modelH Update: Externalities

by Kevin Riley

modelH update: CostsEditor’s Note: This article is an update on modelH, the dynamic co-creation forum created by Kevin Riley and Associates, Innovation Excellence, and Batterii where healthcare innovators from around the world are building a foundation for new business models in healthcare. Their goal is to co-create an open source business model canvas that applies specifically to the healthcare industry.

Learnings on Externalities for the Business Model Canvas for Healthcare (modelH)

We just wrapped up our 17th and final modelH business building block sprint on Externalities. In summary, the sprint for Project 1.17 on Externalities focused on two objectives:

  • Proposing a set of questions to ask on the canvas for Externalities.
  • A deeper discussion examining the status of Externalities (and other new blocks) on the Canvas.

Word cloud for modelH Externalities

This project sprint looked at understanding how government regulations and other external forces affect your business model. Specifically, we uncovered the key issues that drive and transform your market (and your model) for your business model design with several critical questions. What are the crucial issues related to the changing regulatory and compliance landscape, and what shifts are already underway? Where is the market headed due to many regulatory and compliance changes, and how does that affect your business model?

My position for including this building block in our canvas is that, in my experience, nearly all healthcare models are highly regulated.  Therefore, when developing a business model, one must address the key external forces that affect its ability to get to market. There was some disagreement within the modelH community about whether Externalities should be included on the canvas, which I address in more detail below.

1. Questions to Ask on the Canvas for the Externalities Block

We defined the questions that should be added to our business model canvas for helping practitioners define the Externalities that affect their business model.

  1. What Externalities put constraints on your business model?
  2. How do these Externalities restrict your Buyers and Users?
  3. How do these Externalities affect your User’s Key Behaviors?
  4. How do these Externalities affect your Key Influencers?
  5. How do these Externalities drive Costs?
  6. How can these Externalities be turned into Revenue streams?

Externalities on the modelH canvas

2. Should Externalities be Included on the Canvas?

Let’s start with my conclusion: At this point in time, my position is firmly set to keep Externalities as part of our business model canvas. My reasoning is due to several factors, but chief among them is that our Phase 1 co-creation project was not a scientific approach but a collaborative one. Our insights were derived from experts and expert opinion. As such, they are largely based on opinion.

We have now reached the end of Phase 1 of our project – building the canvas. Phase 2 (in 2014) is all about completing case studies to see how the model works in action. It is a process of testing what we have developed, and making necessary improvements based on this testing. Consider the current phase our approach at building a “minimum viable canvas” (see Eric Reis’s minimum viable product design).

However, there was and continues to be a considerable amount of debate regarding whether Externalities should be part of any business model.  There is no doubt that the external environment is important. It affects, influences, and impacts how our business models operate. However, the point of disagreement is whether Externalities should be addressed when defining the business model.

Knowing what to include vs. exclude from the business model canvas is no easy task. My view that “nearly all healthcare models are highly regulated,” and using that as the basis for including Externalities within the modelH canvas, is akin to the fact that all firms are affected by Human Resource (HR) regulation. Should HR be built into their business model too?  On that note, every business has competition. Should that area be crammed onto our canvases as well? This is a really slippery slope that causes confusion between business modeling and business strategy. If we are committed to taking this model seriously and determined to make it a viable tool, then it is critical to remind everyone what a business model is.

The definition of business model from Wikipedia is: “the rationale of how an organization creates, delivers, and captures value (economic, social, cultural, or other forms of value).” Wikipedia even goes further to note in the first line: “The process of business model construction is part of business strategy.”

Here we have a clear definition of a model as an independent tool for a specific reason. Two other reference links make the point very well regarding why Externalities should not be included, which it turns out is the consensus thinking on the topic.

In many ways, I agree with their assessment. However, Externalities are unquestionably a core component of a business model in the heavily regulated healthcare environment. One example from Europe is the introduction of health technologies into a system, which cannot be completed without a health technology assessment (HTA). The U.S. Food and Drug Admiration is another applicable example of how Externalities make or break a business idea.

Furthermore, no healthcare business model exists without Externalities, yet the consensus on business model creation is to create the model and then look at Externalities via an environmental analysis. This was the same approach with the original Osterwalder model for not including the Jobs-to-be-done (JTBD) in the core building blocks, but instead view them as “add-ons.”

In light of this argument, for me to include Externalities (and the other new building blocks) on the modelH canvas, I believe two tests must be passed.

Test 1 – Do the new building blocks affect a business’s business model?

The answer is yes – all of them do.

Test 2 – Are the new building blocks needed to explain how a business model works?

In regards to healthcare, I feel these building blocks are necessary. For example:

  • The Jobs-to-be-done (JTBD) explains why customers (as Buyers) buy, and is quickly becoming a central part of the original model. This is the heart of why healthcare business models fail: the customer (as Users) do not complete their JTBD            .
  • Key Behaviors and Key Influencers explain what healthcare customers need to realize their Value Proposition.
  • Experience explains how we should present our Channels and Customer Relationships to maximize their effectiveness in solving the customer’s JTBD in the context of their Key Behaviors. They are an extension of the Channels and Customer Relationship model – but they are not the actual Channels and Customer Relationship.
  • Informatics is also new to the original model. This block is necessary to explain how the model works – when it works well, using the necessary data acquired from customers, Key Resources, Channels and Customer Relationships, and etc.

