In the prior two posts, I covered the first four key success factors for Industry Cloud providers, now let’s cover the fifth KSF: choosing an industry with high concentration on one side (e.g., buyers) and fragmentation on the other (e.g., sellers).
Successful industry platforms need industry participation. Industry participation is especially hard to achieve if both sides of the industry are fragmented. If both sides are fragmented, the Industry Cloud has two broad scale marketing challenges, rather than just one. If either side is concentrated, the marketing to that side will be easier and, more important, gaining the participation of the concentrated side of the industry can help compel participation for the other side.
In markets where there is high concentration on the buyer side of the industry, getting the key buyers on board can compel supplier participation and create real supplier value if the IC manages to help standardize requirements industry buyers place on suppliers. (Please note, it is not just the concentration that can drive suppliers to participate. If buyers are smart, they can create real value for suppliers.) This was the “idea”–to the extent there was one–of many of the industry consortia that formed in 1999 and 2000. This concentration and standardization is one reason some of the “marketplaces” succeeded. Buyer-side concentration helped Elemica, Exostar, and several other industry consortia to survive, or thrive. Buyer side concentration is also one reason why EDI networks succeeded in auto and retail. Relative concentration among buyers of legal services also helped drive some standardization of the legal billing field.
Importantly, the concentration does not have to be on the buyer side, it can also be on the supplier side. If the suppliers are concentrated and can create value for the buyers, they can also succeed in gaining industry participation. GHX in healthcare, would be an example–where suppliers are more concentrated that the hospitals they serve. (Group Purchasing Organizations (GPOs) are an attempt to remedy this situation.)
To be accurate, there are examples where neither side of the market is especially concentrated, like Real Page in property management, or Sciquest in higher education. So concentration is not necessary and certainly is not sufficient, but my experience says that the concentration helps a lot and reduces costs. Think about the many failures in highly fragmented markets like construction, apparel, utilities, state and local government, and logistics.
Gaining industry participation means developing value propositions that appeal to two different types of organizations. Most companies are only used to thinking about one. It can be done, but it helps to have one side of the industry consist of 20 or fewer companies where a very tight relationship can be developed. Even better is when the those 20 buyers (or suppliers) have an equity stake in the success of the platform, as was the case with the industry consortia. Still, unless there is a value proposition that will appeal to the other side the concentration will have no value. That was something many of the failed industry consortia never figured out.