Leading Research Ramesh Nair Arindam Chatterjee Innovation in Financial Services Embracing Customer-Centricity in Product and Service Innovation
Executive Summary s 2010 Global Innovation 1000 study indicates that a significant majority of senior executives believe innovation is critical to achieve strategic goals, yet few are satisfied with their current performance Traditionally, the financial services (FS) industry has been slow to innovate compared to many other industries due to compliance and regulatory obligations, dependence on large internal and external infrastructure, and an extensive focus on security Despite these limitations, FS organizations are trying to innovate, with varying degrees of success Driven by the need to become more customer-centric, the majority of FS organizations have started working on innovative products and services, enabled by customer insight At the same time, FS organizations have started adjusting their business models, but they seem to fall short when compared with true business model innovation in other industries Our Global Innovation 1000 study has identified three innovation strategies that are being adopted in the market: need seekers, market readers, and technology drivers FS organizations need to align their innovation strategy with their organizational culture Based on secondary research conducted for 16 FS organizations, we have identified several critical enablers that need to be in place and aligned with the chosen innovation strategy Once the innovation strategy is defined and enablers are identified, a set of actions must be undertaken to initiate and sustain an innovation culture From Change Management Graduates to The Boardroom http://www.booz.com/changemgmt1
Senior executives believe innovation is critical to achieving their strategic goals, yet few are satisfied with their current initiatives Importance of Innovation to Strategic Objectives Satisfaction with Current Innovation Initiatives Critical 65% Introduce More New Products Reduce Product Cost 2% 6% 27% Establish/Maintain Technology Leadership Develop Products Faster Improve Product Quality (Customer Value) Increase Engineering Efficiency Improve Product Quality (Defects) Increasing Importance Relatively Unimportant 0% Increase Use of Product Platforms Increase Partnering (Suppliers/Others) 0% 20% 40% 60% 80% Percentage of Respondents Highly Dissatisfied Level of Satisfaction Highly Satisfied Source: 2010 Global Innovation 1000 2
Financial services institutions understand the importance and value of innovation Value of Innovation Recent survey indicates that 57% of FS executives believe innovation has been extremely or very important to their ability to meet revenue targets 65% of executives believe innovation will be key for their competition to succeed A significant majority (67%) of FS executives believe that innovationrelated initiatives and investments will be important for meeting long-term performance targets 70% of FS executives indicated that innovation is one of the top three priorities for their organization Extremely Important 17% Very Important 40% Somewhat Important 29% Slightly Important 12% Not at All Important 4% Importance of Innovation to Meet Revenue Target for My Company Importance of Innovation to Meet Revenue Target for My Competitors Extremely Important 13% Very Important 52% Somewhat Important 28% Slightly Important 6% Not at All Important 1% Source: 2010 Global Innovation 1000 3
but innovation poses particular challenges for financial services institutions compared to most other industries Regulatory requirements, most recently imposed to counter the financial crisis, force FS organizations to spend significantly and to embrace a culture that focuses on compliance within existing processes and systems FS organizations dependence on large internal (e.g., trading systems) and external (e.g., transaction processing networks) infrastructure hinders speed-to-market of new products and services Eroding customer trust in financial institutions, coupled with concerns about privacy and security, has created an environment where innovation is perceived as risky and difficult Lack of organizational structure, processes, and governance hinders the ability to sustain an innovation culture 40% of FS institutions lack organizational mechanisms (e.g., innovation committee, dedicated funds) to facilitate innovation A large number of FS organizations lack formal processes to prioritize innovation initiatives and to allocate necessary resources from the support functions (e.g., IT and security) 4
Despite the barriers, FS organizations have been innovating along multiple dimensions with the focus on customers Product, Customer, and Service Dimensions for Innovation: Examples Customer- Centricity Product Barclays OnePulse card: Credit card that allows contactless payments; card contains a chip with risk management logic for secure transactions American Express Platinum card: Amex is leveraging social media to identify prospects and provide marketing offers for its platinum card HSBC Split Loan Mortgage: Customized mortgage product; customers can choose to fix a part of loan while other part remains variable SunTrust Mobile Banking: Mobile solution for ticketing, coupons, and secure money transfer Visa Buxx: Open loop prepaid card for teens; provides parental control and financial education to manage allowances Customer Bank of America s Small Business Online Community: Website for social collaboration among small business owners Wells Fargo s Planet Wholesale: A business tool that promotes cross-sell across the bank by providing customer insights to line managers Target Financial Services Take Charge of Education: An innovative loyalty program that allows customers to donate to their school of choice by making purchases with Target s privatelabel credit card Capital One Decision Support System: Capital One s innovative data warehouse and analytics platform for customer need assessment Service JPMorgan Chase s Yodlee: Innovative personal money management services for financial institutions State Farm s Pocket Agent: Mobile service that customers can use to take pictures at accident site and submit claims MasterCard s ATM Hunter: Mobile application for locating ATMs that accept MasterCard credit products Royal Bank of Scotland s MaxTrad: Global trade platform with automated purchase-to-pay and order-to-cash process for international trades U.S. Bank s In2Pay: Contactless mobile payment solution with security features to disable the device if the phone is stolen 5
FS organizations have also started adjusting their business models, but evidence of true business model innovation is limited Financial Services Business Model Innovation FS institutions in retail and investment banking, asset management, and insurance consider business model innovation to be growing in importance Organizations have started aligning business models with customer needs: Ameriprise Financial is bundling short-term and long-term investment products with insurance products to holistically address client needs Wells Fargo is extending free overdraft protection for checking accounts as a key differentiator Royal Bank of Scotland is bundling outsourced service connection to SWIFT for treasury products, thus reducing customer overhead However, compared to high-tech companies (e.g., Apple, Google, IBM), there has been limited transformational business model innovation in financial services High Value Added Low Goldman Sachs MasterCard JPMorgan Chase Visa Wells Fargo Bank of America Capital One American Express Incremental Highly successful organizations whose business model innovation has produced outstanding shareholder return 3M Apple Starbucks Google Procter & Gamble Siemens IBM Transformational Business Model Innovation 6
