Make innovation fly
Why do innovation projects fail? One reason may be that executives have become disconnected from their organisation. Another is a lack of objectives. Don Ginsel, engineer-turned-banker-turned-CEO/founder of Holland Fintech, brings up McKinsey’s three-horizon model to dive into the details of success and failure. “Eventually, it boils down to one question: how does innovation contribute to future growth?”
“The key challenge for incumbents is their legacy, which limits the capacity, willingness, and wish to change. Man by nature is not prone to change. As human beings we are able to solve problems cleverly and adapt ourselves, but as soon as those problems have disappeared or do not manifest themselves, we will not change by ourselves. These are the laws of nature. By nature we fulfill our role according to life as it presents itself and only when life itself takes another course do we tend to become stressed and turn into creative creatures to give it a twist. So the biggest challenge for people is to grasp the necessity to change as change occurs in small incremental steps.”
Evangelists vs non-believers
“The rise of the Internet, the rise of blockchain and AI – every now and then we see outbursts emanating from new technology that are going to change the world as we know it. People will then start to move with enthusiasm and will talk about 'disruption'. Literally, there is one group of believers that embraces innovation and claims everything is about to change, while the other group says ‘change comes at a slow pace’. Both groups are wrong. One must find the way in between. This is the challenge for incumbents that have many vested interests that need to be taken into account and defended in times of turmoil.”
Clash between two cultures
“And then there is the desire to implement change in order to achieve innovation. If you have this wish, how do you succeed in empowering your organisation on this innovation journey? Usually this starts at the front-end at the customer stage, where there is usually a clear picture of customer needs and demands. Here we might see a gap between front-end and operations where there is perhaps much less customer focus. At the other side, there is the supervisor and compliance department who are very much focused on maintaining the status quo. Typically, the supervisor’s processes are not geared to change. Here we find the clash between two cultures, and this is one of the reasons why I started working for start-ups and ended up working on behalf of fintechs.”
Digital Lego
“Coming from a banking background myself, I found out some twenty years ago that technology was often perceived as a necessary evil. Software was not that sophisticated and there was no such thing as 'friction-free' customer experience or connectivity. This is the ‘dialectics of lead’ due to the fact that the financial world started digitising their products and processes relatively early on. This is where fintechs stepped in to claim their share of the value chain; better, faster, and cheaper.” Nowadays you can source all the components you need 'as-a-service', e.g. client onboarding, risk analysis, data processing, front-end, these are all available as separate components. This allows you to focus on a problem by building on the ‘digital Lego’ that others have been created for you previously. ‘Digital lego" is the word I use for this. That's what startups do and this is what makes me tick.”
Learn from the differences
“What start-ups are lacking is: working capital, regulatory expertise, and turnover. What they’re good at is focusing on two goals - the first being survival, and the second doing what the customer wants. Only when they start generating turnover will they survive, so they are 100% focused on solving the customer's problem in such a way that the customer is willing to pay for it. This involves a very high risk appetite, which is completely opposite to incumbents that often have limited growth potential and therefore need to focus on maintaining their status quo. The interesting thing here is to learn from the differences between startups and incumbents and use these to accelerate innovation within a company.”
‘Innovation virus’
“The next question is how to put the innovation agenda into practice. Obviously, this requires formulating the objective first. This sounds simple, but usually things tend to go wrong here. Once people have been infected with the ‘innovation virus’ they often forget asking the question: why are we doing this? No answer. This is due to the fact that executives have become disconnected. There are simply no business goals or KPIs attached to innovation. The question that should be asked is: how does innovation contribute to future growth? To illustrate this in innovation sessions, I usually apply McKinsey's horizon model to align innovation efforts with potential future challenges (see visual).”
‘Eight essentials’
“When applying the three-horizon model, it is key to use the portfolio approach, which includes ‘eight essentials of innovation performance’ (see box). When doing this, you need to have a spread of actions across the three horizons, because slowly the horizons will shift towards you in time. In addition, it is key to ensure that you have a sense of direction. ‘What is to come and what may change today?’ This is why you need to know which projects contribute to each of the horizons. Let’s suppose you allocate 40% of your innovation resources to developments that directly impact today’s business, 30% to improving the business of tomorrow (Horizon 2), and 30% to experimental projects in Horizon 3. Now you have plotted out your investment portfolio for innovation. The next thing is you want to make sure that the innovation portfolio provided value and this is exactly where the challenge lies.”
