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3 Myths That Inhibit Innovation (Part 3)

As explored in two prior posts, there are a number of classes of myths surrounding insurance innovation. In Part I , we looked at how a lack of urgency caused by multiple factors leads to strategic complacency. Part II discussed how that lack of urgency combined with concerns about the financial impacts of innovation efforts make it easy to postpone those initiatives until a “better time.”

Process Myths

In this final installment, we will touch on a a number of the myths that inhibit a company from starting an innovation project or, worse, stall a project that is in flight.

The post on financial myths explored the conflict between current IT and new efforts. The waters are further muddied by the uncertainty surrounding what constitutes innovation.

  • Does innovation only represents those game-changing efforts that revolutionize an industry?
  • Conversely, are all those projects that are on the IT road map innovation?

Game-Changing Innovation

Often when innovation is discussed, the focus turns to the biggest, most successful projects, which had multibillion-dollar impacts. Most folks will have heard of the successes and have opinions one way or another.

Too frequently, the belief that innovation is only these big successes turns executive teams off to the possibility of leading their organization to innovate. The concept of the lighting-strike idea is ingrained in modern lore. Although this big bang process does happen, it is the exception rather than the rule.

More often, disruptive innovation is the process of hard work and iteration rather than a single “Aha!” moment. In fact, the initial form of products that disrupt markets is generally less capable than current solutions and addresses the least desirable segments of the customer base. Over time, those products are refined and move up into more desirable customer segments.

Innovation concepts are also seen as unicorns: only discovered by unique individuals.

Organized innovation efforts should cast a wide net for ideas. Creative solutions to existing problems exist today in your organization. The challenge is to align the organization appropriately, focus efforts and develop a culture that embraces the challenge.

We will explore the organization-based myths in a bit, but first a look at another form of innovation will add color to the picture.

Sustaining Innovation

At the other end of the innovation continuum, away from the lightning strike, is the concept that any development or product improvement efforts are innovation.

Unfortunately, not all projects are innovation. Organizations that believe that any improvement efforts are innovative are likely on a dead end road.

Maintenance is not innovation, no matter how urgent. A project to upgrade versions of AIX on your policy admin system is decidedly not innovation. A similarly sized effort to investigate and deploy a new claims-focused chatbot probably is. While not unique or novel, it could be classified as incremental or sustaining innovation.

Sustaining innovations are those that are undertaken to improve products to existing markets, rather than to address new markets or value chains. Harvard Professor Clayton Christensen describes it this way:

“A sustaining innovation targets demanding, high-end customers with better performance than was previously available. Some sustaining innovations are incremental, year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough , leap-beyond-the-competition products.”

Most organizations have a significant portion of their efforts and budgets targeted at sustaining innovations. The CB Insights State of Innovation survey results determined that 78% of innovation portfolios are focused on this type of innovation effort.

Therein lies the challenge. You’re doing it; so, too, are your competitors. Any improvements provide competitive advantage only for a short period until others catch up, and the cycle repeats.

See also: How ‘Not Invented Here’ Limits Innovation  

An organization should commit to a range of innovation efforts, both sustaining, breakthrough and game-changing, sometimes called “ambidextrous innovation.” A good rule of thumb is that the corresponding ratio of investment would be 70%, 30% and 10%. This breakout allows for continuous efforts at sustaining innovation while encouraging investigating “moon shots.”

If innovation runs the gamut from incremental to industry-changing, how does an organization create a culture that embraces and pursues it on a regular basis?

Innovation Culture

While large, well-funded innovation labs get a lot of press, most innovation starts with small teams. But even getting the culture right for those small teams is critical to their success.

Most organizations recognize that effective and successful innovation efforts must be led from the C-suite. Often, after a decision to initiate an innovation effort, the CEO announces that she will personally will take charge. The implementation may need more finesse.

Although the buck generally stops on the CEO’s desk, having her lead the day-to-day may actually impede progress. One of the reasons is that open communication can be inhibited if there are too many organization layers between the participants. A second reason is more nuanced.

As a project moves through the various stages of the innovation process, close coordination with legal and finance may be required. Having the project report into a senior executive in one of those disciplines often helps. Regular updates into one or both of these areas, along with those business units having a vested interest in success, can fast track a project.

