More than a half century ago, Ted Levitt transformed the strategic marketing agenda by asking a seemingly simple question. In his classic Harvard Business Review article “Marketing Myopia,” Levitt declared that truly effective executives needed the courage, creativity and self-discipline to answer, “What business are we really in?”
Were railroads, he asked, in the railroad business or the transportation business? Are oil companies in the oil business or hydrocarbon or energy business? The distinctions aren’t subtle, Levitt argued, and they subverted how companies saw their futures. Marketing myopia blinded firms to both disruptive threats and innovation opportunities.
Levitt’s provocative question remains both potent and perceptive for marketers today. But my research in human capital investment and “network effects” suggests that it, too, needs a little visionary help. Increasingly, successful market leaders and innovators – the Amazons, Apples, Googles, Facebooks, Netflixs and Ubers– also ask, “Who do we want our customers to become?”
That question is as mission-critical for insurance and financial services innovators as for Silicon Valley startups. The digitally disruptive influence of platforms, algorithms and analytics comes not just from how they transform internal enterprise economics but from their combined abilities to transform customers and clients, as well. Successful innovators transform their customers.
The essential insight: Innovation isn’t just an investment in product enhancement or better customer experience; innovation is an investment in your customer’s future value. Simply put, innovation is an investment in the human capital, capabilities, competencies and creativity of one’s customers and clients.
This is as true for professional services and business-to-business industries as for consumer products and services companies.
History gives great credence to this “human capital” model of innovation. Henry Ford didn’t just facilitate “mass production,” he enabled the human capital of “driving.” George Eastman didn’t just create cheap cameras and films; Kodak created photographers. Sam Walton’s Walmart successfully deployed scale, satellite and supply chain superiority that transformed “typical” shoppers into higher-volume, one-stop, everyday-low-pricing customers.
Similarly, Steve Jobs didn’t merely “reinvent” personal computing and mobile telephony; he reinvented how people physically touched, stroked and talked to their devices. Google’s core technology breakthrough may appear to be “search,” but the success of the company’s algorithms and business model is contingent upon creating more than a billion smart “searchers” worldwide.
The essential economic takeaway is that sustainable innovation success doesn’t revolve simply around what innovations “do”; it builds on what they invite customers to become. Simply put, making customers better makes better customers.
Successful companies have a “vision of the customer future” that matters every bit as much as their products and services road maps.
Insurance, fintech and insurtech industries should be no different. The same digital innovation and transformation dynamics apply. That means financial services firms must go beyond the “faster, better, cheaper” innovation ethos to ask how their innovations will profitably transform customer behaviors, capabilities and expectations.
In other words, it’s not enough to answer Levitt’s question by declaring, “We’re in the auto/property/life insurance business.” The challenge comes from determining how insurance companies want their new products, innovative services and novel user experiences to transform their customers. How can insurance companies invest in their customers in ways that make them more valuable? Who are they asking their customers to become?
So when insurers innovate in ways that give customers and prospects new capabilities — like Progressive’s price-comparison tools and Snapshot vehicle-usage plug-ins or Allstate’s mobile-phone-enabled QuickFoto claims submission option — they’re not just solving problems but asking customers to engage in ways they never had before.
Who are these companies asking their customers to become? People who will comparison shop; allow themselves to be monitored in exchange for better prices and better service; collaboratively gather digital data to review and expedite claims. These are but the first generation of innovation investments that suggest tomorrow’s customers will do much more.
This is of a piece with how a Jeff Bezos, Steve Jobs, Mark Zuckerberg or Reed Hastings innovates to make their customers — not just their products — more valuable.
Today’s Web 2.0 “network effects” business model — where a service becomes more valuable the more people use it — are superb examples of how smart companies recognize that their own futures depend on how ingeniously they invest in the future capabilities of their customers. Their continuous innovation is contingent on their customers’ continuous improvement. Call it “customer kaizen.”
How rigorously and ruthlessly fintech, insurtech and insurance companies champion this innovation ethos will prove crucial to their success. Being in “the blockchain business” is radically and fundamentally different than asking who we want our blockchain users to become.
Giving better, faster and cheaper advice on risk management via digital devices is different than fundamentally transforming how customers perceive and manage risk. It’s the difference between “transactional innovation” and innovation based on more sustainable relationships of mutual gain.
The insurance industry needs to transform its innovation mindset. Start thinking how innovations make customers and clients more valuable. If your innovations aren’t explicit, measurable investments in your customers’ futures, then you are taking a myopic view of your own.
Today’s strategic marketing and innovation challenge is how best to align “What business are we in?” with “Who do we want our customers to become?”
“I think it’s particularly important for business today to take an active role in trying to fix the problems that this country does have.” – Jamie Dimon, chairman and CEO, JP Morgan Chase- April 5, 2017
Since the global financial crisis of 2008, concerned business leaders, government officials, thinkers and a wide group of stakeholders have spawned a new discourse on the future of modern capitalism. The Coalition for Inclusive Capitalism was inaugurated in 2014 to encourage businesses to make changes and expand their investment and management practices to regain public trust. Primarily composed of business leaders, the coalition advocates for corporations to be managed for the long term and for the benefit of stakeholders as well as shareholders. Thomas Piketty’s “Capital in the 21st Century” became an international best seller by highlighting the challenges facing capitalist economies and how rising inequality is leading to discontent and undermining democratic values. In January 2017, the G20 finance ministers called on members to pursue inclusive growth.
