Three Innovation FAQ's

Here are three frequently asked questions on how to spur innovation in organizations.

1. Are there schemes that organizations can set up to get employees to generate ideas?

Of course there are. However, when organizations do something like this they have to be very careful of unintended side-effects. Say for example, you paid for each new idea. You would get tons of ideas. Some employees might give up concentrating on their day job and only generate ideas. Say you paid for implementable ideas. Who would act as the filter on these? If this is not judged fairly, it could lead to demotivation and a lack of trust in management.

So if you come up with schemes for innovation they need to be authentic to the core values of your organization. This is not easy. Often some cultural change and a revised view on organizational learning is required.

2. How do you get staff to participate in these schemes?

My advice is to start with a scheme that is relevant to the employee in such a way that it links a corporate objective to something within the capability of the employees. Then keep the rewards aligned to the normal outputs of the employee. In this way the chance of an unintended consequence is reduced.

Show the employees that they can be rewarded for innovations in their day-to-day activities. Over time this gives you an innovative capacity throughout your organization. This is not a quick 'ideas competition' and then everything is OK and we can go back to our desks.

Remember innovation is as much about execution as it is about ideas. So start getting people to innovate locally and they will grow in this ability each and every day. Then when you really need the big ideas they are ready and willing participants.

3. What are the support mechanisms?

Encourage learning and experimentation. If you approach something as an experiment from which are are going to learn, you can't fail. You need to look at the failed experiment and ask "what have we learnt from this? What would we do differently next time?

So for support you need to develop a tolerance for failure and an ability to unpack the learning experience. Obviously, you need to be able to withstand the failures so the experiments need to be carefully structured so as not to put the whole organization at risk. Over time as your capabilities build, you will become more proficient at structuring things so that you can take slightly bigger risks.

You also need to allow the employees time to consider the possible innovations they would like to recommend and experiment with. And then they need the time to do so. This is why a firm like Google gives employees 20% of their week to pursue their own interests. Of course, not every firm can be that generous but you can see the enormous commitment to slack resources. If everyone in your firm is stretched to breaking point, don't expect much innovation.

There is Nothing Personal about Personal Banking

I recently conducted a "straw man" poll into understanding people's frustrations with their personal banks. The population sample was from LinkedIn members from around the world who are computer literate, mainly professional, and have a desire to interect on electronic systems. There weren't any really surprising results. The frustrations can be seen as product, people and technology related. Here is my take on some of the issues highlighted.

The main conclusion is that the customer experience in branches is poor because of long lines and inadequately trained staff. This is an old issue which banks have tried to solve by moving some of the business into call centres.

The frustrations with call centres are relationship churn (never interacting with the same person and the associated lack of continuity and ownership) and lack of ability to make unscripted decisions.

In general people were happy with the products with some minor complaints about lack of flexibility in terms of product delivery, product rules and cost structures.

The on-line experience is better with frustrations related to site performance, browser support and overly complex and fragmented security.

These findings underline the idea that innovation in banking is really about innovation in service and customer experience. Some of the basic products have been around for centuries.

What banks need to take into consideration is that more and more customers are becoming comfortable with conducting business on-line. However, there will always be a handful of interactions that need to be done between people, either over the phone or face-to-face.

At that point the quality of interaction is the key differentiator and a source of competitive advantage.

The on-line experience is an opportunity for further innovation. This is the dangerous zone for many banks with their legacy of multiple complex, poorly, integrated, monolithic applications. The physical-world analogy of the situation is where you are selling steel bars and coal in high fashion clothing stores in popular shopping malls. You need the flexibility to be able to modify, repackage, and tailor relatively commodity products to the whims and fashion dictates of the customer base.

The scariest part of this is that many customers seem loyal only because there is too much pain and suffering in changing from one supplier to another.

Frameworks

Strategy was easy in the '70s. According to the Boston Consulting Group all you had to do was "milk your cash-cows, get rid of your dogs, and turn your question marks into stars". This well-known BCG matrix was perhaps one of the first strategic frameworks. It was effective because it provided people from different backgrounds a common language to use when analyzing problems.

Many other frameworks have followed. Perhaps the most famous is that of Michael Porter who analyzes organisations in terms of five competitive forces; competitors, customers, suppliers, substitutes and new entrants. Porter also set out numerous ideas about value chains. His latest works concentrate on country and regional competition.

I mentioned the need for an innovation value chain in an earlier article. This article investigates how you can use an anlysis of your present value chain to give ideas for places to innovate.

The starting point of the analysis is to describe your existing business within your existing industry. Any one of a number of frameworks can be used. You can even develop one of your own. The important thing to remember is that the framework helps to establish a common understanding of the organisation in its competitive environment. There is a lot of value in having the discussion with your teams in order to develop your own framework. Although this is time consuming.

