In my last post Leaders, Learners and Laggards I talked of banking leaders who describe their approach to innovation as being a “fast follower, and how my typical retort is that they are half-right— most of them are definitely followers, but there usually isn’t anything fast about their approach.

This has spurred some great discussions on social media, including some comments from people who defended the fast follower approach as a sound strategy. So it appears some clarification is needed on my overarching point.

A fast follower approach in terms of making big public bets on new products is absolutely a proven strategy.

A Great Strategy When Well Executed

Apple is often cited as one of the world’s most innovative companies, but they are not known as a bleeding edge pioneer of new technologies. The Apple computer was not the first personal computer, the iPod was not the first digital music player, and the iPad was not the first tablet computer.The iPhone was not the first smartphone, but it controls 92% of the profits of the global smartphone market.

The Apple Watch is not the first smart watch either, as any Android fan will be quick to point out, but within the first quarter of its release it reduced Samsung’s global market share of smart watches from 74% down to 8%.

Within the first quarter of its release.

Within one year Apple became the second largest watch manufacturer in the world. (For way more detail on how Apple, Amazon, Google and Facebook are taking over the world, watch Scott Galloway’s breathless take from the DLD conference.)

The ‘first mover advantage’ theory established in the early days of high tech in the 1980s was pretty much dismantled by Peter Golder and Gerard Tellis at USC in 1993. They found the almost half of product pioneers failed, and even those that didn’t fail had lower average market share than later market entrants. Countless stories abound today of product pioneers being quickly supplanted by upstart rivals.

The Fast Follower strategy is viable, but the operative word is fast. At least in relative terms.

And that is what is missing from most financial institutions, who measure speed by the decade.

Where’s My Jetpack?

As a child of the 1960s, I was promised a jetpack and vacations on the moon. Those were scaled back to a hoverboard and a time-traveling DeLorean in the 1980s, but the future destination of Back to the Future has come and gone with no such improvements in my daily life.

But I do carry around in my pocket every day a the equivalent of a 1970s supercomputer, I regularly video chat with friends and colleagues all over the world on it, and I can now summon my self-driving car from my watch.

The Gartner Hype Curve is a useful construct to visualize how exaggerated expectations come down to earth in the short run. Some ideas die off, and others are iterated upon and adapted, and their lifespan is extended. Sometimes the passage of time can also help the market catch up to those that were initially ahead of their time.

Ideas don’t exist in a vacuum, they catch on (or not) in a society of humans through a fairly predictable pattern that Everett Rogers called the Diffusion of Innovation curve.

This bell curve shows how early or late segments of the population adopt new ideas. Innovators flock to new ideas, followed quickly by the Early Adopters. Over time some of these ideas are picked up by the Early Majority, followed by the Late Majority, and eventually even the Laggards.

Trailblazers, Traditionalists, and the Chasm Between

In 1993 Geoffrey Moore introduced to Rogers’ curve the concept of the ‘chasm’ that exists between the Innovators and Early Adopters and the rest of the segments on the curve. Left of the chasm, people live to explore new ideas, and they are willing to take a reasonable amount of risk in order to reap the benefits of being early. They are the first buyers of new products, the ones waiting in line overnight for the pride of owning version 1.0.

Right of the chasm is where phrases like “Nobody ever got fired for hiring IBM” come from. They want to take zero to very little risk, and they are willing to accept a relatively limited upside in exchange for this reduced risk.

These two broad groups— the left and right sides of the chasm— align closely with the groups I have highlighted before as Trailblazers and Traditionalists. Trailblazers want to explore the unknown and establish next practices, while Traditionalists want to master the known knowns and enforce best practices.

The picture becomes even clearer when you plot the two curves together. Ideas must cross the chasm to have commercial viability.

This highlights the challenges of truly being fast when you’re a follower.

The kinds of companies full of Trailblazers that come up with groundbreaking new ideas often do not have the very different skills of scaling up those ideas for mass market adoption. This goes a long way to explain why the first movers often fail to maintain commanding market share over the long run.

Likewise, mature organizations in mature industries full of Traditionalist employees, like, say, financial institutions, often don’t have the skills (or inclination) to develop and incubate new ideas. Hence the launch of new bank innovation teams and labs in recent years.

The Key to the Fast Follower Approach

The danger is in waiting too long so that the new idea— once groundbreaking and with the potential to set your institution apart from the pack— is now mainstream.

Before long, mainstream becomes table stakes. The longer you wait, the wider becomes the customer experience gap— the gap between what your customers have come to expect as a minimum, and what you actually provide them.