Innovation and global commerce have traditionally been tremendous forces for progress. Capitalism has demonstrated a consistent ability to adapt to changing circumstances and drive technological change. According to the latest available data, the global economy is more than five times larger than it was half a century ago, and global per capita GDP has more than doubled over the same period. These numbers represent more than higher profits for corporations: They also amount to millions of jobs created and billions of lives improved. In 2015, the World Bank estimated that the share of the global population living in extreme poverty had fallen below 10% for the first time – down from more than 40% barely three decades ago.
Networks and connections are playing an increasingly dominant role in all aspects of our lives. As Joshua Cooper Ramo has described in his book “The Seventh Sense: Power, Fortune and Survival in the Age of Networks” — financial webs, DNA databases, currency platforms, medicine and research labs are all increasingly operating through both concentrated and diffuse networks. Networks have compressed time and space, accelerated the speed of commerce and trade and enabled the creation of vast wealth.
But it is also evident that the market economy that has worked so well is not serving everyone equally. Growing income inequality and a rapidly evolving job market have left many people behind. In July 2016, the McKinsey Global Institute released an extensive report on incomes in 25 advanced economies worldwide, finding that between 65% and 70% of households were in income segments whose average incomes stagnated or declined between 2005 and 2014. The growth of artificial intelligence, big data and machine learning is having a profound impact on skilled labor, eliminating many positions and also undermining steady, secure employment opportunities and with it sources of income.
This precipitous rise in income equality is having a direct impact on the way many see the capitalist system as a whole. According to a recent study by the Harvard Kennedy School, only 19% of Americans aged 18-29 identify themselves as “capitalist,” and only 42% of Americans 18-29 say they even support capitalism at all. Some have gone so far as to question whether these trends are insurmountable and if the world is entering a “post-capitalist” phase of economics.
The World Economic Forum’s (WEF) 2017 Global Risk Report shows in detail how rising income inequality and the polarization of societies pose a risk to the global economy in 2017 and will shape the world for at least a decade unless urgent action is taken. The WEF’s 2017 Inclusive Growth and Development Report shows that the U.S. ranked 23rd among the most advanced economies in that regard, one spot above Japan. According to the report, the U.S. ranked 29th out of 30 in net income inequality, 29th in wealth inequality and 28th in poverty rate.
Growing inequality, technological changes and the rise of digital networks are creating new economic paradigms. These disruptions are clear and potentially dangerous. These challenges also present the U.S. with an opportunity to show the world how a new American and inclusive capitalism can work, thrive and ultimately serve as a model for American leadership around the world.
An American inclusive capitalism agenda should be both transformational and empower businesses, governments and non-profits to effectively respond to both the short- and long-term challenges. Government at the state, local and federal level will need to provide an appropriate legal and regulatory framework, but executing the agenda should be led by business and be built on a broader rethinking of the role of businesses and capital markets and their ability to generate public goods. Some of this rethinking is on the notion that financial value can be created by business in addressing social challenges. This view – most famously championed by Harvard Business School (HBS) Professor Michael Porter – is that businesses through a “shared value” model present the best opportunity to scale and solve these problems. And Porter’s HBS colleagues Gary Pisano and Willy Shih have argued for a manufacturing renaissance through the expansion of a new “industrial commons” where research and development (R&D) and production among companies can be co-located and serve as an innovative platform for growth.
Enactment of an American inclusive capitalism agenda could also provide the U.S. with an opportunity to address urgent domestic economic challenges, unlock business creativity and create a blueprint for other countries to address similar issues within their own economies. The implementation of the agenda within the U.S. could begin with the following initiatives:
Reduce incentives for short-term financial engineering. Over the past few decades, businesses have increasingly become unable to plan and execute for the long term. The private equity industry has accelerated these trends by buying companies, restructuring the businesses (often accompanied by layoffs) and then selling the businesses. Financial engineering has been central to private equity-led leveraged buyouts (LBOs) fueled by debt laid upon the companies themselves. While appropriate financial engineering can provide opportunities for failing companies to thrive, in many cases the results are less than optimal for the companies, their workers and the communities where these businesses operate. In addition, private equity owners are both the investors and the managers of their portfolio companies, which creates incentives for owners to manage operational decisions – such as union contracts, plant closings and use of capital – for short-term gains to owners. Partly as a result of these realities, private equity-owned companies are twice as likely to file for bankruptcy as compared with public companies, which lead to significant job losses at individual companies. Policymakers should reduce the incentives for indiscriminate and harmful financial engineering. An initial step could be to address what some refer to as the “carried interest loophole.” Carried interest refers to income flowing to the general partner of a private investment fund that is currently treated for tax purposes as capital gains as opposed to wage or salary income. Instead of fund managers typically paying a federal personal income tax on these gains at about 23.8%, by eliminating the carried interest loophole these same managers would be taxed at a top rate of 43.4% (not including any relevant state and local taxes). Taxing carried interest at ordinary rates would generate $180 billion over 10 years and provide a disincentive to harmful financial engineering.
