In a nutshell
Value delivery is the system that ensures that the promised value is served to the customer in an efficient and scalable way. To realise this objective, we have to back-up all assumptions we have made during the conceptualizsation of our venture. During the iterative process aiming to fulfill all assumptions we have four recommendations: (1) set-up milestones; (2) have the right partnership choice and ownership model; (3) design the right organizsational and governance model and (4) choose the right capital.
To develop a roadmap on how and when we will back-up the different assumptions, we recommend developing a milestone strategy. The basic idea of a milestone strategy is to postpone major commitments of resources until the evidence from the previous milestone event signals that the risk of taking the next step is justified. What we are proposing here is an expanded use of the tool to support the discipline of transforming assumptions into knowledge.
A milestone anticipates what the project is supposed to achieve at a pre-set date. It should describe a desired future situation. There are two important aspects to this. First, the concept refers to a point in time, not a period. Second, it looks forward to what we want to create, not how we create it. The milestone plan charts the logical ties or dependencies between milestones.
A generic milestone and growth plan for an integrated business model includes:
- Feasibility stage: at this stage we aim to resolve all assumptions that can be solved by further, deeper analysis and (market/industry) research.
- Pilot case: at this stage our objective is to resolve all assumptions that can be tackled by action-oriented research. Often in pilot cases, the venture aims to develop a proof of concept for the product-service it aims to bring on the market. Does it generate the impact one assumes? To do so, we often observe three cycles of pilot casing: 1. Qualitative action-oriented research at a small-scale level; 2. A larger-scale trial that aims to get qualitative/quantitative feedback from the different market segments; 3. A full-fledged evidence-based pilot case.
- Minimal viable venture: at this stage we aim to solve all assumptions that the venture is viable, at an experimental or basic level. At this stage we serve our first paying customers, and we receive customer feedback.
- “industrial” stage (=economies of scale): at this stage we aim to give evidence that the venture is efficient and effective at an industrial scale. To reach this level we first need a critical mass of customers. At this stage the venture will also make important investment decisions.
- Impact stage: at this stage we aim to attain the full potential of the impact model
Have the right partnership choice and ownership model
At each stage one needs the right ownership, organisation and governance model. It is indeed at this stage the question will pop-up, who will own and lead the venture and which partners will be taken on board as investors, whom we aim to develop strategic alliances to, and with whom we aim to develop a contractual (open) relationship.
To assess partners in the organisation model is to assess
- which expertise is crucial to embed within the competitive resources and competences of the venture (see resource analysis)
- which actors can generate market access and speed-up the time-to-market of the venture
- which actors can help us to legitimise our model to the different stakeholders and ensure that the venture stays loyal to its mission (universities, social organisations, patient organisations,)
- Agreement: among the terms that should be clearly defined from the outset are the time span of the venture, performance norms, and governance processes. A joint venture board should be established, and agreement reached as to the scale of investment required from each party. Whether the parties will extract surplus cash or reinvest it into the venture, along with a potential exit strategy, are other significant considerations.
- Alignment: successful collaboration is founded on shared objectives. The partners’ risk/reward strategies must be aligned to ensure both derive value from the arrangement.
- Conflict of interest: Assess whether partners cannot generate conflict of interest in the proposed business model, also at a later stage of the growth of the venture.
- Development: the strategic partnership, as well as the relationships between parties, are ongoing, rather than static, and need to be developed. Frequent communication is required to foster a feeling of belonging amongst employees on both sides.
- Flexibility: Parties should be aware of potential differences in venture culture and decision-making processes and deal with any issues that arise in a flexible manner.
- Develop a clear exit and voice path: Develop (positive) exit scenarios for partners to exit the collaboration and develop procedures to mitigate disputes.
- Transparency: Develop a clear framework of what information will be shared and who owns the gathered information and assets at each milestone.
