Friday, February 07, 2014

When your history holds you back

There's an old joke in the banking world, one that many modern bankers to my surprise aren't familiar with.  The joke asserts that there's a rule in banking, the 3/6/3 rule.  This stands for borrow at 3%, lend at 6% (thus assuring yourself of a 3% return) and hit the golf course at 3pm.  Of course this rule reflected the times when the banking industry could count on low competition and predictable regulatory change.  Today few banks make much money on demand accounts, and they certainly aren't paying 3% interest on passbook savings accounts.  Yet, strangely, many of the historical practices and perspectives of banks, and by extension other firms in other industries, have remained the same.  For example, banks often close at 5pm most weekdays, and it was common for many of them to be closed Saturday and Sunday in an era where most retail establishments are open later and on the weekends.

The unfortunate fact that many firms who attempt to become more innovate face is that their history, past success and existing structures become barriers for innovation, because they can't imagine working in a different context.  Why do banks close at 5pm and remain closed on the weekends?  Why does the stock market close at 4pm eastern?  I'm sure there's a historical reason, but I doubt it has much validity today, yet many continue these practices today.

I'm picking on banks today but their foibles are reflected in many other industries.  Here's another historical factor that will become a barrier to innovation:  narrow slices of business built around segments and products.  The average firm is a virtual matrix organization, divided by products (checking, savings, mortgage) and by segments (younger, older, wealthy, etc).  These are divisions the firm imposes to make it easier to deliver valuable and meaningful products, and these segments and product lines were probably a reason for success in the past.  Now, however, they are often a physical and psychological barrier to change and innovation. 

Look for example at the advent of the tablet.  Many firms will say they have a "digital" strategy, but each segment team and each product team are developing "solutions" for mobile or digital devices.  This means there's a solution for checking, and for savings, and for auto lending and for mortgages, and those solutions may look and feel different based on an individual's assets or ability to borrow.  But soon almost everyone will use mobile devices or tablets - what segment they are in or what products they use won't matter.  Rather than focus the delivery on the channel, the old way of dividing up customers and products remains paramount.

What if we completely rethought how we approach customers, more by the channels they use or the needs they have, rather than by our internal requirements and structures.  What if older, wealthier customers actually have some of the same psychological and service needs as younger, less affluent customers?  Couldn't we serve both of these "segments" with some of the same facilities and services? 

Instead, we divide and conquer, and then use the old divide and conquer infrastructure to attempt to do new "innovation".  In many cases what we need to do is think about throwing out the old structures and completely rethinking how customers of all stripes want, and need, to be served, and then build solutions and structures that align to those needs, and are flexible enough to change as needs change.

This is especially true when an individual may be young, a small business owner, affluent and a consumer of many different banking services.  It's often the case that many individuals cross our artificial "lines" or constructs.  Should we serve the individual as a small-business owner, a head of household, a "wealthy" individual, as a younger customer, or all of the above?  More importantly, does that individual think of themselves in all of those ways and expect services to be aligned to those "hats", or does he or she want unified service depending on the situation at the moment in time?

Older, narrow and rigid structures are becoming barriers to innovation.  What's more, they are internally derived and don't add value to the customer - in fact when they become obvious is when they become barriers for customers.  It's often difficult to do innovation "on top of" or within the context of these structures or perspectives, but they are hard to dismantle.  In many cases the best innovation would be to create a completely new structure, then decide what products or services to offer, and how to offer them to the customers you have, and want to have.  Ultimately, innovation is about being nimble and able to change as circumstances warrant.  While many businesses have deep investments and organizational history about these lines of business, product groups and segments, they may create more barriers than value when you need to innovate.
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posted by Jeffrey Phillips at 5:06 AM


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