Enact a Universal Basic Income (UBI). Universal Basic income is a transfer payment in an amount sufficient to secure basic needs as a permanent earnings floor no one could fall beneath, and would replace many of today’s temporary benefits, which are given only in case of emergency and only to those who meet highly specific criteria. Rising inequality, decades of stagnant wages, the end of career employment and technology and networks disrupting the labor force have resulted in unprecedented income instability. Price Waterhouse Coopers (PWC) has concluded in March 2017 that as much as one-third of the U.S. workforce is at risk of being lost to automation. An Oxford University study goes even further, concluding that as many as 47% of jobs in the U.S. are at risk of being wiped out due to automation within the next 20 years. Some countries are already experimenting with a UBI system. Finland launched a UBI pilot program in 2017 where 2000 people are collecting approximately $587 per month for two years without having to report whether they are seeking employment or how they are spending the money. This supplement will be deducted from any benefits they are currently receiving. The program was created by KELA, the Finnish agency responsible for the country’s social benefits. Finnish official believe the UBI will help to streamline a bloated welfare system, and because participants will continue to receive benefits even when they find work there are no disincentives to seeking employment while on the program. A partial UBI already exists in Alaska, and pilot programs are being discussed in Canada, Brazil, Iceland and Uganda. A UBI system would serve as an effective mechanism to fight poverty while providing a floor where citizens could take risks in the job market without fear of losing all of their income. A growing chorus from all sides of the political spectrum – from Charles Murray to Robert Reich to Labor leader Andrew Stern – to business titans such as Pierre Omidyar and Elon Musk – all now support a UBI for Americans. There are various estimates regarding the costs of implementing a UBI program, but the UBI should be considered in tandem with full or partial consolidation of other programs and tax credits that would immediately be made redundant by the new transfer.
Encourage Environmental Social and Governance (ESG) and Impact Investment as core parts of asset management.Impact investments are made into companies, organizations and funds with the intention to create measurable social and environmental impact along with financial returns. Research has shown that currently the majority of institutional investors actively consider ESG criteria when making alternative investment allocations. ESG analysis has moved beyond ethical concerns and has found a firm footing as a risk and investment management topic. Surveys now show most institutional investors are confident that ESG improves risk-adjusted returns and is an important aspect of risk and reputation management. It is estimated that investors committed at least $15 billion globally to impact-related projects in 2015, and that number is anticipated to grow exponentially as impact funds develop a track record and millennials demand more accountability as to how their savings are invested. Large impact investment funds with more than $250 million of assets under management (AUM) include Bridge Ventures, the Calvert Foundation and Turner Impact Capital. These funds and many others invest in sustainable agriculture, global health, water and sanitation, clean technology and affordable housing, among many others. In 2016, the largest asset management company in the world (BlackRock) launched its impact mutual fund to invest in companies seeking triple bottom line returns (profit, social and environmental returns), and the Department of Labor revised its Employee Retirement Income Security Act (ERISA) guidelines to allow pension fund managers to incorporate ESG criteria into investment allocation decisions. Impact investment can serve as a critical future channel to solve problems while generating returns for businesses and investors. The federal government could help to jump start this growing market by creating an ESG-related fund for the federal government’s defined contribution savings plan (Thrift Savings Plan, or TSP) for civil service employees, retirees and members of the military. There are nearly 5 million current participants in TSP, with total assets of at least $468 billion.
Grant special purpose national bank charters for financial technology (fintech) companies. Fintech companies include businesses focused on payments, blockchain, wealth management, crowdfunding, digital currencies, peer-to-peer lending, clearance and settlement. Technology has made “financial products and services more accessible, easier to use and much more tailored to individual consumer needs.” The power of fintech to accelerate financial inclusion and provide greater financial security to the marginal and the unbanked is one of the greatest potential impacts of this segment of finance. Fintech can help address this growing program of “capital deserts” by providing citizens tools to access capital particularly in underserved rural and urban areas. Many U.S. fintech companies consistently cite the lack of a clear and coherent regulatory structure within the U.S. as a major impediment to further growth and expansion. Policymakers currently find it difficult to support fintech innovation while upholding consumer and financial system protections.
In December 2016, the Office of the Comptroller of the Currency (OCC) published and solicited comments for a paper exploring special purpose bank charters for U.S. fintech companies engaged in “receiving deposits, paying checks or lending money.” There would be numerous benefits to the OCC granting special purpose national bank charters to fintech companies. Special purpose charters would help ensure that these companies operate in a safe and sound manner while effectively serving the needs of customers, businesses, and communities. They would promote consistency in the application of the law and regulation across the country and ensure that consumers are treated fairly. The growth of new fintech companies with national charters would also expand access to finance for SMEs and make the federal banking system much stronger. Special purpose national bank charters for fintech companies would represent a crucial step in modernizing the banking system, fostering innovation and demonstrating U.S. leadership throughout the world in the rapidly evolving intersection of technology and finance.
Continue to enact legislation at state level to support alternative corporate forms such as Benefit Corporations. Benefit corporations are legally designated for-profit corporate entities whose mission includes generating a positive impact on society, employees, the community and the environment, in addition to profit. Benefit corporations give entrepreneurs the freedom to consider stakeholders in addition to shareholders and net profit. Shareholders of such corporations, in turn, enjoy all the same protections and powers found in traditional corporate law but also have more freedom to hold the company accountable for remaining true to its stated mission. Benefit corporations create a no-cost economic development opportunity for states by establishing new pathways for social entrepreneurs to scale. Thirty-two states including the District of Columbia have passed benefit corporation legislation. “B” Corporations are businesses privately certified by B Lab, a non-profit organization founded in the U.S. but with offices throughout the world. Companies are granted “B” Corporation status by B Lab upon completion of an assessment and satisfying requirements that the company integrate B Lab commitments into its core business. There are now 4,000 legally constituted Benefit Corporations and 2,000 certified “B” Corporations in the U.S.. Some examples of well-known benefit or “B” corporations include Patagonia, Kickstarter, Solberg Manufacturing and Etsy.
