Overcome resistance and capture growth in the Financial Services Industry

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In this blog post we talk about receptivity to change in Financial Services and some thoughts on how to move forward. As we exit the COVID-19 crisis, the financial services ecosystem has a unique opportunity to transform itself.

Over the past few months, we have learned a lot about ourselves in the way we’ve been able to respond to external unplanned events. Our digital capabilities have been at the forefront due to the increase in the level of acceptance of digital and virtual interaction with our customers and their relative experience across business lines and geographies.  In some cases, we found the experience challenging, in other instances it was surprisingly easy.

Going forward, our customers and other stakeholders will be more receptive to change in how we engage with them and what we offer.  A new reality has emerged, where needs will have changed dramatically, while others will be more incremental.  We can embrace this opportunity by combining 21st tools with industry expertise to deliver products and services that exceed our customers’ expectations.

“Companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow do well after a <downturn>” HBR 2010

Dealing with uncertainty demands innovative ideas

Like many industries, financial services has been immersed in a challenging time and is now emerging into the post pandemic world. Our positioning, skills and tools for an enhanced digital reality have come under scrutiny.  COVID-19 has exacerbated issues that we have dealt with for some time including the nature and quality of our customers’ experience, the need for increasing efficiency, accelerating the move to digitization, and opti-channel and others.  It has also made us revisit considerations such as the utility of physical branches.

Combatting uncertainty demands innovative ideas.  Historically, FS organizations have been challenged by FinTechs and other upstarts, and have managed to survive, but not necessarily thrive. Innovation360 Group’s research suggests that the financial services industry lags many other sectors when it comes to its ability to adapt to change. This can be problematic in a time that demands change. Some key pain points have emerged as a result.

  • Innovative ideas are purchased externally and often not well integrated
  • Difficulties with speed to market
  • Too many initiatives result in traffic jams

An emphasis on the supposed risks of change complicates matters.  It drives innovation to a transactional level and leads organizations to seek the perceived lower risk of acquiring new ideas vs developing them in house.  Those that follow this model often collaborate with FinTechs and start-ups through various means: innovation fairs, competitions, and small seed investments, to identify prospects. This can be both good and bad – good, because the acquirers get access to new ideas which can add revenue, and bad because it tends to discourage the development of internal innovation capability, in particular radical innovation which, in our view, is a critical aspect of long term success. In addition, difficulties with integrating these acquisitions can reduce the realization of long-term value significantly. Perhaps the risk isn’t lower after all.

Recent discussions with industry players have underscored the issue of speed to market. Although FS organizations tend to be well-capitalized, they can be slow to deliver, and may have ineffective development processes and/or performance issues driven by offshore supply chains, etc.

Often agile development initiatives are not ‘agile’ at all. Instead, they represent more process than ‘pop’ because there are too many things on the go and traffic jams abound.

Readiness for Change?

Some interesting insights continue to emerge from a growing body of multi-industry research compiled by Innovation360 Group.  We have found a range of capabilities around the world as well as across industries and organizations and have made some specific observations about the implications of these findings for financial services below.

In comparison to almost all other industries, the financial services industry is one of the least supportive of change (we call it adaptability), especially on one key dimension – a supportive culture for innovation.

The results suggest weaknesses in the innovation ecosystem of financial services organizations, more so than other industries.  Evidence points to two areas in particular – capabilities surrounding radical innovation and the breadth of innovation culture.

The importance of radical innovation

Successful organizations have innovation portfolios that are comprised of several initiatives and fall into two distinct groups: incremental and radical innovation.

Incremental innovations concern an existing product, service, process, organization, or method whose performance has been significantly enhanced or upgraded. This can take two forms: For example, a simple product may be improved (in terms of improved performance or lower cost) through use of higher performance components or materials, or a complex product comprising a number of integrated technical subsystems may be improved by partial changes to one of the subsystems (Innovation Policy Platform).

Radical innovations involve the introduction of a product, process, or service with either unprecedented performance features or familiar features that offer significant improvements in performance or cost that transform existing markets or create new ones (Assink).

Why is this distinction important?  An important link exists between strategy, capability, and success – and this is highly correlated to the future financial performance of organizations that get it right.  There is clear research and evidence that radical innovators are far better at linking organizational strategy and capabilities than incremental innovators. Organizations with strong radical innovation capabilities are more likely to succeed in future business.

This reinforces our view that improving internal “radical” innovation capabilities would provide a significant lift to the financial results of financial services organizations.

The breadth of innovation culture

In a recent BLOG, we talked about the Horizons Model (https://innovation360.com/how-to-speed-up-your-new-product-development-process-by-30/) and the importance of each organization having a balanced portfolio of initiatives that are aligned with its strategy and capability and that it reflects three key horizons.

  • Horizon One (H1) representing your core business —a place of operational excellence and certainty.
  • Horizon Two (H2) your adjacent business arena where innovation is driven by new uses of existing technology and ideas.
  • Horizon Three (H3) your transformational business arena where totally new concepts are conceived and explored.

