Three Strategies to Grow via Digital Partnering

How is your enterprise going to grow in the next five years? The stakes are high to get partnering right to achieve higher growth in the digital era. Recent MIT CISR research found that companies with above average reach (new customers) and range (new products) from digital partnering also had higher revenue growth—nearly 10 percentage points above industry average.[foot]MIT CISR Ecosystem Survey 2017, n=158. Reach and range via digital partners are significant predictors of revenue growth. Our ongoing research on digital partnering includes the survey and interviews with more than seventy executives in 2018 to 2019.[/foot]

Digital partnering refers to increasing reach and range via digital connections with other companies. These connections enable you to have more partners at a lower cost and develop unique value propositions while focusing on what you do best. In this briefing,[foot]A version of this research was published previously as Ina Sebastian, Peter Weill, and Stephanie Woerner, “Partnering to Grow in the Digital Era,” The European Business Review, March 29, 2020, https://www.europeanbusinessreview.com/partnering-to-grow-in-the-digital-era/.[/foot] we introduce three digital partnering strategies, and describe how Ferrovial, a Spanish transportation company, is pursuing a strategy to increase both reach and range via digital partners with its WONDO startup.

Companies Pursue Three Strategies for Digital Partnering

In earlier research we found that companies with digital and organizational capabilities to partner effectively and that participate in ecosystems with strong curation have significantly higher revenue growth. A company’s ability to build digital connections with APIs to share its core capabilities and scale digital partnerships is one key capability to enabling that growth.[foot]See these findings in I. M. Sebastian, P. Weill, and S. L. Woerner, “Partnering to Grow in the Digital Era,” MIT Sloan CISR Research Briefing, Vol. XIX, No.6, June 2019, https://cisr.mit.edu/publication/2019_0601_DigitalPartnering_SebastianWeillWoerner.[/foot]

We have now identified three dominant strategies to grow with digital partnering: increasing your reach, your range, or both via a digital ecosystem.

1. Reach: Companies with a unique product but few distribution channels tend to focus on reach first. Digital partnering helps these companies grow by providing access to new customers and building reputation by association. PayPal designed its payment services to work with any ecosystem, and in partnering the company gains reach. PayPal achieved 41 percent growth in total payment volume in 2018 from its top twenty marketplaces, which include Uber, Airbnb, and Etsy.[foot]PayPal, Q4-18 Investor Update, January 30, 2019, page 11, https://investor.paypal-corp.com/static-files/d7789358-2196-4799-8e0e-a3c3355407f3.[/foot] PayPal also partners with Chevron to enhance customer experience at the gas pump by enabling digital payments via Chevron’s mobile app.[foot]"Chevron and PayPal Partner to Deliver Enhanced Transaction Experience at the Pump,” Convenience Store News, October 4, 2018, https://csnews.com/chevron-paypal-partner-deliver-enhanced-transaction-experience-pump.[/foot] This partnership makes PayPal more visible to Chevron customers and vice versa. Fidelity Investments digitally partners for reach with wealth management companies, which build customized platforms for their advisors and customers using Fidelity’s banking services.[foot]Sebastian, Weill, and Woerner, “Partnering to Grow in the Digital Era.”[/foot]
2. Range: Incumbents with a large, established customer base tend to focus on increasing range first, adding complementary products from partner companies that help provide customers with curated solutions that fulfill more of their needs. Fidelity Investments has increased range by offering partners’ products—including tax preparation, student lending, ID protection, and legal advice—to Fidelity’s B2C customers as they navigate the company's website on life events (with themes such as sending a child to college).
3. Reach + Range: To achieve growth via both reach and range, companies may acquire ventures—or start new ones, such as Bayer’s Climate FieldView,™ which offers data-driven farming. New ventures are often ecosystems with a platform model whose growth depends on digital partners. In other cases, companies may scale a new business quickly by partnering with companies that add complementary products and offer access to a large customer base. Canadian bank CIBC launched SmartBanking for Business in 2019 based on a new digital strategy for business banking with core banking and partner products. The bank partners with large accounting and payroll companies, with the triple goal to expand distribution, add products, and gain insights from data on customer activity in partner environments.[foot]“CIBC unveils first banking platform for SMEs that integrates banking, accounting and payroll,” May 13, 2019, http://cibc.mediaroom.com/2019-05-13-CIBC-unveils-first-banking-platform-for-SMEs-that-integrates-banking-accounting-and-payroll.[/foot]

High-Growth Companies Partner for Both Reach and Range

In our research, companies with both above average reach and range via digital partners (in the upper right quadrant of figure 1) also had high revenue growth relative to their industry: 9.8 percentage points above industry average. Companies that did not digitally partner experienced much lower growth: 7.7 percentage points below industry average.

Typically, when reach plus range is the dominant digital partnering strategy, a mutually reinforcing relationship occurs between the two as companies create one-stop shops that meet more needs for more customers. The increasing range of partner products on the Climate FieldView platform has supported more and better agronomic recommendations, and new types of companies have started to use it—opening the door to new customers. For example, Climate partners with crop insurance company Farmers Mutual Hail, increasing the reach of FieldView to FMH’s customers by enabling farmers to connect their field data to FMH for simplified crop insurance reporting.[foot]“The Climate Corporation partners with Farmers Mutual Hail, simplifies crop insurance reporting to US farmers,” November 19, 2018, https:// climate.com/newsroom/climate-corporation-farmers-mutual-hail.[/foot]Successfully building an ecosystem such as this and then achieving growth requires sophisticated data sharing and analytics, and seamless and curated customer experience.

