BankerVision

Innovation market most innovative of 2008

You can imagine how thrilled my team and I were when we discovered that FinExtra, in its newly launched Innovation Showcase, has decided that our Innovation Market was one of the most innovative developments in financial services in 2008.

At a future time, I'll write a more comprehensive post about Innovation Market, much more detailed than the one where I leaked it. It wasn't really a leak, of course, and I use that term for dramatic effect. We actually told everyone about it a month or two before at the Financial Innovation Awards, where it won Most Innovative IT Project.

Innovation Market isn't really about IT, of course. Its about people, and motivating them to do innovation without relying on a core team to do things for them. As long as you have a central function that does innovation, your capacity to try new things will necessarily be limited by budgets and bandwidth. With thousands of new ideas arriving every month, there was no way my team and I were ever going to be able to do everything that we wanted.

Innovation Market, we hope, will change that. What we're trying to achieve is the set of circumstances that will empower people with the ideas to implement them themselves.

So far, it appears to be working.

Trade Secrets and Open Innovation

If you're a bank, what is the first position of your management when you suggest you should license your patents, share your underutilised trade secrets, and investigate the possibilities of collaboration with your competitors?

You'll probably find you run up against a big, fat, wall. It is likely the same wall you ran into when you tried to deploy social media. The same wall, in fact, that exists between each business unit of your institution, and between the work-groups inside each business unit.

I am put in mind of this as I write a piece on Open Innovation for Future-proofing. Now, in case you've not heard of this, it's the idea that if you have unused intellectual property or uniqueness, you are best served by licensing that to competitors who might make use of it, rather than let it sit idle. And, in reverse, if competitors have something of value  you need, that some arrangement is executed that enables you to get it.

The underlying principal is that everyone knows practically everything about everyone. In such an environment, key uniqueness is protected either legally or because the capabilities are hard to replicate. Everything else is transferable and up for grabs.

Building hard to replicate capabilities is, of course, the central thing that defines competitive advantage anyway. If they can't be easily copied, you don't really care who knows about them.

Open Innovation is the current de-rigor fashionable business model amongst innovator in lots of industries. That's especially true in industries where the products aren't very differentiated like FMCG. And, of course, in industries where the products are very differentiated, like aerospace.

We could never do this in banking, of course. Our protections are still medieval in nature: we rely on trade secrets. Everything is one, even the unique capabilities that would be hard for anyone to replicate.

What are the signs of over reliance on trade secrets in banking?

Constant vetting of external communications, no matter how insignificant, by teams set up specifically for this purpose.

Nervousness when it comes to employees participating in conference pro grammes.

Elimination of collaboration technologies, or a failure to provision them in the first place.

And, of course, outright panic at the idea of staff using social media externally.

Now all this is a cultural thing, and there are signs of change in many banks I talk to. Let's face it, my own institution allows me to have this blog. You'll note we are careful of branding, and also to make sure that any statements I make here are my own, and not reflective of the views of my institution as a whole. But I doubt even a few years ago such a blog would be possible from a bank employee.

So, the pace of change is slow, but it is coming.

My point, though, is that whilst other industries are achieving synergies that can create “man on the moon” type projects, bankers are stuck with the glacial progress that results when you have to do everything yourself.

Institutions have a lot of man-on-the-moon opportunities. One is addressing customer-bank hate. Another is coming to terms with all these non-bank competitors. Dealing with global financial stability. Fixing markets in the absence of decent global regulation. Or how about using banking to alleviate poverty?

We could do these things, but no one bank can do it alone.

Reliance on trade-secrets makes each bank an island. It means that the really big, really significant innovations can come only from the largest players on Earth, who can afford to fund the work required. With the activity going on in the financial services sector at present, it is swiftly coming down to a handful of institutions with such resources.

Here is one thing I've noticed, though. Many institutions have a groundswell which is breaking down such silos anyway. There is this new generation of employees who are simply not prepared to put up with artificial barriers that prevent them from being the best they can be. They'll talk to each other – even about trade secrets – no matter what you do.

