Innovation redefined for corporate organizations in highly regulated industries
Highly regulated companies, including financial institutions and energy companies, have invested significant resources in innovation to avoid being left behind by disruptive technologies. However, the success rate of innovation initiatives falls short despite substantial investments. Why? The perception of innovation as a crucial contributor to the license to operate has weakened. This highlights the need to rethink innovation activities. Innovation managers and innovation board members face many challenges when trying to implement innovation in the business. Do you recognize any of the thoughts below?
With such fragmented views on innovation within the company, it’s no surprise that innovation managers struggle in determining the direction they want to steer in.
From Airbnb and Uber to mortgages and insurance
In the past decade, disruptive companies like Airbnb and Uber shook up the hotel and taxi industries, causing highly regulated companies to fear for their own licenses to operate. A company’s license to operate entails being cost-conscious, making a social impact, complying with rules and regulations and ultimately generating value for stakeholders.
Inspired by Silicon Valley’s tech giants, board members embarked on transformative journeys. Innovation hubs mushroomed, attracting talent and nurturing daring initiatives. These corporate innovation hubs flourished, undertaking a multitude of experiments each year. Unsettled by the thought of falling behind in a world of disruptive technologies, it is worth noting these endeavors of highly regulated companies were partially also driven by fear.
It is crucial to assess the level of success achieved by these past ventures. Without clarity, there is a risk that innovation remains stuck as just a ‘nice to have’ instead of a vital core competency that brings value to the business. The banking, insurance and pension industry celebrated notable triumphs, such as the implementation of chatbots and peer-to-peer payments. However, a closer examination reveals that the success rate of innovation falls short, disappointingly contrasting the substantial investment dedicated to it. Many promising innovation initiatives stumbled before reaching fruition within the business.
Innovation…not as essential as it was once believed to be a decade ago
Drawing on IG&H’s extensive innovation experience and recent research among both highly regulated financial and utility companies, a striking realization emerges: the perception of innovation as a pivotal contributor to the license to operate has weakened. The findings of our research show that innovation is not as essential as it was once believed to be a decade ago.
Choosing the right direction for your innovation portfolio
When it comes to innovation, the first and most important step is to choose a clear direction. For instance, an energy company’s mission of “providing everyone with green energy in 2030’’ is linked to the company strategy. Subsequently, you develop the strategy by elaborating on several key themes for the upcoming years. You can only allocate your innovation resources once; spend them wisely.
We see that many corporates align their innovation activities with their company strategy and strategic themes. Sustainability has emerged as a predominant focus within the highly regulated utility corporate context, driven by new legislation that demands transparency in investment practices and the construction of investment cycles.
From Business-Driven to Mission-Driven innovation
Our research shows that when innovation is not seen as a crucial element in strengthening a company's license to operate, its impact becomes limited. The organization may sideline innovation due to the uncertainties it naturally entails. To reintegrate innovation, a vision for mission-driven innovation is essential. This starts with an inspiring company mission that aligns with the license to operate. We have observed several corporations successfully shift towards an innovation approach centered around their mission.
A burning platform for innovation
In the face of impending delays in expanding the Dutch electricity grid, several energy industry players we interviewed acknowledged the potential repercussions. The prospect of households and companies being unable to utilize their generated green energy loomed large. As a result, these organizations embraced innovation with renewed determination, shifting towards mission-driven innovation to meet crucial societal demands. It became clear to the interviewed energy companies that achieving their 2030 mission of providing green energy for all was impossible without leveraging innovation.
Steering toward the right innovation initiatives
Formulating an inspiring mission-driven vision and selecting the right direction for your innovation portfolio are two vital steps leading up to effectively managing your innovation funnel. As a manager driving innovation, the challenge lies in choosing which experiments and initiatives to invest in with limited budgets. Focus your efforts on initiatives that align with innovation themes and have the support of a business sponsor. Once these criteria are met, evaluate the initiative based on factors like desirability, feasibility, and viability, while considering the potential impact on investments, such as cost reduction or improved customer satisfaction. Making informed decisions based on these specific criteria is key to successful innovation management.
Defining successful innovation: managing your innovation hub effectively
Managing an innovation hub requires clearly defining success criteria for innovation. Innovation can be defined as successful when it achieves predefined goals and objectives. Success can be measured across various dimensions, including business value, societal impact or the extent of customer reach. By establishing these metrics, you can effectively assess and manage the success of innovation initiatives within the hub.
Find the right balance of continuous improvement versus disruptive innovation
Our research shows that several corporates choose to diversify their innovation portfolio and balance their innovation budget. Roughly 70% of the innovation budget is spent on strategic-related innovation and 30% on disruptive innovation. In this way, you make sure that you spend most of your time and effort on innovation that is most likely to be aligned with the running business activities and there is enough freedom for future-proof innovation and exploring the newest technologies and how your business can benefit from these.
Innovation is everybody’s business - especially the business’
Do not invest in innovation initiatives without active involvement from the business. A typical problem for innovation managers: “The change organization is completely occupied with another topic and the connection with the business is completely missing.’’ Merely being involved is not enough. Full support, genuine commitment and active participation from the business are essential.
Unless you operate innovation as a venture builder with a long-term perspective, it is crucial to secure the commitment of the business through active participation as real business sponsors. For the short-term, incremental innovation should be as close to the business as possible. Furthermore, buy-in from higher-ups is essential. Encourage board members to become true sponsors of innovation by involving them in quarterly innovation meetings and inspiring sessions, for example. Establish the boundaries and ensure that the prerequisites for successful innovation within a corporate setting are in place with effective guidance and proper authorization. In practice, this boils down to clear roles and responsibilities.
Real-world innovation examples from Financial Services
A prominent Dutch bank ensures this commitment to innovation by having a business representative involved in each project for a minimum of 18 months. Similarly, the innovation hub of a Dutch pension provider only initiates new projects when at least one colleague from the business joins the venture. An insurance firm concentrates its innovation activities on investing in new business models for insurance and banking, with the sole purpose of staying relevant. This direction requires a long-term strategy of at least 7-8 years to grow and demonstrate market viability. An example is tackling the mental health challenges for caregivers by investing in a digital platform that will support caregivers who struggle with mental health issues and experience work-related challenges.
To conclude: Make it a no-way-back journey
In the dynamic landscape of corporate innovation, leveraging innovation strengthens the license to operate and drives transformative impact. However, genuine commitment, active stakeholder involvement, and alignment with the company's mission and strategic direction are crucial for success. Effective management of the innovation funnel and defining success criteria help measure impact. Balancing continuous improvement with disruptive innovation and involving the business enhances the chances of success. Establishing necessary boundaries and prerequisites within a corporate setting ensures a solid foundation for impactful innovation and sustainable growth.
“Getting out of the 'experimental corner' not only applies to energy companies currently feeling the external push but also to the Financial Services sector. For instance, the pension sector too will evolve and customers will have more choices available to them. Be prepared for change because it’s coming.”
Jolanda Burgers, Manager Digital Experience & Innovation IG&H.
Innovation needs clear direction - it must be part of your way of working towards the future. In the rapidly evolving landscape of corporate innovation, leveraging innovation to strengthen the license to operate is vital for highly regulated companies.
Take the next step toward impactful innovation
Have you heard? IG&H is planning an evening for innovation managers to engage in conversations and exchange experiences on this topic in September of 2023. Would you like to embark on a transformative innovation journey? For more information, please reach out to us:
Jolanda Burgers, Senior Manager Digital Innovation & Business Design
Joep Beukers, Senior Manager Financial Services