Two innovation problems for Finance
When we think about the attitude of Finance towards innovation, there are two key questions:
- What should our attitude be towards business innovation? And,
- What should our attitude be towards internal innovation within Finance?
It’s going to take me two posts to deal with these questions.
But, before I kick off let me be honest about my thinking about innovation and Finance.
I approach innovation, whether in business or Finance, with a combination of scepticism and mind-boggled wonder.
I am still staggered when I think of the rate of change over my working life. The internet, mobile communication, digital music and photography, to name but a few. Life has been transformed in 50 years or less.
And in order to achieve that, brave entrepreneurs – the likes of Bill Gates, Steve Jobs, Mark Zuckerberg – had to take risks with their new inventions.
And there have been hard lessons for businesses that failed to adapt quickly. Just think of Blockbuster Video. They could have bought Netflix for $50m in 2000. Instead, they buried their head in the sand and continued to sting customers with late fees, and went out of business ten years later. In the meantime, Netflix has grown to be worth almost $30bn.
On the other hand, I can sometimes be cynical and see big software vendors (ok, in the Finance space, the likes of Oracle, SAP and IBM) as trying to take most of the profit from an invention, without leaving much for the businesses they claim to serve. There are technologies out there that can help businesses, but they are made so expensive that the business cases are marginal unless the customer has scale.
It sometimes feels like far from being the technological vanguard, taking risks and forging ahead, the big tech players are just as risk averse as their industrial predecessors. Pricing high to store up cash reserves to insure against a product that might fail, attempting to mitigate risk by locking customers into contracts, developing licence models that only serve themselves, and steering customers towards products that they don’t perceive a need for.
I may be completely wrong. One thing is clear, though. We have to, as Finance professionals, get clearer in our thinking about innovation. So, what should our approach be?
Firstly, let’s ask, why innovate? Various people tell us that innovation is imperative.
And this is where business innovation is slightly different to our internal innovation.
Internally, surely, it’s improvement that is imperative, not necessarily innovation. If we choose to improve without introducing something new, what’s wrong with that? We’ll think more about that next time.
As part of business strategy, however, the situation is different. The focus is on how our business can improve things for our customers. If we can clearly improve the lives of our customers, they will buy it.
Innovations such as online banking and online grocery shopping came about because somebody thought, “how can we use this new invention (the internet) to improve our service to our customers, to give them a better experience?” Banks and supermarkets were prepared to put their traditional branch and shop models at risk to deliver a better customer experience.
The reason why – being even more cynical and controversial – Blockbuster didn’t want Netflix was, arguably, because they weren’t interested in improving their service to customers. They simply wanted to make more money out of them. They weren’t prepared to risk their physical shop model by offering customers something better.
Innovation, serving new and better solutions to our customers, must be a part of the way we think in business strategy. If we don’t do it, our competitors will.
The place of Finance in business innovation
So, how can Finance support innovation as a business strategy?
Here are a few thoughts:
First, as far as business resources permit, we must allow there to be research into new technology and new thinking, and into competitor activity. This may be apparently unproductive for long periods of time, as people sift through new ideas, talk to customers, talk to inventors, app developers, technologists, attend seminars and trade shows, etc. The important thing is that those people have a purpose and a clear deliverable – to identify new things that could benefit our customers. During strategy discussions, their ideas should be entertained with an open mind.
Second, we must be careful not to stomp out innovations too quickly on the basis that “the business case doesn’t stack up”. The business case must be based on fair scenario comparisons. Something that radically improves customer experience may not bring in more money, significantly increase sales, or significantly reduce our costs. Compared to today’s P&L the innovation may look detrimental. I’m pretty sure that online banking may have looked that way for the pioneers.
The fair comparison is against the “what if we don’t do it” scenario. That’s a different ball game. We then need to assess whether it’s something that is so attractive to customers that a new market entrant or competitor will offer it, and attract customers away. Perhaps there are already new entrants (e.g. Netflix, LoveFilm). Perhaps competitors are already starting to do it. Can we afford to be let our competitors do a better job of serving our customers?
Third, control the risk. Sometimes where innovation is a big thing, there can be a kind of recklessness. Recklessness is just taking too much risk, or taking risks that endanger the survival of the business, rather than just its short term performance.
The thing about risk is that we want to be conscious of the risks before we take them. Recklessness is not just taking too much risk, but disregarding any consideration of risk.
So, where we have an innovative proposal, we need to ensure that we have set parameters for risk. How much money can we stand to lose? How much money can we put at stake for the potential return?
The key thing here is the stance – risk management is not there to eliminate all risk, but to ensure that the risks of activities and ventures are in keeping with the potential reward. You probably wouldn’t sit in Blondini’s wheelbarrow on the tightrope across Niagara Falls for the promise of a bottle of Bud at the other side! But would you do it for a million dollars? That’s the kind of analysis that risk management is all about.
We don’t want the business to take too much risk, but we do want it to make more money. What we’re trying to do is help it to maximise the return without taking too much risk. The reason I say it’s all about stance, is that it’s kind of the difference between a positive and negative mindset – focus on the return vs focus on the risk. Theoretically, the aim is the same. Practically, it changes your thinking.
Fourth, give options. This point follows on from risk management. There are a number of risk mitigation options that don’t involve saying a flat, ‘no’! Prototyping, market testing, customer surveying, piloting, etc. These are all ways of reducing risk and uncertainty. If something is innovative, it probably hasn’t been done before. So, there probably isn’t a huge amount of information to go on to assess the amount of risk, or even the potential return. Committing money to research, small scale piloting or testing, can therefore significantly reduce risk, through eliminating areas of uncertainty and allowing real customers to help refine the potential offering.
To sum up, innovation is double-edged for Finance. In this article, I’ve focused on business strategy, and I’ve shared a few ideas as to how we can support the business in gaining competitive advantage through offering innovative solutions for customers.
If you’re interested in some of my other thinking on business change, see: