The Indian banking industry is evolving rapidly, and is at the threshold of explosive growth. Changing customer needs, technology-enabled disruptive business models, and a progressive regulatory environment are driving fundamental shifts in the industry, fuelling innovation and forcing banks to reconsider their business strategies.
Banks are aware of looming threats: 80 per cent of global chief strategy officers recently surveyed believe their business models are at risk, and admit to worrying about new entrants with disruptive technologies. Leading companies prepare themselves by building innovation portfolios that go beyond products to include services, new business models and even business processes. These companies are better prepared to compete with or co-opt potential disruptions.
Indian banks, like institutions in other markets, resist fundamental change through innovation. Recent innovations by banks, such as lean mobile branches, solar-powered ATMs, and “tablet-based” banking do not really challenge the status quo; they simply improve existing customer access and convenience. Only time will tell if current pilots and in-market experiments will scale to become new business and profit models. To truly become more innovation-led, banks must embed innovation explicitly into their strategic and operational DNA.
Innovation in banks has proved to be a key element in promoting differentiated growth and return to shareholders. Companies in the top quartile of the McKinsey Global Innovator Index, defined through analysis of hundreds of companies worldwide, report up to 10 times more revenue growth and significantly higher total returns to shareholders over the long run than their competitors.
Despite this, incumbent banks globally struggle to innovate. As with many industries, the most disruptive innovations come from attackers.
PLACING INNOVATION AT THE HEART OF GROWTH
Companies rarely become innovation leaders by accident. Many executives believe that it takes at least two years before an innovation can generate measurable value. An innovation transformation is therefore a journey, not an event. This journey begins when the leadership places innovation at the heart of growth, and holds the organisation accountable for delivering it to achieve performance objectives. An important part of this process is defining the sort of transformation suitable for the organisation. The innovation approach can accordingly be either incremental, or breakthrough.
The incremental approach is observed when organisations believe in minimal risk or that innovation is not their most significant growth lever. Innovations usually include continuous improvement activities to expand current businesses to existing customers, through commercial model improvements, portfolio optimisations, efficiency agendas focused on short-term gains, etc. While this approach may be easiest to adopt in the short term, it rarely improves the long-term competitiveness of a business.
Financial institutions that face the threat of new technologies and business models need to take stronger action, namely a breakthrough approach where they invest in incubating growth options and build new routines and mechanisms such as new lifestyle-oriented product lines, new service delivery platforms, reinventing personal financial management services, and using big data advanced analytics. These types of innovation are less likely to cannibalise core businesses in the short term and can quickly be scaled up, if needed.
Both approaches require that the organisation ensures appropriate people systems, short launch and learn cycles, and resources allocated against pursuing the best opportunities. An innovative company must have three firm pillars to build on: a defined aspiration and strategy, actionable insights, and a mobilised organisation.
Defined aspiration and strategy: Our research indicates that executives who integrate innovation into their strategies are six times more likely to meet their financial objectives. Fifty per cent of executives believe successful innovation needs a leadership that is aligned with the aspiration and strategy. Innovation leaders make tough choices on where they want to invest and align resources accordingly. They also establish a performance system that explicitly links innovation to overall strategic planning and setting objectives.
Actionable insight: While all organisations have good ideas, most struggle to prioritise these for the highest returns. Our research clearly indicates that the best ideas come from the combination of unique customer, technology and business model insight. Leading innovators have robust approaches to uncovering the differentiated needs, wants and desires of their customers, looking at existing and emerging technological enablers and finding business models that reinforce the resulting value propositions. Financial institutions that have tools to surface new customer behaviours, monitor emerging technologies and craft new business models will be able to develop winning value propositions, and will become innovation leaders.
Mobilised organisation: A high-performing innovation system has strong mechanisms to recruit and develop the appropriate mix of people and processes that accelerate moving ideas to the market, a resource allocation method to invest in the best opportunities, and incentives to reward managers who take smart risks while pursuing innovation. However, many financial institutions focus much more on serving existing customers and are constrained by legacy IT systems that reinforce existing business models. This makes it hard to identify and pursue new/potential business opportunities. To overcome this dynamic, many companies create a dedicated innovation group or team. While this may add value, this tactic more often sidelines innovation as a “special” initiative, dulling its impact at scale. A truly mobilised organisation will encourage a shared understanding of the value of innovation, extensive cross-functional collaboration, rapid innovation development processes, and a culture that celebrates successful innovation while also tolerating failure in attempted innovation.
There are no shortcuts to creating an innovation company. Investing in the right building blocks to aspire, choose, discover, scale and mobilise is critical. Organisations that put in the effort and master the principles of innovation are well positioned to consistently outperform their peers, while others risk losing their competitive edge.
The above will be deliberated upon by the eminent speakers at the BANCON 2012 which is hosted by Bank of Maharashtra jointly with Indian Banks’ Association, scheduled for 24th & 25th November 20012 at Pune, Maharashtra.
Erik Roth is a partner in the Shanghai Office of McKinsey & Company, and leads McKinsey’s global Innovation practice.