’s yours?
1. “The Business of Platforms” – ©2019, Michael Cusumano, Annabelle Gawer, David Yoffie.
2. “Modern Monopolies” – ©2016, Alex Moazed and Nicholas Johnson.
3. “Platform Revolution” – ©2016, Geoffrey Parker, Marshall Van Alstyne, Sangeet Choudary.
Source for interview with Rich Pearson of Upwork: