Business ecosystem governance

Published: 16 March 2016 

There have been unprecedented changes in how companies interact with others under the “New Normal” in China, according to the newly launched report from Deloitte China – “The Survey Report on Business Ecosystem Governance Under the New Normal”. The report defined a business ecosystem as a dynamic economic community, comprising different organizations and business groups – such as clients, suppliers, manufacturers, competitors, investors, trading partners, labor unions, governments, and public service organizations. These organizations and business groups co-exist in the same community, competing and cooperating with one another for mutual survival.

The report suggested companies to consider six factors in order to establish their own successful business ecosystems: (1) establish a systematic and well-organized coexistence relationship, which helps create real value and achieve strong performance; (2) maintain multi-party interaction and promote information exchange and sharing; (3) maximize the ecosystem value by providing interactive services in commodities, servicing and finance; (4) expand the ecosystem by leveraging diverse resources to form alliances, which will provide new energy for companies; (5) guard against risk; and (6) foster core abilities and strengthen the cohesion of ecosystems.

The report is based on the findings from a recent Deloitte survey, which was conducted with C-suite executives from over 100 listed companies in CSI 300 and the Hong Kong Stock Exchange. Nearly 80 percent of companies claimed that their external expenses (in areas such as outsourcing, intermediary and advisory services) were higher than internal expenses, and now they have even more frequent connection with the outside world. At the same time, companies have also relied more strongly on their business partners. Over 50 percent of the surveyed companies described their dependence on partners as "high" and "extremely high", and nearly half of the respondent companies claimed that reputation damage brought about by behaviors from their business partners and service disruption from suppliers have become their greatest risk exposure. Over the past two to three years, major risk events resulting from mismanagement of third-party partners affected more than 60 percent of the surveyed companies.

"No company can operate independently in this highly globalized business environment.
The business world is moving beyond the traditional bounds of industries and coalescing into rich ecosystems. The ecosystem of a typical company comprises a large number of related parties. As companies develop a closer relationship with external related parties, media attention will also focus on their regulatory actions and reputational damage triggered by external third parties,” said Eddie Chiu, National Managing Partner of Enterprise Risk Services, Deloitte China.

Forty-five percent of the surveyed companies expressed that their greatest worries are related to the lack of a clear mechanism for managing third party risks and inadequate governance and management of their business partners. Most of the Global 500 executives suggested that it has become difficult to clearly define risk ownership within their organization because of the emergence of different types of risks and the overlap of functions of different departments. There is not a mechanism for different stakeholders to timely discuss and manage related party risks. All these have escalated the difficulty to manage third party risks.

In addition, surveyed companies attributed ineffective partnership and cooperation failure to the absence of a long-term and effective internal risk control mechanism. "These have prompted many organizations to re-consider their approach in identifying and managing third party risks, and how they can build sound ecosystem governance in this highly connected world,” said Chiu.

On this front, Deloitte China Enterprise Risk Services Partners Allan Xie and Tonny Xue have joined a discussion with a number of senior executives from China 500 and regulators and concluded that value creation has facilitated more cross-industry integration. Competition among companies in the ecosystem will intensify along with improved market transparency and continuous development in capital markets and technologies. Therefore, it is very important to build a coexistence model which is both systematic and well-organized. This growing trend has become even more visible in this rapidly changing internet economy.

Business ecosystem governance plays a pivotal role in helping companies to capitalize its value. “Companies can jump out of the traditional ‘supply-production-market’ value chain and invite cross-industry business partners. On the one hand, companies can explore their own core value and invest in innovation, which will help increase their corporate value. On the other hand, companies can opt for a three dimensional ecosystem, which can help raise the possibility of connecting with other ecosystems and support companies to stand out from competition or even take the lead from existing market leaders,” Chiu added.

Deloitte is recognized as the market leader locally and around the globe in the risk management advisory space and aspires not just to react to clients’ requests but to develop innovative approach to help them outperform in their territories. Deloitte Enterprise Risk Services provides a range of solutions from those that can be integrated across the organization and/or to specific risk domains and specific third-party.