With Thomas L. Huber
Platforms are ubiquitous in today’s economy. Startups and incumbent organizations contend for becoming the next Uber or Airbnb in their respective industry. Inspired by these prominent examples, the main function of platforms is often seen as one of matchmaking i.e. of bringing together different user groups — just as Uber brings together drivers and riders and Airbnb brings together hosts and guests. Software platforms often go beyond such matchmaking in that they combine aspects of matchmaking and of more traditional product platforms (e.g., car manufacturers and their suppliers building different car models). Specifically, in addition to matchmaking, a critical function of such hybrid platforms is the provision of the foundational architecture and core functionality of an overall system. For example, Apple's iOS provides the foundational system along with interfaces for complementors to build smartphone apps, but it also matches consumers and app developers through the app store. This blending of matchmaking and providing a foundational system for complement development leads to important challenges related to the governance of value co-creation between platform owners and complementors.
In their recent research, Associate Professor Thomas Kude and Assistant Professor Thomas L. Huber and their colleague Jens Dibbern study the governance of value co-creation in platform ecosystems in the context of enterprise software platforms, such as those offered by industry giants IBM, Microsoft, Oracle, and SAP. Similar to smartphone operating systems, enterprise software platforms have a dual function of providing a foundational system for complement development on one hand, and matchmaking between complement developers and clients on the other hand. Thomas Kude, Thomas L. Huber and their colleague provide important insights into successfully governing value co-creation in this context*.
Tensions between ecosystem-wide and dyadic governance
One central element of ecosystem governance is the general, ecosystem-wide framework that provides the setting in which value co-creation between platform owners and complementors takes place. On one hand, this ecosystem-wide framework consists of ecosystem-wide rules that regulate the rights and responsibilities of ecosystem actors—for example, how and under what conditions complementors are granted access to the platform owner’s resources (e.g., platform-related knowledge or specific sales channels). Notably, in addition to these rules, the ecosystem-wide governance framework also includes ecosystem-wide values, which can be informal but are often formally written down. They serve as guiding principles for co-creating value with complementors in the ecosystem. For example, platform owners may commit to treat all ecosystem participants fairly and facilitate the economic success of complementors.
Through designing ecosystem-wide rules and values, platform owners shape the governance practices of partnership managers in the dyadic partnerships with their complementors. Oftentimes, the interactions are fairly standardized and do not go beyond implementing what has been stipulated at the ecosystem level. Such arm’s length governance often makes sense because it keeps governance costs low, thus allowing for scalability. There may be situations, however, in which governance costs are not the primary goal and arm’s length governance may not be appropriate. In the enterprise software industry, co-creating value may require close collaboration and partner-specific governance moves by partnership managers. For example, platform owners like SAP work with selected partners on jointly creating a specific enterprise software solution reflecting the business process of a critically important client. In such situations where value co-creation is the primary goal and scalability of governance practices is less critical, dyadic governance comes to the fore. Dyadic governance goes beyond implementing a priori and generally formulated ecosystem-wide governance but includes partner-specific activities. For example, partnership managers may facilitate access to specific resources, such as contacts to experts or the usage of sales channels not foreseen by the partner program.
Facing a Dilemma
In the context of hybrid platforms, such as enterprise software platforms, deciding between arm’s length governance and dyadic governance is a dilemma that partnership managers are faced with. There is a need for scalability as hybrid platforms benefit from network effects similar to pure matchmakers. An enterprise software platform is more valuable for clients if there is a higher number of complementary third-party solutions, and the platform is more valuable for third-party solution providers if there are more clients. Scalability calls for reducing governance costs, hence arm’s length governance seems to be a good idea. However, enterprise software platforms are also about creating extraordinary value for clients, and partnership managers are expected to facilitate such value co-creation between platform owners and complementors—thus calling for dyadic governance that may, to a certain extent, disregard the governance framework specified at the ecosystem level. Successfully addressing this dilemma is often what distinguishes successful from less successful platforms in the context of hybrid platforms that are both matchmakers and foundational system providers.
