Why banks and insurers innovate so differently?

Why banks and insurers innovate so differently?

There are certain things you learn the first day at business school: all firms compete at some level with each other for revenues and to outperform their competitors, companies need to have a competitive advantage (and sure, there are various forms of coopetition). In today’s fluid, dynamic and highly uncertain competitive environment, businesses constantly need to prop up their game to keep up with the sudden changes we are now witnessing. The fundamental question, after all, in strategic management, is not why competitive advantage is so crucial but instead how to gain and sustain competitive advantage over time (Helfat et al. 2007; Teece 2009). Competitive advantage takes various forms, but something that has been stressed over and over again in the academic literature is the paramount importance of continuous innovation to achieve sustainable competitive advantage (Lengnick-Hall 1992; Lord, deBethizy & Wager 2005Afuah 2009Betz 2011; Dereli 2011; Weerawardena & Mavondo 2011Pisano 2015).

The wisdom of this maxim is best expressed by Dutch business executive and theorist Arie de Geus, who argued that “the ability to learn faster than your competitors may be the only sustainable competitive advantage.” Furthermore, Professor Stéphane Garelli (2006, p. 32) claims the following, “Firms compete for survival: to succeed, they have to adapt better and faster than competitors; to prosper, they must innovate; and if they do not perform well within their environment, they will disappear.” In our common talk, we tend to suppose all innovations more or less alike. As a long stream of research highlights, there is a wide variety of approaches to innovation, and in general, there is an overreaching consensus that innovation is characterized by its perceived newness (Garcia & Calatone 2002; Rogers 2003). One field of continuous interest in innovation management has been the need to conceptualize and decouple different forms of innovation from each other, and then to classify innovations by various ambiguous criteria to create a logical taxonomies of innovation (Chandy & Tellis 1998Coccia 2006; Slocum & Rubin 2008; Chandy & Prabhu 2011; Kotsemir, Abroskin & Meissner 2013).

It’s easy to understand that there are various typologies available but we tend to emphasize the general 2×2 matrix that highlights four types of innovation on an x-y axis where stands for the intentionality of the innovation and describes the dimension of radicalness.

In most cases when we talk about innovation we tend to refer to strategic innovation. Strategic innovations are all about “the strategy of breaking the rules,” and this occurs when “a company identifies gaps in the industry positioning map, decides to fill them, and the gaps grow to become the new mass market” (Markides 1997; see Hamel 1996; Hamel 1996; Markides 1999). There are various ways to conceptualize strategic innovations, but something that is often underestimated is the importance of change in different mental models of different actors to actualize these critical innovations (Jacobs & Heracleous 2005). Strategic innovations do not happen by accident.

A recent study carried out by Gartner, titled “Different Innovation Patterns Accelerate Digitalization in Insurance and Financial Services,” of almost 170 respondents in North America, Western Europe, and Asia/Pacific shows that there are “remarkable differences in innovation patterns between [financial services and insurers].” According to the study, financial services rely heavily on “the establishment of venture capital funds and investment in startups as foundational innovation objectives, while insurers promote innovation organically through employee engagement”, and the importance of visionary leadership is emphasized as a critical success factor for insurance rather than for financial services. In addition, insurers tend to collect most of the innovation ideas internally from the employees (IT employees, boards of directors, CEO, and business partners) and directly from the clients while financial services rely mainly on employees (especially IT, lines of business, business partners and sales/marketing) and especially peer organizations in their respective industry. See Figure 1 for more information.