JTBD, Externalities, Key Behaviors and Key Influencers explain external factors that we must consider as part of our core building block designs. If we don’t, I do not see how we can make effective business models. On that note, they are essential to our business model design and should exist as part of the canvas.

Informatics explains what we need to measure and monitor to both prove and improve our value proposition. This is a means to provide how our business model works. It adds the dimension of feasibility to the canvas, which is instrumental to the design.

The Case for Externalities

My answer for why to include Externalities can be summed up using a quote from Einstein: Everything should be made as simple as possible, but not simpler. I can appreciate the beauty, simplicity, and acceptance of the original Osterwalder model and I use it for my business modeling outside of healthcare. It is also the basis for modelH. However, with regard to healthcare business models, I find it incomplete, as do many of my healthcare colleagues. I would rather have the base model define an effective business idea completely rather than include add-ons over time. Perhaps it is just a matter of style. I am sure many would disagree with this approach – so I will go on record expressing a genuine understanding and appreciation regarding the opposing position.

I also want to honor the work of Osterwalder’s model and keep to the definition of what a business model canvas truly entails, but at the same time provide a single view into a set of tools that help define all the strategic and operational elements of a healthcare business model.

To me, adhering to the strict definition of a business model is short-sighted. I care more about the outcome. A good business model design is elemental to that outcome, but alone becomes trivial – it is ultimately about the business outcome.  For that reason, I will defend the elements of our modelH canvas as being imperative to driving a better outcome for a healthcare business model design.

I am comfortable with the finer points I enumerated here, but I am not sure if someone who is relatively new to the subject mater will fully understand. Our co-created modelH canvas is undoubtedly a work in progress. Going forward, if we plan to put all business strategy into a one-page tool, it may be a different task than what we have asked our modelH community to contribute in 2013. Perhaps this whole effort requires a follow-up to the core business model with a primary focus on business strategy.  On the other hand, we could display the original BMC – then show the bolt-on sections that are influential to those core elements as a healthcare-specific strategic framework. These are all exciting options as we test modelH on healthcare business models in 2014.

Just for the Record (an Opposing Viewpoint)

Someone I respect tremendously in healthcare, and a member if the modelH Community, Daniel James Scott, stated his belief that there should be a healthcare-specific strategic framework that covers everything from start to finish, but that a business model canvas does not need to include everything. In Daniel’s own words:

Kevin, I and some others have also mentioned previously that some of these split blocks need not be split out at all, just more specifically tailored for the healthcare market. For example, “Experience” and “Key Behaviors” are virtually no different than how we functionally use the “Customer Relationship” block in the wild. “Informatics” is, with certainty, a part of the existing “Key Activities” and “Key Resources” blocks. Let me take a moment here to note that I completely understand highlighting for emphasis. I just don’t see why making the model more complex makes it more helpful (unless absolutely necessary). It is starting to feel like we’ve over-engineered a product without enough market testing to know if we needed the extra features or not. That being said, “Key Influencers” is the only addition, as of today, that I can buy into; however, I’ve also made the point that the “Market Segments” block should simply be split into three: Buyers, Users & Influencers. I understand here that I am the lone voice in opposition; although, in this case, it may be needed as (1) the discussion tools we have at our disposal are relatively crude, (2) we don’t have the opportunity to discuss in real time, and (3) we are not all able to test as we go – so gut calls are landing in the model adding to the over-engineering.

I mention his perspective to underscore that 1) modelH is a work in progress, 2) we are not afraid of disagreement (we actually love it), and 3) the members of our community are very bright people who are committed to making healthcare business better.

What is Next?

In the past, this is the spot in the update where we asked you to join the modelH co-creation forum and get involved in the next project sprint. But this was the last sprint! As referenced above, we are now starting the next phase of development for modelH, through which we will refine the canvas based on actual use case scenarios and case studies. We encourage you to join us as we continue our journey developing modelH and transforming the healthcare industry.

– Join our new research community at where we’ll be continuing our work in 2014.

– Follow us online at:

– Follow us on Twitter at:

– Read our BLOG at:

– Join our LinkedIn community at:

This was cross-posted from Kevin Riley & Associates BLOG –

image credits: Kevin Riley & Associates, modelH Business Model Canvas for Healthcare, drawings by Mike Werner;

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modelH – Health Model Co-Creation Forum (part 1)Kevin Riley is an entrepreneur, healthcare executive, and business model innovator who works with start-ups and legacy companies across the healthcare industry. He founded and was CEO of a national health care retail company, has played leadership roles for national retail health start-ups, and served as the first Chief Innovation Officer of a major insurance plan. In 2006 he started Kevin Riley & Associates Health Model Innovation to help companies with the convergence of health care and the consumer.

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