I find the one suggested by Alex Osterwalder to be quite useful in financial services.

Clients are considered under the sub-headings of relationships, segments and distribution channels; products and services are considered under the sub-heading of offer; operations is considered under the sub-headings of resources and competencies, partner networks and known issues; finally an understanding of the financial implications to revenue and expenses.

This nine point framework lets you ask key questions of each item. "In respect of [each of the nine]: what can we learn from our competitors and other industries? What would our organisation and industry look like if we moved to this? Do we have the experience and capability to do this? What are our risks if we do nothing while others do this?"

For example, "In respect of distributing equities, what would our organisation and industry look like if we distributed over the internet? Do we have the experience and capability to do this? What are our risks if we do nothing while others do this? What happens to the revenue and expense cycle from doing this?"

So the role of the framework is not simply to describe what happens today, it helps focus our attention on what could happen into the future. It gives us a common language on which to base our discussions. The key questions for strategy are; Do we have the common language today to hold this discussion; Is it rich and diverse enough to consider the changes taking place around us; Do we have the desire to develop our own framework; Will doing so be beneficial or simply too time consuming?

Innovation Lies in Misunderstanding

"You cannot have innovation unless you are able to move through the unknown and go from curiosity to wonder.", claims Dawna Markova in a recent New York Times article.

One of the best tools that creates this "movement through the unknown" is an open and honest dialogue. This takes place when people from different frames of reference, backgrounds, specialities, locations and objectives meet to discuss a common problem.

While this seems so simple and obvious, in the business context this is an enormous task that is fraught with wicked issues.

Do the participants agree that there is a problem? Very often, just getting agreement on the problem itself is a challenge. This is because of the diversity in the group. A natural response is to remove the diversity, which is not helpful.

It is far better to find a way of facilitating the debate, ironing out differences of opinion to get to some consensus on the problem. Even if this consensus was not reached participants should be able to get to the point of "I understand why this grouping of people believe this to be a problem and I have a view on subject, so I will contribute to the discussion."

I have often found in these processes that diverse people have developed 'dialects', local languages and ways of expressing the subject matter, that cause confusion. To operate in a trusting environment and to process these 'locally' induced misunderstanding is the route to innovative problem solving. There is a psychological reason for this. It lies in the functioning of the brain. On hearing and thinking about subjects our brain retrieves our stored patterns of related material for review. In order for innovation to take place, we need 'just enough' overlap. Too much is like having a meeting with yourself and too little means there is no understanding. In between these two extremes is the 'sweet spot' of good innovative dialogue.

In this 'sweet spot', ideas spark off each other and the new pathways that are formed are the basis of the innovation or idea that ultimately will need implementation.

The next, and perhaps most wicked issue, is the level of trust around the table. People who are involved in some sort of posturing or power struggle which they bring into the debate, have clouded their ability to retrieve the useful information and patterns. The patterns being sent back are those needed to interpret the dynamics and power fields around the room.

Then there is the question of time and capacity to hold these discussions. If you are embroiled in a survival struggle, or you have major operational concerns, or you are simply too busy with the mundane grind of doing your daily activities, you do not have the capacity for this process.

For these reasons, I believe that firms need to practice constantly these dynamic skills in order to build up their innovative capabilities. This means having a constant supply of initiatives and experiments that require diverse thinking against a backdrop of known problems. Not only will your known problems get solved in ways you never imagined, but you are building capabilities that will let you stand head and shoulders above your competitors.

China Rising

Why does China owe a huge debt of gratitude to a little known US trucker?

In 1953, Malcom McLean, a trucking magnate in the United States, got tired of seeing his trucks stuck in traffic jams. He hit on the idea of driving them onto ships at one end of the states and shipping them to a port at the other end where they could continue their journey.

Malcom soon realised that he was wasting a lot of money shipping the engine and wheels together with the goods. As soon as he left these at the harbour, the shipping container was born. As is usually the case, others had similar ideas and for a number of years there was competition around the format (size and shape) of the containers.

Eventually, McLean's company won significant contracts to ship supplies to the Vietnam-war effort. This led to a ready acceptance of container shipping. The US Government imposed standards on the format of containers used in these efforts.

People realized that not only was containerization feasible but the innovation dramatically reduced shipping costs. Manufacturing started moving from high-cost areas to low-cost areas, first domestically and then internationally. This allowed companies to take advantage of low labour costs and not have the savings eaten up in exorbitant shipping charges.