Successfully Navigating Governance Tensions in Hybrid Platforms
There is no general answer to the question of whether partnership managers should rely on arm’s length or dyadic governance. Hybrid platforms require both value co-creation and scalability, and the upside of a governance mode regarding one of these dimensions comes at the price of the other one: The benefits of arm’s lengths governance regarding low governance costs come at the price of low value co-creation, and the benefits of dyadic governance regarding value co-creation come at the price of increased governance costs. What’s more, the governance mode often changes over the course of a partnership. Thus, whether to meticulously follow ecosystem-wide governance for the sake of efficiency or to go beyond ecosystem-wide governance to facilitate value co-creation will depend on the partnership’s context and history.
The good news for platform owners, however, is that even though there may be no general preference for arm’s length or dyadic governance, either governance mode can be implemented in ways that better address the tension between governance costs and value co-creation.
At the outset of a partnership, partnerships between a platform owner and a complementor tend to be governed in an arm’s length mode. The partnership manager doesn’t know the complementor yet and specific opportunities for value co-creation have not yet emerged. Already at this stage, however, partnership managers can do well or not so well in addressing the tension between co-created value and governance costs. Although the activities of partnership managers may simply implement ecosystem-wide rules, they can do so while emphasizing values or they can disregard values. Emphasizing values increases trust and induces complementors to renounce formal safeguards, which in turn increases the dyad’s value co-creation potential. For example, if a complementor trusts a platform owner, the complementor may be more willing to engage in upfront investments into developing capabilities that are specific to the platform owner even in the absence of a signed contract for a client project.
Over time and facilitated by the trust that may have developed between platform owner and complementor, opportunities for extraordinary value co-creation may emerge, e.g., in a joint project for an important client. Reaping these opportunities may require going beyond ecosystem-wide rules. Again, partnership managers can do so while violating values (e.g., the idea of giving all complementors the same opportunities is violated if dyadic preferential contracts are concluded) or by favoring values (e.g., closer collaboration can happen without dyadic contracts but just by acting in the spirit of the value of creating mutual benefits).
Taken together, the findings provide important lessons learned for platform owners: Platform governance develops over time and is path-dependent in that previous practices create the precondition for later practices. Successful governance practices are those that help address the tension between co-creating value and governance costs in a way that limits governance costs while allowing for some value co-creation or in a way that facilitates value co-creation while keeping governance costs at a reasonable level. Generally, practices that emphasize values when implementing rules and prefer stretching rules over violating values contribute to these goals.
Competences Partnership Managers Need
Given the importance of both arm’s length and dyadic governance in platform ecosystems, especially in hybrid ones, an important question arises: What are the competences partnership managers need to successfully implement these two governance modes?
In both arm’s length and dyadic governance, partnership managers need partner program competences, in the sense of knowledge of the partner program and the ecosystem-wide governance framework along with the ability to implement these complex frameworks. For both governance modes, partnership managers need strong relational competences for embodying ecosystem-wide values and for framing even mundane practices as value-driven. Another facet of relational competences, however, is of critical importance for dyadic governance but detrimental for arm’s length governance: For dyadic governance, it is important to stretch and repurpose rules while honoring values to reap co-creation opportunities, whereas the tendency to respond to pressures to do so may be counterproductive in arm’s length governance where scalability is the main goal.
Networking competences are relevant for arm’s length and dyadic governance. Partnership managers need to be able to build a network, which includes a certain level of technical knowledge, but also act as a gatekeeper between complementors and the platform owner organization. For dyadic governance, partnership managers need to establish contacts between complementors and key individuals in the platform owner organization, which may not be needed and even negative for efficient arm’s length governance. Only in dyadic partnerships, partnership managers need to possess situational mindfulness competences, such as the ability to recognize new joint business opportunities and complementor needs to reap these opportunities.
Taken together, these insights on partnership manager competences are critical for hiring and training partnership managers to create the institutional environment that allows platform owners to situationally and successfully implement arm’s length and dyadic governance.
* Huber, T. L., Kude, T., and Dibbern, J. 2017. "Governance Practices in Platform Ecosystems: Navigating Tensions between Cocreated Value and Governance Costs," Information Systems Research (28:3), pp. 563-584.
* Kude, T., Huber, T. L., and Dibbern, J. Forthcoming. "Successfully Governing Software Ecosystems: Competence Profiles of Partnership Managers," IEEE Software.