What kind of innovation does your bank do?

Now, I know that we're all in a bit of an innovation vacuum at the moment, since the financial crisis seems to have sucked all the life out of most innovators I know. They are all lying low, hoping their programmes won't get too much notice, for fear that they'll be cost-cut out of existence. And you can understand why- attempting to invest for speculative returns in the future when there is trouble paying for the bills of today just seems like folly.

Considering the news of the hour, the fact of the matter is that even successful programmes have to deliver more with way, way less if they want to keep breathing. I know that my own team and I have been cutting back as much as possible to ensure we have enough runway to get through the current situation. Innovation teams are rather like startups in that respect, except instead of money, the key currency is influence. The more you have, the more likely it is you can get through the present circumstances. If you do silly things, you burn influence at a greater rate than you earn it. And a team without influence is cut almost immediately.

But this has led me to consideration of the sorts of innovation that can be done when influence is high, but money is tight. And that led me think about innovation strategy in the context of banks.

Really, when you boil it down, there are only three possible strategies available to bank innovators.

The first is obvious: don't do innovation at all. Rely on what worked in the past. Expect that with "back to basics banking" is it possible resurrect practices appropriate two decades ago and hope for the best. Some banks have, indeed adopted this strategy, and it's a valid option, especially if what you need to do is keep on living during the next two years. Having no innovators at all is the cheapest option in the short term, but also condemns the long term to more of the same.

At the other end of the scale, however, is Play to Win innovation. This is the kind of innovation strategy you have when you can say, with no disagreement, that innovation is going to be the source of all competitive advantage for an institution in the future. This is the kind of innovation that most innovators really want to be involved in. They have their labs, and their corporate incubators, and all the miasma of a startup. Innovators doing Play to Win are expensive in the short term, but (if they are any good) highly profitable in the long term.

I rather suspect the innovation programmes which are under threat right now are in this category. Their strategies are all about a planning horizon beyond the present vision of institutions which are struggling to keep their heads above water. No matter how good the innovation portfolio, the lack of financial contribution now is their chief problem.

Which brings me to the third kind of innovation strategy that's possible: play not to lose. Play not to lose accepts that maintaining parity with competitors is the primary reason to have an innovation function. You may not get the market windfalls that accompany a big breakthrough in the future, but you do get some kind of return in the short term. The innovators doing this strategy have the ability to balance their costs right now with returns right now.

At my own bank, our strategy has always been play not to lose. We are not the sort of institution that seeks out big breakthroughs in the hope of some spectacular future return. Small, gradual improvements in the way we do things is something that just seems to work better for us, at least from an innovation perspective.

Now, when I've talked about this in public, and with my fellow innovators at other banks, one thing always surprises me. They seem to think that if you're not doing Play to Win, you aren't really innovating. To them, I ask this question: with budgets drying up and influence burning at a great rate, isn't it better to be doing small, incremental innovation, rather than doing no innovation at all?

Comments

[Nick Marsh]

Seems like a sensible strategy James - the 'innovation is incremental' message is argued well by Richard Lyon's (head of innovation at Goldman) in this (pre-crisis) paper: http://www.choosenick.com/?action=view&url=a-review-of-innovation-in-services-corporate-culture-and-investment-banking
As he says: "the central themes of R&D, intellectual property and breakthrough technologies often miss how service businesses evolve by steadily generating and implementing new ideas.” Given the circumstances, slow and steady sounds quite exciting at the moment.

[Rachel]

It gets worse when we review the "play to win" projects in the past few years where often the value of these projects both to the bank and the customer is unclear. I still believe that innovation in banking should be "understand what the customer wants and do it well". Although this may sound simplistic, few banks can tick both boxes in this statement. I am not entirely sure that customers want their banks to twitter away on their iPhone...however pretty sure some want to know when a cross-border payment will be cleared into their account (with a date, time and status update like the case of their UPS parcel). If we move towards more "fee-based banking", surely we also need to move towards more SLAs and visible value to the service given. That would be visible innovation

[Prashanth Bhat]

The big party just stopped ubruptly. Power that was plenty which powered a million watts music, disco and laser lights and what not just went off. Party goers are now in total darkness just when they were putting in their latest step. No one knows when the power will be back and everyone is sweating now. I think smaller innovations are more aligned from an individual or small team perspective to save himself or themselves from the crisis. I would go for an organization level fundamental re thinking on the value based innovation. Every idea to be tied to a business value that is aligned to the renewed organization mission for the tough year. Innovation that fundamentally will affect the way the bank does business and lead them through the crisis. For example: Relook at the SLA's, internal price optimization, plugging revenue leakages, etc.

[Colin Henderson]

James- this is a highly pragmatic post. Clearly this is not a time for business as usual, and I especially like the metaphor of a start-up. I thought one had to be in a startup to feel it, but it turns out Innovation groups in banks are just that. Keep the faith!

[Taylor Davidson]

Whether you're driving incremental or breakthrough change, they are both innovation. Honestly if it's delivering value (short-term financial, long-term strategic positioning, etc.) it doesn't matter what it's called.

The bigger problem is when we mislabel our efforts to try to position incremental innovation as breakthrough "Play to Win" innovation; the two types of innovation (although I admit it's more of a continuum) require different operational, financial and strategic commitments. We've got to be honest about what bets we're making and how we're playing them, or we run the risk of tremendous intra-organizational resource misallocation.

[:-D Shea]

Great post James.

Part of innovation is recognizing opportunities. To use an earlier analogy, the room is now dark and quiet but after a while you'll begin to "see" and "hear" well enough to take advantage of your new circumstances. You can't wait for the lights to come back on.

[FredericBaud]

James, you're advocating the concept of "absorptive capacity" - http://en.wikipedia.org/wiki/Absorptive_capacity - which is indeed a strategic advantage for an organization.

But you still need to put a boundary between the area of continuous improvement (which falls to operational staff) and innovation (which may be coordinated by a central team). While this does not belong to the definition of innovation per se, I'd like to propose one of the criteria coming from patenting: Non-obviousness.