Over 50 years of this process has led to seismic shifts in economic development with the phenomenal growth in the economies of Japan, followed by India and now China.
This clear example of disruptive innovation illustrates some key ideas in innovation. First, the length of time these developments can take; second, the far reaching industry changing consequences of a seemingly simple initial change; third, the resistance to such a change when it is noticed by the incumbent powers.

The management challenge in these situations are enormous. First, how do you recognize that what you are looking at is a disruptive innovation that cannot be ignored? Second, and perhaps more importantly, how do you allow both the old and the new to develop side-by-side during the transition?

I believe that it is almost impossible for an incumbent to recognize a disruption until it is too late. Instead all firms should develop an experimental capability in which a reasonable amount of scanning and prototyping becomes a constant part of the organization.

This is not a trivial thing. Organizations taking this route will need to develop significant dynamic and deep learning capabilities. They will have to develop cultures that are flexible and reflective, that tolerate mistakes, regarding them as failed experiments from which much can be learnt.

A Tale of Two Industries

In Gordon Ramsay's book Playing with Fire, he relates how various parts of his operation work. One of the key features is what I would call a system of loose/tight controls. Certain things are centralized and run from headquarters while others are decentralized and operate locally.

This centralized/decentralized process has even been extended to the centralized reservations system where there is a call centre where each restaurant is answered in the restaurant's own name, but if the one being asked for is full there is an ability to cross-sell into one of the other restaurants.

" ... hire the right people and leave them to organize.", says Ramsay. But he is very selective in this area, especially with the chefs. Many of the chefs have had previous direct experience of working with him. It is this skill of getting the right people, giving them freedom and, importantly, a direct stake in the operations of their restaurants, that has allowed Gordon Ramsay Holdings to grow at the speed that they have without resorting to a franchise model.

In a similar manner, EFG International (European Financial Group), has established a model where the Client Relationship Officer (CROs) are regarded as having the primary relationship with the clients, they are given wide decision-making rights and individual P&L accountability. The Private Banking Innovation blog has a video interview with the founder Jean-Pierre Cuoni.

Jean-Pierre highlights the relationship between the client and the people in the bank. Alex Osterwalder, interviewed a number of people in the hospitality industry to gain insights into service cultures. The common thread amongst these is an ability to anticipate the customer expectations and then use this as a benchmark to measure the extent to which these expectations are exceeded or met.

According to Ruud J. Reuland, General Director of the Ecole Hôtelière de Lausanne, hospitality takes place whenever products are consumed in the premises of the producer. This is certainly true of banking products yet how many of them see the hospitality angle as clearly? When we do, all manner of branch and location innovations become possible.

Of course, there are many aspects in which banking is dramatically different from the hospitality industry. However, the one area where the hospitality industry (at its best) beats banks hand down is in putting the client or customer at the centre of their universe.

Let's Start with Culture

The second most quoted success factor for any business change is 'a supportive culture'. The first of course is 'top management support'. We throw these terms around as though simply saying them will make things happen. Then if nothing changes, we can blame these amorphous concepts.

One of the least understood is 'culture'. Let's spend a few seconds on understanding how 'culture' came about in organizations. I like to define the 'culture' of an organization as the commonly understood way of doing and getting things done. It is behaviour oriented.

The example I most often give is our behaviour in religious situations; the wearing of traditional clothes, food taboos or preparation, or commonly understood codes of behaviour while attending rituals. In a commercial setting, the base is usually established by the founders' either explicit or implicit reinforcing of behaviours that work for them. Over time new people are recruited into the organization. These people go through a number of conversations in which they try to make sense of what is required to behave appropriately. The conversations subtly change the culture. Of course, over time these conversations get embodied into meetings, decision rights, formal and informal levels of authority and various processes. At some point, these matters become ever more rigid and change to them becomes more and more difficult.

This sets up the challenge for anyone wanting anything (but especially the culture) to change in an organization. It must start with a number of conversations in which people are able to process the required changes. It is important to understand the context around the use of the word people here. To divorce the person from their formal and informal power structures is impossible. So, in an organization what is the weight of the opinion of the CEO in these conversations versus that of the shop-floor worker? It is so easy for a strong successful CEO to kill off innovative ideas simply by saying 'we tried that..' or 'that is not how we do things around here ...'. Each time this happens, in spite of wishing or thinking that they have an innovative organization, the CEO destroys their capacity for innovation.

A culture of innovation is one where the CEO and other senior executives actively and continuously allow conversations throughout the organization to blossom into action. Action that yields experiments to challenge the way in which 'things are done around here'.

Founders' Fire

"You have to be a little silly about the goals you set. ... You should try to do the things that most people would not.", Google's co-founder Larry Page told a group of students. I am fascinated by the stories founders tell of their trials and tribulations in going from their grand idea to implementation. There is so much to learn from these tales.