Benefit Corporations and “B” corporations create tremendous branding opportunities for businesses seeking to highlight their positive impact on their communities. States and the federal government can expedite a process to provide incentives to businesses to declare as Benefit Corporations. More U.S. states can pass legislation to help facilitate a new market so that current shareholders, consumers and potential investors can make informed decisions based on companies’ missions and performance. And as the federal government downsides and more work is granted to federal contractors and subcontractors, government procurement guidelines could be reviewed and revised as a pilot project to include preferences for benefit corporations.
Eliminate Anonymous Corporate Ownership.Nearly one year after the Panama papers exposed the offshore banking activities of clients of the Panamanian firm Mossack Fonseca, it is still legal for corporations in the U.S. to be anonymously owned. Anonymous ownership directly facilitates the ability of shell companies to hide assets and obscure illegal activity. But in addition to tax evasion and money laundering, anonymous ownership is also contributing to accelerating housing prices in major U.S. cities. According to the New York Times, streams of foreign wealth shielded by shell corporations are already used to purchase more than half of all individual properties in New York City that cost more than $5 million. In a three-block stretch in Midtown Manhattan, 57% of apartments are vacant for at least 10 months every year, and absentee homeownership has grown by 70% in Manhattan since 2000. In South Florida, money linked to wrongdoing abroad is helping to power the new condos rising on its waterfront and pushing home prices far beyond what locals can afford. These investments often result in skyrocketing home prices not only in luxury units but also more affordable housing – ultimately pricing out the ability of American citizens to live in their own cities. Cities also routinely encounter difficulties in identifying who actually owns slum properties and ensuring accountability for those owners and corporate entities that allow residential properties to become dangerous and deadly.
The UK, France, Germany, Spain and Italy have all committed to creating a registry for anonymous corporate ownership. In late 2016, the U.S. Justice Department concluded its three-year Swiss Banking program that provided a path for Swiss banks to resolve potential criminal liabilities related to disclosure of cross-border activities, providing detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest, providing information as to other banks that have transferred funds from secret accounts and closing accounts of those who have failed to meet U.S. reporting obligations. Despite these efforts, no U.S. state requires the name of anonymous corporate owners. Bipartisan legislation cosponsored by Sens. Charles Grassley and Sheldon Whitehouse and Congressman Peter King and Congresswoman Carolyn Maloney has been introduced to identify money laundering and terrorist financing through the disclosure of anonymous owners. Congress should pass that legislation, and the Trump administration should sign the bill into law to prevent the U.S. from becoming a preferred haven for tax cheats and illicit activity.
Jamie Dimon, chairman and CEO of JPMorgan Chase, the largest U.S. financial institution with some $2.5 trillion under management, recently released his annual letter to shareholders. His letter included extensive comments on public policy where he opined that “something is wrong” in America and that “we need coherent, consistent, comprehensive and coordinated policies that help fix these problems.” His letter is another example of the urgent need for inaugurating an American inclusive capitalism agenda. While government can provide the framework and a social safety net, the primary responsibility for such an agenda should be with the private sector through a renewed and reinvigorated business activism. Markets have a unique ability to adapt and allocate resources in the most efficient way, but when needless financial engineering results in the abandonment of communities, when middle-class citizens can no longer access capital and when more and more Americans drop out of the labor force with no source of income, the remarkable consensus that has resulted in American economic strength since the end of World War II will become seriously endangered.
But there is a path forward. Business activism focused on new corporate forms, impact investing and a regulatory structure that facilitates a shift away from short-termism and toward entrepreneurship and greater access to finance can lead the way in this quest for reform. Such reform can be the harbinger of a new social compact between government, established business, entrepreneurs and the people. And it can give the U.S. an opportunity to assert leadership and address the most important economic challenges of our time.
I recently had the pleasure of attending #CityChain17 (blockchain conference) at IBM’s SouthBank offices.
Chaired by Paul Forrest (chairman of MBN Solutions), the conference was an opportunity to learn about blockchain and how it is being applied.
In the past, I viewed the hype about blockchain (following excitement about Bitcoin its most famous user) as just another fad that might pass.
However, as more businesses have got involved in piloting potential applications, it’s become obvious that there really is something in this – even if its manifestations are now much more commercial than the hacking by Bitcoin fans.
CityChain17 brought together a number of suppliers and those helping shape the industry. It was a great opportunity to hear voices, at times contradictory,and see what progress has been made toward mainstream adoption. There was so much useful content that I made copious notes and will share a series of two blog posts on this topic.
So, without further ado, as a new topic for our blog, here is part 1 of my recollections from this blockchain conference.
Introducing blockchain and why it matters
The first speaker was John McLean from IBM. He reviewed the need that businesses have for a solution to the problem of increasingly complex business and market networks, with the need to securely exchange assets, payments or approvals between multiple parties. He explained that, at core, blockchain is just a distributed ledger across such a network.
In such a scenario, all participants have a regulated local copy of the ledger, with bespoke permissions to approve blocks of information.
However, he also highlighted that today’s commercial applications of blockchain differ from the famous Bitcoin implementation:
Such applications can be internal or external.
Business blockchain has identity rather than anonymity, selective endorsement versus proof of work and wider range of assets vs. a cryptocurrency.