Strategies that are reach- or range-dominant should not be discounted, as they are also associated with higher performance. We found that companies had average revenue growth of 0.8 percentage points above industry average when focusing on increasing reach via partners—a good way to start your digital partnering efforts. But executives were concerned about commoditization of their companies’ products, and also that limited access to customers and data would restrict opportunities for creating more value.

Meanwhile, companies that focused on growing by range alone had average revenue growth of 2.2 percentage points less than industry average—but this is still much higher growth than companies that did not digitally partner. Value capture is a challenge with revenue growth in a range-dominant strategy. Many executives we talked with mentioned that increasing range has been important for meeting customer expectations for more choice, and customers are often delighted with the unique value provided by partners—but improving customer experience has not necessarily meant a big increase in revenue. It may be that the extra services are seen as part of an existing subscription, or they may have been offered for free or at a minimal cost.

Companies that digitally partner to increase either reach or range often shift their growth trajectory. As PayPal has grown, the company has added partners to diversify its offering and become “stickier” with current customers. PayPal Business customers can choose partner products in a variety of categories, including building an online store or marketplace, accepting payments in physical stores, or getting invoicing and accounting tools. The PayPal developer website lists 140 solution provider partners with digital connections to PayPal.[foot]“Solution Providers,” https://www.paypal.com/us/business/platforms-and-marketplaces/directory.[/foot] Similarly, Fidelity added its Wealthscape Integration Xchange storefront, where wealth management firms choose for their customers from partner offerings that seamlessly complement Fidelity’s banking services.

Ferrovial’s WONDO Builds a Mobility Platform with Digital Partners

In October 2018, Ferrovial launched its start-up WONDO as a one-stop app combining the company’s carsharing offering ZITY with diverse partners supporting a variety of mobility needs.[foot]This case example is based on (1) “Ferrovial launches WONDO, a platform to expand its urban mobility offering,” October 1, 2018, https://newsroom.ferrovial.com/en/press_releases/WoNDo-urban-mobility-platform/; (2) “WONDO and Moovit team up to offer the world's most comprehensive mobility app in Spain and Portugal,” July 16, 2019, https://newsroom.ferrovial.com/en/news/WoNDo-and-moovit-launch-mobility-app-for-spain-and-portugal/; and (3) an interview with a Ferrovial executive in 2019, used with permission.[/foot] Part of Ferrovial’s mobility offering, ZITY was the leader in carsharing in Madrid, with 300,000 customers. WONDO was first to integrate mobility services in the Madrid region, including public transport, car/motorbike sharing, taxi, and private bus services, into a single app with single payment. The new venture was a natural fit for Ferrovial’s core business, which had developed deep analytics capabilities related to cities and traffic.

Ferrovial’s Digital Hub, the company’s innovation unit, chose to pursue a reach plus range strategy for growing WONDO. In the first six months, Ferrrovial focused on increasing WONDO’s range—adding local transport partners (there were ten to fifteen at the time), testing and optimizing platform and payment systems, and enabling real-time data sharing from providers. As first to market in Madrid, WONDO added 100,000 customers in six months. But with a vision to scale reach globally, WONDO partnered with Moovit, a company with 480 million users in one hundred cities, including 2 million users in Madrid. Moovit, a leader in data on transportation systems and traffic, had not been monetizing its services. WONDO integrated its mobility services into the Moovit platform. The companies’ joint goal was to become a leading platform, offering integrated mobility services in the Moovit app in seven cities in Portugal and Spain in the first year. (See figure 2 for an illustration of the Ferrovial WONDO growth trajectory.)

Position Yourself to Grow with Digital Partners

To harness new opportunities for growth, focus on a digital partnering strategy and build partnering capability. Ask yourself how digital partners can help you grow—via reach, range, or both—and in which businesses. The digital partnering strategies offer different opportunities and risks:

• Reach: Companies with a strong product but few distribution channels can access new customers via digital partners. But companies pursuing this strategy may struggle to create more value over time, depending on how much customer data ecosystem drivers are willing to share.
• Range: Companies with a large established customer base can experiment with digital partnering to complement their core offering by curating products of interest to their customers. Companies pursuing range can expect to increase customer engagement, but they may not see as much financial value as with the other two digital partnering strategies. Whether to charge more, and whom to charge, are often challenges.
• Reach + Range: Companies like Ferrovial that want to grow fast in a new way can build ecosystems of digital partners that increase both range and reach over time. These companies grow the business or new venture quickly with a platform model. The success of these ventures depends on mature digital partnering and data sharing—and are high risk, high return.

Digital connections between companies via APIs have significantly increased in the last two years. According to our research, in 2017 companies shared on average 24 percent of their core capabilities externally via APIs, while in 2019 it was an average 37 percent—a 54 percent increase.[foot]MIT CISR TMT and Transformation Survey 2019, N=1,311; and MIT CISR Ecosystem Survey 2017, N=158.[/foot] Whichever digital partnering strategy you adopt, start build partnering capability such as digital connections now. Are you ready to digitally partner and share your core capabilities?