Digital Ecosystems: Insights from Professor Michael G Jacobides
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Professor Michael G Jacobides holds the Sir Donald Gordon Chair of Entrepreneurship & Innovation at London Business School, where he is Professor of Strategy. He is Academic Advisor to the Boston Consulting Group, Visiting Scholar at the New York Fed, and Visiting Fellow at Cambridge. He served on the Global Agenda Council of the World Economic Forum, where he is the Academic Lead on the Digital Ecosystems project, and has presented in the Davos Annual meetings.
Watch the full video interview with Michael Jacobides:
Professor, you study industry evolution, changes in firm boundaries and new business models. What does the development of digital ecosystems mean for the insurance industry?
It means transformation. As more and more services become interconnected in digital ecosystems, people have instant access to a vast variety of products and with that, the value and power of digital ecosystems will continue to increase. If you look at the top ten firms by market capitalization, you'll see household names like Google and Facebook and Amazon, all heavily relying on digital ecosystem partnerships. The insurance industry is still very traditional, as was the banking industry. We have seen traditional financial services bleed and Fintech grow and today the banking industry, as many others, are participating in digital ecosystems. Competitive landscapes are changing and that brings about transformation even in more traditional sectors.
From your insight into the digital ecosystem landscape and the transformation is has brought to other industries, can you give us a sense of what this transformation might look like?
The key value-add is safety and security – a plug-in that allows people to feel more secure in the things they do, and with the things they have. In digital ecosystems, technology allows the operators to do things they were previously unable to do. The abundance of data allows a plugged-in insurer to offer real-time recommendation or guidance. At the same time changing actuarial conditions need to be evaluated and assessed. I'd suggest a change agenda for the insurance industry on two levels: One, define the needs and the solutions you are able to offer to orchestrators of digital ecosystems and their users; And two, develop the skills and models that are sensitive and responsive to the ever increasing pace of change. The shift is from traditional actuarial science to AI-driven data science. The entire industry is ripe for disruption.
In the process of the insurance industry experimenting and learning, where do you see good opportunities?
Mobility is one example. This is a highly fluid industry, driving behavior is changing, ownership is changing, and environmental conscience is changing. What remains is the aforementioned need for safety and security. There will always be risks – and orchestrators of digital ecosystems need to protect themselves. At the same time they'll always want to give their users that sense of safety and security. Insurance companies need to plug in and become highly interactive – if they don't, they will soon realize that others won't hesitate. Take the example of Tesla: It has the data from every single one of its vehicles and now plans to offer an insurance product. We now have this interesting battle ground: Ecosystems that own the data may say: "You know what, insurers? You're just friction. We can do a similar thing with less friction. Why on Earth do we need the old-fashioned stodgy bit."
What you're describing might very well mirror what happened a decade ago in the payment industry, correct?
Indeed. At that time, the banking industry leadership was convinced that these 'fancy new things' would not amount to more than 10% of the market. Because it was growing slowly, they failed to see the trend. They failed to see that there were very different sets of economics on one hand, and changing customer expectations on the other. What followed was that prices went down and banks realized that they couldn't defend their profitability in the payment sector. To avoid experiencing the same, the insurance industry must be more proactive.
What would be your advice with regard to digital ecosystem engagement – creating one, i.e. becoming an orchestrator, or partnering with existing ones?
When people speak about ecosystems they often get one letter wrong – instead of eCosystem, they think eGosystem. What I'm saying is that often companies see themselves at the center of an ecosystem, but it's just the opposite. Ecosystems are the result of firm and industry boundaries dissolving. Frankly, if we redesigned the world today, we would not stick with the structure of insurance as it is at this moment. In short, rather than thinking of yourself as an orchestrator and of everyone else as being around you – think entrepreneurially and embed yourself in a number of ecosystems where you can leverage your skills and offerings. Think of it this way: In the past the world of business was made up of separate buildings. The world of today is made up of Lego bricks that can be used and reused and you need to think about how you embed yourself in different areas, and how you can be successful in different areas as a result. It is delusion to think that everyone needs to be around us. This traditional way means wasting money and energy and it won't work in a world of thriving digital ecosystems.
From where you're sitting, what does the future hold for the insurance industry?
There will be fewer big insurance companies. Over the course of the next ten years there will be significant change and significant consolidation. Going forward, insurance players need to embrace a technology mindset that ends the disconnect I often note between different units and hierarchies. There is an abundance of data, data that was not available before – and it flows across digital ecosystems. This data is often generated as a by-product by other businesses within a digital ecosystem and it can be used, it can add additional value. What I'm saying is simply this: If the insurance industry is not ready to find a way of doing that, someone else will.
Watch the plenary panel discussion video with an "industry outside-in" perspective that addresses the emergence and role of digital ecosystems in the insurance industry of the next generation underwriting conference event.