Benchmarking Innovation Initiatives in Financial Services

From late September through the end of October, we interviewed innovation leaders at 15 firms within the financial services ecosystem to benchmark their innovation and incubation activities.

With input from InnoLead members, we developed a list of benchmarking questions; conducted phone and email interviews with leaders throughout September and October; and then compiled their responses into a single spreadsheet to make it easy to compare staffing, mandates, metrics, and other data points. We also summarized the five key takeaways from this benchmarking research in a short overview document.

We agreed to profile the organizations anonymously so the leaders of these initiatives would feel comfortable sharing more openly. The tabulated profiles are available in the spreadsheet, organized by type of firm and by longevity of their innovation group. All firms are headquartered in the US or EU.

This report was produced by InnoLead at the request of our members.

Our Top Five Takeaways

Common language, yet a diverse range of underlying activities and mandates: The innovation leaders with whom we spoke frequently used the terms “incubation” and “lab” to describe their innovation activities. But inside that linguistic packaging, they proceeded to detail many different kinds of activities (from API development to actually incubating new ventures) designed to deliver on a wide range of mandates (from core process improvement to transformational new growth business development).

But focus, and shared definitions, are essential. To the extent that the use of common terms like “incubation” and “lab” helps satisfy senior leadership expectations — and their enthusiasm for growth possibilities, if not the granular details — it may be pragmatic. But to the extent that using buzzy terminology leads to the creation of the wrong capabilities, or a “Swiss Army knife” mentality (good at many things, but excellent at none), it may lead to suboptimal outcomes.

Emphasis on core (H1) and adjacent (H2) activities: We were interested to learn that most groups prioritize H1 and H2 innovation, with H3 innovation a priority for relatively few — even prior to the coronavirus pandemic.

These H1 and H2 activities, designed to improve core business unit efficiency and/or develop new products or services for core business units, generally consume significantly fewer resources (people, time, and money). And not surprisingly, they often can create more measurable value than H3 innovation in the early years of an initiative.

While H3 innovation initiatives designed to build new truly transformative businesses have the potential to create much greater value, that potential is always challenged by the complexity and resource intensive nature of such initiatives. The poor “hit rate” for H3 innovation projects may help explain why the leaders with whom we spoke have decided to focus their efforts where generating a tangible return is more assured.

These findings are echoed in our “CxOs and Innovation” research, conducted in mid-2020, where we found that roughly half of all innovation efforts in all respondent firms (not just financial services) are focused on incremental/H1 projects, and that the resources devoted to transformational/H3 projects has been shrinking this year:

The formal incubation or lab group is a relatively recent phenomenon: Only one leader with whom we spoke reported that their incubation or lab group was well into its second decade of operation. A few other groups were established between five and 10 years ago. Most leaders described the formal creation (or re-constitution) of their groups as having taken place within the last five years.

This information about teams’ longevity generally reflects how awareness of design thinking, business model innovation, and the lean startup methodology began to accelerate roughly 10 years ago, and how digital transformation began to follow the same trajectory roughly five years ago.

Fairly consistent group staffing and financial allocation models: Our research revealed that most groups now take a fairly “lightweight” approach when it comes to human and financial resource allocation.

Team size, on average, is roughly 30 full-time core employees. Only one firm staffs their group with more than 100 full-time core employees (a US-based bank with 450 employees focused on innovation), and only two other firms staff their groups with between 50 and 100 full-time core employees. In all other cases, firms staff their groups with 30 or fewer full-time core employees.

These lightweight teams may lack the deep functional bench of heavyweight or matrixed teams, and the ability to execute on a wide range of true product development activities. But they are also often far more flexible, and therefore able to change course quickly as market and organizational needs dictate.

When it comes to financial resources, most groups rely on a hybrid funding model. All groups have a core operating budget that supports the headcount and activities required to support group function. Nearly all groups then have a mechanism in place to secure additional financial resources — as well as talent — as needed to support specific initiatives. As they must be linked to business cases (even nascent ones), it’s much easier to justify such ad hoc resource requests, rather than defending large, standing budgets.

Limited impact of the pandemic on priorities and resources: A few leaders with whom we spoke described how their groups temporarily re-focused efforts earlier in the year to address COVID-related challenges; most of those groups have largely resumed normal operations by now. Some leaders reported hiring freezes, but none reported budget reductions. Several leaders actually described seeing increased demand for their groups’ services this year — that included addressing those COVID challenges and capitalizing on “new normal” opportunities, such as the rise in remote/digital workplace operations or increased consumer reliance on online information and services.

Conclusion

Two insights from our research were particularly striking.

1. The importance of establishing a common language of key innovation concepts. First, our research underscored just how important it is for innovation leaders and their teams to establish a common language and set of definitions for innovation. For example, when McKinsey & Company described the “Three Horizons of Growth” model in 2009, it defined the horizons as follows:

At its highest level, the model created easy-to-say terms (“H1, H2, H3”), each defined by relatively simple purposes, to help senior executives and innovation leaders consider the scale and scope of innovation initiatives optimized to satisfy the growth needs of their individual organizations.

There are likely very few innovation leaders and executives overseeing innovation, however, that can define the horizons as originally presented in the table above from memory. Most people therefore define the horizons in the context of other innovation concepts with which they are familiar. In some cases — for example, defining H1 as continuous or incremental innovation, H2 as adjacency innovation and H3 as white space or transformation innovation — the link is reasonable.

In other cases, use of the terms can actually complicate an innovation team’s efforts to be successful. Some examples: defining H3 initiatives as always disruptively innovative, or as always leading to the development of standalone startups, or establishing a hard-and-fast rule that H3 initiatives cannot be expected to generate revenue in fewer than 5 years.

2. The broad commitment to “innovation capability pragmatism.” Our research also revealed many innovation leaders considering everything from their mandates to their resources to their activities through a very pragmatic lens.

As described earlier, it is common knowledge that it is very difficult to generate a significant, measurable, return on investment in H3 innovation initiatives. Even for closer-to-the-core initiatives, innovation ROI can be challenging to calculate.

While the transformative potential of H3 innovation initiatives captures the imagination and generates excitement about future growth opportunities, our research here suggests that innovation leaders largely no longer view such initiatives as a “bet-worthy” priority. Even at one global financial services firm we interviewed, which operates a wide range of venture capital and innovation programs, the leader with whom we spoke said that past efforts to launch separate new businesses “have been controversial and ineffective.” What has worked: building new offerings in partnership with the core.

Several innovation leaders referenced the adage that “keeping the ‘i’ (investment) in innovation groups small makes it easier to deliver an ‘r’ (return) on those investments” in our conversations. They described the practical challenge of delivering on H3 innovation promises, and how that informed their decisions to seek limited resources to back activities with much higher likelihood of both core business unit leader support and of generating a tangible, measurable ROI on a timeline that C-level executives care about.

In the end, to paraphrase another one of the innovation leaders with whom we spoke: Innovation leaders need to come to key stakeholder meetings with open minds and the ability to communicate carefully complicated concepts so everyone can understand them — and without giving anyone false hope about the potential of new technologies. Innovation leaders need to be humble, make clear that they are trying to solve a specific problem, and set clear expectations for where they are, where they are going, and what the most likely outcomes might be. Bring key stakeholders along for the ride to help develop their commitment. Arrogance has no place on a successful innovation team.

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