The results of our research suggest that financial services organizations need more balance and alignment across these horizons.  This would enable appropriate investments in the development of new ideas and the cascading of them from conceptual to practical products systematically while mitigating risks. Without this structure, innovation tends to be ad hoc and low performing in general.

In summary, results from almost 1,000 financial services companies align with our on the ground observations that many financial services organizations aspire to innovate, have a clear strategy, and organizational infrastructure in place to support it.  On the other hand, organizations report challenges with adapting to change, a lack of internal innovation capability and cultures that block innovation, especially when it involves more radical change across their innovation portfolio.

Addressing these gaps will enable significant performance improvement.

Why doesn’t change last?

Much of this relates to the lack of support and engagement of people.  48% of employees surveyed by Booz&Co in 2014 believed that critical capabilities are lacking to execute and sustain change.

In addition, our research shows culture, leadership, and capability of handling uncertainty as top drivers of resistance. Other reasons cited include scepticism due to past failed change efforts, lack of engagement in the change effort, unclear or misunderstood reasons for change, competing priorities, and unsupportive systems, processes, and incentives.

Innovation capability is also impacted by the level of cultural diversity or “personas”.  In short, the more diverse the thinking of your employee pool, the more successful your organization will be.

Other related observations include:

  • Changes to the business model driven by regulation are given enormous budgets in terms of money and resources, but results are disappointing even when predictable changes are considered.
  • Innovation efforts are often uncoordinated, occur without a set of innovation metrics and are implemented in a very unsupportive manner.
  • Leaders don’t believe there is any right answer to improving results.

Now is the time to act!

Challenges abound.

Many organizations rely on serendipity to foster innovation, or ad hoc, unstructured approaches.

Successful innovators engage all their stakeholders.  They take due consideration of the why, what, where, how and who of their innovation efforts.

They have well communicated, clear strategic objectives based on a shared language of innovation, rigorous ideation and selection mechanisms, a focus on initiatives that are aligned with strategic goals, an intentional allocation of resources and repeatable innovation governance, processes and metrics that engage all stakeholders.

These actions can all be taken in the financial services industry. Leaders embrace the opportunities this unique situation affords our industry. There is no better time to adopt the lessons learned from top innovators to grow and improve your market share.

In thinking about solutions, several important questions come to mind:

  • What is the structure of your business going forward? What is driving that?
  • Do you fully understand your customers’ needs, and importantly how they use your products in addition to the why?
  • Do you really know what your competitors are doing and what our clients need and want? How has this changed?
  • Are you agile enough to quickly respond to the market and in executing your innovation initiatives?
  • Do you collaborate well with all your stakeholders, and do external voices help you to get at big ideas?
  • Are you effective at adapting to and institutionalizing change?
  • Is the underlying composition of your team personas diverse enough to disable bias and “traditional” perspectives?

To grow and prosper in the new normal, consider four actions:

Strategize – develop a well-conceived and aligned agenda that accounts for evolving markets and needs

  • Introduce structure, metrics, tools, and a common language to support it
  • Focus on customer experience and other innovative ways of using technology to keep track with competitors (traditional and otherwise)
  • Take an “anthropologist’s” perspective – be clear on how your clients do and will use your products and services

Learn – understand your market better and identify and harvest opportunities

  • Shape a comprehensive innovation system that supports collaboration on new ideas across and beyond the organization
  • Understand your internal capability – do you have all the skills that you require to move forward?
  • Enhance internal innovation efforts by finding an internal team that demonstrates promise – i.e., “a pocket of innovation” – and encourage them
  • Reinforce an innovation culture and a diverse portfolio of innovation personas

Grow – increase the effectiveness of your execution

  • Build innovation ecosystems and the capabilities for execution
  • Start and continue innovation efforts with small experiments, transparency, open ideation and timely feedback loops
  • Enhance and support “runways” back into the organization to ensure success and the capture of returns, and celebrate

Govern – foster improved and powerful collaborations

  • Ensure effective collaboration, ideation, and product development processes including management tools to coordinate and execute the many channels of innovation within your organization
  • Instil appropriate organizational and governance structures – for example reducing levels and distributing accountability
  • Look for “pockets of goodness” – areas in your organization where performance truly stands out, find out why and replicate that

In conclusion

Our industry has a unique opportunity to transform itself.

We know what works and what does not and have learned a lot about ourselves over the past few months.

Post COVID-19 we expect our customers and other stakeholders will be more receptive to change and at the same time with new needs yet unmet.  This is an opportunity not to be missed.

Our challenge as an industry will involve developing a well-conceived and aligned agenda that accounts for evolving markets and needs, understanding markets better and identifying and harvesting opportunities, increasing the effectiveness of execution and fostering improved and powerful collaborations as we move to improve how we embrace change.

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