Getting good at breaking things

In a post over at BankWatch, Colin writes that banks should expect a round of disruptive innovation after present market turbulence settles. As he says, “there is always someone able to do it better and cheaper”.

Clayton Christensen would now argue, were he here on this blog, that as incumbent companies are unable to disrupt themselves, all this innovation will come from outside the walls of  traditional banks.

His arguments on that point are obviously cogent and well based in historical fact. And indeed, there are very few banking organisations that I know of that have done it. Maybe some marginal examples only.

However, I am beginning to wonder if the day when disruption can only come from outside are almost over.

I am seeing so many senior people in banks start to take the discipline of innovation seriously. They are hiring innovators and tasking them with doing things differently. And these innovators know all about the social systems that make disruption from the inside hard to do, and are taking steps to fix it.

I think markets are starting to notice.

Does your institution have an innovation function? If you don’t know or aren’t sure, there is almost certainly one, even if it isn’t all that visible. And they will be trying their hardest to break things.

That’s what disruptive innovation really is of course. Its where an existing, strategic, and successful business line goes into decline as something new permeates a particular market. The new thing  breaks the old. Now, naturally, those running the successful business don’t want the new thing to succeed. It is a threat. That’s why large companies can’t easily disrupt themselves.

But, as Colin pointed out, there is always someone able to do it better and cheaper. Who was it that said that “in banking, getting growth is getting harder?”

With all this attention innovation is getting, it might be that the iron rule of the existing P & L is coming to an end. What is the corporate dynamic that starts when the market begins to reward banks that are systematically disrupting themselves?

What behaviour will the CEO expect from P & L owners when getting the traditional level of growth in the short term is not enough and the market begins to look at longer term planning horizons?

And what will bank boards start approving when their share price is comparatively weak compared to their more innovative peers?

Here’s the answer: anything which has the potential long term to disrupt what is being done right now.

I predict a renewed focus on long term strategic planning, a willingness to wait for investments marginal in the scheme of today to mature, and a drought of professional innovators as those behind the curve scramble to do so something – anything – to catch up.

6 Responses to“Getting good at breaking things”

  1. July 21, 2008 at 3:26 pm #

    It is reassuring to note that there are Banks developing true innovative functions, however I sit on the side that says the big disruptions will come from outside. Having said that the innovation within Bank’s lays the right groundwork to be prepared, and will help them in how they respond, integrate, or acquire the innovations.

  2. July 22, 2008 at 8:45 am #

    James – I’m with Colin on this. I feel the banking sector doesn’t have the luxury of choice, post sub-prime. It’s a case of innovate or die.
    Traditionally, banks have been able to generate a healthy bottom line by astute investments and clever financial risk management which up to recently paid off. The environment for sustaining that has shifted – banking has had its own financial “global warming” problem and the only way now is through – brace yourself – differentiation.
    There. I’ve said it. I’ll put on my Nomex fireproof underwear because I’ll be burned at the stake for saying it.
    Although here in the UK, the financial sector is the biggest in terms of monetary value, it is only the 6th largest investor in R&D, investing less then 1% of its profit. But hey, that’s good because globally the figure is only 0.7% compared to the average global R&D spend of 13.4%.
    The financial sector also stands out by being the only area that does not rely on customer demand to decide product and service offerings. These aren’t opinions, they’re backed up by established statistics, so let’s just face it.
    With such a small internal commitment to innovation research, it would take a brave bank to throw money at internal sections where traditionally as you allude to, James, there’s not been much activity to disturb the dust around, sorry, disrupt, the status quo.
    What is more likely to happen, given the clear lack of faith in internal R&D that the funding bears witness to, is that management will bring in management consultants and high-level business strategists like Boose Allen and Deloite.
    They’ll doubtless point to the lack of commitment to social networking and then like marketing, where a typical campaign costs around £4 Million, the money will suddenly appear and be thrown to external parties to develop social networking channels to farm ideas.
    These channels, unencumbered by internal inertia and the “can’t do that” attitude, are far more likely to present ideas that will excite the managers at a time when they will be most receptive.
    Meanwhile the investment-starved internal innovation sections will be shaking their head wondering why their own managers never listened to them when they talked about such stuff.
    Proving prophets are never honoured in their own land!
    You can check my R&D information here:
    http://www.innovation.gov.uk/rd_scoreboard/?p=43

  3. July 22, 2008 at 11:23 am #

    Spot on post.
    “They are hiring innovators and tasking them with doing things differently”:
    although this seems like an obvious thing to do, in the past I have been shocked at the number of people responsible for “innovation” that are purely IT focused, rather focused on “doing things differently” such as inventing new disruptive business models, customer engagement techniques, more efficient internal operations etc.
    I’ve recently seen a turnaround in this area with innovation people being a lot more business focused (as they should be), while at the same time having good awareness of how to utilise technology in order to achieve these ends.

  4. July 22, 2008 at 2:48 pm #

    Hi James, having lead an internal innovation culture struggle in a Financial Services environment for the past 6 years with what is regarded by some (in Australia) as very successful, I don’t think having an innovation function per se equates to readiness for disruption from the inside. Its like cutting your own arm off and watching the blood pour out. I have seen so many ideas – great powerful and disruptive internal ideas that are futuristic but will eat away at our existing margins and core business models – but they remain on the shelf because we can’t do it to ourselves. Yet, if someone from outside should do it, as I predict they will, then we all go into damage control and defensive plays.
    This is the next challenge I am working on. To become truly strong, we should arrive at the maturity to try and break ourselves. Unfortunately, the best time to do that is in the fat years, not the lean ones! I think the fat years have been missed!

  5. July 23, 2008 at 1:15 pm #

    Excellent post. Here in the U.S., where I’ve been involved in financial services for many years, the banking industry is not known for dying their hair red and getting body piercings. And that’s the way disruptive innovation is often perceived.
    I think the moment a “chief innovator” is defined, their ability to affect sea change is immediately diminished. Their vision will have to be subordinated to the bottom line if they function as part of the senior management team. That’s a political realty in most large corporations; especially those who operate in a risk-adverse culture.
    It’s been my experience, that organizations who embrace innovation are those that have a clearly defined vision of their place in the market that is guided by a strong, long-term strategic business plan and a firm grasp on their industry.
    In years past, innovation became synonymous with technology which was correct (for a time). It was technology in the role of the new enabler and temporarily, it was king. Perhaps in some companies, it still is.
    I believe that lasting innovation lies in an organizations ability to anticipate and assimilate changes in their industry and their customers expectations. This does not require an innovation czar, but a true commitment to a long-term strategic plan that is defined at the business level and executed by the company’s internal stakeholders.
    What companies should be doing is reaching out to the tremendous resources available today with regards to thought leadership and carefully considering varying points of view as they plan their next steps.
    I’ll take commitment over innovation anytime.

  6. July 23, 2008 at 4:03 pm #

    +1 Patricia

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