‘Cannibalise your business’
“Often, too early senior management will ask: what are the results of innovation? That’s understandable because the innovation agenda is one of the most complicated aspects of running a business. Patience pays off and you will need to agree on time frames on each innovation project to discuss the moment of a ‘go/no-go decision’ or reinvesting to achieve the innovation goals as they have been established. During this process, it is important to note that innovations can cannibalise one's own business. From a business perspective, launching products can possibly compete with other existing products. It is no secret that Philips condemned the blessings of LED-lights in favour of their own traditional light bulb. They only started embracing the innovative LED-light when they had secretly produced the best LED in the world. The strategy lesson learned here is: prepare to go to market with the next-generation product without closing down the old factory too early.”
Turkey for Christmas dinner
“From a cost perspective, customers may decide to switch and use another competitor’s platform. If this happens, the IT department is likely to say: “wait a minute, that was my job!” This is often the case in technology-driven situations where the IT department is needed to give their opinion about capacity. This resembles negotiating with a turkey about the Christmas dinner menu. It’s also about their job, their colleagues, their future. Executives must be very well aware of this possible resistance and tension. It is therefore wise to ask for a second opinion in order to be able to assess the choices that need to be made. You must also ensure that employees gain a clear perspective of what they can expect. The clearer their picture of a changing future, the more they be willing to be part of that future.”
Rewarded for innovation
“Last but not least, in general employees are rarely rewarded for successful innovation, because the KPI’s for success are either not or vaguely formulated in the objectives. And if the innovation project fails, employees will be reprimanded or worse. Innovation goals are the key to innovation success. Senior management must therefore consider innovation from an innovation portfolio perspective and acknowledge that innovation has an experimental character. If the innovation project is discontinued, it has not been a waste of money, but is part of the portfolio strategy. Once senior management is able to communicate this and the fact that employees will be rewarded for successful innovation, this will contribute to the willingness and eagerness for innovation within the organisation.”
Don Ginsel is the CEO/Founder of Holland Fintech and organiser of Amsterdam Fintech Week https://xfw.amsterdam, September 2020
Takeaways
Innovation goals are the key to innovation success.
The three-horizon model aligns innovation efforts with potential future challenges.
Be aware that innovation can cannibalise one's own business.
Senior management must ensure that employees gain a clear perspective and will be rewarded for innovation success.
McKinsey’s Horizons of Growth
The three-horizons framework provides a structure for companies to assess potential opportunities for growth without neglecting performance in the present. Horizon 1 represents those core businesses most readily identified with the company name and those that provide the greatest profits and cash flow. Here the focus is on improving performance to maximise the remaining value. Horizon 2 encompasses emerging opportunities, including rising entrepreneurial ventures likely to generate substantial profits in the future but that could require considerable investment. Horizon 3 contains ideas for profitable growth down the road — e.g. small ventures such as research projects, pilot programmes, or minority stakes in new businesses. Time should not be interpreted as a prompt for when to pay attention— now, later, or much later. Companies must manage businesses along all three horizons concurrently.’ Source: Enduring Ideas: The three horizons of growth, www.mckinsey.com, 1 December 2009.
Portfolio management: The eight essentials of innovation performance
Successful innovators demonstrate a clear advantage in portfolio management. McKinsey has found that over 80 percent of successful innovators have a well-understood portfolio management process in place to evaluate and prioritise projects. These companies begin by gaining transparency into what people are working on. They rigorously assess the expected value, timing, and risk of these initiatives. Every company should be able to understand its innovation portfolio and assess whether it is in line with growth requirements and risk tolerance.
The eight essentials of innovation performance are:
Aspire: Do you accept innovation-led growth as absolutely critical, and do you have cascaded targets that reflect this?
Choose: Do you invest in a coherent, time-risk balanced portfolio of initiatives that are resourced to win?
Discover: Do you have actionable and differentiated business, market, and technology insights that translate into winning value propositions?
Evolve: Do you create new business models that provide defensible, robust, and scalable profit sources?
Accelerate: Do you beat the competition with fast and effective development and launch of innovations?
Scale: Do you launch innovations in the relevant markets and segments at the right magnitude?
Extend: Do you win by creating and capitalising on external networks?
Mobilise: Are your people motivated, rewarded, and organised to repeatedly innovate?
Source: ‘The eight essentials of innovation performance’, McKinsey, 2013