I recently interviewed the founder of a student portal in South Africa. He said, "At first we wanted to get a deal with the Universities for the student email accounts. But dealing with Universities is impossible, there is just so much bureaucracy. In the end we went and built the community person by person using any trick we could to entice members to the portal. This total change in strategy has really paid off because we are now free to do what we want."

So here is a digest of some of the lessons from the founders that I have researched.

1. Believe in the impossible

So many new businesses have flown in the face of conventional wisdom. "It doesn't work like this.", is a perfect response. The stronger you get it, the stronger your potential. Think about how the record labels have fought and fought and fought on-line music. Ten years or more later and so many missed opportunities they are coming to realise that their way of operating has changed forever. Think of discount airlines, most successful e-commerce sites and the Blackberry.

On opening his chain of Internet Cafes, EasyJet's Stelios Haji-Ioannou, told the media, "This is a category killer. I look for opportunities where I can totally change a market."

2. It needs dedication and focus

Of course just having the idea is not enough. "The idea is just the beginning, and I will openly discuss all of mine, because the hard work is in making it happen.", a serial entrepreneur once told me. So often I find that inventors are almost paranoid about talking about their ideas to anyone in case they get stolen. But ideas need to be hardened in the cauldron of debate.

Having done this, you are presented with the opportunity of fine-tuning the ideas. People will give you many practical reasons why you shouldn't be doing this. These are the obstacles you will have to overcome. Make a careful note of them. Then you have to decide whether you are able to push through these or whether they require a change in your approach.

There is a real skill in deciding between making a change, sticking with your original, or retreating totally and giving up.

3. Get it known by the world

The final piece of advice is you simply have to get it out there. This means finding the best way of getting exposure. In today's world we are spoiled for choice. But you need to rise above the clutter and become noticed.

Tools at your disposal consist of a variety of new media from blogs, wikis, and social networks.

The stronger you make the network surrounding your products the more secure your growth will be. The one thing that makes the iPod a success, other than the great design, is the network effect created by the iTunes store. Of course, Steve Jobs' social network with the record labels helped to make iTunes store great. Even Apple Music may finally concede and allow the Beatles music onto iTunes. Then Jobs' network with Hollywood has made it possible to add video and movies to iTunes.

We see these network effects over and over. What is a DVD without a DVD-player? I am sure not many people remember the MD music format. Here was a great piece of technology that simply didn't have content and so the format was doomed to obscurity.

So we see that a dedicated focus on implementing the impossible in a way that will capture the imagination of the world is all that is required.

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This post is cross-posted from Helium.

Reflection 1: The Innovation Value Chain

In the Reflection series on this blog, I want to consider lessons that can be drawn from some of the earlier articles. This Reflection is devoted to the idea of an innovation value chain.

The value chain refers to the sequential steps that support the achievement of a particular outcome. The word sequential is italicized because innovation is a complex set of interrelated processes with both positive and negative feedback loops that have deep roots both within and beyond your organization. But to make the discussion easier it is best to separate them into themes in a value chain.

Organizations can only be considered distinctive if they have distinctive value chains. So, it does not help to prescribe generic value chains. But it is important to establish the innovation value chain for your firm within your industry.

You are bound to find that your firm may not be able to describe its value chain, even though your firm may be considered innovative. Establishing your innovation value chain (at any level of detail) allows you to measure and diagnose where to place your emphasis; in some industries recruiting the right people might dominate, in others R&D effort, in others their patent process or relationships with academic research institutions.

More importantly, working in groups, you are able to conduct a focused conversation about innovation in your firm and what it means.

Here are a three starter topics to consider in these conversation. I will explore these and others in later blog posts.

- Organized for Innovation
Consider how your organizational structures, both formal and informal, support or detract from innovation and its success. Who are the power brokers? How do they respond to new ideas? From where do they take their advice and counsel? Are you or your team part of that power structure? Is there a tolerance for 'underground' experimentation?

- Generating ideas
What processes do you have generate ideas? Are they formal or informal? Is idea generation rewarded? What happens to the ideas once they are generated?

- Attitudes to experimentation and failure
At the heart of all real learning is an action, response, observation cycle that needs to be understood. How does your organization create opportunities for experimentation by doing? How does it respond to failures? How does it reflect on the experience?

When innovation in technology is not enough

"It was the holy grail of inkjet printing", Antonio Perez, the new CEO of Kodak told BusinessWeek in an interview last year. Ever since the lab produced specialist inks that promised archival vivid inkjet prints, Kodak had been working on a top-secret project to make a grand entrance into the inkjet business. The distant echoes of Kodak's founding by finding the mechanisms to switch from wet- to dry-plate technology is muted. This is not revolutionary, but merely incremental; improving on a theme.

