8 minute read 25 Jul 2019
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6 ways financial services firms can industrialize innovation

Authors

David Kadio-Morokro

EY Americas Financial Services Innovation Leader

Passionate about technology, innovation, and leading EY people to solve clients’ most challenging problems.

Roger Park

EY Americas Innovation Leader

Entrepreneurial innovator and strategist. Ardent supporter of diversity and inclusiveness. Father of three.

8 minute read 25 Jul 2019

Findings from a commissioned study confirm that digital enterprise transformation leads to more innovation in financial services.

Findings from a 2018 commissioned study conducted by Forrester Consulting on behalf of Ernst & Young LLP (EY US) confirm that nearly every company in financial services is focused on innovation as part of their digital enterprise transformation programs. Not surprisingly, some organizations are doing it better than others.

For executives accountable for innovation, the study results show that holistic and multidimensional approaches emphasizing human and cultural factors are most effective in accelerating and scaling innovation across the organization.

Read on to learn more about six key trends.

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  • The commissioned study conducted by Forrester Consulting on behalf of EY US was completed in April 2018. The research consisted of online surveys with 240 senior-level executives (more than half of whom hold C-level positions) and additional phone interviews with select participants. Respondents represent financial services organizations — including banks, insurers, wealth and asset managers, and private equity and capital markets firms — based in the US and Canada with operations around the globe. (Private equity and capital markets firms are grouped with wealth and asset managers, and referred to as such, throughout this report.)

    The study evaluated respondents on 27 measures of digital enterprise transformation maturity. Survey respondents were prompted to place themselves on a five-point scale for each maturity measure across five categories:

    • Strategy
    • Structure
    • Culture
    • Technology
    • Security

    The overall maturity score was based on an aggregate score across these 27 measures. Respondents were then placed within one of three maturity groups — low, medium or high — depending on where their score fell along the distribution curve. The maturity assessment is an accurate predictor of where the average firm stands in relation to digital transformation excellence. High-maturity firms, referenced as digital transformation leaders throughout this report, are those with advanced capabilities, strong track records and robust metrics in the areas listed above. They are also notable for focusing transformation efforts and investments on innovation and customer needs.

    The middle cohort, referred to as mid-maturity firms, straddles the line between conventional practices and digital excellence. However, a significant number of these firms are likely to emerge as future leaders as they advance along their digital transformation journeys.

    Low-maturity firms, referred to as digital transformation laggards, are typically focused on — even obsessed with — cost reductions and other financial metrics.

1. CIOs lead the industry focus on innovation

The financial services industry understands the importance of innovation: 87%, or virtually every firm, is investing in innovation as the top priority or a top-three priority. The consensus regarding innovation extends across the C-suite, with the vast majority of chief innovation officers (CIOs), chief financial officers (CFOs), chief marketing officers (CMOs), chief strategy officers (CSOs) and chief digital officers (CDOs) seeing it as a top agenda item.

 Across financial services sectors, increased innovation is also a top goal of transformation initiatives. Overall, 65% of respondents from digitally mature organizations cite innovation as a top goal, vs. only 32% of low-maturity companies. This is not a surprise, given that innovation is widely viewed as critical to meeting rising customer expectations, navigating technology-driven disruption and competing against new players, including innovation-obsessed FinTechs.

Innovation is also key to preparing for the potential obsolescence of business models and attracting new generations of customers and employees, the survey results make clear. Digital leaders appear to understand both the need for innovation and its many benefits more clearly than laggards.

Role of innovation

87%

of firms are investing in innovation as the top priority or a top-three priority.

Do digital transformation or don’t survive. You either master digital transformation or you’ll be left on the heap pile.
VP IT Operations, large US insurance group

2.  Innovation takes on many forms

The survey addressed the various forms of innovation and the specific actions that firms take to promote it. Those actions included a wide range of common techniques and tactics, from the strategic (like creating a “NewCo” business model independent of legacy) to the more tactical (such as creating innovation labs and teams and dedicated “test-and-learn” environments), as well as both internal teams and external partners (including FinTechs).

Further, the most popular actions include both technology and organizational dimensions. Indeed, in terms of expanding efforts in the future, measuring innovation and creating more leadership accountability were the top two answers. Steps such as these help make innovation an inherent part of operations, which lays the groundwork for industrial-strength capabilities.

