Special Edition: Is Innovation Falling Out Of Fashion (Again)?
Just under 20 years ago, Rosabeth Moss Kanter, writing about innovation in the Harvard Business Review, said something that has stuck with me for most of my professional career:
“Never a fad, but always in or out of fashion, innovation gets rediscovered as a growth enabler every half dozen years.”
There’s a lot to unpack in this small sentence - but it’s the “in or out of fashion” question that is stalking the halls in many large corporations today - especially in banking and the broader Financial Services market. Large banks have been cutting costs and reducing headcounts. In this environment, many innovation leaders that I know and have worked with are feeling justifiably nervous. Innovation teams have been cutting back the scope of their ambitions, and narrowing their focus to short-term metrics and less topics.
But I would argue that this is a mistake - just as Prof. Kanter wrote in 2006. The lessons from then (and earlier) are just as applicable today - because innovation is as much a social & leadership phenomenon as it is about technology.
Innovation outcomes cannot be switched on like a light bulb when it is needed, instead it requires an ongoing investment in underlying capability - it is the consequence of strong capabilities. Firms that understand this will continue to invest in building innovation capability - which is a mindset and a set of choices, in the same way that competitiveness is about strategic choices.
Why innovation matters now more than ever
“Innovation is inherently associated with change” - and in times of great uncertainty, as we find ourselves in today, innovations are both the products and the causes of change.
Joseph Schumpeter elegantly captured this concept in his writing about the link between innovation and the business cycle: “Innovation leads to a process of ‘creative destruction’, where new technologies and business models replace old ones, leading to long-term economic growth and development”.
We are living in one such period in history now, where multiple factors, ranging from technology to geopolitical shifts to economic turbulence and climate change are pulling organizations in many directions. Faced with greater uncertainty, it’s tempting for line executives to dial back innovation investment, and talk about focusing on core business and reducing risk.
But it’s been shown in many different studies over the past decade that firms that invest in innovation during downturns reap outsized returns over time:
The 50 most innovative companies in 2007 who continued to invest in innovation after the 2008 financial crisis “greatly outperformed the market as the economy recovered, delivering total shareholder returns that were 4% higher per year than the market from 2007 to 2012”
Separately, the most innovative global firms, the ‘innovative growers’ in research by McKinsey showed higher total shareholder returns (TSR) over a 10 year period from 2002-2022.
On the other side of the coin, firms that reduce innovation capability end up actually increasing the levels of risk they face. They make it more likely that they will be the ones disrupted by new competitors. “In this current era of competing priorities and endless disruption and uncertainty, we know that innovation remains a must-have, not just a nice-to-have”
The state of innovation in Financial Services today
Financial Services firms, including banks, insurers and asset managers have taken a variety of approaches to fostering innovation. These range from internal idea generation campaigns to working with external third parties as collaborators (e.g. fintech firms & BaaS platforms).
Over the past 20 years I have worked across all of these areas, from leading large internal innovation & new venture units, to building up a global fintech platform, to advising banks and large tech companies.
During this time I have seen the ebb and flow of innovation enthusiasm, and the cycle of approaches. Again, Prof. Kanter described this most eloquently: “Grand declarations about innovation are followed by mediocre execution that produces anemic results, and innovation groups are quietly disbanded in cost-cutting drives. Each managerial generation embarks on the same enthusiastic quest for the next new thing. And each generation faces the same vexing challenges—most of which stem from the tensions between protecting existing revenue streams critical to current success and supporting new concepts that may be crucial to future success.”
The same forces and behaviors can be seen today - innovation teams are under threat in many large Financial Services (FS) organizations. But just as we have seen large companies that continued to invest in innovation during downturns reaping outsized rewards later, so too will FS players who invest in building effective innovation capabilities today will be well positioned through the cycles.
Challenges and opportunities in Financial Services innovation
In our work with global banks and other FS players, and in collaboration with our partners at Innovation 360 Group, we have repeatedly seen four main challenge areas:
Not linking innovation strategy with overall corporate and business unit strategy;
Unclear mandate and oversight for innovation teams;
Poorly defined innovation processes & metrics; and
Lack of communication and training to create a common language & culture.
What we see above is backed up in other research, including the Most Innovative Companies in World Report (“MIC leaders”), compiled by Fast Company for the past four years (2020-23). Across the year, common features of MIC leaders included:
“65% … include innovation language in their mission, vision, or value statements—and in their reporting structures”
“63% … say one of their key tactics [for] innovation is by articulating innovation goals to the entire organization.”
“49%... say their CEOs are responsible for driving innovation—but this quickly spreads to the entire organization”
So what should FS innovation leaders do?
Sensing the prevailing winds are changing, with pressures to pursue projects with only short-term benefits (which are often not actually innovation), innovation leaders in FS need to:
Work to show that their innovation strategy is coherent - i.e. aligned with corporate and business line strategy
Reinforce understanding of the purpose & role of innovation within the context of overall strategy
Define, agree and align on innovation risk appetite
Based on the work above, ensure that there is a formal mandate for innovation, including defining measures of success;
Develop and socialize formal processes around innovation, including an intentional portfolio of innovation projects spanning all three innovation horizons.
Looking Forward
The problem is that while innovation is critical, many companies make classic mistakes in how they approach it, such as:
Rejecting opportunities that seem too small at first
Isolating innovation teams from the core business
Strangling innovations with the same rigid planning and budgeting as established businesses
Allowing a risk-averse, closed-minded culture to squash new ideas
To avoid these traps, companies need to take a disciplined approach to innovation as an ongoing process, not a fad. This includes: systematically looking for innovation opportunities; setting up the right structures and incentives to nurture promising ideas; and fostering a culture that embraces smart risk-taking and collaboration.
Together these are all part of building innovation capability, which will ultimately determine which financial services players are part of “building new technologies and business models” - and which fall by the wayside.
Best regards,
Principal, Ulysses Partners