Business Modelling

NextGRID Business Units workshop II

Paul Mckee IT Futures Centre BT

Acknowledgements

British Telecommunications plc

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
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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

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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
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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 firms 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 Corporations technology spin-off companies, Industrial and Corporate Change, Volume 11, Number 3 pp529-555.
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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.

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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
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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
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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.

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 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?

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 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
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 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?
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 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?
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 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?
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 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?
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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

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 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.

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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
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Value Exchange
Service Consumer Service Provider

Value of Service

> Price >

Cost of Resources

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Business Value Exchange: Use Cases

Assets Event Cash Purchase equipment Agree SLA Provide service Breach SLA Cancel SLA Provider settles Customer settles Customer defaults Equipment depreciates EquipmentBritish Telecommunications plc Lose maintenance Debtors Resources Ret profits Creditors Promises Spend to acquire resources. Zero sum: asset = cost Incurs a promise customer may agree pay a fee just for that Fulfils a promise using resources customer normally agrees to pay Breaks a promise provider may outsource or pay a penalty Cancels an outstanding promise customer may pay a penalty Zero sum: both sides agreed the price ahead of time Zero sum: both sides agreed the price ahead of time Liabilities Comments

Gain

Incur

Gain

Gain/ Lose Lose (used)

Incur

Gain

Gain

Reduce

Lose FINANCIAL VALUE (X)

Lose

Incur

Reduce

Gain

Gain/ Lose

Reduce

Lose

RESOURCE (Y) Reduce [ACQUISITION COST]

Lose

Gain

Lose

Lose

SERVICE (Z) [DELIVERY LIABILITY]

Nasty, but it happens. This is why we need to check customer credit Remaining life of kit goes down whether or not it is used Costs money to maintain and operate equipment

Lose (unused)

Lose

Lose

Service Provider Risks

Assets Event Cash Purchase equipment Agree SLA Provide service Breach SLA Cancel SLA Provider settles Customer settles Customer defaults Equipment depreciates EquipmentBritish Telecommunications plc Lose maintenance Debtors Resources Ret profits Creditors Promises 1).Risk of investing in kit that wont be needed Gain Incur 2).Risk of committing/delivering service the customer wont pay for Liabilities Comments

Gain

(1)
Lose (used)

Gain/ Lose

Incur

Gain

Gain

(3)
Incur

Reduce 3) Risk of promising services that cant be provided

Lose

Lose

Reduce

Gain

Gain/ Lose

Reduce

Lose

Reduce

(2)
Gain Lose

(4)
Lose

4) Risk of committing resources the customer doesnt actually use

Lose

(5)

Lose (unused)

Lose 5) Risk of failing to utilise resources without excessive management

Lose

Business Models The Story

Questionnaire

Business modelling
Tools

The Numbers Confidential information

Dynamic Orchestrators (discovery, workflow, invocation, etc)

Higher value Business models

Management Data-centric Systems Functional and SLAs Systems

Dynamic Trust and Security

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

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
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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

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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
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License Models ( Ovum)

User based licensing
Concurrent or named user

Role based licensing

Particularly applicable to business applications

Software as a service

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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

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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

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Customers Still Find Licensing Overly Complex

January 2008 Trends 2008: Applications Licensing And Pricing

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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

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 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

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Conclusions
The application code provides the means to solve the customers problems and is a key component of tomorrows 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
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Thank you

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

British Telecommunications plc

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
British Telecommunications plc