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Unbundling Business Model
Unbundling Business Model
Unbundling Business Model
Abstract - The Internet creates opportunities for micro-level information provision from the transactional activities of
unbundling in stockbroking and other information-intensive brokering was one of the first applications of the
industries. This research proposes a framework to capture the commercialisation of the Internet. Historical and real-time
unbundling effects on value chains and illustrates the stock market information became available on the World
opportunities for the case of the Australian securities market.
Inter-organisational work and data-flow models are employed to Wide Web soon after its wide-spread adoption. Generally the
describe the phases of on-line trading and investigate current ‘freedom of information’ and the scope of free, global
and future models that leverage the unbundling arrangement. services available on the Internet provided investors, and in
Finally, the paper identifies key socio-economic and technical particular smaller investors, with better market knowledge.
drivers for the adoption of unbundling arrangements within The broker and specialised stock market analysts were no
electronic markets. longer the single source of financial market information for
I. INTRODUCTION investors. Today, the information provision function of
stockbrokers has to add value on top of the knowledge
The development of on-line trading models presents the available on the global networks or it will become redundant.
stockbroking industry with yet to be realised opportunities Such de-coupling of processes (= unbundling) will not be
and threats. The traditional trading model in the stock broking restricted to the early, information phases of a trading
industry focuses upon a single entity performing the entire process. However, these phases are the parts of the value
process (information provision, investment decision and chain where unbundling has already become obvious in the
order, trade execution, settlement and record keeping). On- current market situation. This research will lay out an
line discount brokers are able to offer trading processes, in explanatory framework for other, later phases of electronic
particular trade execution and settlement, through electronic market transactions.
marketplaces at a lower rate than under traditional brokering
arrangements. These market forces require brokers to address II. RESEARCH METHODOLOGY
the issue of unbundling services with separate revenue models The aim of this research is to examine the organisational
applied to each unbundled service. For example, traditional and economic aspects of unbundling opportunities at the
brokers would regard the provision of stock market micro-process level as exemplified by the Australian
information as ‘free’ customer service, while on-line traders securities market. The research methodology is
are usually unable to provide such individualised assistance. descriptive/interpretive using qualitative methods and
On the demand side, on-line customers expect the flexibility according to Galliers categorisation, is based in an
of choosing separate service providers for separate phases of interpretivist paradigm [2]. The interpretivist paradigm
electronic market transactions to minimise charges. Pressure provides consideration to the environment, i.e. the market
from supply- and demand-side will lead to new business itself and its associated operations [3]. In fact, the multiple
models, and the event of new competitors from within and ‘pictures’ of the trading process call for an interpretivist
without the traditional industry presents serious threats to paradigm that allows the existence of multiple realities from
current market leaders. as many perspectives [4]. An extension to this issue is the
These ‘unbundling’ trends are not restricted to the modelling of data interfaces for each component-process/new
brokerage or financial services industries. Hagel and Singer business model that may arise from the unbundling.
[1] predict similar scenarios as described above for all The research is holistic by gaining insight into the trading
industries: processes from the investor’s perspective as well as the
‘As more business interactions move onto electronic perspectives of other market entities [5]. From the
networks like the Internet, basic assumptions about interpretation and description of the trading processes, a layer
corporate organization will be overturned. Activities that of abstraction is built by establishing a model that maps the
companies have always believed to be central to their trading processes, the owners of each component-process and
business will suddenly be offered by new, specialized the flow of data between the component processes. This layer
competitors that can do them better, faster, and more of abstraction provides the necessary detail from which
efficiently’. theories regarding the potential for high level and micro-
Financial services show early and illustrative examples of process unbundling can be established.
these unbundling processes. The (partly) separation of
search
III. UNBUNDLING IN THE ON-LINE TRADING CONTEXT generic model. This adaptability is aided by the high
degree of homogeneity in operations among international
The general approach for non-quantitative process analysis securities markets around the globe.
