Because firms must now provide more and cut costs at the same time, planning must include an "innovation perspective."
There once was an immutable law in business: to increase quality, you must increase cost. In other words, to make something better, you must spend more. The principle seems quaint now given the generally held expectation that we should get more and pay less at the same time.
One reason for this change in mindset is a collection of business disciplines often referred to as total quality management. Throughout the 1980s, ’90s, and into the 2000s, businesses across the world introduced techniques such as statistical process control, kaizen, quality circles, employee involvement, the Toyota Way and the teachings of W. Edwards Deming into multiple areas of their business.
What does this have to do with today and with financial services? Businesses everywhere are now challenged with delivering consistent, meaningful innovation to meet customers’ growing expectations. New technologies offer the promise of different business models that simultaneously deliver higher value to both companies and consumers.
Companies making progress with innovation adjust their traditional business processes to include an “innovation perspective.” This is particularly true in the annual planning process used to select which strategic projects will be funded and which will not.
One approach is similar to portfolio management, where a set of choices are profiled according to different factors. The result is then reviewed to determine which factors are overweight, which are under and which are not addressed at all.
The first step is to select 20 to 25 projects considered to be the most important strategic business initiatives in the organization for the coming planning horizon. There is no magic to this number, but there is a practical limit within which choices can be made efficiently.
Second, each project should be reviewed to identify its strategic intent. This is defined as the principal reason that an initiative is undertaken. Many high-profile projects are pursued for a multiple of reasons; however, it is important that one central, driving motivation be chosen for each item.
Next, identify which type of change each project seeks to make. To label these, the company must have agreed-upon definitions for different types of changes. Again, it is important to limit the number of labels. What has proven successful is a three-tiered model of improvement, innovation and disruption.
Once these two dimensions are identified for each project, plot the results on a 2x2 matrix or on a graph showing the intersection of different strategic levers and types of projects. The visual will clearly show where there are clusters of initiatives and where there is no representation at all.
Teams of senior leaders can then challenge their results and ask a number of questions, including:
- Given our strategic intent, are our “bets” the right ones?
- Are our resources aligned against the right initiatives?
- Are we being bold enough regarding innovation?
- Are there disruptive technologies that should be tested?
- Where are we at risk of losing ground against competitors?
- What trade-offs in the portfolio need to be made?
- Is the organization ready for the changes required?
Research in insurance has shown a predictable concentration of initiatives that are improvement projects related to the strategic lever of efficiency and expense reduction. Disruptive efforts are not prevalent, but where they are present are usually related to product and market strategies.
This model is not intended to replace current budgeting tools or planning methods used by project management offices or finance teams but is meant to introduce the concept of innovation into the control process. The desired outcome is a plan that considers the impact of more, or less, innovation in an approved project portfolio. As the annual budgeting cycle begins for firms on a calendar-year reporting schedule, companies are encouraged to include an innovation perspective in their deliberations.