SAP recently received an innovation award for business model agility. Head of Business Model Innovation Claus von Riegen explains the rewards and challenges of teaching big companies new tricks.
Author, educator, and business consultant Clayton Christensen once said: “Smart companies fail because they do everything right. They cater to high-profit-margin customers and ignore the low end of the market, where disruptive innovations emerge from.”
All mature companies are eventually put to the test of defending disruption of their business models through smaller, more agile upstarts, and the ongoing digitalization of complete industry sectors has put C-level executives on red alert. All the more important that established companies redouble their efforts to renew themselves by nurturing the entrepreneurial ideas of their employees.
But so-called “intrapreneurship” programs have their own challenges, because the corporate machine is very efficient at filtering out initiatives that don’t fit the mold, or don’t reap the high margins referred to by Clayton Christensen, above. Business model transformation is the term used to describe a company’s ability to renew itself, and it’s the Holy Grail of the corporate world.
In December at the World Open Innovation Conference 2016 in Barcelona, SAP received the Business Model Transformation Award for its ability to disrupt itself to drastically restructure its own model. Open innovation is a term promoted by Henry Chesbrough, professor at the Haas School of Business at the University of California, Berkeley, referring to the unhindered flow of knowledge inside and outside organizations to improve innovation potential.
SAP’s Business Model Innovation (BMI) team, headed by von Riegen, is a cross-board initiative whose sole mission is to pursue the right business models faster. With dedicated employees representing all relevant corporate functions, the group provides in-house entrepreneurs (“intrapreneurs”) an environment that allows the fast and inexpensive incubation and market validation of new business models. Successful incubations are then supported in the scaling phase to drive their commercialization and to create the relevant structures, processes and incentive schemes needed for implementation.
“Corporate innovators and intrapreneurs need to be guided through the jungle of corporate standards and rules in big corporations such as ours,” says Luka Mucic, chief financial officer, SAP. “This was one of the ideas behind building up a team and service center dedicated to business model innovation within SAP several years ago.”
SAP Chief Innovation Officer Jürgen Müller, who runs several programs at SAP aimed at discovering and nurturing new products and business models from within, has had good experience with the BMI team. “Business model innovation is more important than ever to stay ahead of the curve,” says Müller. “The BMI incubation channel offers a space to experiment and quickly validate business models inside a protected and guided environment. Prime examples are the ideas selected through the SAP Intrapreneurship program and now driven by our incubation unit SAP.iO: ruum and Adaza.”
Florian Frey and Stefan Ritter drive the ruumapp.com incubation project. For their team it is extremely important to test and validate assumptions in the market at an early stage. “The BMI team is and has been a great partner from the start,” notes Florian. “It has provided us with a lean framework for corporate entrepreneurship as well as great guidance and support for business model validation and all commercialization aspects.”
Claus von Riegen understands the opportunities and challenges of innovating from within. SAP News asked von Riegen about his experience building and implementing the company’s programs and initiatives.
Q: Thousands of corporate awards are given each year. What’s the significance of the Business Model Transformation Award for SAP?
A: It means a lot to me to see external acknowledgement of SAP’s Business Model Innovation (BMI) Service Center, and the impact our team has had over the past years. Prof. Chesbrough and Prof. Darwin from University of California, Berkeley clearly see that SAP is successfully creating its own business model innovation capability. And of course, we can be proud to receive this prestigious award in a competition among dozens of industry peers.
The capability of an organization to transform its business model is becoming an increasingly important element to remain competitive, because product innovation by itself is not sufficient. At the end of the day, the business model chosen for the commercialization of the product determines its commercial success, and what’s succeeded in the past is not always a reliable indicator for the future.
Business model innovation is a real challenge for larger organizations because they generally have one or more viable models and are therefore focused primarily on economies of scale for them. This protects and optimizes existing business models, but it also leads to structures, processes and incentive schemes that focus only on the incremental optimization of the status quo.
We call this the “corporate immune system.” If you try to transform your business model or pursue a new one in parallel, the corporate immune system reacts allergically. At times, a business model innovation – regardless of its economic viability – may be rejected because it doesn’t fit the current corporate mold. Organizations that find a means to stay agile and develop a business model innovation capability are better off in the long run. Through this capability, they can pursue the right business models faster and eventually stay competitive.
What do employees absolutely need to know about SAP’s business model transformation in view of the 2020 strategy?
By 2020, cloud will be the dominant model. Aiming for €10B cloud revenue is only possible if we drive significant growth of our public and private cloud offerings and at the same time invest in new ways to create, deliver and capture value. Here are three routes of transformation to the cloud that I believe are critical for our future success.
Identify new – and more indirect – routes to market.
If we want to be a true cloud platform player, we need to find ways to significantly scale the monetization of innovations that happen outside our company borders. Think about markets that SAP would normally leave untapped such as gaming, weather forecast, traffic management, etc. How can we enable others to drive innovation in these markets by leveraging SAP technology? As long as SAP HANA is a key ingredient of, for example, a traffic management solution, we can create new revenue streams without putting the solution on our own pricelist.
Institute new sales motions and monetization models.
The cloud allows us to create volume businesses where our solutions are used by an increasingly large number of SME customers. This requires new sales motions and monetization models such as “try before you buy”, “pay-as-you-go”, or “freemium”. Customers try out new cloud solutions and only if they perceive the value, they will commit to a paid subscription. SAP needs to better understand and learn how to be successful in such demanding markets.
Turn data into information and insights.
The vast data assets we manage in our cloud infrastructure on behalf of our customers can – when anonymized and aggregated – be turned into information and insights that effectively represent new value propositions for customers. Here, we are entering new markets with new competitors and need to understand how to flexibly package and monetize such insights. In addition, we need to manage the data in accordance with relevant data protection and privacy regulation so that we don’t risk our reputation as a trusted business partner.
How can employees contribute to SAP remaining relevant in an extremely competitive enterprise software environment?
The best new business ideas often come from within SAP’s employee base, but they are often left untapped or else sidelined by the corporate immune system. Always question the status quo and act like an entrepreneur. The trick is not to follow an industry trend or a competitor’s move, but rather find new ways to generate value by focusing on the business value a technology innovation can unlock.
It’s important to consider the business model early in the product lifecycle, but this is not obvious and outside support is often needed. Use the programs that SAP offers employees such as SAP Intrapreneurship or defend your business idea in front of a jury to become the next corporate startup as part of SAP.iO.