has been to break down, or disaggregate the operations and
their associated business processes [compare 6] and review Schmid puts forward an electronic market reference model
each component level individually. This approach has by disaggregating the market transaction process and
facilitated analysis of distribution channel impacts (supply applying different organisational views. In their model, three
chain) as well as potential areas for process improvement pertinent market transaction phases were sequentially
(business process re-engineering). This systematic identified: the information phase, the agreement phase and the
disaggregation is analogous to the unbundling of the investor settlement phase. Accompanying these disaggregated phases
trading process that is occurring now in securities markets are four separate views of the market transaction: the business
around the globe. The Internet distribution channel is view, the transaction view, the services view and the
facilitating this unbundling while market forces develop new infrastructure view. Rather than providing a more detailed
business models for the provision of each of the unbundled description of this concept, we refer the reader to Schmid and
processes. The trading process is no longer the exclusive Lindemann [7].
domain of particular service providers that have often been
protected by legal regulation. The dynamics of electronic C. A phase model of investor trading in the Australian
marketplaces becomes apparent with portal sites like securities market
Gomez.com (http://www.gomez.com) offering comparison Schmid’s electronic market reference model closely
‘shopping’ with detailed product analysis of nearly 50 parallels the trading processes in the Australian securities
Internet brokers. In the following sections, the trading market making it an appropriate model to use as a contextual
transaction is disaggregated within the context of Schmid’s framework for this research. Using the three market
established electronic market reference model [8, 9] with transaction phases of the Schmid and Lindemann model, the
application to the Australian securities market. trading process in the Australian securities market has been
A. The Relationship between Unbundling and Business disaggregated into its component process level. Under the
Processes original electronic market reference model the settlement
phase encompasses the complete fulfillment of the contract
When analysing the unbundling of business processes for including the maintenance and warranty obligations of the
separate provision by different market entities, the granularity vendor. However for the Australian securities market, this
of disaggregation where unbundling occurs, is difficult to does not represent a close enough description of the investor’s
define. At a certain level, operations dictate that these trading process. To include the on-going nature of
processes must be performed by the same market entity. The maintenance functions we divide the settlement phase from
close interaction and interwovenness of processes can make the original electronic markets reference model in order to
the separation economically unjustifiable or even technically accommodate this market: settlement and record and account
infeasible. In such situations, the transaction costs associated keeping. The new settlement phase does not include any
with coordinating each low-level process between different maintenance of share registry holdings; this describes the
providers are too great and these processes remain provided operation of the records and account keeping phase.
within the hierarchy of a single market entity [1]. The Consequently, the extended model as represented by Figure 1,
occurrence of electronic markets (as opposed to electronic adds this fourth phase of records and account keeping where
hierarchies) favours the coordination through market the component process of the same title resides. Figure 1
mechanisms (as opposed to internalised, hierarchical aligns the disaggregated component processes with an
coordination mechanisms) [17]. However, government adapted electronic markets reference models and shows that
regulation may require certain processes to be performed each component process is in fact comprised of lower level
exclusively by specific entities. The unbundling of business processes.
processes will be broken down to such a level where each
component can (theoretically) be provided by a single market
entity, regardless of whether that entity actually provides
other adjacent processes.
B. An (On-line Trading) Extension to the Electronic
Markets Reference Model
Considerable work has been completed on the concept of
electronic market reference models (EM-RM) [compare 7, 8,
10, 11]. Two major advantages are achieved by
disaggregating the investor’s trading processes within the
context of an established generic market transaction model:
1. The investor’s disaggregated processes inherit a certain
degree of context from the established model (that in turn
should facilitate easier understanding), and
2. The adaptability of the disaggregated processes to other
international securities markets becomes easier through a
search
IV. ANALYSING UNBUNDLING STRATEGIES WITH BUSINESS Figure 2: Modelling entities and diagram syntax
PROCESS MODELS
This research aims to disaggregate and analyse the trading
processes qualitatively. Traditional methods of systems A. An Illustrative Example: The Settlement Processes
analysis and design for process (interaction) analysis typically Once the order has been placed and executed, the ensuing
include work-flow and data-flow diagrams (DFDs). However, settlement processes, as depicted in Figure 3, are provided
the purpose of this research is not the detailed description of almost exclusively by the stockbroker. Figure 3 is a diagram
process activities, but the identification of process owners and of the settlement micro-processes in the Australian securities
their interactions. Therefore, a simpler modelling method that market.