Another myth is that once a team is set on task, the hard organizational work is done.

“Innovation will drive the culture” is an oft-heard mantra. Unfortunately, in many instances the reverse is more accurate: Culture drives the innovation.

Some cultural issues need to be addressed up front. Insurance is inherently a conservative business, and saying “No” is rightly part of the culture. Individuals build careers around never making a mistake. Thus, no can be an ingrained habit.

Innovation on the other hand is all about saying “YES.” That shift can be difficult for some conservative organizations. Encourage participants to first find the value in every concept. Positivity is contagious and will lead to increased participation.

One major myth is that there are too few good ideas. On the contrary, there are lots of good ideas. A key to success is rigorously soliciting, collecting, evaluating and filtering them.

In the early stages of the innovation process, many ideas should be explored. So, solicit participation from your entire organization. Often, innovation and creativity are seen as someone else’s responsibility. But by extending participation to the entire organization, you may find that insights may come from unlikely departments and individuals.

With many valuable ideas and opportunities, prompt evaluation and selection must be a core principle. This is where constraints come into play. Both time- and expense-based constraints focus mind and project.

The last myth that should be addressed is the notion that the goal of innovation efforts is to launch. In some instances, the launch is immediately successful, but, in most cases, further modifications are required to perfect the new product and processes.

Pilots are worthwhile and often necessary. However, the final goal is widespread adoption across multiple relevant business units. Frequently, pilots reveal how the process can be improved. To encourage widespread adoption, implementation must be streamlined, benefits clearly articulated and internal support built.

The ultimate measure of success should be returns on investment of 5X to 10X in two to three years. This level of success will obviate financial concerns of cannibalization and build support for follow-on projects.

See also: Digital Innovation in Life Insurance

Long Story Short

Consumer behavior has changed dramatically in the past 10 years. While traditional insurance practices sufficed to allow continued success, both incumbents and new entrants are working hard to change to meet new expectations. Even though the industry has weathered many storms, and successfully repelled outsiders in the past, this time is different.

Twenty-years ago, the auto line was revolutionized with the introduction of credit-based underwriting. Today, there are pioneering efforts in a dozen areas with the potential to have effects of the same magnitude.

Couple those industry changes to the changing expectations of insurance buyers, and the potential for one or more industry revolutionizing innovations grows every quarter. This is not the time for complacency.

Financial performance rightly concerns senior executives and must be part of any decision-making process. The problem to avoid is allowing financial considerations to be a primary gating factor.

Financial analysis can be a valuable addition to the project definitions by providing guidelines as to the magnitude of the returns given the potential impacts of the innovation project.

Success depends on an organizational commitment to change. This requires culture shift, buy in and support from middle management, and widespread participation.

Although there are any number of moving parts to an integrated innovation strategy, implementation is fairly straightforward, and well within the capabilities of any well-managed insurance organization.

3 Myths That Inhibit Innovation (Part 2)

Even though senior leaders in many insurance organizations realize that innovation is an imperative in the current environment, there are many reasons that success is difficult. There are some legitimate roadblocks, but many of the reasons that innovation efforts are either never started or, more troubling, never successfully completed are falsehoods.

In the first installment of this three-part series on Myths of Insurance Innovation, we covered strategic complacency: those myths that are a function of misreading the current environment and lead to a lack of urgency. As we saw in our last post , even though the importance of innovation efforts is high, the urgency is low, and other concerns take precedence.

Financial Myths

Here, we look at a problem closely related to the lack of urgency: the canard surrounding innovation and financial performance. One of the key ways that financial concerns inhibit innovation decisions is through a focus on quarter-to-quarter results. Innovation efforts are often seen as hurting financial performance.

Many insurers have multiple development efforts in flight at any time competing for resources, and the list always grows. There are two ways to add an effort: either put it into the current work queue, adding the attendant costs, or shift resources by slowing or stopping work on an existing project. But adding expense reduces corporate financial performance, and diverting resources from needs such as critical infrastructure can be a poor choice.

Because there is little urgency, the innovation project can be tabled. The rationale is that, once the workload has been reduced and critical infrastructure improvements have been made, then the work on innovation can be started.