Blockchain for businesses is interesting because of the existing problems it solves. Broader participation in shared ledger reduces cost and reconciliation workload. Smart contracts offer embedded business rules with the data blocks on the ledger. Privacy improves because transactions are secure, authenticated and verifiable. So does trust because all parties are able to trust a shared ledger – all bought in.
Several sectors are currently testing blockchain implementations, including financial services, retail, insurance, manufacturing and the public sector.
Finally, John went on to outline how IBM is currently enabling this use of blockchain technology (including through its participation in the Hyperledger consortium and its Fabric Composer tool).
As someone who was involved in the early days of data warehouses and data mining, I was delighted to hear the next speaker (Dr. Gideon Greenspan from Coin Sciences) talk about databases. Acknowledging that a number of the so-called unique benefits of blockchain can already be delivered by databases, Gideon began by suggesting there had been three phases of solutions to the business challenges of exchanging and coordinating data:
Central shared database
He had some great examples of how the “unique benefits” of blockchain could be achieved with databases already:
Ensuring consensus in data (B-trees in relational databases)
Smart contracts (the logic in these equal stored procedures)
Append-only inserts (database that only allows inserts)
Safe asset exchanges (the ACID model of database transactions)
Robustness (distributed and massively parallel databases)
Even more entertaining, in a room that was mainly full of blockchain advocates, developers or consultants, Gideon went on to list what was worse about blockchain vs. databases:
Transaction immediacy (ACID approach is durable, but blockchains need to wait for consensus)
Scalability (because of checks, blockchain nodes need to work harder)
Confidentiality (blockchains share more data)
After such honesty and frankly geeky database technology knowledge, Gideon was well-placed to be an honest adviser on sensible use of blockchain. He pointed out the need to consider the trade-offs between blockchain and database solutions. For instance, what is more important for your business application:
Disintermediation or confidentiality?
Multiparty robustness or performance?
Moving to more encouraging examples, he shared a few that have promising blockchain pilots underway:
An instant payment network (using tokens to represent money, it’s faster, with real-time reconciliation and regulatory transparency)
Shared metadata solution (as all data added to the blockchain is signed, time-stamped and immutable – interesting for GDPR requirements, even if the “right to be forgotten” sounds challenging)
Multi-jurisdiction processes (regulators are interested)
Lightweight financial systems (e.g. loyalty schemes)
Internal clearing and settlements (e.g. multinationals)
But a final warning from Gideon was to be on the watch for what he termed “half-baked blockchains.” He pointed out the foolishness of:
Blockchains with one central validator
Shared state blockchains (same trust model as a distributed database)
Centrally hosted blockchain (why not a centralized database?)
Gideon referenced his work providing the multichain open platform, as another source for advice and resources.
Blockchain is more complex, hence the need for technical expertise
A useful complement (or contradictory voice, depending on your perspective) was offered next. Simon Taylor (founder of 11:FS and ex-Barclays innovation leader), shared more on the diversity of technology solutions.
Simon is also the founder of yet another influential and useful group working on developing/promoting blockchain, the R3 Consortium. He credits much of what he has learned to a blogger called Richard Brown, who offers plenty of advice and resources on his blog:
One idea from Richard that Simon shared is the idea that different technology implementations of blockchain, or platforms for developing, are best understood as being on a continuum, from more centralized applications for FS (like Hyperledger and Corda) being at one end and the radically decentralized Wild West making up the other end (Bitcoin, z-Cash and Ethereum). He suggests the interesting opportunities lie in the middle ground between these poles (currently occupied by approaches like Stellar and Ripple).
Simon went on to suggest a number of principles that are important to understand:
The shared ledger concept offers better automated reconciliation across markets.
But, as a result, confidentiality is a challenge (apparently Corda et al. are solving this, but at the expense of more centralization).
No one vendor (or code-base/platform) has yet won.
It is more complicated than the advertising suggests, so look past the proof of concept work to see what has been delivered (he suggests looking at interesting work in Tel Aviv and at what Northern Trust is doing).
To close, Simon echoed a few suggestions that will sound familiar to data science leaders. There continues to be an education and skills gap. C-Suite executives recognize there is a lot of hype in this area and so are seeking people they can trust as advisers. Pilot a few options and see what approach works best for your organization.
He also mentioned the recruitment challenge and suggested not overlooking hidden gems in your own organization. Who is coding in their spare time anyway?
In his Q&A, GDPR also got mentioned, with a suggestion that auditors will value blockchain implementations as reference points with clear provenance.
After three talks, we had the opportunity to enjoy a panel debate. Paul Forrest facilitated, and we heard answers on a number of topics from experts across the industry. Those I agreed with (and thus remembered) were Tomasz Mloduchowski, Isabel Cooke and Parrish Pryor-Williams.
I took the opportunity to ask about the opportunity for more cooperation between the data science and blockchain communities, citing that both technology innovations needed to prove their worth to the C-suite and had some overlapping data needs. All speakers agreed that more cooperation between these communities would be helpful.
Isabel’s team at Barclays apparently benefits from being co-located with the data science team, and Parrish reinforced the need to focus on customer insights to guide application of both technologies. What panelists appear to be missing is that, in most large organizations, blockchain is being tested within IT or digital teams, with data science left to marketing or finance/actuarial teams. This could mean a continued risk of siloed thinking rather than the cooperation needed.
An entertaining, question concerned what to do with all the fakes now rapidly adding blockchain as a buzzword to their CVs and LinkedIn profiles. Surprisingly, panelists were largely positive about this development. They viewed it as an encouraging tipping point of demand and a case that some will need to fake it ’til they make it. There was also an encouragement to use meetups to get up-to-speed more quickly (for candidates and those asking the questions).