They're the ones who want openness as a first principal. They'll have it, no matter what management thinks. And with it will come the end of the trade secret as a source of competitive advantage for banks, if it ever was in the first place.

What then? Nothing all that innovative, in fact. Institutions will simply have to focus on building hard to replicate uniqueness that lasts in the market. But because that very, very hard for banks – who have undifferentiated products in the first place – it will require serious innovation to pull off.

The lucky institutions will be those that have made appropriate investments to build out their innovation capabilities in time.

Lift and shift

Since I started working on Future-proofing, my book on innovation methods  due out next year, something interesting has started to happen.

I am getting calls from institutions around the world (or consultants retained by them), asking about the experiences we've had building out our innovation systems and processes. Apparently, even in these times of trouble, wanting to get more innovative is still a key imperative.

The other day, for example, I was on this call with a major European bank. I always take those sorts of calls by the way, especially when my own institution is not competitive. The fact of the matter is I get just as much from it as they do, and our innovation group is improved as a result.

Anyway, I was on this call, and they said to me: “we have lots of money, we are ready to invest, we know innovation is the future of our business. But we don't want to waste money. And we don't want to have to discover how not to ourselves”.

I told them about my five capability model of innovation programmes, and suggested they should prepare themselves for a multi-year journey. Cultures don't change all that quickly.

Now as far as I could tell, this institution was crying out for what I'd style a “lift-and-shift” innovation process. That's where someone with tried and proven methods is retained to create the environment in which innovation can flourish. Those things take a long time to build well independently, sometimes years.

This institution needed a short-cut. Why wait years to get it all right if you can buy it in working already?

The thing is, I take such calls several times or more a month. Everyone is always after the same thing: tell us how we can build an innovation programme without the expensive mistakes along the way. And how we can do it quick-smart.

I'd make two interesting observations about this.

The first is that everyone I'm talking to realises that the competitive advantage from innovation never comes from the way you do innovation, but rather, from the people that are actualised by the innovation process. That, by the way, is the reason I am usually delighted to share details of how we do what we do: it is the people that we have that make it work, not the process itself.

Here is my second observation: There is clearly a significant opportunity here for someone. But all the major vendors have no offering.  Oh, I know there are lots of innovation consultancies around, but they offer high level advice. Where is the innovation service that can install all this stuff in an institution without all the bother?

The opportunity to do this must be massive. The opportunity for an institution that were to buy such a service must, similarly be massive.

Imagine the model: the institution doesn't pay for anything up front. Because the process is lift-and-shift, the vendor knows it can make windfall returns for its client, and therefore is delighted to do a risk and reward pricing scheme. Decent innovation science will usually make innovation the preferred investment activity compared to practically all other opportunities. That's especially true where the programme is supported by senior people who are believers.

So where is this service? Perhaps I've failed to examine the market sufficiently and it does, in fact, exist somewhere. But if that's true, there are lots of other institutions out there that have also failed to find the lift-and-shift innovation process.

And I only know about the demand in banking. What about all those other industries that face the same problem?

That magic business document

There is a magic document that is almost always associated with practically every business decision. It is a document filled with mystical powers, such as the ability to foretell the future. It is able to shape the way things happen in the present. And even when things go wrong, it has the power to provide a universal get-out-of-jail-free card.

I'm referring, of course, to the Business Case, that tool much loved by MBAs and practically everyone else.

I was put in mind of this as a result of a conversation with one of the people in my team yesterday. He was wondering where he could get examples of some excellent business cases, This, of course, led us to a discussion of what actually constitutes such a document.

Actually, the business case document is an exercise in the suspension of disbelief, rather like you see on those reality talent shows. Thousand and thousands of applicants who think they can sing, and only one winner. All judged by three or four successful industry professionals.

Just where did they get all that time?

The business case is similar. It makes predictions about specific future states, when the rest of the time, we accept that such predictions are hard or impossible. But in he context of an official business case document, this kind of crystal ball gazing is not only accepted, it is expected. About the only feedback one gets with respect to this oracular vision is “hmmm, those numbers look high to me”, or “um, don't those numbers seem low to you?”.

