Trade Secrets and Open Innovation

If you're a bank, what is the first position of your management when you suggest you should license your patents, share your underutilised trade secrets, and investigate the possibilities of collaboration with your competitors?

You'll probably find you run up against a big, fat, wall. It is likely the same wall you ran into when you tried to deploy social media. The same wall, in fact, that exists between each business unit of your institution, and between the work-groups inside each business unit.

I am put in mind of this as I write a piece on Open Innovation for Future-proofing. Now, in case you've not heard of this, it's the idea that if you have unused intellectual property or uniqueness, you are best served by licensing that to competitors who might make use of it, rather than let it sit idle. And, in reverse, if competitors have something of value  you need, that some arrangement is executed that enables you to get it.

The underlying principal is that everyone knows practically everything about everyone. In such an environment, key uniqueness is protected either legally or because the capabilities are hard to replicate. Everything else is transferable and up for grabs.

Building hard to replicate capabilities is, of course, the central thing that defines competitive advantage anyway. If they can't be easily copied, you don't really care who knows about them.

Open Innovation is the current de-rigor fashionable business model amongst innovator in lots of industries. That's especially true in industries where the products aren't very differentiated like FMCG. And, of course, in industries where the products are very differentiated, like aerospace.

We could never do this in banking, of course. Our protections are still medieval in nature: we rely on trade secrets. Everything is one, even the unique capabilities that would be hard for anyone to replicate.

What are the signs of over reliance on trade secrets in banking?

Constant vetting of external communications, no matter how insignificant, by teams set up specifically for this purpose.

Nervousness when it comes to employees participating in conference pro grammes.

Elimination of collaboration technologies, or a failure to provision them in the first place.

And, of course, outright panic at the idea of staff using social media externally.

Now all this is a cultural thing, and there are signs of change in many banks I talk to. Let's face it, my own institution allows me to have this blog. You'll note we are careful of branding, and also to make sure that any statements I make here are my own, and not reflective of the views of my institution as a whole. But I doubt even a few years ago such a blog would be possible from a bank employee.

So, the pace of change is slow, but it is coming.

My point, though, is that whilst other industries are achieving synergies that can create “man on the moon” type projects, bankers are stuck with the glacial progress that results when you have to do everything yourself.

Institutions have a lot of man-on-the-moon opportunities. One is addressing customer-bank hate. Another is coming to terms with all these non-bank competitors. Dealing with global financial stability. Fixing markets in the absence of decent global regulation. Or how about using banking to alleviate poverty?

We could do these things, but no one bank can do it alone.

Reliance on trade-secrets makes each bank an island. It means that the really big, really significant innovations can come only from the largest players on Earth, who can afford to fund the work required. With the activity going on in the financial services sector at present, it is swiftly coming down to a handful of institutions with such resources.

Here is one thing I've noticed, though. Many institutions have a groundswell which is breaking down such silos anyway. There is this new generation of employees who are simply not prepared to put up with artificial barriers that prevent them from being the best they can be. They'll talk to each other – even about trade secrets – no matter what you do.

They're the ones who want openness as a first principal. They'll have it, no matter what management thinks. And with it will come the end of the trade secret as a source of competitive advantage for banks, if it ever was in the first place.

What then? Nothing all that innovative, in fact. Institutions will simply have to focus on building hard to replicate uniqueness that lasts in the market. But because that very, very hard for banks – who have undifferentiated products in the first place – it will require serious innovation to pull off.

The lucky institutions will be those that have made appropriate investments to build out their innovation capabilities in time.

9 Responses to“Trade Secrets and Open Innovation”

  1. November 5, 2008 at 8:00 pm #

    “It means that the really big, really significant innovations can come only from the largest players on Earth, who can afford to fund the work required.”
    I’m not sure I understand this part James. BT didn’t invent Skype, Citibank didn’t invent Paypal etc etc.

