BankerVision

AMPlify09

Today I want to write about something amazing, and that amazing thing was Amplify09, the corporate innovation festival organised by financial services company AMP in Australia last week.

Corporate innovation festival, I hear you ask? Well, yes indeed, and when I first heard about it, I was impressed, but couldn't for life of me see how anyone could possibly get a business case together to support such a thing.

Let me paint you a picture: get your Head of Innovation to go around the world and find the most interesting people she can. Doctors, political advisers, new media people, web psychologists, and, yes, even a banker. Then bring them all to Australia and let them talk about their work to the whole institution. See if it inspires new and creative thinking in your people.

But don't just stop at internal. Have an event in a pub where local ph.d students can pitch their research on a mic in two minutes of less, and give prizes to the best as voted by the crowd. And then have your CIO decide that everyone deserves a prize and give each struggling student $1000 to roaring applause.

And since you're not just doing internal, how about you broadcast the whole event, including all these expensive internal guest speakers, so that the world can share the inspiration. Do this even though traditional thinking would suggest that allowing just anyone, including competitors, to participate, would reduce any potential competitive advantage you might generate from the investment.

And just as icing on the cake, bring all your top customers and investor in to meet all these interesting people. Don't just stop at confronting traditional thinking in your staff, make sure your most valuable customers get their thinking challenged as well.

Finally, finish it all off with a staff expo where everyone gets to show how off their work in new and creative ways. Have, for example, a mock cave complete with cavemen to explain how your legacy systems have evolved to their present state.

You can understand, being somewhat a traditionalist myself, that when I looked at all this, I couldn't understand the business case. That's because the results aren't obvious when you just look at the numbers. I'm very busy running an innovation function that tries to get all these nice predictable returns from investments, so doing a festival hardly seems a great use of money.

But then I realised this: Amplify09 is the most magnificent ideation campaign I've ever seen. It makes the ones my team and I run internally at the bank look ridiculous in comparison, and we know how to turn our little attempts into money predictably.

Can you just imagine how much differentiation AMP will have as it actualises all that out-of-band thinking it generated from this event?

But the more important point is this one: quite obviously, AMP is an institution that's realised that the real competitive advantage it has is the people who choose to work there. Who cares about technology and products and processes, when you have the ability to invent uniqueness whenever you want?

Meanwhile, the rest of the industry is very busy with dark ages thinking about the nature of competitive advantage. They're all still doing trade secrets and patents, and trying to close down the ability of their staff to collaborate in, and outside, their institutions.

Want to bet which institution I think will really differentiate in the long term?

The death of experience

As you know, I spent last week at Amplfy09, an innovation festival hosted by AMP of Australia. At one of the events, I had the chance to sit with some financial planners and their clients. The question I posed was this:

Which do you think has more brain power: 25 twenty-three olds (i.e., brand new graduates) with a year's experience each, of one 65 year old with 25 years of experience?

The obvious answer, of course, is that the crowd of 23 year olds has more brainpower, but the real question is whether the value of experience outweighs the obvious advantage in mental watts of the group.

My thinking is it does not, and here is why.

Experience is a result of the formation of mental models about the way things work. Essentially, one observes that certain actions produce certain effects, and over time one learns to generalise so that even actions which are only marginally related to those previously observed can result in reasonable predictions of outcomes. Because the mind has limited abilities to accept information and process it, developing experience is something that takes a large number of years.

This is why you generally reserve very accountable positions in organisations for those who have lots of experience.

But try this experiment. Get a group of new graduates together, and confront them with a crisis. You will be amazed when you watch what happens: instead of some alpha-male/female attempting to take control of the situation, the group optimises itself, using rapid fire burst of communication, to solve the problem synergistically. It looks like chaos, and you wonder whether or not anything will ever come of it, but invariably very good outcomes do. And the order that emerges from all this chaos tends to be a highly optimised resolution of the problem at hand.

I know this, because I've had lots of time to study our new workforce at the bank, and they do things in quite different ways to those that my peers and I do things. We try to take control, to lead. They don't bother with any of that, and self organise into a non-structure that produces results, which are often unexpected.