As Innosight’s Scott Anthony puts it in Harvard Business Review:

“But make sure that when you say that you want to be a fast follower you aren’t really saying, “Can’t I just go back to running my core business?” Too often people find that when it is a strategic imperative to respond, it is too late.”

So a fast follower approach can be a wise one, providing you’re actually fast enough to capture an idea on the upside of a growth curve.

Otherwise, it’s a riskier strategy than you realize.

Late last year I was asked by my good friend Jim Marous of The Financial Brand to contribute to his crowdsourced list of 2015 Digital Banking Trends and Predictions. My prediction was that we would see an increase in the current trend of banks investing in innovation. More newly-minted Chief Innovation Officers, and more establishments of new innovation teams, innovation labs and fintech venture funds.

I also offered the opportunity to provide my 2016 prediction 12 months ahead of schedule– and that is that half of these new innovation efforts would be mothballed for a cited “lack of clear ROI”.

Innovation is about more than whiteboards and minimum viable products, and most most banks are ill-equipped to move from ideation to actual implementation, and fewer still are prepared to truly address their internal cultural barriers and their own ‘business prevention departments’.

Traditionalists vs. Trailblazers

We have found in our research and our work with financial institutions of all sizes all over the globe that there are two major camps of employees– Traditionalists and Trailblazers— and most organizations fail to capitalize on their differences to get the best of both worlds.

Traditionalists are the old guard, and in far too many financial institutions, they are actually the only group; a single-party system of centralized planning and control. If you think about the kind of person who seeks a job in a financial institution, let alone one who stays in the industry a long time and takes on more responsibility over time, you are often thinking about a Traditionalist.

Traditionalists seek and strive for stability, security and predictability. They like to quantify the “known knowns”, reduce risk and variability, and methodically catalog and implement “best practices”. This is exactly the right way to run the lending and risk functions of a bank, and many Traditionalists came up through these departments over the course of their career. Most financial institutions still derive the majority of their earnings from loan spreads, and you have to make the right loan decisions pretty close to 99% of the time over the long run. The global financial crisis sparked in 2008 is a pretty good testament of what happens when you get that wrong.

Some financial institutions are taking the approach of giving Traditionalists new roles with the word ‘innovation’ in their title, and the result is typically an over-engineered top-down approach full of idea capture forms, complex filters and evaluation criteria, and committees full of more Traditionalists to ensure that nothing too new or unproven sees the light of  day. That would be too risky.

But asking people who are wired, hired and fired based on their abilities to identify, manage and avoid risks to take on the job of innovation is ironically a risky proposition in itself. Not the kind of cataclysmic, industry and macroeconomic-shaking risk of lowering lending standards in the name of increased loan production, but one that nonetheless can have equally dire consequences at an institutional and microeconomic level. Dying the slow painful death of irrelevancy is the risk of not taking risk in a world full of disruptors and innovators. Ask Kodak, Blockbuster and other poster children of this approach.

Enter the Trailblazers

Trailblazers are wired differently than Traditionalists. They seek to discover new knowledge and explore the unknowns, and they like to spend time outside their company and outside their industry. They like learning new things, and that comes from trying new things. They see “best practices” as myopic at times, leading to perfect execution of all the wrong things. Right tree, wrong forest. They prefer experimenting and testing things to establish “next practices”, and sometimes making “mistakes”. Or, to paraphrase Thomas Edison, not failing, just finding 10,000 ways that will not work on the path to finding a new solution.

The natural inclination is often to isolate these iconoclasts and firebrands in their own labs, if only for their own protection. And that’s not necessarily such a bad idea. Traditionalist organizations have very powerful antibodies that seek to kill any invading viruses that threaten to disrupt their homeostasis. Trailblazers need to be around like-minded innovators, and they need some amount of insulation to create and iterate in ways protected from those who would seek to overly neuter and homogenize their unique ideas.

But isolation is not the path to innovation, and a few creative people locked in lab is not sufficient to bring about real change. The best organizations put the right people on the right tasks at the right time.

Leaders, Learners and Laggards

 

The vast majority are Laggards, and while many mistakenly characterize themselves as fast followers, the sad reality is that they are typically only half right— ‘fast’ rarely comes in to play.

Next, we see a small but growing group of Learners. These are the organizations that know they need to do innovate, and often have pockets of innovation, but may need some help connecting disparate efforts and spreading them around the organization.

Last, a very small number of institutions are true innovation leaders. These are the rare few that have both broad and deep innovation efforts across approaches from incremental to radical, and seek to embed innovation throughout the organization. They also connect and collaborate with external ecosystems including customers, vendors and partners.

These are also the organizations that take the time to understand and harness the best of both Trailblazers and Traditionalists, and seek to develop a culture where each group can contribute meaningfully. The most innovative organizations in the world leverage the strengths and weaknesses both Traditionalists and Trailblazers, blending the necessary risk taking with the equally necessary risk management.