This illustrates another powerful effect this fascinating document has. It can infect anyone who reads it with the ability to read the future as well.

It is hardly surprising, really, that most of the time the actual set of circumstances predicted in any given business case do not come to pass. I've yet to see such a document that was a completely accurate reflection of the way something actually got done, once all the money was approved. That's because during implementation, you learn a lot which you didn't know when you make your forecasts and all this new information changes the shape of the thing you're doing.

During the process of building something out, it is not unusual to see it morph completely. In the start-up community, in fact, people are starting to offer advice which reflects this: you might have to try two or three business models before you find one that works.

Pity the poor investors who made their funding decisions based on the first business plan (a business case, in everything but name).

All this brings me to the main point I want to make on business cases. Since they don't usually reflect the actual reality of what gets implemented, why do we persist in creating them?

The answer is obvious when you think about it. A business case is a sales document. It is a collection of statements about some future possibilities framed in a such a way that it attracts the interest of those with resources to invest.

What are stakeholders looking for in a business case?

They want to understand the value proposition to them, and how much it will cost. What will they look like if it is successful? In the overall scheme of things, what are the implications for the organisation of which they are a part? And, in the end, what assurances do they have that in the event of a failure, they won't go down with it?

Let me put that differently: even if it is only subconsciously, budget holders make an assessment of the business case in terms of how well they think the document might work as that get-out-of-jail-free card when it is later found that the investment didn't go the way it was expected.

Accepting the true purpose of the business case lets you target the messages within it much more effectively. A focus on benefits rather than costs is helpful. Creating custom business cases for specific audiences can be powerful.

And, whilst you need the numbers to be there, they themselves don't communicate the actual message one needs: this is the investment opportunity you've been waiting for, and it is the most attractive you have available at present.

It is impossible to do without a fully featured business case for any significant decision, since we've all been fully conditioned to expect the document these days. Since we're stuck with writing them anyway, it makes a great deal of sense to optimse the business case for the real audience need.

On pilots and prototypes

I found another bank innovation team the other day that spends its life doing pilots. Now, don't get me wrong. That is a perfectly good way to make innovation investments. Pilots are an important outcome of the innovation process because they let an institution “suck it and see” before they take whatever-it-is to a broad base of customers.

But I was struck, when talking with this group of innovators, by the fact that they were confusing the terms pilot and prototype. It is a mistake that so many people make.

There is only one reason to run a pilot: to get learnings about how to operate an innovation before you put it in the hands of customers or end users. Pilots are about trying the innovation for real and making sure that everything works. They are about preparing to scale up to production.

However,  a pilot is not a technology experiment to see if people will “like” the service.

A pilot is not a proof point that whatever-it-is can be made to work in the first place.

Neither is it a sales tool used to help win funding.

These are the roles of a prototype, which is a small demonstration of the doability of a new innovation.

Prototypes are good for resolving technical and political ambiguity. They are small, hardly functional, demonstrations of what something could look like if it were built. Or they are experiments that show that the process or technology involved can work in this new, novel way.

And, of course, they are entirely throw-away, since they don't do anything very useful, other than illustrate one, specific point.

The mistake that some innovators make when they confuse a pilot and a prototype is they commit significant resources to building something for real before they have achieved agreement that whatever-it-is will go ahead.

This point seems not to be obvious, and I have to admit I've made the mistake myself. I continue to do it whenever I let my excitement with something new run away with me.

But in the end, asking a simple diagnostic question is helpful. In order to win this funding, what is the minimum I have to do?

Most often, the answer is provide a few static screen shots or a proof point that whatever it is that's novel works.

Since, most of the time, things will not go ahead, spending as little as possible up front results in far more innovation being possible in the long run.

The democratisation of statistics

I’ve spoken here often of the democratisation of the tools of banking. Anyone can be a banker, thanks to Peer to Peer lending. Anyone can do payments cross boarder, thanks to PayPal and similar. And anyone can do customer service, thanks to account aggregation and financial advice sites.

But the democratisation of tools is not limited to banking. And one example which I think many people have missed is the democratisation of the tools of statistics.