Coming back to my original question, then, the value of experience as a differentiator in this case is very much reduced. Because you have 25 minds processing things in parallel, the amount of information that can be involved in a mental model is incomparably greater than that for a 65 year old with experience. 25 minds working together can accept all the evidence a 65 year old accumulates over their career in hours or days, and Instead of building models over time, they do it in real-time. The result will tend to approximate the best available outcome given a much broader analysis of data.

Here's another experiment you can try if you don't believe me: talk with a group of twenty-somethings about a project they've been working on, and ask them for detail of things they didn't work on personally. They'll have no clue at all what their peers are doing, and will refer you onwards. They don't care what their peers in the crowd are doing, because they have self-optimised their handoffs and interactions so they don't have to care.

That's quite different to the way that I, for example, would approach something. I need to know that the whole outcome is under control. I need to know the detail is in hand. And I must certainly feel able to explain the whole project to anyone who asks me. I am accountable; therefore, I must know what is going on.

In other words, I am unable to harness the power of multiple minds in any way which makes the whole greater than the parts.

Now, before I leave this topic, I want to make one last point, and it is this: the communications and collaborations technologies in the hands of our new workforce already let them collaborate at lightning speed. But these are not technologies that one expects in any way to slow down their advance. The power of crowds of young people to do things previously reserved for only older, more experienced people will continue to grow, probably in an exponential fashion.

Consequently, I predict the death of experience as the defining decision factor in who gets what job in our workforce within the next 10-15 years. That's the timeframe, by the way, that significant numbers of these collaborating crowds of young people will start to win their first senior jobs away from the old guard non-collaborators who presently rule the roost.

I'll close this post with another discussion I had at Amplify last week, and it was with a senior executive I'd made these points to. He wanted to know, if the end of experience was nigh, what would happen to all the older workers out there? Now, I don't have a convenient answer to that, because I don't know. But what I have observed so far is that collaborating groups in this age band tend to make collectively moral decisions which include the social best interests of most players.

The probable result? Our experienced workforce will get taken care of, whilst at the same time, they are pushed to the edges of major decision making. They will be reference encyclopaedias that can be called on for historical facts quickly and easily, but won't be core to the actual process of creating substantial change.

The death of experience

As you know, I spent last week at Amplfy09, an innovation festival hosted by AMP of Australia. At one of the events, I had the chance to sit with some financial planners and their clients. The question I posed was this:

Which do you think has more brain power: 25 twenty-three olds (i.e., brand new graduates) with a year's experience each, of one 65 year old with 25 years of experience?

The obvious answer, of course, is that the crowd of 23 year olds has more brainpower, but the real question is whether the value of experience outweighs the obvious advantage in mental watts of the group.

My thinking is it does not, and here is why.

Experience is a result of the formation of mental models about the way things work. Essentially, one observes that certain actions produce certain effects, and over time one learns to generalise so that even actions which are only marginally related to those previously observed can result in reasonable predictions of outcomes. Because the mind has limited abilities to accept information and process it, developing experience is something that takes a large number of years.

This is why you generally reserve very accountable positions in organisations for those who have lots of experience.

But try this experiment. Get a group of new graduates together, and confront them with a crisis. You will be amazed when you watch what happens: instead of some alpha-male/female attempting to take control of the situation, the group optimises itself, using rapid fire burst of communication, to solve the problem synergistically. It looks like chaos, and you wonder whether or not anything will ever come of it, but invariably very good outcomes do. And the order that emerges from all this chaos tends to be a highly optimised resolution of the problem at hand.

I know this, because I've had lots of time to study our new workforce at the bank, and they do things in quite different ways to those that my peers and I do things. We try to take control, to lead. They don't bother with any of that, and self organise into a non-structure that produces results, which are often unexpected.

Coming back to my original question, then, the value of experience as a differentiator in this case is very much reduced. Because you have 25 minds processing things in parallel, the amount of information that can be involved in a mental model is incomparably greater than that for a 65 year old with experience. 25 minds working together can accept all the evidence a 65 year old accumulates over their career in hours or days, and Instead of building models over time, they do it in real-time. The result will tend to approximate the best available outcome given a much broader analysis of data.

Here's another experiment you can try if you don't believe me: talk with a group of twenty-somethings about a project they've been working on, and ask them for detail of things they didn't work on personally. They'll have no clue at all what their peers are doing, and will refer you onwards. They don't care what their peers in the crowd are doing, because they have self-optimised their handoffs and interactions so they don't have to care.

