Creating values under the new norm: Ecosystem Governance

What is happening to our world?

A recent study on Governance in Business Ecosystem of China by Deloitte China Enterprise Risk Services (ERS) indicates that current enterprises are facing more risks in reputation, compliance and finance due to a much more complicated business ecosystem environment, where supply chains, distribution channels and more flexible business cooperation and platform models are bringing more unpredictable new risks. By an in-depth research into 300 enterprises in the Shanghai and Shenzhen 300 Index, Deloitte finds that enterprises in industries of, with no exception, Technology, Media & Telecommunications (TMT) (including Internet), consumer business, manufacturing, financial services, health care and pharmaceutical, energy and resources, public affairs, and property are influenced by a variety of close and loose alliance partners, competitors, malicious competitors, compliance regulators and the new media, where their business performance fall sharply in the event of crisis and a wave of shock would be sufficient to destroy an enterprise. According to the Deloitte’s Global Outsourcing and Insourcing Survey 2014, the top 5 commonly used Ecosystem Governance measures by global enterprises include alliance financial performance, contracts and compliances, governance and trust management, service standards and conflict managements. Meanwhile some aspects are still suffering for a lack of advance management methods, such as monitoring partnership transformation, third-party clients demand management, composition of diversified clients, risk management and third-party compliance and intelligent document management. High quality enterprises devote special attention on the Ecosystem governance activities. However, within the surveyed enterprises, 72% revealed they lack of related management tools and skills; while 49% expressed their urgent need in assistants related to such matter.

1. What is Ecosystem Governance?

What is Ecosystem Governance? "Ecosystem" used to be a term in natural science. It was first introduced in business studies by American scholar James Moore. In summary, we can describe business ecosystem as "a dynamic economic community where organizations or groups who have certain connected interests including clients, suppliers, lead producers, competitors, complementary products producers, investors, trading partners, standard-setting institutions, trade unions, governments and social public service organizations etc. compete and cooperate with each other." The current "sharing economy", "platform enterprise", "crossover operation", "distribution revolution" and "up-stream and down-stream coordination" we often talk about are all connected to it. The success and failure of an enterprise no longer lie in your own hands but are changing everyday by third party cooperation: the yearly big show brought by one of the largest online shopping platform in China, vendors and the State Administration of Industry and Commerce; the challenges faced by retailers and suppliers in the consumer business industry in establishing joint performance indexes, standards of fair trade contracts and ethics management, etc.; the credibility crisis and billions of US dollars of penalty imposed to one of the American multinational manufacturer, one of the largest engineering company in Europe etc. due to non-compliance of third party partners.

2. Value creation through Ecosystem Governance

Deloitte holds that there are four strategies for enterprises to survive in the "business ecosystem". The first is to establish a systemic and ordered coexisting relation which creates things of value. The second is to well utilize customers, markets, as well as alliances and suppliers and further expand the ecosystem. The third is the necessary backbone in the business ecosystem – cohesion. The fourth is to visualize and quantify "third party risks" and reduce the "uncertainty" caused by platform cooperation. Deloitte’s Ecosystem Governance model offers a whole new perspective to enterprise management, to help reduce the cooperative complication as well as the competitive relations.

There are two key factors within the Ecosystem. The first is “Creation of values”, which is to discover things with values through alliance collaboration and innovation. The second is “Ecosystem Governance”. How does a group of enterprise interact with each other if they are gathered together? How do messages get transferred through? How do we ensure that messages are true, accurate and complete? How do brands get shared? How should joint performances be managed? What do we have to do when facing crisis ever? It is crucial to be able to handle all the problems above. If not, this could lead to an unhealthy ecosystem governance and thus unable to maximize prosperity.

3. Management of Ecosystem Governance

Deloitte suggests enterprises should consider the below three steps:

• Identify focus area in the management of cooperative enterprises, define the power and responsibility of cross-function management  
• Define the focus of management control, and focus on key indicators
• Monitor joint performance and improve management through coordination

The most important factors in the process: Risk Management, Alliances performance management, compliance management (regulation restriction, financial data reliability, development and sustainability and objectives) and big data analysis.

While the focus is often on protecting the organization from downside losses, companies that proactively manage their ecosystem operations also stand to reap substantial upside benefits in terms of increased productivity. Hence, with a sound ecosystem Governance practice, a company can:

1. Realize more joint innovation and growth opportunities with extended parties in the business world
2. Improve the performance of joint solutions and operations with extended parties
3. Enhance the extended party performance and mutual trust
4. Achieve compliance of contract terms, regulatory requirements and sustainability goals
5. Gain visibility into key extended party information
6. Monitor and manage better the extended party operations (supply chain, distribution channel, franchisee, business partners, JV partners, etc.)
7. Manage effectively the reputation risk after crisis
8. Provide a holistic technology solution
9. Facilitate the regulators to update the rules in cross-over boundaries
10. Reduce the possible attacks from hostile parties

4. Are you ready?

Deloitte is recognized as the market leader locally and around the globe in the risk management advisory space. ERS aspires not just to react to clients’ requests, but to develop innovative approach to help them outperform in their territories. In response to the new challenges of our clients as described above, we have developed a new value proposition for our clients. ERS provides a range of solutions from those that can be integrated across the organization and/or to specific risk domains and specific third-party which categorized into the three areas below:

• Risk management strategy and Project Management Office
• Evaluation and continuous monitoring
• Technology enablement

Business ecosystem is the outcome of this age by globalization and internet technology, and has become an irreversible characteristic of the age. Enterprises no longer remain undefeatable with their internal core competitiveness. Therefore, new generation of enterprises must uphold their secret weapon by proactively building and optimizing relationships with partners in the business ecosystem to create opportunities for mutual benefits, cooperation and regeneration.