incorporates the following elements appears sufficient:
1. Specification of actual processes;
1. Traditional Model: In the traditional model each macro- V. DRIVERS FOR UNBUNDLING STRATEGIES
process is owned and performed by the stockbroker acting
on behalf of the investor. This model is still persistent in Modelling methods as illustrated in section IV and
current market operations. electronic market theories describe the most considerable
drivers behind the unbundling trends in on-line trading.
2. Internet broker model: This model is consistent with Particular consideration needs to be given to the underlying
current market trends whereby existing and new effects of the shift to Internet transactions and services as the
stockbrokers are offering Internet trading through enabling technologies for these business phenomena. The
transactional web sites. These new Internet brokers are drivers introduced in this section are mainly generic and
merely traditional stockbrokers that have added a new equally applicable to other industries.
distribution channel via the Internet to their avenues of
trade placement for clients (investors). Similar to the The automation of information (and data) flows between
traditional model, (almost) all broking macro- and micro- entities, the decrease of transaction costs of (electronic)
processes are still owned by the same legal entity. There is market transactions, the availability of micro-pricing
very little in the way of innovative operations whereby arrangements and the obsoleteness of legislative regulation
dis-intermediation, re-intermediation or other such are the major characteristics of on-line services working in
phenomena of transitional electronic markets occurs. favour of unbundled business models. These drivers
differentiate on-line from traditional trading through the
3. Macro-process unbundling model: With this stage the technical feasibility of new solutions and/or the economic
macro-processes become independent from the process change of market structures and powers. The following
owner. In theory, each (macro-)process can be performed sections A to D explain each of these drivers in greater detail.
by a different process owner. In such instances, a client
may go to different markets from around the globe to A. Automated Data-Flows
source a particular trading (macro-)process. In practice, The inter-organisational exchange of information is a time-
regulations and the lack of market maturation will only consuming and costly process with non-electronic means.
lead to the unbundling of singular (macro-)processes. Even electronically, inter-organisational data communication
4. Micro-process unbundling model: This is the final stage processes can be difficult and indeed economically
of unbundling. The trading processes are broken down prohibiting in the absence of a global information
into micro-processes, which can be assigned to different infrastructure and common data interface standards. The
process owners. The same conceptual model underpins Internet as a globally accessible electronic network
this stage and the former stage, only the process level is at established affordable and geographically independent
a sufficiently more granular level. This added granularity physical access to communication infrastructures. In the short
is only feasible through technical innovations, but also term, global standards for the syntactic and semantic
requires innovative business models that are distinctly definition of data-flows will be achieved through XML
different from traditional trading and current Internet (Extensible Markup Language). The DTDs (Document Type
stock broking. The theory behind this model is explicated Definition) in XML enable the exact specification of the data-
in the following sections. flows between business entities. The automation of sending,
receiving and processing of data becomes manageable for
search
multi-national corporations, small- and medium-sized for unbundling at the micro-process level where process
enterprises and consumers alike. owners can realise low operational costs.
The open specification of DTDs ensures the C. Micro-Prices and Micro-Processes as New Revenue
interoperability of the data flows and the global availability of Models
information specifications. Such DTDs have already been
implemented and are in widespread use in the financial Micro-pricing arrangement allow clients to source several
services industry and on-line trading. The on-line retail ‘micro-processes’ for a very small charge from various
banking transactions standard OFX (Open Financial vendors. Again, Internet technology becomes instrumental as
Exchange - http://www.ofx.net) offers support for investment an enabler, providing the infrastructure for micro-payment
operations, share trading and portfolio maintenance. Personal mechanisms and automating the communication processing
Financial Management software, for example Intuit’s and account maintenance. The emergence of business models
Quicken or Microsoft’s Money, are already supporting OFX. to fit such arrangements will also be driven by client demand.