The panel also agreed that there was still a lack of agreement on terms and language, which sometimes got in the way. Like the earlier days of internet and data science, there are still blockchain purists railing against the more commercial variants. But the consensus was that standards would emerge and that most businesses were remaining agnostic on technologies while they learned through pilots.
The future for blockchain was seen as being achieved via collaborations, like R3 and Hyperledger. A couple of panelists also saw fintech startups as the ideal contenders to innovate in this space, having the owner/innovator mindset as well as the financial requirements.
It will be interesting to see which predictions turn out to be right.
What next for blockchain and you?
How do you think blockchain develops, and do you care? Will it matter for your business? Have you piloted to test that theory?
I hope my reflections act as a useful contact list of those with expertise to share in this area. Let us know if this topic is something you would like covered more, on Customer Insight Leader blog.
That’s it for now. More diverse voices on blockchain in Part 2….
Having spent a number of weeks speaking at, or chairing, various industry events, I’ve seen how firms are nervous about the rise of fintech/insurtech and are convinced they should focus on digital and technology for growth.
Is that right? Does success and sustainable growth come from that focus?
In response, I want to share a two-part blog post, based on a talk that I’m giving to mutual lenders in London.
The topic concerns where to focus as a 21st century business. I hope it will help leaders grappling with competing demands on their time and attention. Here is part one.
Where to focus? (Winds of change)
In our ever-changing world, where should you focus to succeed with improving performance and readiness for the future?
Many social and business commentators will highlight key trends. These include:
The rise in the power of consumers (including transparency and ease of switching)
The erosion of trust in organizations (especially financial services)
Increased regulation (including conduct risk)
Rise in services expectations driven by experience from other sectors
Emergence of technology disruption/innovation scene
All these combine to make it ever more urgent for lenders to regain trust, by both meeting service expectations and communicating more appropriately. Both of those twin aims are informed by better customer insight: genuinely understanding your customers and the jobs they want to get done (including when), better than your competition.
On the encouraging side, a number of studies have shown that businesses that make extensive use of analytics can outperform their peers. But, just as has previously been seen with the “hype cycles” of data warehousing and customer relationship management (CRM), a lot of technology spending can also be wasted. How can businesses avoid that pitfall?
Many lenders (and financial services firms more broadly) aspire to “customer-centricity“ as a business strategy. Far fewer achieve both improved customer experiences and sustainable profit growth as a result.
Insights 2020 findings
A key global study focused on understanding why some businesses succeed at this challenge, while others fail, was Insights 2020. As reported in Harvard Business Review, this collaboration talked to more than 10,000 practitioners and 330 leaders across more than 60 countries. Insights 2020 identified three factors that distinguished those who achieved customer-centricity, measured through customer satisfaction, digital engagement and commercial return.
Embedded customer obsession in culture (decision-making, performance management and embracing experimentation)
Customer insight team is an active, equal business partner
Getting clear on customer insight
What do I mean by customer insight?
Different organizations will have different answers. Some appear to equate the term with research, others with analytics. A few relate it to targeted database marketing, and almost everyone can see the importance of quality data for any such work.
Benchmarking best practice within customer insight, especially for financial services firms, has taught me that a more holistic approach works best. The most capable teams combine technical skills in data, analytics, research and database marketing. But, as the saying goes, it’s what you do with it that counts. Using those technical skills in concert, to achieve a deeper understanding of your customers that enables behavioral change, is where true customer insight lies.
“A non-obvious understanding about your customers, which if acted upon, has the potential to change their behavior for mutual benefit.”
Key strengths needed (including soft one)
To achieve that depth of insight and impact requires two key strengths.
First, the use of the use of the four technical disciplines I mentioned above, in concert to produce synergy. I normally explain this through use of Laughlin Consultancy model for Holistic Customer Insight, a virtuous circle of how to operate in multi-disciplinary teams.
The second strength needed is analysts who can speak to your business. There is no point discovering great insights into your customers if these remain on the shelf. For that reason, several leading customer insight teams have benefited by investing in softer skills training for their technical teams.
The model I use is a nine-step model, from incisive questioning (to determine real business need) all the way through to following up to ensure insights are acted upon in the business (to achieve customer and commercial targets).
For most organizations, reaching that level of capability begins with a focus on data.
When speaking with leaders from across many different sectors, I find that a perennial headache is either getting the data they need or being able to achieve a single customer view. Such a focus on data, as the foundation of customer insight and customer-centricity, makes sense.
However, I would like to make a plea for a focus on two aspects that are too often neglected. Data models and metadata may sound too much like topics for technophiles or data geeks, but lack of both can have big business impacts.
Faced with the challenge of capturing and using more data, egged on by technology suppliers, too many companies leap straight into a technology solution and technical build. However, with the pace of change and ever-growing list of data that may be needed (considering the growth of Internet of Things, for example), businesses need a more sustainable and technology-independent map. That is the role of the too-often-neglected conceptual and logical data models. These should be treated like blueprints for your business ecosystem.
Alongside that data gap, another common lack for analytics team is missing metadata. That is data about data. In all the excitement to gather more facts about customer segments, or potential triggers for marketing campaigns, the basic need for things like a data dictionary can be missed. Many insight or analytics teams rely on what senior analysts hold in their heads. But the expertise about what different data items mean, which can be trusted and how to interpret different values – all this is too valuable to allow it to walk out of the door.