"You press the button and we do the rest", is the famous catch phrase coined by George Eastman in 1888. At the age of 24, Eastman was about to go on holiday and a friend suggested that he record his trip on his wet-plate camera. While he never made it to his holiday, he became obsessed with simplifying the process of making pictures. This effort culminated in the Eastman Kodak Company, which has been around for close to 130 years.

The switch to digital away from film is a classic example of a "disruptive technology", where a slow-start, fringe technology is taken up and eventually threatens the existence of the major players.

Kodak's mainstream business of consumer and professional film and the associated ecosystem of processing and print shops seemed too big and stable to take any significant interest in the growing field of digital photography. However, the trend reached the point in the early 2000's that simply couldn't be ignored. In 2003, Kodak slashed its dividend to provide R&D funds to refocus its imaging business, which made up 70% of its revenue, on the digital market.

Now Antonio Perez, who hails from HP, is attempting to complete the turn-around. Besides the increased range and capabilities of the consumer level cameras and the retooling the processing shops to be more digital and self-service friendly, he has taken a huge bet on innovating the home printing business model.

He argues that people don't print at home because the costs of the inks are too high. Working with a team of ex-HP staff he has tried to rewrite the inkjet printer business model. Three years of R&D and some $300 million later, the new range of Kodak printers was launched in February 2007.

A year later the jury is still out on these printers, with Kodak selling only 520,000 units of their multi-function printer against global sales of 61 million.

Here we have an example of a systematic and strategic attempt at innovation in the hope of turning a company, if not an industry, around. Looking at Perez's background at HP it is not at all surprising that he is focused on the inkjet printer market. The dangling question is whether the market is appropriate for a late, but innovative, entrant who is using innovation to drive a low running cost, higher initial cost model.

Doing and Learning

Isn't it amazing how authors seem to have perfect vision when looking backward at innovations? The reason I mention this is because I recently read "Hidden in Plain Sight" by Erich Joachimsthaler. He implies that Apple spurred the iPod by activating the growth platform of “managing music” including its behavioral episodes: finding, evaluating, selecting, buying, listening to and storing music.

While I agree that understanding and playing into the behavioural episodes of customers can lead to innovative opportunities far beyond the product itself, my own research into the iPod shows none of the foresight attributed to this idea.

Steven Levy, in his book "The Perfect Thing", shows that there was a lot of serendipity in the iPod's rise to fame. In 2000 when Apple wanted a Mac-based music player they bought out Soundjam, one of the only two available on the Mac platform. iTunes was re-skinned to look like iMovie.

Then in 2001 realizing that there was dissatisfaction with the music devices of the day, Apple recruited Tony Fadell as a consultant to do an eight week feasibility study. Fadell coupled some commonly available parts together and the iPod was born. In presenting the results of the feasibility study to Jobs, Fadell and his team created two dummy products, knowing that Jobs routinely knocks the first ideas.

The marriage of iTunes, iPod and the deals that Steve Jobs did with the record industry to create the iTunes Store put an almost unbeatable ecosystem together. We can learn a lot from this, but we should not attribute any of this insight to the founders of iPod. They like most business executives (especially founders and entrepreneurs) simply play a game of survival and growth, ducking and diving, experimenting with new ideas, learning and responding.

This then is the ultimate paradox of business research; founders do amazing things because they are driven to do something special or know no better and business researchers find ways to understand why it was successful and then generalize this into techniques for others to follow.

The Bank of Ideas

My wife is an opera singer and was recently invited to take part in a brand new work. I went along to some of the rehearsals. These were a microcosm of business innovation.


The author of the work had a really good and original idea. Sadly, he was unable to translate it into action. Also, as it was an amateur company, they were constrained in many different ways; from costumes, sets, lighting and marketing budget.


In this video Seth Godin, points out that "ideas are only effective when they spread." He quotes the example of the inventor of sliced bread, whose idea languished for 17 years until it was marketed.

In a related experience, I was asked recently whether creating a bank of ideas was a good suggestion. By this I understood that the client wanted to create a kind of electronic bulletin board with a 'suggestion box'. I explained that while this looked good on paper more investigation was required.

What drives staff to put forward ideas into an anonymous suggestion box for others to process? If there is an incentive attached, would it be linked to the number of ideas, the quality of the ideas, whether the ideas get implemented, the effect of the ideas post implementation?

We need to tackle innovation in organisations in a more holistic fashion. This can start by diagnosing where in the innovation value chain we need attention. Sometimes a firm will have lots of ideas but not be able to implement them, others may suffer from not being able to get them marketed adequately.