See also: Can Insurance Innovate?  

Unfortunately, the day when urgent tasks have been completed and resources have been freed up for innovation often never arrives.

Additionally, as financial performance is pressured by market cycles and underwriting performance, it is easy to postpone innovation to a time when underwriting results are sure to be better. But hard markets are further apart and of shorter duration because new pricing and underwriting tools and processes enable faster course correction.

Concerns about cannibalizing revenue from profitable business units may manifest themselves in two primary ways. First, leaders of the organization may be concerned about the overall impact on corporate performance. Second, business unit managers will fight to protect their resources – they not only need to protect their people and initiatives, but the battle for resources also determines status and potential for career advancement.

In fact, companies often aren’t playing a zero-sum game with resources. In many instances, net new revenue from additional products easily offsets the revenue loss in the existing product line.

An even bigger financial myth is that innovation is only for the largest carriers. The assumption is that successful innovation requires dedicated labs, large staffs and huge budgets. This is understandable, given the nature of how our industry deals with change.

The press is full of stories of how giant insurance brand Y built this amazing offsite lab with 30 full-time staff. The result of this multimillion-dollar investment? An amazing new product or process that is revolutionizing some aspect of the insurance ecosystem.

It is easy to see why this myth has come to be: The successes are often well-funded efforts. But there are as many highly effective improvements being fielded that aren’t heralded.

See also: InsurTech: Golden Opportunity to Innovate  

The truth is that most successful innovation efforts are driven by small teams with limited resources. With the right tools and processes, two to five individuals working within the boundaries of well-chosen constraints are able to quickly formulate, develop and launch innovations that will scale and quickly return multiples of the original budget.

Constraints on financial and time resources are actually very effective in focusing a team’s efforts because the limits encourage timely decisions and trade-offs.

3 Myths That Inhibit Innovation (Part 1)

As the pace of change accelerates, the chances that incumbent businesses will be affected or displaced grows. According to a recent CB Insights report, insurance is one of the top five industries facing disruption risk; 85% of surveyed corporate strategists believe that innovation is critical for their organizations. Yet the vast majority are focused on incremental changes.

In other words, while the insurance industry is in the business of mitigating risk, too many insurance companies aren’t taking advantage of innovation to address disruption.

A number of innovation myths foster complacency among market leaders. While the myths aren’t unique to the insurance vertical, our industry may have embraced them more fully than others. These myths can be grouped into three main areas: strategic complacency, financial concerns and misperceptions of the innovation process.

Over the course of three articles, we will explore each of these areas in detail, starting with strategic complacency.

Strategic Complacency

Great Changes

The insurance industry is at a crossroads. A number of significant trends are converging to change our customers:

  • Their behavior,
  • The risks they experience,
  • The technologies they use,
  • And, most importantly, their expectations.

Add to those challenges the changes in underwriting, pricing and service delivery allowed by new technologies and analytic capabilities. Both the opportunities and the challenges presented by the intersection of these trends are significant for senior leadership in all segments of our industry. Yet, too often, the insurance industry hides behind our perception that “insurance is different,” or that “we’re regulated” or that “it’s complicated.”

Other industries have faced similar situations, and things haven’t always gone well for the established companies, even in a complicated industry computers and software or a heavily regulated one like automotive manufacturing.

Some market leaders such as IBM are often written off as roadkill, but they reinvent themselves time and again. Others like Blockbuster mistakenly believe that their position provides them with unassailable advantages and end up either dramatically changed or out of business. In Blockbuster’s case, the high water mark in their valuation was in 1996, the year before Netflix was launched. In 1998, their valuation was 50% of what it had been two years prior. They mistakenly believed that breadth of location and depth of inventory were walls that couldn’t be scaled by the competitive hordes.

One thing is certain:

The client views his or her needs and wants as primary. That client neither understands nor cares how difficult transformation is, what the backroom challenges are or whether we’re addressing the issues as fast as we can.

See also: Innovation Imperatives in the Digital Age   

Clients just want to solve their problems now. If the incumbent can’t or won’t provide what the client requests, then the client goes elsewhere.

In times of great change, strategic complacency kills.

