Unbundling

Updated on March 27, 2024
Article byPallabi Banerjee
Edited byPallabi Banerjee
Reviewed byDheeraj Vaidya, CFA, FRM

Unbundling Meaning

Unbundling refers to splitting or breaking up a business operation into several parts. The aim is to increase productivity, better performance, raise capital, or market expansion. In addition, it helps create value for stakeholders by breaking down valuable services and offering them for various uses.

Unbundling

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Different sectors, like manufacturing, legal, medical, insurance, etc., follow unbundling. The split help to cater to the needs of different fields with less cost and higher performance because less valuable processes are removed, and most useful parts are retained. But it is a continuous procedure because of unending technological innovation and emerging trends.

Key Takeaways

  • Unbundling of services refers to the method in which different business operations are broken down into parts for better value creation.
  • Major corporations involved in manufacturing, healthcare, technology, legal, insurance, etc., can go for unbundling their business.
  • It helps create value for stakeholders and upgrade the business, capitalization, or innovation at a lower cost.
  • Unbundling is a continuous process because market trends change, and new ideas emerge, which can be used better by adding value to functional processes and eliminating the less useful ones.  

Unbundling Business Model Explained

The unbundling procedure refers to splitting different business operations to achieve better results. Unbundling the corporation by selling off a business division, a product, and an asset class demerger or spinning off an existing company into various parts is a continuous process.

Unbundling of services in a company is done with the consent and decision of the board or management. For example, if the management feels that the business is performing up to the desired level, losing market or reputation, in urgent need of funding, or incurring extra costs due to the operation of divisions that are not useful, it may decide to unbundle.

It increases customer satisfaction because there is an improvement in efficiency. It also helps understand how much the business has progressed and its future growth potential, a criterion for analysts to make investment-related decisions.

Unbundling legal services is a growing trend nowadays. Here, the legal advisers or lawyers provide specific legal services related to the case and make necessary documents, which reduces the consultation cost as the client is responsible for the rest of the processes.  

Unbundling exists in the medical field, which results in higher bills. Here, the practice of unbundling codes is prevalent. Billers often use two different Current Procedural Terminology (CPT) codes to split the bill into two parts when the biller should do both billing under the same code. Thus, unbundling codes results in increasing the bill value.

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Examples

Some examples will help in understanding the system better.

Example #1

Star Media is a leading media and news agency headquartered in New York City, New York. It previously published newspapers with the latest news updates, which was hugely popular among readers. But with the advent of the internet, its popularity started reducing. People prefer to surf the net to learn about the latest happening across the globe.

Thus, Start Media launched its news website and a mobile application to enable customers to reach news published by the company. Slowly it started unbundling the news by using search engines like Google and Amazon to place links with interesting taglines and keyword research. Thus, any news published by Star Media is found all over the web with access to readers worldwide.

Example #2

A few years back, tech and media giants like Uber, HBO, and Google introduced unbundling in a big way, disrupting the conventional business process. Uber entered the e-commerce industry using algorithms and human experts and tying up with retailers. The company proved to be tough competition for eBay and Amazon. Similarly, HBO launched HBO Now, allowing subscribers to choose high-demand channels. Finally, Google offered mobile service on Nexus phones at competitive prices, allowing customers to pay only for the data they used.

Example #3

According to a report by McKinsey & Company, even though the financial crisis of 2008 ended and the equity markets in the US boomed, insurers still did not see any significant development.

The effect of opaque risk and external factors remain the same. Significant industry changes, increased competition, technological changes, and investors’ perceptions put insurers at risk. Similarly, modernization is expensive. Thus, it is necessary to go for unbundling the value chain and look for services that will provide a competitive advantage.

Advantages & Disadvantages

Unbundling means separating a complete business process into parts that can cater to the needs of a larger market or increase efficiency and create better value. The advantages and disadvantages of the procedure are mentioned below:

Advantages

  • Create value –   Unbundling helps to create value for consumers of the product, whereas there is no need to create or manufacture anything new.
  • More options to choose from – Customers get more options because now the entire process is divided into parts from where it is possible to choose the most helpful process instead of opting for the entire package.
  • Increase in revenue – The consumers can choose the part of the product or operation they need, and if more consumers opt for it, unbundling leads to an increase in revenue for the company.
  • Less cost – The cost of individual parts of a process is less than the entire package. Unbundling legal services makes them more affordable because clients pay only for a specific service related to a case.
  • Market expansion – The product’s market expands because more consumers purchase the product.
  • Product customization –   To increase profit margin and get more customers, organizations will try to customize the product to meet the demands and needs of the market better.
  • Gain competitive advantage – Organizations gain competitive advantage by removing parts of a business process that no longer add value, which is particularly useful for new entrants and helps them capture the market quickly.
  • Helps in business upgradation –  Unbundling the corporation involves innovation, better staffing, the latest technology, and research, which leads to business upgradation.

Disadvantages

  • Lots of parties involved –  Since one process is being broken down into many parts, many parties are getting involved.
  • The expense related to research –    Expense increases due to added research and separating business into smaller units.
  • Customer preference change –    Customer preferences keep changing frequently. Therefore, the value addition made today due to the split up may go down after a few months or years.
  • Lack of name recognition – Since parts of the business are separated, there is a lack of name recognition by customers. Therefore, maintaining the brand name is crucial for any company to survive in the market.

Unbundling vs Bundling

Unbundling separates different business lines from the entire value chain to increase efficiency and gain better market access. In contrast, bundling is a series of value-added services grouped as a single unit or package. Let us look at the difference between the two.

UnbundlingBundling
The services of a business are separated into different parts.Different services are brought together to form a complete package.
Each part caters to different sections of customers.Customers get all services in one product with a unique offer.
Valid for new firms who try to enter the market by using the service with the highest value for customers.Useful for firms trying to gain a monopoly by offering all services in a single value chain.
Sometimes, cost increases when one service is split into two separate services.Sometimes cost decreases due to combining more services into one package.
There might be a need for name recognition since services get separated from the main business.Customers can associate the services with the brand name since the same business or company offers all services.
Unbundling might lead to selling off existing subsidiaries or divisions.It might lead to the purchase of more subsidiaries or divisions.

Frequently Asked Questions (FAQs)

1. Is unbundling codes illegal?

Sometimes, two medical procedures that should be billed under the same CPT code are billed separately. This increase the bill value, which is illegal at the healthcare system’s cost.

2. What is local loop unbundling?

In the case of a local loop, an extensive broadband network is connected to customers’ homes. Various service providers physically lay down wire connections. Previously the local exchange carriers had a monopoly, but now many small providers have this access to increase competition.  

3. What are unbundling charges?

Unbundling charges refer to the extra charges incurred due to the separation of a procedure from the entire block of the value chain. For example, different procedures that should be billed separately are clubbed together in the medical field, thus increasing the charges.

4. What does unbundling mean in insurance?

An insurance policy is unbundled when the various parts of the product are purchased from different insurance companies or carriers. The risk funding and claims are handled separately. The carrier arranges the coverage and a TPA, a separate entity, handles the claim. In life insurance, along with the claim, there is an investment option. In case of the policyholder’s death, the beneficiary gets both.

This article has been a guide to Unbundling & its meaning. We explain it with examples, advantages & disadvantages, and compare it with bundling. You can learn more about it from the following articles –

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