innovation 11capozzi

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Driving innovation at scalein financial servicesMarla Capozzi, McKinsey & Company

9 April 2014

Limra Retirement Conference

CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission ofMcKinsey & Company is strictly prohibited

McKinsey & Company | 11

Where are we today withdriving innovation in ourinstitutions

What can we learn from

leading innovators thatoutperform

One company’s innovation

story…and your stories

Today’s agenda




Where are we today?


Question

We have pockets of innovation but do not achieve scale

We innovate incrementally on core products/services only

We innovate successfully, incremental and breakthrough

We have limited or no innovation happening

Other…?

Which best describes your institution…

1

2

3

4

5




Question

Very satisfied with innovation returns

Somewhat satisfied with innovation returns

Not at all satisfied with innovation returns

Don’t know, we do not track

How satisfied are you with returns on

innovation investments?

1

2

3

4


Our biggest barrier to makinginnovation happen is…

Linking innovation to strategic priorities

Leadership commitment /governance

Investment model to take smart risks

Prototyping and experimentation capabilities

Organizational structure and design

Talent and expertise, culture

All of the above

Question

1

2

3

4

5

4

5




Question

At my institution, we are most likely to

believe that consumers and advisors...

Do not want to change their behavior

Will change behavior, but are likely to resist it

Are willing to change their behavior

Are excited to change their behavior

1

2

3

4


Consumers feel a range of emotions when they talk about theirrelationship with money today

SOURCE: Creating a New Relationship with Money, online community 7




Our research challenges the convention wisdom about consumer

behavior, they actually have high expectations for innovation

SOURCE: Creating a New Relationship with Money, online community

To what extent do you agree with these statements

8

84%

77%

69%

45%

“I believe there are products out there that will solve needs I don’t

even know I have”

“Sometimes I feel like companies know

more about what I need than I do”

I am sure there are products and services being created right now that I don’t even

know I need but will come to rely on

I believe there are products out there that will solve needs I don’t even

know I have

I feel like some companies do a great job anticipating my needs”

At times I find it hard to believe that I now rely on

products/services I didn’t even know I needed a year ago

Sometimes I feel like companies know

more about what I need than I do

91%


While friends and family are often cited sources, consumers tell usthey are more comfortable with professional sources for advice

A financial advisor

My personal financial advisor

Financial services company website

Television program

A customer service representativefrom my financial service provider

A family member

Financial services related blog or newsletter

A friend

SOURCE: Creating a New Relationship with Money, online community

Percent of respondents most comfortable with advice sources

18.9

16.2

16.2

13.5

8.1

8.1

8.1

2.7




Who wants to hear

actors ta lk?

– H.M. WarnerWarner Brothers, 1927

There is no reason anyon e would

want a comp uter in thei r home

– Ken OlsenFounder and president of Digital EquipmentCorp., 1977

Anyon e who th inks the ANC is

going to run South Afr ica is l iv ing

in cloud-cuckoo - land

– Margaret ThatcherBritish Prime Minister, 1987

I think th ere is a world m arket

for maybe f ive com puters

– Thomas WatsonChairman of IBM, 1943

There wil l never be a bigger plane bui l t

– A Boeing engineer after first flight ofthe 247, a 10-seater


The Candle Problem




The Candle Problem


The Candle Solution




No one believed people who shopped

in discount stores would pay extra

for designer products

No one believed consumers would

pay extra to have equipment installed

in their homes

No one believed consumers would

buy electronics in stores after Dell

had changed the model

No one believed that BMW drivers

were more concerned about parking

damage than high performance


How leading

companiesinnovate




Our perspectives on innovation at scale

Companies that innovate at scale are twice as likely to outperform

competitors; innovation at scale is repeated and consistent organicgrowth from innovation at least 70% of the time

Asset optimization - extending strengths through new technologies, IP,customer behaviors studies - is one of the most effective ways to

innovate at scale

Companies that integrate innovation into strategic planning, budgetingand resource allocation processes are six t imes more likely to meetfinancial targets

There is no right organizational answer for innovation, as nocorrelation found between these choices and performance; howeverleadership, structure and talent are common strengths for the mostsuccessful companies

Market and economic driven innovation processes are more oftencorrelated with success; processes that over-emphasize ideation tend tobe less successful

1

2

3

4

5


Revenue growth is driven by three sources

SOURCE: McKinsey’s Granularity of Growth

Revenue CAGR, percent

Proprietary

database of ~720

large companies

Description

Total

revenue

growth

Portfolio

momentum

(45%)

M&A(32%)

Share gain

(23%)

The revenue growth a companyachieves through growth of thecurrent portfolio

Net revenue growth achieved

from mergers, acquisitions ordivestitures

Growth from gaining or losingmarket share and organicinnovation

Revenue growth achieved bythe company




2.2

3.0

3.9

4.8

-2.3

-0.7

3.9

14.2

6.0

6.6

6.0

10.6

5.8

8.9

13.9

30.1 6%

22%

50%

ConsistentinnovationYoY (> 70%)

Frequent butnot Year-on-Year(35-50%)

Sporadic(1-2 years,random pattern)

21%Limited(<1 year)

0.1

-0.1

0.1

0.5

5.9

23.5

7.5

10.3

Average: 8.7%

SOURCE: Granularity of Growth large company database of 776 companies, McKinsey analysis

1 Includes both public and private companies that were public between 1999-2007* We have not computed the regression analysis as the dataset in each sectors is l ess than 100. Calculating the regression analysis may skewed up the results

M&AOrganic

share gain(innovation

driven)

Total growth

Category

Number of

companies (322)