Since open innovation is all about sharing know-how and inventions with third parties, organisations should start managing IP at a very early stage of the innovative process, starting with an accurate allocation of the IP owned by each party. IP can strengthen the assets of the new venture and, at the same time, can be a source of conflict between partners. Example of IP are: 1. Patents or patentable technology - the vast majority of projects will involve some element of social challenge solving. A non-trivial solution to a technical social challenge that achieves a commercially useful result may well be patentable. 2. Confidential information and know-how – this could be research data, manufacturing or process factors (temperature, flow rates), design know-how or industry knowledge – it can provide a commercial advantage, but not if it is generally known by competitors. 3. Copyright - examples are technical drawings and manuals, data compilations, process information, software routines and user interfaces. 4. Designs – these relate to how a product looks – there are both registered designs and unregistered design rights (which are automatic rights and similar in nature to copyright) 5. Trademarks - new product or service names or logos may be created for a new collaboration and the parties may have existing trade mark rights. 6. Third party rights – third parties may have any of the kinds of rights indicated above, and this could prevent exploitation of the results of the project unless these rights are appropriately licensed.
The need to define a detailed framework to deal with this IP generates a process with several milestones featuring agreements before the venture is set-up. Typically, four types of contracts are signed: a non-disclosure agreement during the initial discussions; an agreement of principle when the partners have defined the main points of their future collaboration; a consortium agreement setting up details of the relationships between partners; and a licensing agreement, setting out the rules for the use of IP generated by the project.
- Non-disclosure agreement:
- Organise the protection of confidential information exchanged between partners
- Must be signed before entering into a future collaboration
- Agreement of principle
- Declares the intention of the partners to collaborate
- Presents the main principles of the collaboration
- Is the precursor to the consortium agreement
- May be binding or non-binding
- Consortium agreement
- Precisely organises the relationships between partners (governance, rules of decisions,)
- May be bilateral or multilateral
- Is legally binding
- User agreement
- Presents the rules governing the distribution of fees and the domains of use
- Regulates the IP issues and the conditions for licensing
Design the right organisational and governance model
It is crucial that project management realises every milestone, given the entrepreneurial and innovative nature of the endeavour. Our observation is that agility is an important factor in project management.
- Strategy: create actionable strategic guidelines, be clear about targets and KPI’s of every milestone .
- Structure: build a network of empowering working groups or teams (clear, flat structure, clear accountable roles, hands-on governance, robust communities of practice, active partnerships, open physical and virtual environment, fit-for-purpose accountable cells).
- Process: make rapid decisions and adapt learning cycles (rapid iteration and experimentation, standardised ways of working, performance orientation, information transparency, continuous learning, action-oriented decision making).
- People: recruit dynamic people that ignite(s) passion (cohesive community, shard and servant leadership, entrepreneurial drive, role mobility).
- Technology: use next-generation enabling technologies (evolving technology architecture, systems and tools).
In this stage in the roadmap it is also crucial to integrate at which stage we plan to set up a separate legal entity for the further growth of the integrated business model and to map out the need for investment capital.
Important factors that will determine the organisational form of your venture
- Determine the number and nature of owners. If you are going into venture with a limited, static set of actors or with many, this can narrow down your options. What is the nature or ultimate objective of your owners? Are they aligned? If not, it could be crucial to organise them in different investment groups.
- Check investment readiness: Not all owners are able or willing to invest. If crucial actors are not able to invest significantly and are not able to follow other investors, how can you avoid that they retain a minor weight in the organisation.
- Evaluate liability issues. If you are involved in a venture with high liability, then you may want to consider what the impact and risks are for every investor.
- Evaluate the fit with your integrated business model: does the organisational form match the mission and purpose of the venture? Can one organise everything in one organisation? Or do we have to setup a hybrid structure (a venture for economic exploitation and a non-profit one as a guarantor for social impact).
- Evaluate your scaling path: is the organisational form aligned with your scaling path? (nationally and internationally).
The choice of the nature of your capital investment is also fundamental. One may need other sources of capital for each stage:
- Start-up/feasibility: at this stage the source of capital is often own investment, combined with capital of early believers (so-called FFF- friends/fools/family) combined with grants or subsidies.
- Venture angles: seed-capital providers often combined with coaching.
- Venture Capital fonds: non-seed and growth capital to develop the venture to an industrial level.
- Private equity: capital that enables the development at international scale, with impact
- IPO: capital for mature companies
The intention of the investment capital is not neutral and should be strategically selected:
- Philanthropic sources: this is capital from which investors do not expect economic return (they do not want their capital back) but expect measurable social impact.
- Venture philanthropy: this is capital that aims for social impact and for a certain economic return when milestones are met.
- Impact investment: this is capital that aims for social impact but also expects a fair economic return.
- Venture capital: this is capital that aims to grow ventures and to obtain optimal economic return on their investment.
