So, You Think the Innovation Lab is the Answer?
By Andra Sonea
FinTech Thought Leader
In the public perception, the banking world has remained almost unchanged while other industries have remodelled themselves in response to the global crisis and, recently, increasing pressure from digital customers. Bankers, consultants, and regulators on the other hand would state that the banking world has changed dramatically and they can even point to the thousands of millions spent in transformation programmes across the financial services industry. I would argue that clients do not see or feel this “transformation” – they largely get the same products and services as they used to get 20 years ago. While all banks now offer a mobile and web platform, the type of information offered is still the same and there is no sign of product personalization or contextual financial information allowing the customers to make the best financial decisions.
Life has undoubtedly accelerated as compared to 20 years ago. I can now buy online items ranging from books to electronics, even on my commute, within a timeframe which previously required days of browsing on the high street in order to make the final purchase. Now, mere seconds of impulsivity can unbalance people’s finances and lives because they do not have, at their fingertips, the information needed to take financial decisions with confidence. While everybody thought real change in banking would come from regulatory change and large transformation programmes, it seems the combined pressure from customers and start-ups is a stronger disruptive force. The quick reaction of many banks was to set up an innovation lab in order to understand and meet the demands of this “new” customer and to react to them with the speed of a start-up. If the intention to change is not just a display of “innovation” for PR purposes, then I believe there are two key areas which should be taken into consideration if one wants to establish and run an effective innovation function:
- Creativity and innovation need fertile ground to manifest themselves and the environment needs to be purposefully created.
- Consistent methods for absorbing the outputs of creativity and innovation in the larger organization need to be enabled.
Foundations
Early decisions in setting up an innovation function lead to different work dynamics and, as a consequence, to fundamentally different innovation outputs.
Key questions for management are:
- Do you have a vision about the level you want to play at? Globally? Nationally?
- Are you focused on certain customer segments or products?
- How do you want your bank to operate in five years?
- Do you want your innovation function to explore and experiment in order to discover the path to that “future state”?
To illustrate the point, let me outline just two possible scenarios and how they impact the innovation function. Let us assume one bank’s view is that the world moves towards financial services being consumed as utilities, and they will provide the forever-elusive pipes which will enable open innovation on top of its infrastructure. Another bank could hold the view that they should be your platform of choice for viewing your complete financial status through facilitating aggregation of all your financial data. These are two very different visions of the future, which both require important changes in the existing modus operandi of a retail bank. Their infrastructure does not yet have the fluidity or connectedness of the “pipes”, nor can they provide their clients with a centre of control, analytics, or contextual advice. However, the innovation function in those banks will have something in common: they focus on a future scenario, and the innovation is aligned to it strategically – see the following Figure.
Figure: Defining your innovation lab – decision tree
An innovation lab set up on such a path of discovery would be very different from one with a free agenda for “experimentation”. Such innovation initiatives could be like “Google’s 20% projects” where Google employees can spend one day a week focusing on side-projects which have the potential to bring new products to the table. These projects, while not clearly aligned to the company strategy, often end up in the company’s product portfolio.
The most common form of experimentation in financial services within innovation labs is with a “business-led pipeline” or an “independent pipeline”. The first type works with a pipeline constantly adjusted, depending on priorities and funding from “the business”, while in the other model the lab has decision-making power over the priorities for experimentation, but probably less financial resources under its own control. Both types of innovation functions – let us call them “goal-focused” and “free experimentation” – need to explicitly answer some more questions in order for them to be effective:
- What is the bank’s appetite for disruptive innovation?
- Do we want the lab to focus on discovering disruptive business models and formulate the accompanying requirements for technology delivery?
- Or would we like the lab to focus on incremental innovation1 supporting other functions like strategy and planning or architecture, which together define the path to the “future state”?
The choices you make – disruptive or incremental; technology, product, service, or business model focused; betting on identity, big data, infrastructure, or blockchain – will lead to fundamentally different ways of delivering innovation – see the following Figure. One lab could be focused on disruptive product innovation using big data, while another could be focused on incremental innovation for customer experience. Both could exist within the same organization and also in parallel with free experimentation.
Figure: Innovation labs – focus and approach
For each model, there are obviously pros and cons. For an effective innovation lab, it is very important that the bank makes its intentions transparent to those working in the innovation function and to those using the outputs of this function, so the efforts and expectations are aligned and no resources are wasted in the decision process.