Financial institutions, however, are currently supporting the On top of better bargaining power, the option to select the
‘pure’ banking transactions to a much larger extent than the most attractive providers for specific activities and combine
investment operations. This bias is due to greater technical their strength according to the client’s demand offers an
challenges in the implementation and to business strategies, added incentive for such arrangements from the investor
which see on-line transactions mainly as a vehicle for cost perspective. In the longer term electronic market systems with
savings. advanced search and comparison facilities and (intelligent)
agent systems will reduce the transaction costs (most notably
Maturation of technology and market pressure will remove search cost) for organisation of such arrangements prior to
these barriers and force financial institutions into offering the trade.
services that clients demand. The technical feasibility of
exactly specifying the information exchanged in the process D. Weaknesses of Regulatory Environments
chain allows to cross organisational borders without incurring Currently legislative regulation of the stockbroking
high interaction cost and management risk. The Internet industry is still a major barrier to unbundling trends.
technology therefore becomes the major driver behind the However, only a limited number of processes or data-flows
unbundling of on-line trading. Obviously, these organisational can be regulated through legal requirements. The further
structures are infeasible without global electronic networks. disaggregation of the processes into ‘micro-processes’ and the
In the case of the stock broking industry it is the very nature creation of global electronic marketplaces for the sourcing of
of automated data-flows on the Internet that allow to split up those activities may provide a vehicle to circumvent local
one process further, to be handled by several organisational jurisdictions. The crucial ‘regulated’ micro-processes can still
entities. remain under a certain jurisdiction, while other micro-
B. Reduced Transaction Cost in Electronic Markets processes are performed under different jurisdiction. Such
arrangements assure legal compliance with the regulatory
Transaction cost theory [compare 13, 14] attempts to environment and opens up the buying power of global
explain the superiority of coordination mechanisms on the (electronic) marketplaces to achieve more effective sourcing.
continuum between markets and hierarchies by minimising Naturally, the shift of a large portion of the process activities
transaction costs. The effect of electronic networks and inter- to other jurisdiction while the regulatory jurisdictional control
organisational systems on transaction costs is reduction, remains intact, will make regulatory environments more
which favours electronic market coordination over electronic difficult to sustain.
hierarchies [15]. While transaction cost economics have been
criticised as an analysis tool on the micro- (firm-) level [16], VI. CONCLUSION AND FURTHER RESEARCH
the theory can be utilised to predict the competitive The extent and direction of the changes the Internet brings
environment and the general trends of electronic markets. In about the economic landscape are difficult to predict ex-ante.
fact, the theory has been applied frequently in support of In this paper, one of the aspects that is leading towards new
electronic market models ever since their occurrence [17]. business models, the unbundling of corporate services and
Transaction cost theory provides an analytical framework to more particular on-line share trading, has been analysed. The
explain the emergence of business models with electronic close scrutiny of the macro- and micro-processes unveils the
markets for each of the micro-processes. The electronic potential of disaggregation and recombination of business
coordination mechanisms described in the previous section A processes for existing market players and new entrants. The
make such micro-markets economically sound. simple modelling method employed here can be adapted for
The technical requirements for a widely interoperable the analysis and prognosis of other industries and
electronic financials markets as outlined in the previous marketplaces. The results of the illustrative business
section A, also sets a precedent for low marginal costs of processes included into this paper show the usefulness of this
additional information transfers between different process method for the prognosis of future roles. The paper also
owners. In line with Bakos and Brynjolfsson's extensive identifies the socio-economic and technological drivers
research on aggregation and disaggregation of information behind the unbundling of micro-processes.
goods [18, 19], as process owners obtain such interoperable There are inherent interdependencies between these micro-
technology, the marginal costs of transactions are diminished process that are a major obstacle to a frictionless financials
to almost zero. Such low marginal costs are a major incentive market. Today and in the foreseeable future, a trader would
necessarily be required to prescribe the complete path her
search
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While the models are backed through anecdotal evidence and
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