In the health sector, the beneficiary of the product/service is not the same person who pays for it. This is a unique dynamic and explains why building business models in the health sector is more complex than in other sectors.
Regular product/service: customer is the beneficiary
For a product like a phone or a car, the person paying for the product will most likely be the one enjoying its benefits. Thus, the customer is interested in the functionality of the product and accepts the price: they know the car will get them places, or the phone will allow them to make calls, and they are willing to pay for the product. For the maker of the product, the decision whether or not to go into production depends on whether there is a positive or a negative case for a successful business:
- If the customer is willing to pay more than what it costs to produce the product? Then go for it!
- If the customer is not willing to pay enough to cover the cost of producing the product? Stop the project and search for another idea.
Preventive healthcare product/service: no clear paying customer
In the health sector and when looking at preventive healthcare products and services in particular, things are different. For instance, consider the following preventive product: a game that motivates people to move their bodies and consequently reduces the obesity rate of the user population. This product has two types of beneficiaries:
- Health beneficiaries (the users): if the game works as intended, the users will enjoy health benefits such as reduced body weight and related health issues such as type 2 diabetes, heart disease, stroke, sleep apnoea, etc.
- Financial beneficiaries (the health insurers or government): if the game works as intended, the health insurance companies or the government—who would otherwise bear the financial costs related to their customers/population suffering from obesity, diabetes, heart disease and other health problems—will enjoy high cost savings.
In this example, the actual users of the preventative product (the game players) are the beneficiaries of better health. However, the users are not often willing to pay money to cover the development and marketing costs of a preventative healthcare product or service. As a result, many possible preventative healthcare products and services do not get developed.
This is why more sophisticated revenue models are needed. The financial beneficiaries of preventative products or services must be convinced to participate in the business model. One possible way to do this is by using Health Impact Bonds.
In most cases today, almost all cooperative arrangements between companies and healthcare organisations are characterised by a so-called ‘arm’s length transaction’—a type of customer/supplier relationship.
In an arm’s length transaction, the healthcare organisation experiences a problem and searches the market for a supplier who can provide the solution. Then, the healthcare organisation buys or leases the solution and uses it to solve the problem at hand.
That means there are two possible types of business models:
- The business model of a healthcare organisation. The aim here is to create social value. The product/service provided by the company is a part of the value delivery building block, because it typically concerns products or services (the resources) needed to deliver a solution (e.g. good health, comfortable living environment, etc.) to the customer.
- The business model of the companies. The aim here is to create economic value. The healthcare organisation is a customer for the companies.
How can the healthcare organisation become a partner of the companies—and partly share in the gains—instead of being the customer of the companies and thus having to pay them?
To answer this question, a business model has to be created. Not at the level of the individual organisations, but at the level of a partnership. In contrast to the arm’s length transaction, there is only one business model: one that is created together.
When a business model is created at the level of a partnership, the three aforementioned building blocks have to be considered from the perspective of the partnership:
- Which business opportunity are we going to realise and exploit together?
- Which partner is going to do what, in terms of value delivery to the client? What is the division of roles and tasks between the partners?
- How will the value that is created be distributed between the partners?
In an arm’s length transaction, there is no discussion or negotiation. The companies simply capture 100% of the revenues and the profits. In an integrated partnership, however, one has to think about how to split the created value—social as well as commercial—between the different partners.
Why is there a need for an integrated approach?
Why is there a need for collaboration between companies and healthcare organisations? How is the existing model insufficient? And why is there a need for business models to be created on the level of a partnership rather than on the level of the individual organisations?
Problem: Insufficient knowledge about market needs and customer preferences ➔ weak product/market fit
To answer these questions, we need to take a step back and look at the reasons why so many new products and services fail. The most common reason it happens is that companies try to bring products and services to the market without having a clear idea about the specifics: the specific needs of the market and the specific preferences of the customer. The next figure gives an indication of the failure rate of new products.
Often, it is only after a solution is developed and an attempt is made to bring it to the market that it’s discovered that (a) the customer is not entirely satisfied with the product, (b) the customer is using the product in the wrong way, or (c) the product doesn’t meet the customer’s expectations and consequently doesn’t bring them any value.
Solution: partnerships between health organisations and companies
This problem can be overcome when healthcare organisations and companies form partnerships. Both parties bring things to the table that are interesting for the other.