Simply having a bunch of ideas in an electronic system is not good enough.

Innovation Black Belt

One of my clients recently interviewed and rejected a job applicant who was a six sigma "black belt". The role they were interviewing was for someone to work in the strategic projects area. I was really struck by the reason I was given for not hiring this individual. The manager said, "We are worried that the six sigma "black belt" will introduce practices that squeeze out creativity and over-engineer our organisation."

This echoes the 3M experience, where the BusinessWeek suggested that six sigma had removed some of 3M's renowned creativity and innovation. Of course, they also acknowledge that it's introduction helped improve the profitability of the organisation.

So we are left with something of a dilemma: lean or innovative. What I fail to understand is why we can't have both lean and innovative?

The process of becoming lean in and of itself can be seen as innovative to a bloated, inefficient organisation. What is required during this transition is to simultaneously change the culture of the organisation to be one that grasps novelty and experimentation. In introducing a transition like this the risk is that we inadvertently change the culture to one of "lean" above everything else. Where squeezing out all defects removes any chance of further creativity, variability and novelty.

We may irreparably damage the organisation in this process.

We should instead regard the process as a reason to encourage change and experimentation, where "lean and defect free" is a goal of some of the experiments that the organisation undertakes. Others goals of experiments could be looking for new products or markets. We need to do this deeply throughout the organisation and listen to what our staff are telling us. In so doing, we encourage all staff to take seriously their role and accountability for organisational goals.

We need to use these opportunities to embed the appropriate dynamic (learning) capabilities into the organisation. It is these capabilities that will ultimately give the organisation the "stretch" to be able to be both "lean" and innovative.

We are then setting the scene for more dramatic capabilities in the years to come. Imagine, what we could accomplish if we had the majority of our staff as innovation black belts.

Wishing you well with your start-up

"Dear Lara,
This is just a note to wish you well with your clothing business. We are hoping that the $200 we lent you makes the difference. We love your designs and are looking forward to your becoming a famous fashion designer.
John Smith
Credit Manager
A Big Bank"

This is not the usual type of letter one would expect to get from a bank. You are right! This is not the usual kind of bank. Prosper brings social networking and direct lending together to try to be the eBay for money.

In this CBS clip on Prosper, you can get a much better idea of how this works and the impact this kind of lending is having on the network of people involved.



Chris Larsen, has a real mission. He believes that credit is an essential ingredient in the American dream. He suggests that the banking system is elite and keeps the masses out, only lending to those who don't really need the money.

His novel approach of trying to be the eBay for money is starting to gain traction with over $36,000,000 lent out already. The Prosper system provides a complete auction market for money and a social network to support the lenders and borrowers.

My friends at the Built to Thrive Experiment, point out that Prosper is applying for patents for these ideas.

In an article I wrote for Helium, I made the point that one the characteristics of an entrepreneur (especially founders of start-ups) is "a dedicated focus on implementing the impossible in a way that will capture the imagination of the world." Clearly, Chris Larsen has this "founders fire".

In the words of Dr Seuss:

"If you want to get eggs
you can't buy at a store,
You have to do things
never thought of before."
- From Scrambled Eggs Super!

From Oil Change to Dance Troupes: Google's Dynamic Capabilities

I was recently involved in a process where an organisation wanted to generate ideas for new leadership practices. The idea was to get many in leadership positions to creatively present their ideas. Needless to say, the team members put in a lot of effort and many ideas emerged in the process. Some on the list met the response of, "We've tried this before" or "The MD doesn't want this".

This prompts me to contrast this with the deeply embedded practices at Google.

"We found someone who does oil changes here in the parking lot. That's not something that Google pays for. Employees pay for it. We just offer the space.", Anne Driscoll, Google's HR Manager, told FastCompany in a recent interview. Anne went on to explain the reasons for some of these internal people-focused services. They underline Google's commitment to their staff, "We're trying to make your life outside the office more efficient. We don't want you to spend three hours going to the doctor. Let's have doctors here on site so it'll take 20 minutes. Not because we want you back in your seat doing work. But because we don't want you to have to go home and do extra work because it took so long to go to the doctor."

They are also linked directly to Google's start-up and innovation culture. "[W]e bring in highly technical people, leaders in their field, who get together with a group of like-minded people to talk about those subjects. ... It fosters the ongoing learning culture here."

In a related article, David Glazer, Google's Engineering director, takes up the story. The founders of Google, Larry Page and Sergey Brin, emphasize the quality of the staff and the degree of risk they are required to take. "If what you're doing has the potential to really make a big difference in a good way, then don't distract yourself or me by telling me how and when you're going to make money from it. On the other hand, if you have something that's clearly going to make some money over the next few quarters or year but won't be big and exciting, then don't do it."