“There are lies, damned lies and then there are statistics”  said Benjamin Disraeli in a particularly famous diatribe about the misuse of mathematical statements to bolster weak arguments. Disraeli was twice the Prime Minister of the United Kingdom, and it were his words which were then popularised by Mark Twain in his 1907 work Chapters from my Autobiography.

Disraeli’s words are increasingly relevant today. Who, for example, has not naively used Excel to create a trend line to support a business case and then wondered why the real world result didn’t match the projection? 

One thing I’m always surprised about, though, is that people don’t spend a little more time understanding the statistical tools which are available to them easily these days. When one is an innovator, for example, you are dealing with phenomena that are amenable to statistical treatment. The arrival of new ideas, when captured in a structured manager, is eminently describable in a statistical sense, for example. 

So having a grip on statistics is something you almost certainly want to do. Because of democratisation, anyone can do statistics, whether they are educated in it or not.

At the level of an individual business case, I regularly see methods which are unnecessarily simplistic, given the tools available today. When one needs to forecast the likely take up of a new product, for example, it is de rigour to provide base, optimistic and pessimistic cases. One makes three point guesses and then crosses fingers.

But Monte-Carlo methods, for example, can take us much further. Monte-Carlo is a technique that lets you simulate a business case thousands of time (if you like) and then aggregate the results. With Monte-Carlo, you can make statements such as “it is less than 10% likely we will make a loss of greater than X”, or “it is 90% likely that we will make a profit of at least Y”. 

Such statements are powerful when you want to convince stakeholders to buy. At least they are, as soon as stakeholder realise that you’ve used a rigorous process to get to your predictions.

When I was doing my doctoral work on forecasting innovation curves, I used a Monte Carlo method to get my results. I had to code a cluster of machines to make it work. But that was then.

Today, dong stuff like Monte Carlo is simplicity itself. There are plug-ins for Excel that take your current models you’d have used anyway and Monte-Carlo them. All you have to do is specify a few extra parameters and out pop the results. Don’t believe me? Do a search for Crystal Ball, now owned by Oracle.

The point of all this is that there is now the opportunity for more sophistication in the methods we use than ever before.

Here’s my advice. The next time you want to do a business case or any other kinds of analysis of unpredictable phenomena, try something different. Don’t guess three times and cross you fingers.

Try a simulation, do a Monte-Carlo, or run a Delphi survey, or any one of hundreds of other techniques that used to be out of reach.

If nothing else, people will marvel at your brilliance and sophistication. But most importantly, you’ll be showing everyone that it is possible to raise the bar on the way we run our businesses, and you’ll be doing it without much effort.

The role of innovators in future thinking

So yesterday I wrote about the idea of machines having bank accounts. Apparently, that post was met with some surprise. James from Aqute Research said that I'd extracted the basis of a science fiction story from the original Peter Cochrane article. And Neil suggested I was waiting for the birth of Max Headroom. These are amusing remarks, and I smiled when I read them.

I admit the scenario seems far fetched on the surface. But then, so do many scenarios when you initially start to think about them. Credit Crunch seemed far-fetched a little more than a year ago during the housing boom.

There are many possibilities that have far reaching consequences and seem equally implausible, yet bankers would be highly remiss if they didn't consider things in advance.

What if the government imposes a carbon tax on data centres and the result is we can't afford our infrastructure any more?

What if peer to peer lending does take 10% share as Gartner suggested earlier this year?

What if a Telco launches an NFC based handset with full wallet capabilities and starts competing directly with banks for transaction accounts and loans?

Here is my question to bankers: who in your organisation is thinking about the future in a structured way? Who is it that is surfacing these potential realities to senior leadership so you can rehearse your decisions ahead of time?

I'll guess at the answer. No one is doing it routinely, and if they are, they will likely not be backing it up with actionable data.

But the thing is, performance of banks is quite correlated to their ability to think forward. I wrote about that here.

Actually, senior people don't have all that much time to be thinking about the future in terms of potential realities. They are running businesses worth billions. That is the focus of their attention, and rightly so. To think about the future, they need to have the information massaged, structured, and presented in chunks of appropriate size.

