I was listening to the HBR Ideacast on my bike ride into the office. The guest was Nathan Furr, Assistant Professor at INSEAD, author of Innovation Capital: How to Compete--and Win--Like the World’s Most Innovative Leaders, and a fellow Monitor Group Alum. Nathan describes how ideas are not enough; "Great leaders of innovation… succeed...because they have the vision, reputation, and networks to win the backing needed to commercialize them. It turns out that this quality--called "innovation capital"--is measurably more important for innovation than just being creative.”
Nathan breaks down innovation capital into 4 components:
Who you are
Who you know
What you’ve done
The things you do (also known as amplifiers).
The importance of execution over initial idea is pretty well accepted in the innovation world. The concept of innovation capital as a prerequisite for execution makes sense to me. As I pedaled on, it occurred to me that this an accurate representation of how things work, especially in the financial services world, but not necessarily how things should work.
Historically most new initiatives in banking almost always had their genesis in the c-suite or someone connected to it, a combination of who you are and who you know. Banking is not alone in being strongly hierarchical, however, there are few industries where the c-suite is so far removed from the customers’ real needs, even in smaller institutions. Bankers are a special breed and the climb to senior positions is often bred over a long time and enabled by behaviors that comply with the norm of what is expected of a banker.
Calling out the elephant in the room, the bank c-suite is also far more likely to be “stale, male and pale” (credit David Reiling of Sunrise Banks for introducing me to that phrase). The c-suite has the greatest level of influence on which ideas are pursued and which are shelved, but they are also the furthest from intimately understanding the customers’ deeper underlying needs, the pains they feel, and the latent opportunities to change their lives.
Challenging the Status Quo
I can hear many of my industry CEO friends now, “I talk to our customers every day!”, and I know that to be true in many cases. All too often though, these conversations are too tightly bounded by a narrow perspective framed by existing bank products, services, and policies. I’m not talking about having sales and relationship conversations, I’m talking about deeply understanding their underlying needs so you can provide better solutions they don’t even know how to ask for. This is why so many of the most game-changing innovations have come from outside the industry lately.
This conundrum is exacerbated by bank culture; avoiding risk is the “what you’ve done” behavior that is rewarded. Risk takers rarely make the climb to the top of the ladder and rabble rousers that seek to change the status quo, the way we do it today, are not the voices that are curated. Much of this can be traced back to the lending as one of the historically central activities of a bank. Risk and loss often go hand in hand. Risk elimination is the safest long term strategy to avoid failure even if it mitigates upside gain.
On Furr’s last point, "the things you do", banks more likely have dampeners rather than amplifiers. These dampeners go by many names: risk assessment, compliance review, business plan, project management, budget, core processor limitations to name a few. Perhaps my favorite is the catch-all, impossible to be countermanded, “reputational risk.”
These innovation capital deficits make it challenging for banks to remain relevant unless they are addressed head on. Steve Blank kicked off the customer development wave in the ‘90s but it is still making its way ashore in banking. His core tenants were that the voice of the customer was the most important in the innovation process and that voice could really only be heard by validating a product served an unmet need through testing. My favorite summary: the facts lie outside the building. Banks that succeed are those that branch out (pun intended) and listen to and observe customer behaviors from the customers’ point of view. Innovation needs to be driven outside in, rather than planned, QA tested, and launched entirely from within.
No Silver Bullets
Banks often approach us looking for the silver bullet idea or guidance on what they should do. The reality is the best ideas are likely those from those that are closest to your internal or external customers. The idea holders need to be given a voice and the dampeners need to be turned off, at least in the early stages, until the idea can be developed and tested. The mantra needs to become “what might work?” rather than “what could go wrong?”
Culturally, we need to get comfortable that we manage our innovation process differently than the core business. The core business can only accept failure rates measured in decimal points. Innovation efforts, by contrast, shouldn’t deliver the expected result with the same surety. This isn’t to say failure to design thoughtful experiments and execution should be tolerated; quite the opposite. We need to up our game on both fronts so when we test hypotheses there isn’t the lingering doubt that we should do it again, but this time find “better” customers / change the button color, or a host of other red herrings that slow down iteration.
Capital is the lifeblood of banking, and banks talk about capital requirements all the time in the context of liquidity, CECL, and deposit funding. We need to add innovation capital to the list of topics we measure and pursue as a critical function to survive and thrive.