Figure 1. Origin of Innovation Ideas Among Banks and Insurers (Source: Gartner)

Financial services and insurers struggle with a set of various challenges in developing and implementing innovation projects; while financial services refer, according to Gartner, to political or regulatory factors, organizational culture, and lack of or inadequate IT infrastructure, insurers’ problems are related to lack of funding, lack of talent, and political or regulatory forces. These issues are also reflected by the fact that “innovation leaders in financial services organizations have been more successful in turning ideas into POCs than their insurance peers.” Gartner’s Juergen Weiss and David Furlonger argue that this difference is explained by two mutually parallel issues, namely that “the innovation ideas in financial services organizations are of a better quality, and/or that financial services innovation has fewer barriers to overcome to bring their ideas to minimum viable product stage.” Maybe banks are better innovating than insurers but Capco’s Jeff Tijssen has nonetheless recently highlighted various reasons why banks find innovating so hard,

There are different forms to approach innovation as part of strategic management, but most of the literature focuses either on strategy or on innovation (so there is a gap regarding theorization and conceptualization). As Dany Jacobs (2014, p. 134) asserts: “In order to realize repeated successful innovation, there has to be a direct link between innovation and strategy. Innovation then is necessary to realize the strategic objectives of the organization.” There is no simple way to link strategy and innovation with one another but as Langdon Morris (2013) points out, “innovation plays in transforming the concepts of strategy into realities in the marketplace tells us that none of these companies could have succeeded without innovation.”

Gartner study highlights the fact that both banks and insurers “struggle to create strategic partnerships, best-in-class innovation capabilities, and resources, or enterprisewide directives for innovation.” Gartner study highlights several differences between these players regarding carrying out innovation, but something I found especially impressing was the stated objective of starting/improving co-innovation with customers. Innovation, after all, begins from envisioning the future state of affairs. This process begins with recognizing customers’ jobs to be done (Ulwick 2016Wunker, Tattman & Farber 2016). To conceive and build something new, there has to be some understanding what needs to be done.

There are various forms of strategy – business strategy, corporate strategy, marketing strategy, etc. – but the fundamental aim of strategy is to set down firm’s logic about how to compete, and it sets “the pattern or plan that integrates an organisation’s major goals, policies and action sequences into a cohesive whole.” (Quinn 1980; in John 1997, p. 176) For banks and insurers, there are various ways to break the old habits and find out new ways to emphasize the importance of innovation beyond plain vanilla productsservices or processes. By this, I mean that unstable, the organization in question has to understand that dynamic capabilities are closely tied with innovation capacity (Lidija & Robert 2014). In the end, innovation and strategy should aim at aligning organizational goals and objectives with those of its clients so that value creation can happen (see Voima & Grönroos 2012).

As Gartner study points out, both banks and insurers are well aware of the strategic significance of innovation as the importance of collaborating with customers, use of new technology to support innovation, and strong visionary business leadership is emphasized as critical ingredients for successful innovation strategy. [1] No, not all financial services or insurance executives are the same, but I argue that most C-suites have recognized at least some of the critical megatrends affecting the whole financial services ecosystem and they are somewhat aware of implications of the most prominent ongoing changes. Globally the industry is undergoing an uneven rotation to the new. As Gartner study points out, “banks and insurers considered the adoption of new technologies as an important ingredient for the success of their innovation strategies . . . , but we have found a few differences in the prioritization in importance of those technologies”.

It’s obvious that for banks and insurers patterns of innovation will differ, but incumbents are at least trying to transform their mindset from introvert innovation (“Innovation is done somewhere by somebody for some reason”) to more extrovert, collaborative capability to innovate (“Innovation is done together with other to alleviate and respond outside and inside pressures”). Gartner study doesn’t explicitly state that there is a cultural problem in the financial services industry as a whole, but it does state that “[c]orporate culture and the absence of strong leadership are highlighted by a significantly higher percentage of the financial services respondents as major inhibitors for their innovation strategy. We don’t believe that the challenge to overcome corporate inertia is fundamentally different in the insurance industry …”. But I think that there is a real problem, as Gartner study highlights, that “innovation did not receive enough mentions to be ranked among the top 10 strategic priorities”.