People
People are definitely the most important resource for the success of an innovation function. If you need people to deliver incremental changes along the bank’s established functions or if creators are required who can envision “new worlds”, the personalities and skills of your lab must be constructed to align with that vision. Most innovation labs I know end up, unfortunately, with a collection of the same type of people and skills and very often with too many project managers. There should also be UX designers, the CX specialists, and people versed in strategy and formulating propositions. There should also be developers not borrowed from an agency. I would always involve architects – people who know the bank by heart and can tell you how or if a shiny new technology could be applied in the real context of that bank. Diversity is key to enabling creativity. Bring people with different professional and cultural backgrounds together; take people from other industries, younger and older generations, and veterans from within the organization.
Just because “innovation” is young and hip, your lab should not be exclusively a collection of young hipsters. Managing diversity and people with deep expertise is never a simple task. Whoever will manage the labs will need to nurture, not stifle the diversity, enable, not suppress critical thinking, and manage deep expertise for a common collective purpose.
Methodology
An innovation lab is a Noah’s ark of professions and specialisms. Each profession has its own methodology and language and each individual can in principal create an end-to-end solution to a problem within the confines of their specialism. However, the premise of an innovation lab hinges on the collaboration process of a cross-section of expertise. Therefore, a common “language” must be developed to allow a service designer, who has never been exposed to Financial Services, to communicate with the banking decision-makers or architects. To be clear, it is very difficult to coalesce skills and people with very different professional backgrounds – but this is precisely the combination needed for “real” innovation to happen. It is imperative, that the different voices and ideas are not silenced or suffocated. Thus, active and paramount effort must be placed and maintained in creating a communal “language” and, in turn, methodology. Another key dimension of diversity is melding the ways of working in the start-ups and enterprise environments. The lab exists within the remand of the enterprise but has to deliver like a start-up. Therefore, it is acutely important that the lab methodology enables both “ways of working”.
If you choose Design Thinking, Lean or Agile Methods, or if you develop your own method – train the whole team. Do not let them play by the ear. Simply put, through the common methodology, you initiate interactions between specialisms that are unlikely to happen within the larger organization, and allow them to feed off each other’s energy and ideas.
Resources
Is the innovation function a physical space, or can innovation happen through virtual collaboration?
I have seen both work. People can simply use the resources of the organization available for normal business (rooms, technology, and processes). There is no definite need for that shiny space, with coloured modern furniture. However, most financial services labs now have dedicated physical spaces,2 some of them located with the rest of the business, and some in global tech centres. There is no “best” choice here, however there are implications. A remote location might allow the lab to develop new ways of thinking, away from the restrictions of the organization. This positive aspect can, however, be negated afterwards when the lab wants to feed back their findings. They can be perceived as out of touch with the organization, or they simply might not have the means to forge the necessary relationships with the key internal stakeholders who would be affected by their findings and need to take a decision about their innovation proposals.
What makes the actual difference to the output of a lab is what type of resources they have access to. Ideally, a lab would have its own infrastructure and tools. They would need collaboration tools, which enable them to communicate safely with external organizations that are very often involved in the idea development. The lab would need access to platforms where they can securely store and analyse data. Some labs developed a mini-bank stack, to which projects connect when needed and thus the experiments are not lost, but rather they build on each other.
Access to data is essential, as the collaboration with technologists from within the bank in understanding how various legacy systems work is crucial. Ignoring the needs for a technical infrastructure for innovation limits considerably the scope of work and success of a lab. The results of lacking an IT lab infrastructure can be unambitious proposals which undermine the desired innovation role of the lab.
Governance
“Innovation governance” is much misunderstood, by people from both inside and outside the banking world. Outsiders often look puzzled. “What is it to govern here?” (see the following Figure). This shows, however, a lack of understanding of how a bank works. As a heavily regulated industry, needing to operate 24/7 without fault, while dealing with highly sensitive data, banks function according to strictly governed processes and rules. Insiders and especially the guardians of governance would say on the other hand that everybody, including the innovation function, would need to respect the same rules as the rest of the bank. This is not true for many reasons. Innovation projects have a very different purpose and lifecycle than the business-as-usual projects: they might not use live client data; most often they do not connect to the productive infrastructure or do not have a chance of “going live” in their respective set-up.
Most of the bank’s governing rules have evolved over the years from the era of a paper-based business and nine-to-five opening hours, before the cloud or cyber-security threats existed. Financial institutions are now a mixture of old and new, trying to cover all aspects of risks. They were, however, not defined for the case where somebody in the bank wants to experiment a bit, connect and combine technologies, or use client data for live testing.
Figure: Author’s Twitter feed
Source: Twitter Feed from Private Twitter account from the Author and a contact, 23 June 2015
If you want to repetitively but rapidly set up proofs of concept which use a new technology, real data, and are tested by bank clients, the rules of such engagements need to be formally defined. It is not “blank sheet” governance as some imagine, which allows experimentation within the bank, but precisely the opposite. The governance should contain a clear definition of what the innovation function needs to do in order to have access to resources and what experts and governing bodies it needs to consult in order to make sure the data is not compromised and large risks are not created through experimentation.