They balance experimentation with execution.

Read More

For more on how the most innovative organizations leverage Traditionalists and Trailblazers, read my interview in the MX Money Summit.

I often write and speak about the “Business Prevention Department” that lurks inside banks. Devoted to sniffing out and stamping out anything that looks “risky”, the Business Prevention Department is staffed with members committed to “protecting” their banks from those scary people who want to try unproven ideas.

As banks worldwide hurriedly launch accelerator programs, venture capital funds and internal innovation initiatives aimed at finding the next hot FinTech idea and separating themselves from the competition; here are five surefire tips from the Business Prevention Department to make sure those efforts fail.

1. Give Your Innovation Initiative No Power or Funding

One of the easiest and most common ways to make sure your innovation initiative goes absolutely nowhere is to staff it with junior-level people and make sure they can’t spend any real money. Senior people have real jobs devoted to protecting real products and revenue streams, and they can’t afford to be distracted by such folly.

Let the kids have some fun by meeting in the boardroom and playing around with the video-conferencing equipment, and have them present a PowerPoint to the board about every other quarter. Then you can teach them what it’s like in the real world when you grill them about all the ways their ideas won’t work and explain to them why you would never let them actually launch anything that could siphon business from any of your existing products.

2.   Staff It Only with Senior Executives

But what if one of your Senior Executive Vice President Vice Chairmen Chief Business Line Officers read a book or attended a conference somewhere about innovation and wants to get in on the fun? Then you should put ALL of your Senior Executive Vice President Vice Chairmen Chief Business Line Officers on the “innovation committee”.

The best part of this strategy is that you don’t have to do any additional work at all. You just label the last 20 minutes of your Executive Committee meeting “Innovation Committee Report” and talk about all of the things you normally talk about. Did you add a new fee to your checking account disclosures because you were behind in your fee income goal? YOU JUST INNOVATED! It’s just that easy.

One warning about this strategy though; under no circumstances should you involve anybody with a rank below Brigadier Admiral. They don’t really understand executive priorities, and they will unnecessarily bog things down with irrelevant distractions like “customer pain points” and “I was at this really cool Next Bank conference, and I heard…”

3.   Turn It Into a High-Tech Suggestion Box

Some innovation consultants will try to tell you that your innovation initiative should include diverse perspectives from all over your organization. Some will even claim such nonsense as “those closest to the customers should be empowered to come up with unique approaches”. I know you know better, but some of these hucksters are pretty tricky, and your CEO might fall for it. They might even sell your bank some fancy software to help connect your people and help them develop and communicate their ideas.

Don’t worry, there’s an easy solution to this.

Remember when you read that book on Excellence back in the 80’s and you decided to put a suggestion box in the employee cafeteria? What happened?

The first couple of months people eagerly dropped slips of paper into the slot, and then you and the rest of the leadership team painstakingly listed, categorized, and evaluated the ideas. Then you formed task-forces and subgroups to analyze, prioritize, re-evaluate, and stack rank the ideas, and then reported out the results in quarterly town hall style meetings.

They learned their lesson soon enough and stopped giving you suggestions then, and you can do it again now. You don’t even have to report back at all.

The deafening silence ought to do it.

4.   Expect Immediate Results

If someone is insisting on innovating, at least make sure that it pays off financially. No later than next quarter. Preferably this month.

Apply your usual ROI, ROE, ROA and Efficiency Ratio measures against every idea, no matter how early stage it may be. If it can’t be NPV-positive against a decent hurdle rate by the end of the year, kill it. Those creative types don’t really understand the real world of business, so it’s up to you to make sure they learn that this isn’t kindergarten art class.

5.   Lock Your Innovation Team In Their Own Silo

Let’s say an Innovation Watch has been issued for your area—this means that conditions are favorable for innovation, even though no actual innovation may be present. Maybe there has even been an official Innovation Warning; that means that innovation is imminent, or possibly even has been sighted touching down in the area.

Don’t panic.

You can isolate yourself and the rest of your bank from the damaging winds of change by locking the innovation team securely in their own silo. A windowless basement conference room is ideal, but even if your local innovation system has gathered enough strength to have it’s own brick-walled loft with jeans and T-shirt clad women and bearded men in hoodies, you can still ride out the storm.

What makes innovation dangerous is contact with people in your company who are open to trying new things, able and willing to fund early-stage experiments and open to exposing early prototypes to actual customers. With careful firewalling, stonewalling and sandbagging, you can rest assured that you will have once again protected your shareholders and customers from the untold risks of the unproven.

You’re welcome.