When small innovations are good

Last week, I spent a few days in Atlanta attending the Emerging Payments Forum, run by consultancy Global Concepts. The event itself was an extremely interesting one, and one of the main topics was innovation.

Actually, I was there to speak on that topic, and perhaps the central point I made was that incremental innovation, as in small, low risk changes that aren’t all that huge in themselves, are the way to pay the bills in an innovation group. Because incremental changes are usually low budget and low risk, you can generally be pretty certain that you’re going to get a payback.

That’s not true for innovations which are ground-breakingly new, where you have to invent new technology. Or even those which are potentially market defining, that build on something someone else is doing to “move the goal posts”. In both of those cases, there is such a level of risk that the expected value of the innovation is usually quite small.

Expected values, by the way, are a great way to prioritise innovation investments. If you have a potentially large payoff (such as getting monopoly control of a new payments channel, for example), but the chances of it being successful are very close to zero, then clearly, the expected value of that innovation is probably low.

Lower, in fact, than the expected values of incremental innovations. Do lots of incremental, and you have a large portfolio of returns. Do lots of ground breaking, and you may have a hit product/service/process which pays off big time, but the probability is that you won’t.

Interestingly, just as I was making these points, I got an email from Ron Shevlin, who writes the excellent Marketing ROI blog. He referred me to this post, where the author details the extreme hassle of getting a bank account in the UK. Ron pointed out that fixing these kinds of things is the sort of thing that an innovation team should be doing. Not, always, looking for the next big thing.

I agree completely.

But back to Emerging Payment Forum, where another interesting point was made by a large bank based in North America. They took what I thought to be the converse view to my own (and, by inference, Ron Shevlin’s).

This particular institution suggested that the line between innovation and optimisation can become blurred. Optimisation, they explained, is the process of measuring and improving in little steps. Six Sigma, for example, is optimisation. And the tendency in banks, in their view, is to optimise first and innovate later.

This bank's opinion is that optimisation is not the same as innovation. And, they added, you can optimise yourself out of the ability to be innovative at all.

Initially, I disagreed with this. Doing small, incremental optimisation sounds rather like doing small, incremental innovation. But then I thought about the question of incremental vs. optimisation in the context of our own definition of innovation: innovation is anything except what we would have done as business as usual.

Optimisation, clearly, is business as usual. Innovation isn’t.

In the end, I’ve come to conclude that the approach outlined isn’t that dissimilar to ours, but they make the distinction between change that is part of the process of improving the business, and change that is outside that process.

We do too, but have a specific number target on how much of our attention is on incremental changes for which we can easily get a decent return.

Comments

[Colin Henderson]

I would add another element, that is the need to consider both at different times. Using the BofA approach, optimisation could be viewed as business as usual, with periodic innovation. However their must be adequate balance on innovation, otherwise there will never be the opportunity for technology integration or synergy investments.

I look at Citi and their results today. Hidden in this NYT piece on their latest results, is the fact they have failed to keep up with their technology, which given their 'low cost provider' strategy, could (potentially) be the outcome of continual focus on optimisation.

http://tinyurl.com/2suqut

[Tim Gray]

For an interesting academic study of the relationship between innovation and eg: six sigma programs see:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=1321

[Anon LTSB monkey]

You might want to 'innovate' by copying Sweden, all payments there are to be processed 'within reasonable' time. At LTSB we have (and have hard for decades) a real time payments system, but the crap IBM systems around it won't support it.

[Jeremy Barth]

'Innovation is change which makes money' - I'm working from memory here, but that was the gist of what a former editor of Australia's Business Review Weekly wrote a couple of years ago.

Sometimes optimisation activities (e.g. two-factor authentication in online payments) can make, or save, significant amounts of money, as can the introduction of entirely new innovations like online banking.

Let's not split hairs about what we call it - if the change is good for the business, ie. makes or saves money, let's do it !

Cheers,
Jeremy

[Tyler Hannan]

I tried to post a trackback to this entry, but it doesn't appear to have worked. . .

It was with great interest that I read this posting on innovation vs. optimization. As the platform evangelist for a technology company (focused on the payments industry), the battle of business as usual vs. innovation is a common theme. I, frequently, encounter the trade-off decision between modifying existing business processes and determining how to serve new markets.

This, to me, is the beauty of the technology platform. It can allow for minimal, if any, disruption to existing business processes while brining new capabilities to bear. This non-disruptive innovation is, for our financial services partners, a low-risk way to explore new technology in their existing (and new) markets.

Cheers,

Tyler Hannan

[Malcolm Rosier]

Before coming to work for a bank, I spent many years as an SME, firstly in manufacturing and then eCommerce. Like all SMEs, I had no cash and had to innovate in incremental steps, trying out small changes to see if they worked. If they did, I went on to the next step, if they didn't, I went back a step and tried something else. Although this sounds like six sigma in a grown-up world, it wasn't. I was not looking to improve exisitng processes; I was looking to find a disruptive edge. A different way of doing something better, not a better way of doing the same thing. The manufacturing example was finding a better way of transporting heat-sensitive medical products (including blood and organs for transplant). The current practice involved cardboard boxes, polystyrene and lots of dry-ice. Rather than look at ways to prolong the life of the cardboard boxes or reduce the amount of dry-ice being used, my solution replaced all of these altogether with a thermal blanket, that had been developed for a totally different purpose. This, I think, illustrates the difference between optimisation (the former) and innovation (the latter).