What does the healthcare partner bring to the table?
- Market knowledge
Healthcare organisations have a very clear view on the exact needs and preferences of their customers. This market knowledge is crucial for companies (and thus extremely valuable) because it gives them the information they need to recognise and develop a good product/market fit.
- Market access: for product development and commercialisation
Another problem many companies struggle with is being able to access the market: not just at the moment of commercialisation but also during the product development process.
A concept that has gained a lot of attention in recent years is ‘spiral development’. This refers to a development practice in which the end user is involved during the product development process and the product is tested by a particular customer group via rapid prototyping. The customer test group gives feedback that can be used to improve the product. This ultimately leads to a product that is fine-tuned to the customer’s needs and expectations. And a product that brings value to the customer is more likely to succeed.
Healthcare organisations often underestimate the value they bring to such partnerships. This is a crucial mistake. It means they give away their valuable knowledge to companies for free, instead of sharing in the financial benefit that can be created from it. To avoid this in the future, healthcare organisations must change their mindset and become aware of the value they add to companies.
What does the company bring to the table?
Since financial resources in the healthcare sector are very limited—proving the need for strategic product development investments—the company’s partner will usually take responsibility for the financial investment that’s needed for the development and commercialisation of the solution.
Commercial capabilities and expertise
A company typically has more expertise and knowledge about bringing a product to the market and scaling up a product than a healthcare organisation.
➔ Companies and healthcare organisations complement one another very well.
What is the gain from an integrated approach?
The gain for the healthcare organisation: new source of income
Today, the financial model of healthcare organisations is under pressure. Budgets are being cut and government subsidies are decreasing. As a result of these institutional changes, healthcare organisations are forced to switch to what’s called an ‘efficiency mode’: they try to maintain high-quality products and services with less resources by using those resources in more efficient ways. However, this is a finite process: efficiency can only be stretched so far.
Healthcare organisations don’t spend much time thinking about new financial resources—probably because they lack an entrepreneurial mindset. They don’t often consider that their knowledge about patients and the market is, in itself, a resource that can be translated into commercial returns.
The gain for the company: higher profits
In an arm’s length transaction, the company takes 100% of the profits. Therefore, it might seem unbelievable that those profits will increase in a partnership with a healthcare organisation. However, a collaboration between a healthcare company and an organisation will improve profits thanks to the improved problem/solution fit, which results in more products sold.
Collaborating with a healthcare organisation gives the company a much-needed view of the needs and expectations of the market, as well as access for conducting product development systematically. This translates into a better product/market fit and more profits for the partners.
When an integrated business model is set up, the method for dividing the returns between the partners is subject for discussion. The company might not get the whole pie anymore, but it will get a large share of a much larger pie, which means a net increase in profits.
An important factor in setting up partnerships between social-profit and profit organisations is whether or not the board of directors—the ultimate decision-making body of the social-profit organisation—is willing to proceed.
Even if the management team and other executives of the social-profit organisation are convinced that setting up partnerships is necessary for the sustainability of their organisation, they need the permission of the board of directors in order to move forward.
Marketisation and professionalisation have created pressure on social-profit organisations. They’ve been forced to shift focus from a traditional emphasis on social value creation to an increasing need for economic value creation.
However, in many cases, the board of directors remains predominantly socially oriented. Many board members have social backgrounds and mindsets, rather than being commercially focused. This means the board in charge of the social-profit organisation is not in favour of evolving towards the hybrid structure of creating both social and economic value.
A change in board structure is necessary to truly evolve into a hybrid organisation. And this change should occur radically rather than incrementally.
Replacing socially oriented directors, when they retire, with commercially oriented directors might appear to be the most respectful way to facilitate this change, however, this is not the best way forward for the social-profit organisation.
We suggest that a radical change of the board’s processes is necessary in order to cope with the needs of the changing environment. The board must undergo extreme change to best respond to the demand for professionalisation and marketisation. Without a drastic overhaul, the socially oriented directors will remain dominant for a long time; incremental changes will not result in fundamental change of the board’s functioning in time to meet pressing demands.
We propose this radical change involve two elements:
a collective resignation of the existing board—including the chairperson—in order to establish a hybrid government structure.
a change of the organisation’s bylaws that will make the hybrid governance structure sustainable in the long term.
For more detailed information and scientific background, please consult this paper. (available soon)