By geir alexander talseth, PA sourcing expert, and alexandre de oliveira e Sousa, pa financial services expert
Disruptive technology, waves of regulation and volatile financial markets are driving financial organisations to put innovation higher on their corporate agenda.
As innovation and disruption are changing the Nordic (and global) market as a whole, it requires «traditional» organisations to make radical organisational readjustments to stay relevant when their existing customer base matures.
In this process, do not forget to transform your partnerships as their innovative force will be vital to your success. Partnership with IT service providers is the norm within the financial services sector today. The partnerships are structured to provide organisations with access to technology and skilled resources, flexibility, scalability and cost reduction. To manage these partnerships, the organisations are structured based on the services being delivered and govern them through a set of performance indicators, service levels, covering throughput ratio and processing accuracy. The partnerships are rooted on a clear «outsourcing logic».
This «logic» contradicts the «innovation logic» that nurture disruption by risk taking, agility, proximity to business and room for failure. A partnership dilemma is therefore emerging, as current setups are not rigged to accomplish the objectives of both «logics» (see figure 1 below).
Hence organisations that want to leverage their IT service providers to strengthen their innovative force, needs to transform their partnerships. Because assuming that one will be able to govern innovation based on, for instance, one quarterly joint innovation board meeting is utopia.
According to PA’s Innovation Report 2015, financial services sector obtains the greatest value from incremental innovation (68%), e.g. process improvements/tweaks. Still, the sector is assessed to be the 2nd most innovative sector after Life Science, even though only 35% of the financial services executives said they would back high-potential but risky innovation. Hence there are challenges for the financial services sector to become more disruptive in order to stay relevant when their existing customer base matures.
So how shall financial organisations leverage their IT service provider partnerships to successfully drive innovation?
Innovation is about culture, leadership and trust
Innovation in a partnership setup is about establishing a collaborative environment based on common beneficial incentives through culture, leadership and trust. In PA’s Innovation Report 2015, which compared innovation leaders against their peer groups based of a set of innovation criteria, 71% of the innovation leaders vs 43% for the rest put innovation at the heart of their corporate culture and mission.
Thus, establishing an innovative culture across the organisation is a precondition to succeed with partner-driven innovation. This will require the financial organisations to transform both their structure and how they reward their employees. In addition, it will require a different mix of capabilities – one will need to attract new talent. This transformation will demand strong leadership that is willing to make fundamental changes and is ready to back high-potential but risky innovation.
Trust is a two-way street and crucial for a partnership to evolve beyond focusing on delivering existing services. It is of course about honesty, dedication, and being in for the long run, but also about exposing your core business and their challenges to your partners. Too often one delimits the IT service providers to the organisation’s IT department, thereby restricting their ability to gain insight and understanding of your core business. IT typically focuses on stability and continuous improvements to existing services, e.g. process automation, and thus are rarely the ones pushing forward a step change.
In consequence, IT service providers’ contribution to your organisation’s innovative force becomes incremental (and technology related) rather than disruptive. Therefore, both parties in a partnership need to be open and transparent about their business challenges to strengthen each other’s innovative force. It is through exposure one can support the other party’s ideas, co-invest, and ensure to bring the right mix of resources (either technology and/or talent) to the table, accelerating the total innovation force.
Getting partner-driven innovation right
In summary, fundamental changes on how to govern the «traditional» IT service provider partnerships, co-operate and incentives the right behaviour are required. Getting it right starts with your organisation’s own corporate culture, mission and leadership. Partner-driven innovation can only succeed if your organisation has established an innovative culture that introduces your business needs and challenges to your partners. This is a complex process, and we recommend to kick-start the journey through a five step approach:
- Define your innovation culture – understand how to make innovation part of the heart of your corporate culture and mission, and how will it be nurtured and led.
- Take the initiative – take the initiative with your service providers to establish a set of common goals and objectives for ways of working with innovation, and ensure you directly include your core business in the dialogue.
- Prioritise areas for innovation – given the strength of your partners, work out how can they support your innovation and vice versa? What part of your portfolio can ‘Partner A’ focus on to add value to your business? And which resources should each of the parties bring to the table?
Foster collaboration and transparency – foster an open and collaborative innovation environment and introduce your core business needs and their challenges to your partners. Ensure transparency about your decision-making processes and how you measure ROI for innovation. And be open to the fact that the majority of the ideas will fail, but ensure you celebrate the successful cases.
- Incentivise the right behaviours – ensure that you measure the partnership’s success based on desired business outcomes. Incorporate performance indicators that are linked to innovation outcomes and ensure that achievements are mutually rewarding. Make sure that you have the commitment to support each other in scaling up ideas if needed.