  2. November 6, 2008 at 12:42 pm #

    @Dave: and airbus didn’t invent the airplane. But they needed to collaborate with a large number of other innovators before they could make the a380. It was too big to do alone.
    I guess my point is that big, systemic problems – as opposed to small innovations which are disruptive and grow over time – may not be ammenable to solution from banks in isolation.
    Disruptions, on the other hand, are obviously possible from lone innovators.

  3. November 6, 2008 at 4:51 pm #

    So are you proposing some some sort of barcampbank but one that only representatives from big banks are allowed to attend? If so count me in. 😉
    I had a conversation about this with someone from Visa on Tuesday…he wanted some sort of future of banking outlook in a similar vein to the IBM global technology outlook. I said that was a good idea but getting all the banks together to discuss such a thing would be a fun task.

  4. November 6, 2008 at 6:32 pm #

    Our experiences in the Eclipse community is that open source software development helps break down the barriers between organizations and drives a culture of open innovation.
    I agree banks are slow in this regard but I see things are changing. We are actually organizing an Eclipse Banking Day in NYC that features different banks talking about what they are doing with Eclipse. The first step is to get people talking and then look for areas of collaboration.
    Things are changing and I think the banking community can learn a lot about collaboration from the open source community.

  5. November 10, 2008 at 4:29 am #

    RE: “Reliance on trade-secrets makes each bank an island”
    I agree with that but not with the “the really big, really significant innovations can come only from the largest players on Earth, who can afford to fund the work required” part.
    What about innovation and disruption from large banks aligning with small players, such as (one example) Monitise who are doing things with mobile and ATM technology that banks could have done by themselves.

  6. November 11, 2008 at 4:41 am #

    @Colin: well yes, but isn’t that actually a case of Open Innovation? On the other hand, by own institution (who has partnered with Monetise) was on the point of doing everything itself on more than one occasion.

  7. January 1, 2009 at 11:15 pm #

    Hi James
    Banks are perhaps less unique than they like to think they are. And they have no more (and no fewer) issues with capabilities (whether taken from a value, rareness, imitability or organisation perspective) than most other industries. In fact in my 20 years in business, all of the industries I have worked in all say more of less the same. They are different. But they are not unique.
    All industries do however face similar innovation challenges. Banks perhaps more than most. I note that the 2008 Booz & Co survey on the Global Innovation 1000 didn’t contain a single bank in the top 20. And the 2008 BCG/Business Week survey of the Most Innovative Companies only contained a single one (Goldman Sachs).
    It is a mistake to think that a company, no matter how large, has enough of the right people to drive sustainable growth through innovation. For example, P&G with almost 10,000 researchers reckons that it only has around 20% of the required knowledge, skills and experience available to it internally and through existing partnersahips, to achieve its aggressive innovation goals. This is one of the reasons why it has developed its Connect & Develop programme to reach out to innovative thinkers outside the company, why it participates in open innovation communities like Innocentive to reach out to innovative scientists and why it developed its Tremors programme to reach out to and understand its customers better. P&G has reputedly spend more than US$ 1 BILLION on Tremors alone since 2001. And don’t think for a minute that P&G isn’t just as obsessive about IT protection as any bank.
    The key messages: There is no alternative to increased openness if you want to be an innovation leader, no matter how big you are. And many of the barriers to participation have already been solved by other companies in other industries.
    Graham Hill

  8. January 8, 2009 at 4:55 pm #

    Looking at a link on Alph Bingham’s ‘Innoblogger’ blog I came across Karim R. Lakhani’s paper at the Harvard Business School on ‘The Value of Openness in Scientific Problem Solving’.
    The paper shows how hard scientific problem that internal R&D could NOT solve were successfully solved by an open group of solvers.
    Is there really any alternative to some form of managed open innovation for hard business problems, even in banking? Unless you are happy to leave valuable innovations and their economic value on the table that is.
    Graham Hill

  9. January 11, 2009 at 1:23 pm #

    Regarding Graham Hill’s comment, see the refenrence from Daniel. I am looking forward to the book, hoping it gives some answers. The sample pages about “The Strategic Value of Growth and Innovation” sounds promising.

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