Business ecosystems are recognized for their capacity to stimulate innovation, scale swiftly, and adapt to changing circumstances relative to more traditionally organized firms such as vertically integrated companies or hierarchical supply chains. Many businesses that attempt to create their own ecosystems, however, struggle to achieve this promise. Some studies found that only around 15% of business ecosystems remained viable, with the most common reason for failure being the way in which the ecosystem was handled.
Sound Ecosystem Business Management begins with a balanced governance architecture—not too open, and not too closed. A mechanism to police bad behavior on a platform is also important.
Disputes among ecosystem participants are another sort of governance failure. Complaints from partners about the orchestrator abusing its dominating position and imposing unfair terms and conditions on the ecosystem are early warning indicators.
Consumers and regulators have reacted negatively to some business ecosystems, signaling governance flaws that could jeopardize their ability to function. Social media platforms, for example, have been chastised for their data privacy regulations and for propagating inaccurate or misleading information on their sites. Ride-hailing and lodging marketplaces have been accused of avoiding costly standards for safety, insurance, hygiene, and workers’ rights in the transportation and hospitality sectors. In the most extreme cases of governance failure, legal action is taken against the platform or its ecosystem.
Getting your ecosystem’s governance right is both critical and a significant problem. An effective model is a set of explicit or implicit structures, rules, and practices that frame and control the behavior and interactions of participants.
Many orchestrators struggle with this problem since managing an ecosystem is extremely different from managing a vertical supply chain or an integrated firm. Rather than clearly defined customer-supplier relationships and transactional contracts, ecosystems are founded on voluntary collaboration between independent organizations. To exercise hierarchical control without going overboard, the orchestrator must persuade partners to join the ecosystem and participate. The dynamic nature of the model adds to the challenge. Most ecosystems emerge quickly and are constantly adding new products and services, connecting new members, and changing roles and interactions, putting a high demand on the governance model’s flexibility and adaptability.
To avoid market failures, a good governance model must achieve three goals:
Encourage environmental value production, making it easier to recruit, motivate, and retain partners, harmonize objectives and activities, and maximize resource allocation.
Effective risk management, to ensure that all partners follow laws and standards, safeguard the ecosystem’s reputation, secure societal and regulatory acceptance, and reduce negative forces.
Improve the allocation of value among ecosystem partners, with a fair means to distribute wealth to ensure that all participants can profit and are reimbursed in proportion to the value they add.
It’s important to remember that ecosystem governance isn’t a one-time event; it must actively evolve over time. The orchestrator needs to make sure that the initial model is scalable and not overly complex. The path that an ecosystem takes is extremely important, and many successful platforms begin with a relatively tight approach to establish the correct quality and behavior, but then scale and open as the ecosystem grows.