This sense of empowerment, coupled with Google's renowned 20% own-time culture has set up a platform for innovation and creativity. You can see the establishment of a very special set of capabilities in this process; from the type of people that have been hired, the way they are brought into the organisation, and the tolerance for experimentation and failure.

The late Sumantra Ghoshal, identified three key capabilities that would produce entrepreneurial businesses; getting the right people to start with, building relationships that encourage individual development, and, thirdly, trying to connect individuals' activities and beliefs to the core vision of the organization.

Talk to Chuck

Many would say that "innovation in financial services" is a contradiction in terms. The key elements of all financial products have been around for centuries. These are a play on time (as in a loan), a play on contingency (as in financial futures and options), and a play on liquidity (as in all standardised trading both on and off exchanges). However, there have been a number of large episodic, ground-breaking innovations. Often, these are linked to external events like changes in regulation, technology or customer preferences.

I will use the example of Charles Schwab to illustrate some of the points; starting with changes in the SEC regulations in the 70's, the changes in the Glass-Steagall Act in the 80s, together with waves of technology-led innovation in the 80s and 90s, with a return to customer in the mid 2000s.

1. The role of the regulators.

In 1974, the SEC (Securities Exchange Commission) allows deregulation of certain brokerage transactions. Charles Schwab takes this opportunity to launch a discounted brokerage with vastly reduced fees and commissions and high street branches.

The regulatory two-step is an intricate dance in financial services. At each turn the regulators, in trying to reduce the political fall out of the profit maximising strategies of clients and firms, provide a spring-board for even more opportunities to make money. This creates an ever changing environment to which firms have to adapt.

2. Technology's powerful fly-wheel.

In waves of technology driven innovations using, successively, basic computing, call centres, home based PCs, the Internet and social media, Schwab grows into a huge financial services operation, as some of the points below illustrate.

• 1979: Automated transaction and record keeping: Client accounts 84,000


• 1980: 24 hour quotation system: Client accounts 147,000


• 1982; 24 hour order entry system: Client accounts 374,000


• 1984: PC-based on-line investment system: Client accounts 903,000


• 1985: Over 1.2 million client accounts with $7.6 billion under management


• 1986: Using existing capabilities to have mutual funds quoting and trading 24/7: Client assets $11.3 bn


• 1989: Automated telephone brokerage: Client assets 25.3 bn


• 1991: First network TV advertising campaign launches: Client assets $47.5 bn


• 1995: schwab.com launched (see the WayBack Machine record for January 16, 1999): Client assets $181.7 bn


• 1996: Web trading introduced: Client assets $253 bn


• 1997: Registers 1 million online accounts: Client assets $437 bn


• 2002: Launches an advisor-branded website and hosting service for independent investment advisers: Client assets $657 bn

At this point the dot com boom is gone and the world is grappling with the after effects of 9/11, prompting Schwab to look at refocusing on customer needs at a more fundamental level.

3. Listen to the voice of the customer

Many of Schwab's biggest innovations arise through asking customers a few key questions:

• What can we do better?


• How can we make your life easier?


• What new service or product would you like to see us offering?

This is illustrated in some detail in the Ogilvy case study on Schwab's "Talk to Chuck" campaign.

In 2006, after extensive analysis that included ethnographic and qualitative research, Ogilvy identified "When it comes to my investment firm, I’m just a small fish.” as a real customer 'pain point'. The business response to this was to ensure that "... all clients have easy access to the best of [Schwab's] insights into financial markets & investments". Finally this was executed in the following range of commercials, where the innovation is in the manga-style execution of the television ads.

This article highlights many features of entrenched corporate innovation. To me these can be summed up in a sound bite. Schwab have become well skilled at responding to the shifting competitive landscape using whatever is at their disposal in order to remain relevant. Of course, it was still necessary to understand the extent of what is at their disposal and how to use it, and more importantly to understand that being relevant means being relevant to customers.

On a Razr Edge

Yesterday, Motorola announced a restructuring that would see its mobile handset business isolated from the rest of the group. Most commentators see this as the end of the road for the mobile division; doomed to be sold off.

This is very sad as Motorola is not only a pioneer in electronic innovation, but in effect created the mobile phone industry 25 years ago. It was the leading handset maker through the 1990s, loosing this position to Nokia in 1997.

This failure to recognize the handset as a fashion item and remain in tune with the fickle needs of the consumer could be the ultimate cause of Motorola leaving the business it started. The inability to understand and respond to customers plagued Nokia in 2004, when it was accused of arrogance and lack of design and innovation.

