I was recently invited to join a session of a ‘Mobile Fight Club’, an interesting attempt at addressing a major pain point in how the financial service industry manages innovation. In the founders’ words, the MFC is an initiative that aims at “fostering free, visionary and innovative thinking, foreseeing evolutions and breakthroughs in mobile technologies, understanding the next big thing and defining the future strategies and functionalities of the mobile channel in banking”. The MFC focuses on the mobile domain, but its approach can be used as a solid foundation for tackling innovation well beyond the boundaries of mobile.
In his Originals (2016), Adam Grant suggests that in order to accelerate innovation, “instead of seeking out friendly people who share your values, try approaching disagreeable people who share your methods”. With its flat structure that praises competence versus ranking, and peer review versus authority, the MFC is a typical example of ‘skunk works’, a small and loosely structured group of professionals who research and develop a domain primarily for the sake of revolutionary innovation. Originally introduced by Lockheed during World War II, skunk works are common in several industries, including defence. In the US, for instance, the chief of naval operations rapid innovation cell (CRIC) fosters and promotes innovation in the navy, covering areas such as 3D printing, AR, VR, wargaming, biomimetic unmanned underwater vehicles, and renewable energy.
In FSI, the mission of such a club starts from addressing a very fundamental question: How can we separate disruption from distraction when we look at what technology enables today? How can we make sure that we don’t get distracted by solutions that don’t have a serious use case in our industry, such as Snapchat Spectacles, or Meerkat. Google Glass may have disruptive potential in defence or manufacturing, but no serious use case in retail banking.
What may appear as a simple question to those familiar with managing innovation through a portfolio approach is in reality an acid test for how the industry tackles innovation, and how this is changing under the pressure of events.
Business as usual
Until recently, before the aftermath of the financial crisis triggered the fast growth of a global fintech movement, and suggested that regulators around the world focus on empowering the consumer in a traditionally supply-side industry, banking showed very limited uncertainty. Taking revenue volatility and R&D budget as share of total revenue as proxies for uncertainty, banking scored at the bottom of the ranking, close to utilities, insurance and real estate, and not far from precious metals; its level of disruption being an order of magnitude less than pharma, transportation, recreation, software or medical equipment. Business as usual, therefore no need to devise a structured approach to innovation – this was the shared understanding of the industry’s leaders.
In what may appear an astonishing underestimation of Herbert A Simon’s seminal distinction between effectiveness and efficiency, the banker’s mantra was: We don’t have any problems with generating good ideas; if any, our problem lies in IT execution. And this can easily be solved by replacing waterfall with agile in the development and delivery of our IT solutions.
Fast-forward to today, and after praising the efficiency gains that agile brought in, focus on effectiveness instead and dispassionately assess the quantity and quality of ideas in the innovation roadmap. In terms of quantity, the number of ideas upon which individual players are working is usually too small to ensure the necessary ‘requisite variety’ that Ashby and Shannon deemed prerequisite for an organisation to survive, by adapting to changes in its environment. If in innovation, ideas are similar to bets, you’re making too few bets to have a chance to win. Also, the ratio between ideas that are conceived and those that are shipped to the end-customer suggests that the way innovation is managed is too rigid. When this ratio gets scarily close to one, this hints at the entire innovation management not tolerating failure, nor allowing to turn failure into learning, making it possible for the organisation to pivot.
A pivot is a fundamental insight of Eric Ries’ ‘Lean Startup’, a methodology designed to help organisations introduce new products or services into the market, that’s only slowly making inroads into banking. It says on day one: All you have in your new venture is a series of untested hypotheses or bets. Therefore, you need to get in the field and rapidly test all your assumptions. Chances are that one or more of your bets will be wrong. When you discover your error, rather than axing people and/or creating a crisis, you simply change the hypotheses and test them again.
A pivot, though, isn’t just a superficial change of the features of the product. Rather, it’s a substantive change to one or more of the nine business model canvas components, as they were defined by Alexander Osterwalder.
When it comes to the quality of innovation, many industry professionals still struggle to understand what the real business impact is of the idea they’re working on. In his seminal Change by Design (2010), Tim Brown put forward an easy way to classify innovation and understand its impact on the existing business of an organisation. By simply considering whether an idea addresses new or existing users with a new or existing offering, four options emerge:
- Managing the status-quo by incremental improvements to the existing offering to the existing customer base.
- Evolving the current offering by adding new products and services, but sticking to the existing customer base.
- Adapting the existing offering to target prospective customers in new market segments or territories.
- Revolutionise your business by creating a brand new value proposition with a completely new offering for new customers.
What are the use cases that you build around these technologies? Stress-test the way you look at the latter and understand if (and what) they can bring in each and every one of the four Brown’s innovation quadrants. Nokia got distracted by the continuous optimisation of its feature phone range, while playing with the same technology that Apple was putting together to disrupt the entire TMT value chain. On the contrary, you can miss what a potentially disruptive innovation can bring in terms of optimising and augmenting what you already have.
What type of innovation is a chatbot, a voice interface, biometrics, AI, or the blockchain? Without making sense of the potential impact of different types of innovation, it’s hard to realise that incremental and evolutionary ideas have a significant lower potential of creating value than revolutionary bets, but with a significantly lower risk. No doubt, disruptive innovation can be funded only if incremental and evolutionary innovations succeed in generating new value. But the question is whether in FSI today an organisation can thrive just by optimising the as-is when the entire industry is facing a growing level of uncertainty in the face of new challenges, e.g., open banking, or the shift to an all-encompassing customer experience that Forrester epitomises as the “age of the customer”.
In their innovation portfolio management studies, Bansi Nagji and Geoff Tuff have shown that companies that allocated about 70% of their innovation activity to incremental initiatives, 20% to evolutionary ones, and 10% to revolutionary ones outperformed their peers, typically realising a P/E premium of 10-20%. But when more direct returns on innovation are considered, the return ratio is roughly the inverse of the ideal allocation above: incremental innovation efforts typically contribute 10% of the long-term, cumulative return on innovation investment, evolutionary initiatives contribute 20%, and transformational efforts contribute 70%.
This is why experiments such as the MFC may have a positive impact in as much as they focus on approaching innovation in a structured way by bringing the concept of managing a multiple portfolio of bets, and accepting the connected risk and upside. This will help bankers reflect upon what type of innovation our bets belong to, and introduce a method to take these bets through a structured innovation funnel, from opportunity mapping to ideation, from validation to prototyping, from MVP to customer rollout – always welcoming that a bet can fail at any stage, and it would really be bad if this were not the case.
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