Who does have time to be thinking about it? Why, the innovators, of course. An innovation team that doesn't routinely scan scenarios for potential futures, isn't really doing its job. The point is not just to cause new things to happen inside the bank, but to guard it from things that might be done to it from the outside.

And, as I discovered (to my surprise, actually), when speaking with a very senior innovator from another bank here last week, we are not the only people who tell stories to help senior people think forward. Stories are just the kind of bite sized chunk that leaders need.

Try this experiment. Dream up some bank-important scenario. Create two stories, one in which the bank makes a decision, and the other in which it doesn't. Present both. Watch the mind set of leadership change as they begin to rehearse the implications through for themselves.

I have to tell you, having now spoken to a very large number of innovation teams for Innovation and the Future-proof Bank, that few organisations do this kind of work in a very structured way.  Its a pity, because it leaves a lot of opportunity on the table to make a real difference.

Don't drown the puppy

As you know, I am a big advocate of doing what we call here at the bank "drowning the puppy". We've had puppy drowning as part of our innovation team culture for ages, and even celebrate those who can do it the quickest. One person currently holds the record: 9 minutes from concept to drowning, and that included a vendor meeting.

I've always held that puppy drowning is an important part of the innovation process. Ideas are emotional things. Once you have them, you get attached to to them. The longer you hold them, the harder it is to let them go. Sooner or later, even if the ideas isn't going to work, you are so emotionally invested that you'll push it through regardless.

Anyway, last night I was at Capgemini , where they are working to create a cross-industry innovation forum. It was the second meeting, one that had people from a few different sectors. Under Chatham House Rules, of course, so I'm not going to say who was there or what we really said.

But here is something that came out: Don't kill projects, morph them. Or in other words, don't drown the puppy.

So I then went back through some of our projects when I got home, and actually, this describes what happens quite a lot in my own innovation function. A project which initially seem like it needs to be drowned gets changed into something else and we push on. We still call it drowning the puppy, but we've really done is give the puppy plastic surgery.

This is an interesting insight, but one that causes me some problems.

My team and I process more than a thousand ideas a month through various ideation systems we run for the bank. There really isn't the bandwidth available to have more than one shot at things.

One of the Pharma guys at the forum pointed out this has been a classic mistake for his industry for years. A drug which fails to perform in one area could easily be the wonder drug for another. Pfizer with Viagra is the classic example.

It has been a conundrum over which I've lost sleep during the evening. And what I've concluded is something I probably should have realised earlier. Ideas have a certain escape velocity, but we've always felt we had to provide the fuel (read my post on that here).

Some ideas, though, have enough fuel to reach escape velocity on their own. Those are the ones that morph, and they will do it whether you try to force them to or not.

Update: after this comment, I fixed the spelling of CapGemini. Sorry for the mistake.

The valuation of innovation

So here's a problem: what is the value of an innovation to a financial services firm? What is the value of a breakthrough versus incremental? And how can you guess it in advance so that you can win the money?

In my team, these are questions we wrestle with every day. The fact of the matter is that without a reasonable justification for doing innovation, noone wants to hand over the money. And that's money you need to have if you want keep innovating.

Ideally, one wants a justification in terms of the net effect on firm value. Wouldn't it be great to say that if we spend X on innovation, the share price will go up by Y%?

Actually, a study exists that tries to do that, reported in the March issue of the Journal of Marketing. "Innovation's Effect on Firm Value and Risk" is a scholarly article full of statistical stuff (and behind a paywall), but the headlines are these:

1. Breakthrough innovation provides windfall gains to firms, but may cause financial distress
2. Incremental innovation provides ordinary profits to firms
3. On average across sectors and markets, a breakthrough innovation increases the market value of a firm by 0.0847%. For a firm with an average market value of $4.9 billion, that translates to a windfall of about $4.2 million (NPV)

Here are my key takeaways. Firstly, doing incremental is going to pay the bills, as I've said on this blog on multiple occasions. You want to pay the bills otherwise, sooner or later, you're going to get shut down. But incremental isn't going to drive all that much direct growth.