At the same time Nokia was struggling, Motorola had a huge success in the launch of the Razr handset, selling over 110m units and reclaiming a market share level of over 20%. However, since then Motorola has not had any significant handset launches or innovations. BusinessWeek has a great view of this failure, "The Razr was a fluke. Motorola was never an innovation-led company. It was a technology-driven company run by engineers who failed to understand the difference between technology and innovation." You can read the complete article here.

The stakes are high in this industry. The metronome of contractual upgrades beats out a rhythm demanding handset manufacturers respond to new product cycles of no more than two years. Then as part of the fashion industry, they need to understand the psychology of being 'cool'.

Here is an industry where innovation, has to be 'built in'.

Constraints

Recently, I was chatting to a product developer for a large retail bank. She had two very insightful observations about innovation in banks (and I guess many other firms).

First, she said, "Well, Tom [not his real name] the CEO, was very excited and fully behind the idea of innovation, but the middle managers were a real problem." She went on to detail how they had blocked, rejected and made implementation difficult.

This shows the importance of a culture that embraces change on a more fundamental level than mere 'lip service'. Contrast this with Toyota where change and innovation are somehow 'built-in'.
Second, she observed, "Then the IT is a real stumbling block. No matter how good the innovation is, we have to be scheduled into the next release cycle and that means our time to market is far too long."

This practical problem is as serious an impediment as the cultural issues. Perhaps it is even the cause of some of the negative experiences of the middle managers. In banks, the technology is the product. Poor technology architectures inhibit change and the introduction of innovations.

Most banks are in a similar position with a large investment in product specific packaged applications. These count against bringing in new products and services as they often need a new product-specific application that requires extensive integration into the existing environment. Alternatively, they cause a replacement of an existing monolithic application. In either event these result in multi-year roll-out plans.

Even those that build most of their applications, have built layers of complexity on top of layers of complexity. This makes each change incrementally longer. A large financial clearing house, recently quoted five days of testing for every day of coding!

There is a major opportunity when banks' product development can move at anything approaching Internet speed.

Local Search

I recently came across a list of interesting inventions and new products. Seeing all of these together from so many industries and applications really brought home a few points.

1. Humans are dangerously inventive
   
   Humans are unique in the world for their use of tools and language. This combination, without going into debates around which came first, allows us to dominate, control and mold the environment to our own needs.
   
   Unchecked this ability will lead to the extinction of everything that does not meet the needs of human development and survival. The reason that so many of the products and inventions are 'green' is the result of the human worry for survival of the planet.
   
   
2. Products carry knowledge
   
   Products that we have developed and evolved over the years carry important knowledge. Could we have a wind turbine without years of development of windmills and knowledge of electricity generation, or an electric vehicle without batteries, electric motors, electricity, vehicle body design, and lightweight materials.
   
   
3. There are discernible patterns in many of the product's evolution
   
   Many of the products are the result of people searching for knowledge or ideas a small distance from that which is already contained in their product. A PC keyboard with a storage compartment, a washing machine with sensors that control precisely the amount of water needed for a particular load, a bicycle with an attachment for crushing grain, are just a few examples.
   
   The further from the knowledge already contained in the product, the more radical the invention seems. Often new knowledge is introduced as a simple juxtaposition or combination from other products. For example, the laser guided robot brings together a robot with an ability to pick-up irregular objects and light detection, together with a simple laser pointer.
   
   There are many other patterns of this kind in the human creative process that moves from one product to another.

Micro-payments

There are some things in life that have emerged over eons and seem unlikely to change. My two favourites in this category are paper and cash.

In spite of all the hype of the digital age, paper still seems to win over a screen in most practical situations. Have you ever tried reading your laptop in the bath? The convenience of paper makes me think it will be around as a medium for a good few years to come.

With the worldwide take-up of mobile phones, we already have a complete digital platform in our pockets. What smart inventors do with it is only starting. My own prediction is that it is a good contender for a cash replacement. Pre-paid accounts already contain stored-value and those who have contracts have already been granted 'credit' by the celular operators.

There is one major stumbling block and that is to disconnect the cash or stored-value from the banking system. TipJoy is just one example of an onine business trying to do this.

While not related to the mobile industry, they are an example of the need. This service allows you to leave a tip on a website by simply entering your email account. It creates accounts that hold the proceeds of your tips, offset by tips you've left for others. Settlement is via PayPal accounts. When you want to cash out you can receive an Amazon voucher. Neatly, bypassing the monetary system.

Of course, Amazon does not provide, gasoline, schools, hospitals, and so-on. However, the point remains, break the banking link and the economy will change.