Our research has identified three distinct innovation strategies: need seekers, market readers, and technology drivers Three Innovation Strategies Need Seekers: Consistently strive to be first movers; have an embedded innovation culture; proactively engage customers, taking a market-back approach to determine needs and shape new innovations (e.g., Black & Decker, P&G) Market Readers: Adopt a second-mover strategy; focus on driving value through incremental change; determine new innovations market-back, although less proactive than need seekers (e.g., Walmart, Parker Hannifin) Technology Drivers: Drive innovation via technological achievement; leverage technology for both incremental and breakthrough change; focused on customers, although less directly than need seekers and market readers (e.g., 3M, Google) Incremental Change Fast Follower Technology- Forward Indirect Customer Insight Innovation Strategies Relative Positions on Strategic Elements Need Seekers Market Readers Technology Drivers Breakthrough Innovation First to Market Market-Back Direct Customer Insight Source: 2010 Global Innovation 1000 7
Our research further indicates that success with each innovation strategy requires specific enablers aligned to critical priorities Innovation Strategies & Key Enablers Innovation Strategy Critical Priorities Key Enablers 1 Facilitate research to develop innovative product/services Research capability to identify new product/services Need Seekers Empower employees to experiment with and market new concepts Customer analytics to anticipate emerging market needs Employee/team decision authority to test new concepts 2 Market Readers Establish an innovation culture to engage employees Understand opportunities to leverage innovation to refine product/services Innovation program to facilitate ideation process Leadership engagement to create innovation culture Customer insights integrated into product/service life cycles 3 Technology Drivers Evaluate new technologies continuously for new product/service opportunities Establish plug-and-play infrastructure to enable experimentation and proofof-concept development New technology evaluation processes Collaboration platforms and simplified vendor processes Technology platforms based on plug-and-play infrastructure 8
1 Need seekers need to invest in research, develop customer insights to anticipate future markets, and empower teams to tinker with ideas Critical Enablers for Need Seekers Use quantitative research to analyze market trends and potential innovation opportunities Research Capability to Identify New Product/Services Leverage experimental design to determine key differentiating features of product/services Create a collaborative research culture among business units Customer Analytics to Anticipate New Market Needs Collect input from customer interaction channels (e.g., customer-facing portal, social media), and mine it to improve customization and inform new product/service ideas Establish Web crawls and other analytic tools to glean customer insights Employee/Team Decision Authority to Test New Concepts Establish decision rights for portfolio and line managers to customize product/services and to test new concepts Define governance structure for ideation and go-to-market processes 9
2 Market readers need to focus on instilling an innovation culture in the organization and integrating customer input in ideation processes Critical Enablers for Market Readers Create an innovation program led by a lean, empowered team Innovation Program to Facilitate Ideation Process Establish a communication plan to create awareness of the importance of innovation Define decision rights for ideation processes, and identify funding sources Include innovation program in leadership agenda, and identify an executive sponsor Organizational Support and Structure for Innovation Culture Provide employee incentives for creating, developing, and collaborating on new ideas Create innovation awareness, and foster idea collaboration platforms for employees Voice of Customer to Refine Product/Services Leverage direct customer insight to understand product/service improvement opportunities Integrate input from customer interaction channels to product life-cycle processes Establish a market monitoring center of excellence to track market trends and competitor activities 10
3 Technology drivers need to focus on setting up the right technical platforms and lab environments for rapidly incubating new concepts Critical Enablers for Technology Drivers Allocate time for technical experts to ideate and explore new technologies in marketplace New Technology Evaluation Integrate new technologies into existing infrastructure for new product/service development Establish technology portfolio planning to identify reusability of technology solutions Collaboration Platforms and Simplified Vendor Processes Establish incentives for support groups (e.g., security, compliance) to collaborate with technology partners Create a culture that embraces failure, and encourage learning from failed initiatives Establish a partner network and simplified vendor processes to introduce new technologies Technology Platforms Based on Plug-and-Play Infrastructure Establish flexible technology architecture and platforms to facilitate new product/service and customer channel creation Enable proof-of-concept processes leveraging plug-and-play technology infrastructure to rapidly test and market new concepts 11
FS organizations can execute a few critical steps to formally launch, and then sustain, a value-delivering innovation program How to Get Started Assess organizational culture and core competencies to identify appropriate innovation strategy Align innovation strategy with business strategy, and ensure ongoing support from leadership Getting Organized Establish innovation governance based on the innovation strategy; market readers need a more formal governance structure than need seekers or technology drivers Set up critical enablers for implementing innovation strategy; for example, establishing an innovation program is critical for market readers to create awareness in the organization Sustaining Innovation Ensure continuous leadership engagement to foster innovation in the organization Include innovation in core leadership agenda, and establish innovation champions Gain consensus with leadership on processes to manage failures Establish clear employee incentives to innovate (e.g., links to evaluation processes, profit sharing) 12
Contact Information Atlanta Arindam Chatterjee Senior Associate +1-952-994-0980 arindam.chatterjee@booz.com Resource The 2010 Global Innovation 1000 (strategy+business, Winter 2010). www.booz.com/media/uploads/booz_global_innovation_1000_2010_ How_Top_Innovators_Keep_Winning.pdf Florham Park, NJ Ramesh Nair Partner +1-973-410-7673 ramesh.nair@booz.com 13
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