Customer Intimacy

Ask any insurer about its strengths, and one knee-jerk response will be, “We take great care of our customers.” If that is the case, why does such a significant portion of our customers respond negatively to the industry and our efforts?

Explore customer experience with insurance industry leaders a bit further, and the responses will be more nuanced, perhaps to the point of admitting the poor job the industry actually does. The good news is that some of the problem isn’t our fault.

Our industry provides irreplaceable products and services of which we can be rightly proud. We regularly step into the breach in some of the most trying times our customers will ever face. But, thankfully, those events are rare or even nonexistent for the average customer, and many insureds don’t recognize that a valuable service was provided by risk transfer even during a period when they experienced no losses.

Insurers’ job is to see the big picture, and to connect disparate facts. We have increasing amounts of data about those customers, which provide insights into behaviors and opportunities.

These factors lead many organizations to profess that they deeply understand their customers, and that, when the customer is looking for additional products or services, the insurer will immediately know and develop the appropriate response. Dig a bit deeper, and another story emerges. Perhaps we don’t have the intimate relationship that would inspire those insights.

Unfortunately, in many corporate cultures, it is hard to be a dissenting voice on customer intimacy and experience when others are professing the “common wisdom,” no matter how misguided. Finally, both improved customer experience and more intimate customer relationships are difficult, multifaceted problems and easy to put off.

Carriers rightly see the relationship as one insurer to many insureds. On the other hand, customers see the relationship as one to one. While insurers think in terms of spread of risk across a pool of clients, customers are only interested in what’s in it for them.

In many instances, because of these differing perspectives, the carrier-customer bond is weak. A recent Bain & Co. report said that, worldwide, only half of insureds have been in contact with their insurer for any reason in the past 12 months.

The result is that customers don’t have any real relationship with their carrier and are likely to focus on price. Rarely will they share their needs and wants with a services provider with whom they have a tenuous relationship.

Strategic complacency can appear when shorthand expressions of customer intimacy and experience prohibit open dialogue on customer priorities, or efforts designed to address problems are short-circuited because of their complexity. Even though insurers have gigabytes of data on their insureds, the data doesn’t translate into information and insight.

Lack of Urgency

Another myth among insurers is that there is no great urgency to change. Organizations survey the competitive landscape and don’t see any discernible threats on the horizon.

There are two primary reasons. First, most innovation efforts are quiet, so insurers don’t necessarily see what potential competitors are doing until a product or service hits the market. Second, many lauded innovation efforts are taking place in lines or niches that don’t appear to be a threat to incumbents.

So what if one new insurer is writing usage-based insurance for the gig economy, or another specializes in coverage for renters? Either those aren’t lines of business that “real” insurance companies want to write, or they aren’t a key component of the carrier’s book.

See also: Digital Innovation: Down to Business  

The insurance innovation landscape is large and convoluted. Most early innovation efforts are small, and the “signal” is easily mis-categorized as noise. Because of this, potential competitors and collaborators are easy to miss. But the lack of urgency is a key factor in Harvard Professor Clayton Christensen’s seminal work on industry disruption.

His model states that innovators find a segment of unserved or underserved consumers that represent low profit potential. These startups then offer an inferior product or service to these consumers. It doesn’t have to be perfect because these consumers aren’t being appropriately served prior to the innovator’s arrival.

The crude nature of the solution is derided by incumbents, because their customers “wouldn’t want to purchase something that limited.” Because the unserved or underserved segment is low-profit, and may have other undesirable characteristics, the market leaders have no urgency to respond.

But while the existing players ignore or disparage the newcomers, the disruptors refine their offerings. Once innovators win the low-profit segment, they move upstream by repeating the process with more profitable and desirable customers.

Often, by the time established industry players figure out that they are under threat, it is too late to reverse their fortunes.

Guy Fraker, chief innovation officer at Innovator’s Edge, says, “Ignore this innovation activity, whether from incumbents or new entities, at your peril.”

This lack of urgency, and the willingness to either accept as fact, or blithely repeat, mistaken beliefs and put off difficult, needed changes to address customer problems contribute to strategic complacency. Recognizing these problems and opening dialog within your organization is a key to formulating a strategic response to the onslaught of changes affecting the insurance industry.

The next post will further explore common myths with a focus on financial concerns surrounding innovation.