In the third in a new series of articles, Neeraj Sahai and Amin Rajan argue that robust
innovations require robust processes and robust drivers
“Paul Volcker may be right: ATMs are the only financial innovation that has worked. Others only appear to work in a rising market when you don’t need them,” said a US pension plan participating in the Citi/PGI/CREATE 2011 global survey titled ‘Investment Innovations’.
However, as our first article showed (IPE July/August 2011), unlike cars and computers, investment products do not have a definable shelf life and replicable outcomes. Two factors are critical in delivering the innovation results: market timing and economic environment. After the 2008 meltdown, asset managers have been deepening their expertise in these factors. In the process, innovation processes and their drivers have come under the spotlight. If focus is the silver bullet, Apple is the role model.
Starting with the newly introduced processes, these have involved four sequential but distinct stages that are critical to successful innovation:
• Ideas generation - inviting individuals concerned to post their new investment ideas;
• Evaluation - doing a feasibility study and crafting a business case;
• Design - constructing prototype products subjected to ‘paper trading’ to provide ‘proof of concept’;
• Delivery - road testing via seed capital before going public.
The robustness of the process is measured as much by the number of kill-offs at each stage as by the successful launches. The aim is to weed out the ‘dogs’ from the ‘stars’.
Currently around 40% of asset managers are using this approach or variants of it. This is in marked contrast to the last decade when competitor leapfrogging, time-to-market and managerial interests mattered more. No wonder innovation had a bad press.
In sum, the processes aim to promote three types of creativity:
• Provoked creativity, based on a mandated approach that identifies a specific challenge or problem and invites creative solutions, akin to what task forces do;
• Unstructured creativity, based on open-minded brainstorming without a set agenda in order to generate ideas without much regard to how they are connected;
• Eureka creativity, based on real breakthroughs that deliver solutions that did not exist before.
Furthermore, under each type, innovations now increasingly take many forms: incremental versus step changes; product versus process; organisational versus structural. In all forms, the primary aim is to deliver better value to clients through products that are fit for purpose - namely, products that clients need, not products that asset managers have
Turning to the drivers, these are being used to dictate the central thrust of the current innovation effort. Going anticlockwise in the diagram:
• 25% of asset managers are currently seeking new product ideas from clients as a tool for expanding the market and geographical boundaries of their businesses;
• 15% are creating fast-track systems that frame specific challenges for dedicated virtual teams and implement their ideas after evaluation;
• 5% are setting up dedicated R&D shops for generating breakthrough ideas;
• 70% are directly relying on their talent pool to generate high conviction ideas in their day-job in a boutique-type environment;
• 40% are encouraging a culture in which innovation is everyone’s concern and everyone’s responsibility.
These tools target the knowledge residing inside individuals and leverage it to expand ‘corporate memory’.
Innovative fund houses in our study also harness four other factors when creating the necessary tail winds.
One is work environment. The best ideas often come from the serendipity associated with frequent and intensive discussions in small informal groups, with minimal bureaucracy. Successful hedge fund managers, for example, attribute their success more to their free-thinking environment than to their inherent talent.
Another factor is corporate culture. It not only has innovation as a line item in personal balanced scorecards, it also provides financial incentives and personal recognition for successful ideas.
The third one is a fast track process that bypasses corporate bureaucracy and encourages staff to post new ideas on a dedicated website, thus creating a portfolio of ideas. Then the good ones are adopted through the four-stage process described above. Technology thus helps to harness latent creativity.
The final one is talent deployment. The experience of successful hedge fund managers shows that talent is only as good as the environment in which it is deployed: having the right bench strength is one thing, getting the best out of it quite another.
The latter requires three sets of benefits conducive to a high-performance culture: an employer brand that generates personal pride; an interesting job that stimulates personal commitment and a balance of hard and soft rewards that inspires self-motivated creativity.
Talent is now motivated via light-touch management, a liberal dose of open
honest communication, meritocratic incentives and peer recognition. Since talented individuals are more interested in managing money than people, they are increasingly organised into small teams with minimal hassle, ensuring that ideas breed new ideas and talent begets talent.
A practical roadmap
Above all, successful asset managers are also adopting new activities along the path leading to credible innovations.
They are putting innovation at the heart of their business strategy, which sets out corporate goals as well as the role of innovation in their delivery, duly highlighting actions, metrics, milestones, timeframes and accountabilities.
As a part of this alignment, they are also developing a common language and mental models of what innovation means in an environment where outcomes are neither predictable nor replicable. They are also operationalising the concept of ‘failing forward’. Under it, mistakes are used as learning tools: lessons learnt from them are used to create fresh momentum.
In the action phase, new challenges are being defined around deep-seated problems that need fixing. Teams are created to generate new ideas for fixing the identified problems and driving their implementation, involving people who have the necessary skills, expertise and credibility.
Each team also has a senior executive sponsor whose role is to provide the necessary ‘air’ and ‘ground’ cover by providing resources, doing reality checks, walking the talk, setting the tone and taking successful ideas to the finishing line.
Finally, IT platform and HR systems are also being overtly oriented towards ideas sharing and their successful execution. Innovation is a separate line item on the relevant people’s personal balanced scorecard.
Few asset managers can claim Apple’s historic run of successes. But many are taking a leaf out of Apple’s book. At the least, they recognise that success is as much about ‘when’ as ‘what’. Whilst their products cannot deliver consistent outcomes, irrespective of the market cycles, they are seeking to minimise investor foibles and choose the right time.
*Available free from firstname.lastname@example.org
Neeraj Sahai is global head, Citi Securities and Fund Services, and Amin Rajan is CEO of CREATE-Research