Insurance is the industry most affected by disruptive change, according to the percentage of CEOs who are extremely concerned about the threats to their growth prospects from the speed of technological change, changing customer behavior and competition from new market entrants.
Insurers know they need to innovate to remain competitive. In fact, 67% of insurance respondents to PwC’s 2017 CEO Survey see creativity and innovation as very important to their organizations, ahead of other financial services sectors and the CEO Survey population as a whole. And, insurance CEOs noted that the area they would most like to strengthen to capitalize on growth opportunities is digital and technological capabilities, followed by customer experience (reflecting the connections between the two).
However, the industry’s traditional conservatism and the dizzying pace of technological change has made it difficult to change. As a result, most insurers are looking outside the industry – typically in the insurtech space (e.g., drones, sensors, internet of things (IoT)) – for the best ways to improve their systems, processes and products. And there is no doubt that industry stakeholders think insurtech has real promise: Annual investment in insurtech startups has increased fivefold over the past three years, with cumulative funding reaching $3.4 billion since 2010, based on the companies that PwC’s DeNovo platform follows.
To facilitate a diverse approach to identifying opportunities and potential partners from different industries and specialty areas, an enterprise innovation model (EIM) is table stakes. An EIM facilitates:
New product and service development: Being active in insurtech can help insurers discover emerging coverage needs and risks that require new insurance products and services. As a result, they can improve their product portfolio strategy and design of new risk models.
Market exploration and discovery: Prescient insurers actively monitor new trends and innovations, and some have even established a presence in innovation hotspots (e.g., Silicon Valley) where they can directly learn about the latest developments in real-time and initiate innovation programs.
Partnerships that drive new solutions: Exploration typically leads to the development of potential use cases that address specific business challenges. Insurers can partner with startups to build pilots to test and deploy in the market.
Contributions to insurtech’s growth and development: As we describe below, venture capital and incubator programs can play an important role in key innovation efforts. Established insurers that clearly identify areas of need and opportunity can work with startups to develop appropriate solutions.
Most insurers are looking outside the industry for the best ways to improve their systems, processes and products.
Maintaining awareness, influencing the market and identifying the right partners
To ensure an organization’s innovation efforts are in sync with – or even driving – the latest developments in the market, an EIM needs a formalized yet agile process for identifying and incorporating best practices.
Dedicated assessment of insurtech advancements can allow insurers to identify and promote best practices and key technologies. Moreover, maintaining a close connection with the insurtech market can help a company develop its external knowledge and relationships with innovators. Through this process, insurers can identify potential partners that can help them understand evolving technologies and their applications, and even contribute to developing the capabilities they desire.
With a deeper understanding of the market, capabilities and key players, insurers can be better positioned to facilitate innovation, ideation and design. While some fintech companies already have compelling insurance applications, insurers have a great opportunity to identify and design new potential use cases.
Fast prototyping is key to quickly creating minimally viable products (MVP) and bringing ideas to life. Early-stage startups develop and deploy full-functioning prototypes in near real time and go to market with solutions that evolve with market feedback. The development cycle is shortened, which allows startups to quickly deliver solutions and tailor future releases based on usage trends and feedback and to accommodate more diverse needs. Established insurers can follow the same approach or can partner with existing startups that have a MVP to help them to move to the next stage, scaling.
The ways to accomplish all of this vary based on how the organization plans to source new opportunities and ideas, how it plans on executing innovation and how it plans to deploy new products and services. The following graphic provides examples of EIMs by primary function.
The innovation center
The innovation center (also named “lab” or “hub”) is a structure at a corporate level that bridges external innovation with business unit needs and innovation opportunities. It relies on internal subject matter experts and innovation champions to ignite and drive innovation initiatives at a business unit level. With this model, innovative new products and services go to market under the company’s brand.
The innovation hub provides an outside-in view while promoting innovation internally. With this model, the company dedicates a team to constantly monitor trends and market activity, build and maintain relationships with key insurtech players, identify potential future scenarios and determine new partnership opportunities.
The hub should be managed through business units to effectively innovate (i.e., building prototypes and scaling models). Execution is a key success factor, and we recommend insurers consider complementary innovation models to help promote positive outcomes.
Regardless of the model they use, we recommend that insurers of all sizes consider developing an innovation center and create an external connection based on potential future scenarios.
An incubator can drive innovation from idea to end product by identifying new opportunities and developing related solutions. Although it does require a significant investment of both money and resources, it has proven especially effective in addressing complex problems and devising new approaches to them.
Although the incubator can be internal, external structures typically create unique development environments and attract necessary talent. Via an external approach, ideas come mostly from outside the company and a panel of internal or external innovation specialists provide high-level guidance and approval for the innovation the company is seeking through the incubator.
Although the incubator initially drives innovation, business units typically become involved during the development process. They have an important role, especially when planning to deploy new solutions within the organization. The incubator can wind up as a start-up that can go to the market under its own name.
One of the main strengths of the incubator model is that it facilitates execution. It holds an idea until a prototype is developed and a minimally viable product is available. The gradual involvement of business units during the process enables the model to adequately scale. Upon adoption by its future owner, the incubator and business units can address any related challenges related to operating capacity, cyber risk, regulation and other issues.
Strategic venture capital (SVC)
The SVC model offers the opportunity to participate via stake or acquisition in relevant insurtech-related players. This is a way to influence and shape the development of specific startups (e.g. pushing them to solve specific problems) and acquire key capabilities and talent, and as a way to derive value from strategic investments.