That's quite different to the way that I, for example, would approach something. I need to know that the whole outcome is under control. I need to know the detail is in hand. And I must certainly feel able to explain the whole project to anyone who asks me. I am accountable; therefore, I must know what is going on.

In other words, I am unable to harness the power of multiple minds in any way which makes the whole greater than the parts.

Now, before I leave this topic, I want to make one last point, and it is this: the communications and collaborations technologies in the hands of our new workforce already let them collaborate at lightning speed. But these are not technologies that one expects in any way to slow down their advance. The power of crowds of young people to do things previously reserved for only older, more experienced people will continue to grow, probably in an exponential fashion.

Consequently, I predict the death of experience as the defining decision factor in who gets what job in our workforce within the next 10-15 years. That's the timeframe, by the way, that significant numbers of these collaborating crowds of young people will start to win their first senior jobs away from the old guard non-collaborators who presently rule the roost.

I'll close this post with another discussion I had at Amplify last week, and it was with a senior executive I'd made these points to. He wanted to know, if the end of experience was nigh, what would happen to all the older workers out there? Now, I don't have a convenient answer to that, because I don't know. But what I have observed so far is that collaborating groups in this age band tend to make collectively moral decisions which include the social best interests of most players.

The probable result? Our experienced workforce will get taken care of, whilst at the same time, they are pushed to the edges of major decision making. They will be reference encyclopaedias that can be called on for historical facts quickly and easily, but won't be core to the actual process of creating substantial change.

Where is James?

I wanted to write a quick note to let you know that I'm presently engaged in reviewing the typeset proofs for Futureproofing, which arrived last week. You have to go through every single page, and use all these funny little coded marks to tell the publisher what changes you want made. It is all very tedious and very time consuming, especially as I have just found a significant error I made a few months ago in the manuscript.

That means I have to write out all these pages of coded squiggles, using a crib-sheet the publisher conveniently supplied. The poor crib-sheet has been referred to so much now that it's basically just two pages of crumpled stained paper, valiantly holding on to its life by a dog-eared staple.

Anyway, I'm doing the review in my normal blog posting time, so forgive the momentary break in transmission here. I'll complete the task on the plane to Australia on Sunday, and will be resuming an enhanced posting schedule from down-under

Centre or Periphery Part 2

In a comment on my most recent post, where I suggested that banks are likely to be pushed out of the centre of the financial value chain, Colin Henderson writes:

My own thinking on this is that banks, and we already see this to a certain extent, will evolve into two groups that I have roughly describe as:

1. financial utilities
2. innovators

The former will meander in and out of government control, but never stray far as economic impacts exceed the stress test results periodically. On their clear thinking days they will consider new services or approaches that will work in the future environment you describe so well, then realise the infrastructural change required is prohibitively expensive and risky and go back to providing basic service to the 'system' as water and electricity utilities do.

The innovators will see beyond that, and carve a niche approach (large or small) that plays a role (large or small) in your mash up world. I used to call that disaggregated financial services, but I might steal your mash-up line because it is how the web 2.0 generation view everything. The Citi consolidator of everything view no longer holds true in 2029. Innovation will not necessarily be fancy or catchy - just practical and something people actually want.

This echoes a point he made a while back when describing the State of Innovation in Financial Services.

Now, in principle, I don't disagree with Colin, since both he and I imagine a future world where banks don't hold the sway they once did. But I think what Colin is saying here is the level of influence wielded by a bank will be sharply controlled: that they will be allowed to participate in the economy only to that degree which systemic security will allow. This follows from increased scrutiny and regulation which will surely be the outcome of bank performance in recent years. That, however, does not go as far as I have done, because in Colin's typology, banks are still the centre of the financial services value chain, just as electricity and water producers are still the centre of their various distribution networks.

My argument is it is possible that crowd based production eliminates the role of the generic utility altogether. In fact, we see this for both water and power: dispersal of both to the edge of networks is already occurring. I can install a rainwater tank, and reduce or eliminate my reliance on the water company. And I can install Solar and wind to cut back on power. Sometimes, on a good day, I may even give both back to the network.

It is inevitable, I think, that this happens in banking as well. Decentralisation is a natural consequence of the democratisation of the tools of banking production. And that is happening very quickly indeed.