It’s not very innovative to partner with a bunch of random fintechs (almost every market actor wants to do that at some level), and state that this is what innovation looks like. Innovation – at least for me – represents something very, very different than just jumping around something that is perceived hip and cool. According to Gartner study, banks are ahead of insurers in terms of innovation as (1) banks have been collaborating with fintechs for longer time than insurers, (2) banks are better informed about the new business ecosystems and the phenomenon of platformization, and (3) banks are forced by regulation to be more transparent and open (e.g. PSD2).

There are various steps in exploring probable new avenues for innovation both for banks and insurers. There has to be a clear understanding of the fact that banks and insurers are fundamentally working with relationships and therefore they need to define themselves as service businesses (Grönroos 1996). As a customer, I am not just acquiring a banking or insurance product but rather more or less comprehensive service offering that includes training, updating information, communication, customer service, etc. Focusing solely on the actual product doesn’t make sense as a product or a service is composed of various layers of interrelated activities (Storey & Easingwood 1998).

So both banks and insurers have at least four to five mutually compatible strategic options available: (1) modifying the existing offering by adjusting multiple components of the current value propositions, (2) changing the current offering by adjusting a single component of the present value propositions, (3) adding new value drivers into the present value propositions, (4) creating new additional offering by creating new value propositions, and (5) remixing and reconstructing the existing offering by removing and adding wholly new value propositions and/or individual elements of single value propositions. Also, the core offering can, of course, be changed by just discontinuing it, changing the sub-offering and/or modifying the auxiliary offering but due to contractual obligations and other considerations, this options probably isn’t available every time and carrying it through – namely, discontinuing some service, product, or a combination of these two – isn’t always smart. While I worked in a small Finnish software company that focused on supply chain management, we carried out numerous warehouse and inventory optimizations, and while doing simple ABC analysis for inventory control was insightful in most cases, in some cases those category C products turned out to be very tricky ones. In addition, the core offering can, of course, be changed by just discontinuing it, changing the sub-offering and/or modifying the auxiliary offering but due to contractual obligations and other considerations, this options probably isn’t available every time and carrying it through – namely, discontinuing some service, product, or a combination of these two – isn’t always smart.

While I worked back in a day with a small Finnish software company that focused on supply chain management, we carried out numerous warehouse and inventory optimizations, and while doing simple ABC analysis for inventory control was insightful in most cases, in some cases those low volume category C products turned out to be very tricky ones. They had to be there when the client made the order, and therefore we had to come up with a solution to tackle with the automation and proposing smarter ways to procure these ‘low value’ items. In service delivery, we can’t apply similar kind of inventory management logic but the basic premise – the 80/20 rule – still applies. Every change in the underlying offering has to be carefully considered to yield the best possible outcome, and therefore continuous rigid experimentation with the offering is needed. If a decision is made to discontinue or change a certain line of business, this will always have consequences on the company as well as on the business. There is no way to certainly forecast what will happen if this or that component of the value proposition is changed, refined or removed altogether but we have tools and frameworks, for example, customer lifetime value (CLV), to understand the effects, and what’s even more important – there are more advanced conceptualizations available too.

Essentially there are two different states of innovation, namely innovation under steady and predictable conditions and innovation under unstable and uncertain conditions. What kind of value propositions are suitable under different conditions? Nobody knows apriori. There is no one-size-fits-all innovation management solution to answer the possibilities and challenges posed by these two unique circumstances. To act under unstable and uncertain conditions, banks and insurers need to embrace experimental culture so that the patterns of innovation are well understood, and not just a solo projects carried out here and there. As Gartner study recommends, “Establish a structured innovation process that can be monitored by your innovation committee by developing a common taxonomy for assessing and prioritizing innovation ideas.”

How can strategic innovation happen in the first place if it’s not perceived as a crucial strategic priority? Just asking.

[1] Gartner (2016). “Customer Co-Invention Is Paramount for the Success of Innovation in Financial Services“. (Juergen Weiss David Furlonger), 14.10.2016.

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