In the SVC model, the company establishes a new ventures division, which sources ideas from the outside. The company provides funding and support for equity, while a SVC from this new structure explores, identities and evaluates solutions and markets new ventures under its own brand. The funds thatSVC invests in a startup help new players augment their capabilities and scale their business model. This could lead to potential market joint ventures, acquisitions or other deals to monetize the initial investment.
Established insurers with SVC arms are usually leaders in specific market segments and therefore leverage their experience and knowledge to select key ventures. To become more active with insurtech, these structures can be linked to innovation centers, thereby allowing companies to connect ventures with business units.
Instead of choosing one model over the other, we propose one that combines key elements from each. Companies can select elements based on their need for external innovation, the availability of talent, their ability to execute and the amount of investment the organization is willing to commit.
EIM operating options
EIM operating characteristics
Bridging the cultural divide
Complicating the need to innovate is the fact that an insurer’s culture often influences an external company’s decision about partnering with it. In fact, according to our 2016 Global
FinTech Survey, more than half of fintechs see differences in management and culture as a key challenge in working with insurers. Insurers also realize this, and 45% of insurance companies agree that this is a major challenge.
Accordingly, insurers will need to assess the availability and compatibility of existing resources and determine how and where they can find what may not currently be available. By clearly articulating the organization’s needs, defining explicit roles and establishing a model for enterprise innovation, an insurer can address any underlying concerns it may have about partnerships.
While insurers can create internal structures to support innovation, most of them will have to enlist external resources in one way or another. In fact, we expect many talented professionals without insurance-specific skills will be the ones who wind up driving innovation.
Attracting and developing innovators
Insurers can create internal structures to support innovation, but – as EIMs stipulate – success ultimately depends on having the right talent. And, most insurers will have to enlist external resources – ones who have an entrepreneurial mindset and who are well-connected to insurtech – in one way or another.
How does a company attract and retain this kind of talent? There are four primary ways:
Acquire the new talent from start-ups. This works well if the acquired company keeps running its business under its own start-up rules, away from the acquirer’s bureaucracy. Otherwise, if there is too much acquirer interference, then retention will be a challenge in a market that covets innovators.
Attract the talent directly from the market. This option typically requires a new mindset from the hiring company in terms of business role, work environment and even location. Establishing a presence in relevant innovation hotspots will help make an offer more attractive, facilitate external connections and demonstrate the insurer’s commitment to letting innovators be free to innovate.
Partner with startups, technology vendors, universities, researchers and other proven innovators. This option represents a major opportunity because it enables the insurer to create the connections to and formal partnerships with new talent. However, while identifying desired capabilities is relatively easy, there will need to be strong alignment of purpose between the organization and the new partners for the relationship to work. In this case, the Innovation Hub should be the most helpful model.
Grow the talent. This option is probably the least disruptive because it doesn’t require external changes. Large organizations have the opportunity to discover talent within their structures. But, the organization will have to ascertain and leverage the mentality and professional background of employees in many different ways. Gamification, internal collaboration groups and other resources can help in the search for potential in-house innovators, but most companies will need a more sophisticated staffing model to develop this talent (e.g., having specific development plans and offering “external” experiences in projects and with partners).
Complementing these options is the insurance industry leadership’s advocacy of new methods to foster change in employee skill sets. According to insurance respondents to PwC’s 2017 CEO Survey,
61% are exploring the benefits of humans and machines working together (considerably higher than any other FS sector), and
49% are considering the impact of artificial intelligence on future skills needs (also considerably higher than any other FS sector).
In response to this rapidly changing environment, incumbent insurers are approaching insurtech in various ways, prominently through joint partnerships or startup programs. But whatever strategy an organization pursues, insurtech’s main impact will be new business models that create challenges for market players and other industry stakeholders (e.g., regulators). In this environment, insurers will need to move away from trying to control all parts of their value chain and customer experience through traditional business models, and instead move toward leveraging their trusted relationships with customers and their extensive access to client data.
For many traditional insurers, this approach will require a fundamental shift in identity and purpose. The new norm will involve turning away from a linear product push approach, to a customer-centric model in which insurers are facilitators of a service that enables clients to acquire advice and interact with all relevant actors through multiple channels. By focusing on incorporating new technologies into their own architecture, traditional insurers can prepare themselves to play a central role in the new world in which they will operate at the center of customer activity and maintain strong positions even as innovations alter the marketplace.
To effectively develop these new business models and capabilities and establish mutually beneficial insurtech relationships, established insurers will need to start with a well-thought-out innovation strategy that incorporates the following:
An effective enterprise innovation model (EIM) will take into account the different ways to meet an organization’s various needs and help it make innovative breakthroughs. The model or combination of models that is most suitable for an organization will depend on its innovation appetite, the type of partnerships it desires and the capabilities it needs. EIMs feature three primary approaches to support corporate strategy, partnering via innovation centers (or hubs), building capabilities via incubators and buying capabilities via a strategic ventures division. Companies can select elements from each of these models based on their need for external innovation, the availability of talent, their ability to execute and the amount of investment the organization is willing to commit.
Even though insurers can create the internal structures that support innovation, most of them will have to enlist external resources in one way or another. Accordingly, they will need to assess the availability and compatibility of existing talent and determine how and where they can find what may not currently be available. Much like with enterprise innovation models, there are certain ways (often in combination) that insurers can locate and obtain the resources they need, including acquiring it, trying to attract it, partnering and growing it internally.