There's another thing going on, though, which I think makes all this likely, and that's the desire customers have to buy things unique to them. Now, as bankers, we're all rushing to personalise our offers, but let's face it, the personalisation of today is just putting lipstick on a pig. Take a mass market offer, or bundles of mass-market offers, and throw them together with some personal data and you have "personalisation". That's not going to cut it for the next generation of consumers, if it does now. They want uniqueness that no one else has.

The thing is, that's practically impossible for a bank. We're all geared up to do things with large markets and large returns. There's no way you can build a product for a market of one and get away with it. Long tail economics are all very nice, but show me the bank that can fill the role of an aggregator of long tail products (the way Amazon and Netflicks) does, and I'll be off to work there in an instant. By the way, neither Amazon or Netflicks actually make the products they sell, unlike most banks which like to link the manufacture and sales functions.

No, the only way to get to markets of one is if customers make the products themselves. This is where the "mash up" I spoke of my in my last post comes in. Customers, who are able throw together bits of offers in unique ways, and then share them with other like minded customers, are the way things will eventually pan out. These are crowds at the centre of the financial services value chain, which will be highly distributed, highly chaotic, but not subject to the system risks of a centralised banking system.

Not that I don't think there will be utility-like financial services players. The kinds of people who provide highly regulated places to put deposits, for example. My view, however, is they are niche service providers to the crowds, as will be the innovators (in Colin's typology), who will do value-add things that cut down the work that the crowd will have to do.

Now I know this scenario sounds far-fetched, especially if you are a traditionalist banker. But you only have to look at what's going on in other industries (where, by the way, there hasn't been a banking crisis to accelerate things) to know things are changing fundamentally at a very deep level: in so many other places, the large corporations are being pushed out of the centre of their respective value chains by crowds.

Check out music, where record labels are being killed off by crowds. In computer hardware and software, where open source products are significant threats to incumbents. In film, where anyone can make and broadcast anything. In literature, where you can self publish and sell through mass market channels. In manufacturing, where anyone can design anything and send to fab-plants that can make anything. You get the picture.

It is hard to imagine that an in an industry as little loved as banking, this won't happen too.

Banking at the centre or the periphery

Picture this scene: I'm in a meeting where we're trying to work out the future of banking. Not just next year, or the year after, but in 20 years from now. This is an exercise, by the way, which is valuable for everyone to undertake. No-one expects to get their predictions right, but it crystallises thinking about some of the issues right now.

Anyway, so I'm in this meeting, and I present, as a working hypothesis, the idea that banks may no longer have a significant economic role in 2029.

Surprisingly, it was a junior consultant working in the bank, a gen-Y-er, who said to me "Huh?. Banks have been around for hundreds of years. What's going to happen in the next 20 to kill them off?".

Notice that the immediate misinterpretation of my remarks was that banking would end. But what I actually said was "significant economic role". There is a difference, and I think it an important one.

The real question is whether banks will remain at the centre of the financial services value chain, or be forced to the periphery. In the latter case, they still exist, but have a less significant economic role. They become providers of niche and specialised services, services which are important, but don't have economically earth-shaking consequences.

It follows that something else would flow into the void left by the banks.

Now, as with all these exercises, you never know for sure what might happen in the future. But you can extrapolate from trends you see today.

For example, the increasing pace of change.

The rise of non-bank competitors.

The democratisation of the tools of banking production.

Generation-Create, and their penchant for turning the stuff we do into something we don't expect.

Consumer mistrust of banks.

Increasing banking system complexity and rising regulatory costs.

And many, many more.

If you think about these trends a bit, you can come up with some interesting scenarios. I like to typify them as a binary pair: the worst possible thing that can happen to banks, compared to the best. For example, the increasing pace of change might make it impossible for monolithic banks to keep up, so they persevere with products and services that no one wants until they wither and die. On the other hand, the increasing pace of change could be something banks take active steps to address, and they mobilise their huge resource advantages and leave their competitors in the dust.

You can do the same for all of these trends. Generation-create, for example, might mash-up its own bank using commonly available internet services on the one hand rendering banks obsolete. Or a bank might provide an API for its services on the other, and therefore become part of a mash-up itself. In the latter case, this would be a shift towards the periphery, rather than the centre of the financial services value chain.