Innovation “Consumption”
While in the pharmaceutical, technology, and energy industries R&D and innovation functions are by definition at the heart of their competitive edge, financial services have neither the culture nor the experience of setting up innovation functions and absorbing their products. There are countless stories of missed opportunities, too painful to hear: Xerox not knowing what to do with Alto, IBM letting go of the SAP founders … the list goes on. This is why I think right now it is more important than ever for the financial sector to genuinely learn how to incorporate innovation, otherwise the future will slip straight through their fingers.
What outputs does one expect to see from the bank’s innovation function?
If a bank sets up a lab with a mandate for disruptive innovation focused on the use of data with big data technology, one would expect in a certain timeframe to clarify some real opportunities and choices of technologies which the bank will follow up on, given its expressed view that the bank will create business value out of data. If, however, the innovation function does not have a clear mandate, but delivers experiments in response to a varied set of business questions, the output would be just that: a set of answers to those questions only. It is thus very important to align the way the innovation lab functions with the type of output the bank expects to get.
Most of the outputs from a typical bank innovation lab could be included in one of the categories below:
- New feature(s) of an existing product and/or platform (e.g. web, mobile)
- New product
- Identification of new technology or combination of technologies for a specific use case
- Improved Customer Experience (CX) journey for a particular product or channel
- Industry trends
- Strategy reports
- FinTech scouting and news
- New business models.
There are many ways, of course, to measure the success of an innovation lab. In my view, that success is by no means represented by the delivery of many experiments, but rather by the delivery of the relevant information to the relevant people in the organization in such a way that enables them to take decisions, adopt the solution proposed, or learn from the tests performed in the lab. Without enabling the handshake between the innovation lab and the larger organization, the organization as a whole will waste resources and, more importantly, lose valuable opportunities.
Can the handshakes between the lab and the larger organization be predefined?
I strongly believe they should. In some cases the lab could search a while for the relevant stakeholders for their particular findings. However, in most cases, depending on the type of output, the clients, the audience, and the mechanisms to promote and distribute the innovation can be predetermined. The following Figure gives some examples of how typical lab outputs need to be handed-off in order to be converted into genuine action.
Figure: From output to action
So, you still think an innovation lab is the answer?
My advice:
- It is not one lab but many labs – set up focused labs, but also allow free experimentation in the organization.
- Innovation governance is not a “blank sheet” as many believe, but a clear and simple framework which allows the lab to function creatively and have rapid access to resources (people, infrastructure, data, etc.) in a highly regulated world, which functions at a different tempo. Make sure you have a framework in place from the beginning and keep it updated and relevant.
- Find, retain, and nurture people knowledgeable and passionate about their field of expertise, who are not put off by repeated trial and error and problem reframing, but who, on the other hand, thrive on challenges. Nurture them. Find that leader who loves the “nerds” and knows how to create the environment which allows them to work at their best.
- Diversity creates fertile ground for creativity – do not go for a lab staffed only with young, white, male hipsters who all know “agile” and “Ruby on Rails”. Do not ignore the hard technical skills, or you end up with too much PowerPoint material. Do not forget innovation needs must be fed back into the organization and somebody needs to speak the language of the organization in order to be able to advocate for the required changes.
- Do not focus only on the tip of the iceberg. Innovation in banking focuses very much at the moment on the visible part of banking – a new feature in the app, on the web, or a brightly coloured branch with modern furniture. If you assess the content of most of the FinTech conferences around the world, the ideas presented attack the visible business model or the presentation layer of the banking world. For those who understand how a bank works, this is just the tip of the iceberg. Where is innovation in Assets & Liability Management, or Treasury, or even Regulatory Reporting? All these functions continue to be delivered in silos and in the “old ways”.
- Changes in the deep layers of the bank would have a massive impact in the way a bank functions and would surface immediately in better CX, better products and services. What sort of lab allows experimentation in the core of the bank? How can we allow for experimentation of the incredibly powerful combination of hardware and software, which transform and disrupt all industries? This is the type of change I strongly believe in and I hope to see and contribute to in the years to come.
The ultimate “innovation lab” in my view would deliver an in-house full-scale “challenger bank”. With the budget of yet another massive transformation programme, instead of trying to add a layer of polish to systems on life support, the banks have the option to build their own challenger banks. The customer in search of a better proposition would, as before, migrate. But at least now, they will be able to migrate inside your bank.