Secondly, breakthroughs do give you the growth, but they aren't, on average, the transformational tickets to the future that innovators would like them to be. You'd have to do quite a lot of serial breakthrough to make a substantive dent in the fortunes of my bank, for example. But does anyone really have the appetite for risk that that would entail?

Anyway, those are estimates across industries. Trying to get something a bit better for the banking industry is challenging, so we've begun looking at specific innovations from our own history.

We have a scoring system that we use to evaluate potential ideas in 16 dimensions. The answers to these questions are weighted based on the priorities that our business units give us for various strategic questions. And out the end comes a number.

We went back and scored a basket of historical innovations, and then correlated that number with the actual returns from the innovation. It turns out our score, coupled with cost data, is quite a good predictor of the returns one might expect from an innovation, be it breakthrough or otherwise.

But we're still interested in the performance of financial services firms in general in the presence of innovation. Does anyone have any pointers to a study or other data?

Your five step plan to kill your innovation programme

Times are tough. Your innovation programme has been gasping for air for months now, and finally, it's time to end it. You want to do that humanely of course, with minimum fuss. And you want to do it so that it looks like the process of innovation is continuing across the institution, whilst the formal effort is terminated.

For those of you in this boat, I present my five step plan for killing off an innovation programme.

Step 1 - Forget you are a salesman. Forget everything you know about selling new concepts and ideas, of influencing to get funding, and of being gunpowder to make sure the thing gets delivered. You know that innovative things take people outside their comfort zones, so you need to sell to reduce uncertainty to the point where someone can invest. Stop doing that: Its far better to build gadgets (with the highest level of uncertainty possible) and hope the money will come. It won't of course, but that's OK. We're trying to kill the programme here, not save it.

Step 2 - Disconnect your results from the money. Spend all your time doing things which are very innovation-forward but don't actually take out cost or create new income. Forget that incremental innovation can help you pay the bills and invest practically your whole budget on a new iPhone banking application. Make sure you rarely, if ever, see your colleagues in the business, because they wouldn't know anything anyway, and besides, we're not selling any more so what is the point? And finally, if you do do something that makes money, be sure that you don't tell the people who invest in your innovation programme. You wouldn't want them to get cold feet at the last minute and expand your programme, now, would you.

Step 3 - Run the "I'm under-funded" argument one more time. Most big money innovation programmes fail pretty quickly because innovation programmes can't scale to decent returns quickly in the short term, so they get de-prioritised against ordinary business as usual investment which do scale. But don't worry about that, because when you're doing innovation in a vacuum, you can never have enough money regardless of the return. You should ask your sponsors for as much money as they can possibly give you, waste that on gadgets and other things which make no material difference to anyone, and then go back for more. Trust me, you'll soon get the push back.

Step 4 - Complain that you don't have an "innovation culture". I've never been in any organisation where there weren't more brilliant ideas than anyone could use. Neither is the usually any shortage of people willing to take the baton and run with it. Innovation cultures are nascent everywhere. Ignore that, however, and forget your duty to foster an innovation culture one person at a time. Instead, throw your hands in the air and run in circles a few times saying "no-one is innovative in this place!", as if doing so will make a difference. Keep saying it so often that you actually believe it to be true. This will act as an anaesthetic during the termination which will surely follow.

Step 5 - Annoy your sponsor too little. Actually, make sure you are so far under the radar no-one at all hears anything at all about what you are doing. An innovation team that doesn't annoy anyone isn't doing much innovation: new ideas are uncomfortable for many people, especially those who have to deal with the consequences. If your sponsor has no consequences to deal with, then nothing is happening. It is a thin line innovators must walk though: too much disruption will get one closed down, but so will too little. I advocate the latter: when you disrupt too much you at least have the upside of the possibility of a major transformational change.�

Following this plan is likely to result in quite good results, even in the short term. Failing to follow each step, of course, will likely win you significantly more support, funding, and ultimately a more innovative institution. Avoiding this disagreeable outcome should be the main goal of any plan to kill off an innovation programme.