Starting

portfolio

Average Absolute Revenue CAGR (1999-2006/2000-2007)Average

TRS1

Portfolio momentum

Portfolio

change

Companies that innovate at scale are twice as likely to outperform1

Disruptive innovation Innovation within current portfolio


Combining behavioral information based on aggregated

purchasing data of 90 million cards with analytics to revealinsights about customers, competitors, and marketplace andprovides small business planning and marketing expertise

Monetizing the transactional data from cardholders bycombining data with the analytic skills. Provides variousinformation and analytic services for merchants

UPS used to be a trucking company, now is a company withtrucks:▪ Built a $7 billion logistics business off their core assets of

global infrastructure and planning▪ UPS Capital is a new division entering supply chain financewith global asset-based lending, cargo finance, expert

credit agency financing and lines of credit

Safaricom, a leading mobile network operator in Kenya,launched MPesa in March 2007 to enable subscribers totransfer money outside of financial institutions. Phone isalso an electronic wallet for up to 50,000 Kenyan shillings

Innovation via asset optimization: branching out from and into

financial services

Innovation

f rom

financial

services

Innovation

in to financial

services

2




McKinsey & Company | 2121SOURCE: Press search; team analysis

Google is an example of out-execution with the asset of

entrenched consumer behavior

Despite its reputation asan innovator, the majorityof Google’s core productswere in-market by anothercompany but not at scale

Google’s advantage is

gained out-execution andentrenched consumer

behavior Test and failure is part of

the game: 50% of newproduct and servicesGoogle launched failed




Intellectual property rights in insurance, asset management and

digital banking

Four of the top 10 patent filers in insurance are IT companies: IBM, Accenture, Intuit,

CSC. USAA holds the most (103)

American Express and Bank of America lead the asset management patent space witha combined 200 patents

Bank of America is patenting 30% of new digital banking innovations followedby…Samsung

Technology companies have filed 3x more patents for digital banking than financialservices companies. Patent filings are growing at 31% p.a. for these tech companies

McKinsey & Company | 2323SOURCE: McKinsey Quarterly survey 2012

8%

24%

49%

Not at all integrated

6x

Somewhat integratedFully integrated

Companies that integrate innovation with strategic planning are 6

times more likely to meet their financial targets

2

Companies with a separate innovation function

Performance score (percent of respondents)

3

These companies are also 7x more likely to have in –

market success and 5x more likely to be profitable




FROM, existing BUallocation …

TO a BU re-allocation …

Budgeting and resource allocation are critical inputs to innovation,

not just setting outcomes within existing allocations

SOURCE: Sanitized client example, financial services

Investment % in innovation notdirectly tied to revenue

Budget % allocated to directrevenue impact

All initiatives go through the

same process and governance Little to no ‘slack’ or ‘seed’

investments for experiments

Core

Core

▪ % allocated to innovation platformdevelopment to create the backbone AND BU resources to customize forproducts

▪ Adjacencies: similar products indifferent markets, services, oneclient view, one market with

multiple products

▪ New opportunityspaces: contributionbased on strat plan

3


There is no right answer for structure, but common success

factors and barriers are consistent

Success Factors

▪ 57% cite clear strategic focus

▪ 56% identify C-level andleadership support

▪ 51% have successfully launchedat least one in-market product,service or business

Biggest Barriers

▪ 53% cite competition withbusiness short-term priorities

▪ 42% integrating the separatestrategic objectives with those ofthe parent core businesses

62%

Use multiplestructures 44%

Report to theCEO

60%Co-located at

HQ

70%Less than 5

years old

44%Report to the

CEO

50%Responsible for

in-marketlaunches

4




High performers address three types of innovation

organizationally

▪ New opportunity spaces (new segments, products, services,

markets) are identified by senior leadership▪ These are typically exploratory in nature and represent

opportunities that sit outside existing units and functions

▪ Governance by the top team level is essential

▪ Cross business, product, service or functional innovation

themes, e.g., advanced analytics, digital

▪ Represent scale opportunities across businesses and/or products

▪ Governed by the top team as a portfolio to capture full economiesof scale and execution within each BU/function for development

▪ Priority innovation initiatives within the core business(es) in

identified areas critical for growth and competitive advantage▪ Accountability resides with unit leaders

▪ Typically regular reports made to executive team on progress

against outcomes

Innovation platforms

BU/functional initiatives

N e w B

U

New opportunity spaces

4


Most stronglycorrelated withunsuccessful

innovations

Most stronglycorrelated withsuccessful

innovations.

Personal motivations mattersPercent, N=984 global executives who were involved in major innovationsWhich describes how you become involved in the innovation (select up to 3 choices)

6

7

11

20

41

47

47

I wanted the reward/recognition offeredto people who were involved

I respected the leader of the initiativeand wanted to work with him/her

I wanted to be a part of this particularinnovation team

It was my idea, and I wanted to bea part of it going

I am passionate about creatingnew things

The initiative was a significantpriority for my organization

I strongly believed in the idea

Staffing the innovation team with “believers” is key…

SOURCE: McKinsey Quarterly Innovation Survey

%

4




Time spent in testing and rapid go-to-market is correlated with

new business success

54

62

Innovation isnot at all/

not very successful

Innovation isextremelysuccessful

SOURCE: McKinsey Quarterly Innovation Survey

Generating

ideas

Selecting

ideas

Testing &

prototyping

Go to

market

46

38

% of time spent on each phase of innovation, N = 984

5

Phases of an innovation process

McKinsey & Company | 292929|

Innovation

stories




Challenged orthodoxiesabout consumer credit

and segments

1

Executive leadershipteam full participation

in ideation and

governance

2

Sourced ideas fromcustomer support,

partners and all

employees

3

Rapid and rigorous

testing of concepts

multiple times

4

Created 4 growth

platforms, R&D team,

hired IT talent, changed

budgeting

5

Made a formal part of

leadership agenda

6

One company’s innovation story

innovation 11capozzi

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