Digital leaders show the practices and actions that have the most impact. It’s noteworthy that the biggest gaps are in the organizational factors, such as measuring innovation (which 88% of leaders do, vs. 41% of laggards). A similar gap (84% vs. 42%) exists when it comes to identifying executives with accountability and budget for innovation. They are purposeful and holistic in formalizing innovation, which is guided from the top levels of the organization.

3.  Innovation priorities will shift moving forward

The survey also asked what companies have done recently and where they plan to focus in the next 12–24 months. Compared to their top three areas of focus over the last 24 months, leaders will place greater emphasis on improving efficiency and productivity, improving the customer experience and implementing new ways of working. The implication is that leaders anticipate great progress in terms of deploying platform-based business models.

The views of CIOs are very similar to those of the most mature firms. More than two-thirds, or 68%, are focused on improving efficiency and productivity. Improving the customer experience (58%) and implementing new ways of working (56%) are other top priorities.

Shifting priorities

68%

Percentage of CIOs who are focused on improving efficiency and productivity.

4.  Investments are targeted toward current business models

While innovation can be applied to nearly every part of the business, most investments are still focused close to current business models and on sustaining innovation. Nearly half, or 43%, of respondents say innovation investments are focused on improving the core business by innovating around known industry capabilities, markets or existing business models. Another 35% are establishing new capabilities to extend the current business. Only one-fifth are seeking disruptive or transformative innovation that will redefine current ways of doing business. Interestingly, CIO responses are consistent with those of all respondents.

“Near-horizon” innovations that are designed to enhance or extend current business models are more likely to deliver 10% returns than they are to deliver 10x returns, which only come from more ambitious efforts designed for disruption. The implication is clear: firms seeking breakthrough performance gains or stronger market positions must think bigger and act bolder.

5.  Innovation is largely measured through the eyes of customers

Most organizations view innovation through a customer-centric lens. Metrics related to customer satisfaction, such as gains in Net Promoter Scores (NPS) are used by 61% of participating companies. Customer adoption of new products and services generated through innovation is another popular metric, cited by 59% of respondents. Slightly higher percentages of CIO respondents cite such measurements — 72% for NPS gains and 68% for customer adoption of new products and services.

Employee participation in innovation is cited as an innovation measure by 48% of all respondents and 58% of CIOs, another reflection that they understand the crucial organizational dimensions of innovation. Interestingly, 84% of CIOs say business model shifts are used to measure innovation, vs. 61% of all respondents. Again, it seems that CIOs see the big picture.

6.  CXOs are not fully aligned on the role of innovation

When it comes to transformation goals, business benefits and future priorities, there are significant gaps between the views of CIOs and their C-level colleagues. For instance, CDOs and CIOs are more closely aligned with each other than with CTOs.

On one level, the lack of alignment is not surprising. Naturally, chief innovation officers are more focused on driving innovation, while CTOs want to prepare the organization for new technologies. However, the gaps raise three important issues:

  1. Need for C-suite alignment: The entire C-suite needs to be in synch in driving innovation. As technology evolves at a constant and increasing pace following Moore’s law, chief technology officers have a critical role to play, not only in keeping up with, but — more importantly — also in promoting and enabling innovation through a robust digital infrastructure.
  2. An underlying cause of innovation struggles: All firms have access to powerful technology, but perhaps a lack of coordination and consensus among senior leaders holds back returns on investments.
  3. A need to clarify strategic goals for innovation at the highest levels of the organization: Senior leaders must work together to build consensus where it matters — especially relative to goals, target outcomes and metrics. A sense of shared purpose is particularly important for companies seeking to accelerate and scale innovation.

Summary

Many financial services firms are working actively to “industrialize innovation,” though the need for further improvement is just as clear. Yes, banks, insurers and wealth and asset managers have made progress on their digital journeys in the past few years. However, new challenges — demographic, technological and competitive — mean the industry still has a long way to go.

About this article

Authors

David Kadio-Morokro

EY Americas Financial Services Innovation Leader

Passionate about technology, innovation, and leading EY people to solve clients’ most challenging problems.

Roger Park

EY Americas Innovation Leader

Entrepreneurial innovator and strategist. Ardent supporter of diversity and inclusiveness. Father of three.