“Innovation in financial services is deliberate and predictable; incumbent players are most likely to be attacked where the greatest sources of customer friction meet the largest profit pools.” –World Economic Forum, The Future of Financial Services (June 2015)
It’s clear that financial services organizations must develop new products, services, and experiences for customers. What’s less clear: the reasons why innovation in this industry is so rare. The literature suggests that there are multiple causes, ranging from regulatory burdens to profitability concerns to culture.
The fact is, financial services companies with the will to innovate can make change happen; but it’s not easy. Below you’ll find three steps motivated firms should take, all based on Continuum’s work with multiple financial services companies.
(1) Get Senior Leadership Involved
Leadership must be substantially enmeshed in innovation work, motivating and supporting the necessary teams. This process of changing an organization’s legacy culture can take time—multiple years, in fact—and it won’t happen without the senior leaders’ blessing. However, in financial services, executives typically move around to gain expertise in different aspects of the business. As the moves take place, innovation projects get handed off. (New executives typically have little incentive to continue someone else’s projects, as the credit is shared, but the blame is theirs alone.) Senior leadership must recognize where the disjunctions exist and step in to provide ongoing support for innovation projects. Innovation is a team sport, and senior executives must serve as its captains.
Below are three steps to motivate your senior leadership.
Create a Sense of Urgency
The financial services industry has been rocked by many changes, due to both market forces and shifting consumer behaviors. As the CBinsight blog says: “emerging companies generally don’t attack incumbent players head-on, but rather focus on tackling specific verticals.” One sees this with firms like Betterment and Wealthfront attacking the wealth management and SoFi revamping the loan industry. On the other side, consumers now expect a high level of digital experience from financial service organizations, thanks to Google and Amazon. To succeed at innovation, financial services leaders must begin by recognizing and socializing these urgent threats.
Measure Success Differently
Innovation requires its own criteria for success. In large organizations, less risky ongoing projects get compared with innovation projects, which are ambitious and long-term in nature. Hardly an apple-to-apple comparison (more like apple-to-rutabaga). Better to take the sort of approach that ideas42 suggests: “The requirement that an innovation be ‘profitable’ is perhaps better stated as a requirement that an innovation be ‘profitable enough.’”
Innovation projects must be judged on relative, rather than absolute, standards. Returns on innovation are typically long-term and strategic in nature, so specifying short-term goals based on development of insights and employee learning are a better ways to measure success.
Define Your Innovation Vision
Include innovation in your firm’s long-term strategy, and socialize this idea. Thoroughly. Clearly define your vision—Is it to grow market share or is it to capture a new market? Is it to move to an adjacent market or to move into a new geography?—and then bring it to everyone in the organization.
Apart from defining the vision, it is important to translate the vision into achievable goals for employees, so their everyday work aligns with the vision and they are properly engaged.
(2) Reimagine Innovation Efforts
Structures and processes developed in an organization to manage and fund projects are efficient and highly standardized. They work for standard business-as-usual projects, but are too rigid for innovation initiatives, which are ambiguous and morph as time progresses.
In addition, team members can be hesitant to dedicate themselves completely to an innovation project if their performance will be measured against criteria set up for standardized processes. There might be limited motivation for employees to think and act differently, and a substantial fear of failure.
Want to get started on changing the innovation efforts? Here are three ways:
Design a Flexible Project Approach
You need to create a flexible innovation process—one that adapts to the needs of a project as it progresses. This doesn’t mean that innovation should be given complete freedom without any accountability. Instead, you should design a process with regular check-points at more frequent intervals, and with opportunities to shift course when necessary. Senior leadership must provide necessary air-cover here, giving team members true permission to be creative problem solvers.
Measure Opportunity Cost
For most financial services organizations, project funding decisions are based on forecasts. Precise forecasts. This is obviously too high a hurdle for most innovation projects to leap. Innovation requiring capital investment normally looks at long-term, strategic initiatives, which are traditionally resistant to fiscal prognostication.
What to do? Ernst and Young puts it well: “A change in mindset is required. Rather than the traditional ‘what will I get?’ question, organizations need to consider ‘what is the opportunity cost of not doing this?’ in terms of financials, competitive positioning and customer experience.” Converting a long-term project into small wins, and creating a business case for these small wins, will help your organization confidently fund more substantial initiatives.
Rethink Rewards and Metrics
Employees who participate in innovation projects should do so with the confidence that this will help their careers. Metrics for team members should reward new ways of working, learning from failures, and proposing new solutions. Their rewards and compensation should not be dependent on financial or market outcomes of the projects, but more on learning and customer experience goals. Create specific, phase- and learning-based projects goals. These first steps will build the human capital and culture required for innovation projects.
(3) Know Your Customer Better
Involving customers in the development of new products and services requires organizations to venture out of their comfort zone. This can be a novel way of working and may be challenging for many financial services firms. (Such organizations are not always ready to hear the truth about their offerings, which can create some serious cognitive dissonance). But this shouldn’t dissuade firms from going forward: Understanding customer needs, and using this to develop new offerings, is the differentiator that sets organizations apart.
Here are two ways to get customers involved:
Get Sales and Customer Service on Your Innovation Team
Some financial services firms have difficulty pinpointing the right customers to participate in innovation projects. The best move here is to include sales and customer services personnel in your cross-functional project team. These employees are always closest to customers, and will be able to recruit and initiate productive conversations with the right people.
Build Customer Platforms
Getting the opportunity to talk with customers throughout the process is important. To assist recruiting, build a customer platform where your best customers can easily register to participate in research. In return, they will have first access to the product or service you produce. It’s all about starting small and building your circle of influencers over time.
Yes, this is a complex process, but when followed methodically, it can yield real progress. Step up, financial firms, and start to innovate.