Big Companies and Innovation- Challenges Ahead
Last week the topic came up a few times about why large companies struggle to innovate. It was in a really good FT article about why large companies squander good ideas. In a nutshell, they highlighted that it is a myth that big companies lack intelligent personnel, or lack awareness of market trends, ability to develop technology or any of the other urban legends about why startups innovate faster. Xerox was earlier than Apple with PCs and Polaroid was the first to create the digital camera. Neither could bring them to the market. Xerox did, however, conceive of and was able to be the first and most successful in laser printers. Why? Because for Xerox to effectively build and distribute printers, even highly innovative and technologically different printers didn’t disrupt their organizational structure and workflow. It was impossible for Xerox and Polaroid to figure out how to fit the PC and digital camera respectively into their existing business models, and business models are hard- and sometimes virtually impossible- to change.
There was a similar article in HBR - this time the case study is Gerber trying to get into the adult food business (so not technology) - but the conclusion is the same - it is the organizational structure of large companies that impedes their ability to capture the trends that they are well aware of, and by all accounts should be best positioned to lead.
I was speaking at the ReWork AI in FInance Conference in New York on a panel entitled “FinTech & The Traditional Banking Sector: Bridging The Gap”. The discussion brought to mind the above referenced articles- and why it’s the case that there is a partnership developing rapidly between Fintech companies and large financial institutions. While banks, insurance companies, asset managers and others have the capital necessary to create the next innovation, as well as the brain power, and the ability to see where the trends are headed, what they are often lacking is the ability to marshal the necessary resources to make it happen- but why?
Territoriality - the world is changing to be less compartmentalized. That is why your phone is a flashlight, a camera, a computer a calculator, a music player - and a whole bunch of other stuff- including a phone. So in most mature organizations, each department involved would have to be able to weigh in and drive the portion of the development that is their area of ownership. That isn’t going to get a smartphone built, and it isn’t going to allow for any other cross departmental innovation. Fintech companies are looking to connect the dots- in the case of Pefin, for instance- across the user's entire financial life. A bank will have tons of data - but try to get the retail bank and credit cards, investment management, mortgages and all of the other touch points to adequately synthesize that information to develop a holistic, fiduciary financial plan and you are looking at a task typically more monumental than is possible.
Budgets are earmarked. Now some financial institutions have “innovation budgets” but they are often by department. Again, if the project is cross-departmental, who pays for it? Those arguments can be a black hole in many large organizations. Worse, however, is that many large organizations have innovation initiatives with virtually no budgets at all. Not sure why that is expected to work...ever...
Business models being disrupted can cause job dislocations in the short run. This is most obvious in back office functions but is true across all jobs. If investment banking associates can be replaced 90% by intelligent presentation generating programs - that means that potentially 90% of those jobs go away. It also means that the person running those groups has a smaller fiefdom. Resistance in so many places.
A lot of will is required- and budgets and deadlines can go past one earnings season. Fintech companies don’t develop for earnings season- and it can take years to develop really complex, AI driven products. Banks and other large institutions need to show profitability on an annual and, sometimes, quarterly basis. That just doesn’t work for real innovation. There are large organizations that have dealt with this - it is a reality in research- heavy industries, for instance, but for many financial services firms it is hard to think like a tech or pharma company.
The good news is that more and more fintech companies are positioning themselves to help large institutions leapfrog ahead and solve the challenges they have. As these partnerships become more ingrained it will likely become easier for all involved to develop a cadence of working together that won’t feel as new as it does today.