Business Modelling NextGRID Business Units workshop II Paul Mckee IT Futures Centre BT

Business Modelling

NextGRID Business Units workshop II

Paul Mckee IT Futures Centre BT

© British Telecommunications plc

Acknowledgements


Business Modelling Challenges

• No agreed real world definition of the term “Business Model”

• Effective evaluation requires confidential information– The “numbers” and not just the “story”– Can only be carried out by the owner of the potential

model

• The range of potential business models is unbounded– If someone finds a good business model they will operate

it but not broadcast it– Which are of interest?– Expression of interest may itself be confidential

• Hence our approach focuses on strategies for the articulation and evaluation of candidate models


The Approach

• 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


Definition of 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.”

• Minimal description– 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


Extended definition (1)• Chesborough and Rosenbloom specify that the 6 functions of a

business model are to: – Articulate the value proposition– Identify a market segment, i.e. the users to whom the offering is

useful and for what purpose, and specify the revenue generation mechanism for the firm.

– Define the structure of the value chain within the firm to create and distribute the offering and determine the complementary assets needed to support the firm’s assets in this chain.

– Examine the cost structure and profit potential of producing the offering given the value proposition and value chain structure chosen.

– Describe the position of the firm within the value network linking suppliers and customers including identification of potential complementors and competitors.

– Formulate the competitive strategy by which the innovating firm will gain and hold advantage over rivals.

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.


Extended definition (2)

• Magretta identifies 2 key areas in a business model description– The story – The numbers

• Both have to make sense

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.


Interesting observations

• 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


Evaluation Tools

• 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


Business Model Evaluation Questionnaire

• 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.


• What value do you add? – 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 internal motivations for being in business are there? – The obvious one of these is to make money, but there

may be more to it – for example, you may have spare capacity that you wish to make money on.

– List these internal motivations and identify if and where they conflict or support the delivery of the service

• What are the costs for delivering the offering to the customer? – These costs are many and varied, and may not all be

financial. – Analysis of these costs is an input to the balance sheet

analysis


• What is required to be bought in so as to deliver the offering? – 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 will customers pay for the service? – 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• Others?

• 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?


• In what way are relationships important to you? – 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?


• How will you make customers aware of and want your offering? – 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?


Outcomes from Candidate Business Model Questionnaire Analysis

• 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.


Risk and Reward “Balance Sheet” Analysis

• 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– Service providers– Consumers– Third parties (application vendors, etc)

• Role of SLAs– Define commitments, rewards and penalties– Relate QoS to business risk and value– Support business decision processes


Value Exchange

Value ofService

> Price >

Service Consumer

Service Provider

Cost ofResources


Business Value Exchange: Use Cases

EventAssets Liabilities Comments

Cash Debtors Resources Ret profits Creditors Promises

Purchase

equipmentGain Incur

Spend to acquire resources. Zero sum: asset = cost

Agree

SLAGain

Gain/

LoseIncur

Incurs a promise – customer may agree pay a fee just for that

Provide

serviceGain

Lose

(used)Gain Reduce

Fulfils a promise using resources – customer normally agrees to pay

Breach

SLALose Lose Incur Reduce

Breaks a promise – provider may outsource or pay a penalty

Cancel

SLAGain

Gain/

LoseReduce

Cancels an outstanding promise –customer may pay a penalty

Provider

settlesLose Reduce

Zero sum: both sides agreed the price ahead of time

Customer

settlesGain Lose

Zero sum: both sides agreed the price ahead of time

Customer

defaultsLose Lose

Nasty, but it happens. This is why we need to check customer credit

Equipment

depreciatesLose

(unused)Lose

Remaining life of kit goes down whether or not it is used

Equipment maintenance Lose Lose

Costs money to maintain and operate equipment

FINANCIAL VALUE (X)

RESOURCE (Y)[ACQUISITION COST]

SERVICE (Z)[DELIVERY LIABILITY]


Service Provider Risks

EventAssets Liabilities Comments

Cash Debtors Resources Ret profits Creditors Promises

Purchase

equipmentGain Incur

1).Risk of investing in kit that won’t be needed

Agree

SLAGain

Gain/

LoseIncur

2).Risk of committing/delivering service the customer won’t pay for

Provide

serviceGain

Lose

(used)Gain Reduce

Breach

SLALose Lose Incur Reduce

3) Risk of promising services that can’t be provided

Cancel

SLAGain

Gain/

LoseReduce

Provider

settlesLose Reduce

Customer

settlesGain Lose

4) Risk of committing resources the customer doesn’t actually use

Customer

defaultsLose Lose

Equipment

depreciatesLose

(unused)Lose

Equipment maintenance Lose Lose

5) Risk of failing to utilise resources without excessive management

(1)

(2)

(3)

(4)

(5)


Business Models

The Story The Numbers

NextGRID Architecture

Confidentialinformation

Dynamic Orchestrators(discovery, workflow, invocation, etc)

ManagementSystemsand SLAs

Data-centricFunctionalSystems

DynamicTrust andSecurity

Base standards (http, wsdl, soap, naming,notification, addressing, policy, security…)

Higher valueBusinessmodels

Questionnaire

Tools

Businessmodelling


Conclusions

• Cute technology has a small market place, end users need solutions to real world business problems and we need business models to address this need

• We propose a strategy to evaluate business models– Full articulation of the business model – questionnaire– Balance of risk and reward – spread sheet analysis– Simulation to validate performance– Finally deploy it for real

• Business models– may not work everywhere– there may be a first mover advantage– they are confidential

Licensing

NextGRID Business Units workshop II

Paul Mckee IT Futures Centre BT


Licensing Challenges in Flexible Computing Architectures

• 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


License Types

1. Perpetual license– One off payment– No maintenance included– Most preferred license by volume of licenses sold

2. Term license– Fixed term license (e.g. yearly)– Often includes maintenance element

3. Subscription license– Regular payments– Includes updates and some technical support

4. Appliance license– Linked to hardware supplied by the same vendor


License Models ( Ovum)

• User based licensing– Concurrent or named user

• Role based licensing– Particularly applicable to business applications

• Software as a service


Changing License Models

• 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


Maintenance Fees –justify the value(Gartner + Forrester)

• Maintenance costs are a big issue– Rising steadily range from 17%(SAP) to 22%(Oracle) and

up to 30%– Customer effectively re-buys app every 4-5 years– Value of maintenance depends on customer need

• Maintenance costs will therefore be under pressure• Value proposition is access to future products

– High degree of customer lock in

• Key point- software as a service reduces/eliminates this as a separate cost


Customers Still Find Licensing Overly Complex

January 2008 “Trends 2008: Applications Licensing And Pricing”


Software Pricing Models: Key Messages (Ovum)• 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


• License based software always suffers a “mid life crisis”– “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


Conclusions

• 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


Offices worldwide

Telecommunications services described are subject to availability and may be modified from time to time. Services and equipment are provided subject to British Telecommunications plc's respective standard conditions of contract. Nothing in this publication forms any part of any contract.

© British Telecommunications plc 2008 & partners of the NextGRID consortium

Thank you


Trends 2006 ( Forrester )

• Enterprises a generally dissatisfied with vendor offerings– Enterprises reject named user models– Large corporates prefer site or volume licenses

• Biggest challenges with licensing models– Maintenance costs too high, too complex, too rigid,metric

miss-match, not aligned with business goals

• Interest in utility pricing models still low (single

percentages)• Improvements in shelfware management• User based pricing trumps usage based

Documents

Business Modelling NextGRID Business Units workshop II Paul Mckee IT Futures Centre BT