When you do this kind of analysis systematically, you quickly get to some interesting clarity around the issues of today. And of the kinds of strategic decisions banks would need to make right now to position themselves where they want to be in 20 years. That's the point of the innovation process I describe in Futureproofing, by the way.

As far as I am concerned, I don't see the end of banking as we know it happening in the next 20 years, no matter how provocative I am with new consultants coming into the bank. But I do think the moves we all make now will determine whether banks are able to – or even want to – retain their economically central role in the future. My own view is that a move to the periphery is inevitable.

And as to what will fill the void that's left?

Crowds.

0.5% of your customer base will use twitter

Finally, someone has shown up with evidence that Twitter probably doesn't stack up for banks. Ron Shevlin, long absent from the blogosphere, describes the results of a quantitative survey his company has done on Twitter usage in credit unions. There's so real surprise- hardly anyone is interested in doing their banking via this new stunt.

Thank you Ron, for coming back to the blogosphere, however briefly, to give us this insight.

PS: Note to the Twitterati – yes, I am on Twitter (@bankervision), so clearly I get Twitter. Just thought I'd head off that potential comment before anyone utters it again.

Why you need and innovation team AND an NPD team

If you're anything at all like my bank, you have lots of little New Product Development teams scattered around in various business lines. Because of this, there is always the need to justify the exististance of the central innovation team as well. Why have two teams that, at least superficially, seem to be doing the same job?

I contend you need both kinds of teams, and here's why.

NPD teams, especially those funded by the core business lines, are concerned primarily with producing products and services that support their paymasters. They are engaged, most of the time, in creating sustaining innovations – new things that make the existing business work better. That's all very well, of course, but with such a narrow focus, there's lots of money left on the table by such teams. Firstly, they aren't in a position, generally, to consider things that don't have anything to do with new products and services. My own experience is that those "hidden" things add up to a great deal of hard cash if they are systematically pursued.

Such teams also don't often have the liberty of working across business lines. So what you get is more product silos, in what is already a very silo driven business.

But perhaps the most important thing a business line specific NPD team is unable to do is deal with disruptive threats to their current businesses.

Let me give you an example. Lets say a retail lending NPD team notices a threat to their business in the form of a new peer to peer lending site. The first thing they do is try to put together the right business case to build a product. Then, they swiftly discover the year 1 and 2 revenues of this P2P product are insignificant compared to the other investments they might make more traditionally. Knowing the rational funding decisions made by institutions will naturally deselect this opportunity compared to more swiftly scaling businesses, they press on undaunted. But then they realise that if their new product were to be successful, they'd have to explain to their managers that they wanted to build a business with microscopic short term returns that in the medium or long term had the potential to kill off the current business.

At this point, you can see that the NPD team is facing an uphill battle. Frankly, the configuration of their business line is set up to eliminate threats to its core revenues, so a member of that team is going to have little or not chance of moving anything forward like this.

That's not necessarily true of an innovation team, however.

For starters, being outside the directly revenue-making business lines of a bank (as most innovation teams seem to be), they have a little more latitude in what they can explore than the NPD team. Now, it may be just as difficult to get anyone to agree to disrupt a core revenue stream, but at least they are in with a fighting chance. Their bosses, clever enough to realise the need for innovation in the first place, aren't likely to close them down just for new thinking.

And, any team worth its salt is going to do rather more than think about new products and services. Anything is a candidate for innovation, even the incremental stuff that so many people don't think of as especially innovative. Here, we have a definition of innovation that makes it easy for us to do this, by the way. We say innovation is anything that would not have been achieved by an ordinary project or process we already have. It gives one great latitude in what can be looked at.

An innovation team will be scanning for opportunities to make a difference, and their non-specific remit means they have the chance to take their institutions in unexpected directions. Our own Innovation Market is an example of this. We were doing work on prediction markets internally, and it just struck us one day that here was a good way of selecting ideas and making them progress. Clearly, such a thing would never have come from an NPD team, and nor would you expect it to have.

So you do need to have both teams, at least, if you want to cover the range of possibilities available to do new things. I'll grant you, however, that in times of uncertainty, it does seem easy to cut innovation groups. After all, NPD is something that all firms, at least those that are successful, are pretty good at. Innovation, on the other hand, is a young discipline, at least in banking. Consequently, most institutions haven't gotten themselves to a place where they can measure their returns from this kind of investment reliably. That will come in time, and in fact, my own belief is that by the time of the next downturn, banks will either have created an innovation capability as mature as their NPD, or they'll be scrambling to stay in business.

 

Yes, but how do you pay for it?

Last night, I was at a power networking event, and here was the question I was most asked: "Innovation – well we want it, but how do you pay for it?", Especially in a downturn, apparently. Broad consensus seemed to be that it was easy to afford innovation in the good times, but much, much harder at present.

Obviously, the bad old days where doing innovation is considered optional have not left us yet.

However, the question remains a valid one: sorting out the funding thing is indeed one of the biggest challenges a new innovation programme faces.

In my research for Innovation and the Future-proof Bank (out on August 29 – Hurrah!), I discovered there are as many funding models as there are stars in the sky. They range from elaborate internal corporate taxation schemes, to pure overhead supported by single business units. But successful innovation programmes – meaning ones which last more than 18 months - all have several common factors.

The first of these is obvious. Given scarce funding, an innovation programme must be the best available investment considering the opportunity costs of doing everything else. It is surprising how many people who do innovation fail to realise this, but why would innovation be any different to any other investment a rational business makes? It is when investments in innovation are irrational that programmes are seen to be speculative and risky. They naturally get cancelled the second the reality distortion zone generated by the sponsoring executive evaporates.

The second factor common to successful innovation programmes is they don't cost much, and it is consequently easy to justify they are the best available investment opportunity. Let's say that in a particular institution, the best available use of the money before innovation returns 49% in year 1. That's unrealistic, I know, but I use it to illustrate my point.

Let's say the innovation programme is spending a million in cash a year, and for this, they need to generate a real cash return of 1.5 million to be the best opportunity available. That's a 50% ROI, and to do it, let's imagine the innovators have made 10 100k investments. Further assuming that one fifth amount to anything, we have two investments that have to make about 750k each in the first year. Now clearly, that's not a very big ask, supposing you're screening properly. You can do that with a few changes to a volume business process in some cases.

Now let's imagine a much bigger programme now, say 10 million or so. To get to 15 million (assuming the same success rate as before), you'd need to make 100 100k investments, or a smaller number of much bigger ones. The bigger the individual investment, naturally, the more concentrated the risk. At least 80% of what an innovation programme will try is going to fail, so concentrating the risk in this way tends to be very expensive. But the fact of the matter is that very few innovation teams scale up their bandwidth at the same rate as they scale up the money.

Anyway, for argument's sake, lets imagine our innovation programme has quadrupled the number of investments it can make in a year to 40, and each is worth 250k. 20% will likely translate into value, so now we have to get 15 million out of this smaller pot of success: each must investment must return 1.87 million in year 1.

The difference between 750k and 1.87 million is very substantial: the former can likely be achieved in a single year, but unless you're lucky anything really new won't make the latter until year 2 or later. At least, not anything that starts out with a cost of 250k.

The final factor common to successful innovation programmes is they are very, very predictable in terms of making their numbers. Obviously, such programmes don't know which specific innovations are going to come out of their pipelines in advance, but they do know pretty accurately how much money they'll be making. This is a numbers game we're playing, after all, and is very little different to running a loan book. You know in advance how many loans are likely to go bad, so you can compute a return on the loan book. It is no different for an innovation portfolio, and having more investments rather than less is the best thing to spread the risk.

By making large numbers of small investments, an innovation portfolio can be as predictable as you like. You can also adjust the investments in such a way that you can hit a particular return number with a good level of precision.

Innovation programmes with all three of these success factors tend not to have to answer the funding question often. Since they're making money and at a better rate of return than other available opportunities, a rational firm will usually make a rational decision with respect to funding.

The most interesting thing that happened last night at my networking event, however, was the reaction I got when I explained all this. Apparently, lots of people still think in terms of single innovation investments. Is it any wonder that innovation is sometimes seen as optional in the bad times?

Travel plans

In case you're interested, I'll be in Australia from the 23^rd through 26^th of June. Mainly in Sydney. Most of the time, I'll be attending Amplify, but am free for other meetings as well if anyone is interested.

Let me know by email.