Innovation at a large bank – lean startup in practice

I’ve recently been consulting as a lean startup expert at the retail side of a large bank in the UK which is exploring how to increase their rate of innovation. The project has been challenging, inspiring and filled with lessons learned.

The bank hired me to help them create a new venture, and in doing so it became clear that the bank is struggling with a larger underlying challenge: how to drive innovation in and around their organization.

I went into the project expecting to find bank managers who had no interest in innovation – why would a bank that is “too big to fail” have much interest in shaking things up? To my surprise the situation was quite the opposite. Almost everyone I met, which spanned a range of management levels, shared three views. First, they wanted to innovate. Second, they were frustrated at the inability to innovate within their organization. And third, they were proud of the ideas that the bank had managed to nurture and launch.

The bank, it turns out, has the potential to be what Steve Blank would call an earlyvangelist customer.

Earlyvangelists are a special breed of customers willing to take a risk on your startup’s product or service. They can actually envision its potential to solve a critical and immediate problem—and they have the budget to purchase it. Unfortunately, most customers don’t fit this profile. (source)

In this case:

  • The bank management have a problem – lack of innovation
  • They are aware of the problem.
  • They are actively looking for a solution.
  • The problem is so painful that they cobbled together interim solutions.
  • And they have even allocated budget to continue to tackle the problem.

With this in mind I used the project as an opportunity to iterate towards a business model for delivering an effective intervention for driving innovation in large banks. As you’ll see in the remainder of this post, my team and I have learned many lessons. We’ve also made considerable progress towards finding a model that is likely to work.

The rest of this post details the business models we tested and the resulting lessons we learned. It ends with a proposal for a new model, the Inside-Out Incubator, that’s centered around seeding an ecosystem of innovation in and around the bank. It uses an indirect approach that is more likely to succeed than trying to directly change the bank’s deeply engrained culture.

So, without further ado…


Plan A: Innovation Outsourcing

Customer: Bank management
Need: Innovation
Unique Value Proposition: Our expert team will help you to find, design and build innovations for your bank
Solution: An innovation agency (Analogs: tech dev shops, design agencies)
MVP: A client engagement
Revenue model: Time and materials

We were already doing the MVP (handy!). Does it work? No.

The project was a bumpy ride, and exposed a host of conflicts and challenges that proved difficult to resolve. Early on we hit the question of who should make decisions regarding the vision for the new venture.

Most startup decisions are made in the face of uncertainty. There’s seldom a clear-cut, perfect solution to any engineering, customer or competitor problem, and founders shouldn’t agonize over trying to find one. The company that consistently makes and implements decisions rapidly gains a tremendous, often decisive competitive advantage. Startups should, as a policy, make reversible decisions before anyone leaves the meeting.

(Steve Blank, The Startup Owner’s Manual)

This policy is almost the complete opposite of how decisions are made at the bank. And both policies are correct in their respective environments. At the bank there is a lot to lose by a bad decision. At a startup, there is little to lose because everything is only made of straw. And at the bank, time is rarely of the essence for decisions because the institution has so much momentum. But at the startup, who’s lifespan is likely to be measured in months rather than years, even a few days of delays hurts.

The interface between these two policies is awkward at best. When the bank owns the vision it causes decision making to grind down to an unworkable pace for the outsourced team.

Time to pivot.

Lessons Learned

  • Entrepreneurship requires quick decision making. Enterprise requires deliberate decision making. The interface between the two is challenging.
  • Customer development requires a clear vision owner with the capacity to make unilateral decisions.

Plan B: Startup In a Box

Customer: Bank management
Need: Innovation
Unique Value Proposition: Our expert team will find, design and build innovations for your bank
Solution: Startup-in-a-box (Analog: skunk works, innovation at Intuit)
MVP: A client engagement

With this pivot we shifted the vision ownership from the bank to the outsourced team. Our intention was to create an “island of freedom”, Eric Reis’s description of the space a startup needs to iterate effectively. In doing so, though, we hit another challenge. How to keep the new venture aligned with the banks needs and constraints? And the other side of this coin, how to keep the team motivated and passionate about creating the new venture?

Our answer, which is reflected in the business model canvas, was to try and change the engagement model from consulting to investing. We wanted the bank to think of the project as an investment rather than as buying a service. Intuit reports that they’ve had great success with a similar model. They set up internal “boards” to oversee the investment that the core business is making into new ideas that small teams are exploring based on the lean startup methodology. Our idea was to run an analogous service, but using a external team rather than employees of the bank.

This approach revealed an underlying paradigm rift that made for a turbulent relationship. The bank’s management team primarily operates in the executive paradigm, “how can we be more effective?”. They also understand and could shift into the creative paradigm, “lets build this (known thing) to enhance our business.” Few in the bank, at least that we encountered, shifted into the discovery paradigm, “lets learn about this area to find value creation opportunities”.

Successful entrepreneurship has to start with discovery. It’s the only way to avoid the most common cause of failure, building something no customers want. Entrepreneurship as presented in the movies is about a eureka moment followed by an intense period of creation. But that approach fails 99 times out of 100. What works, in contrast, is to apply the scientific method to discover a viable business model. This means starting with falsifiable hypothesis, testing it, and revising the hypothesis if the test yields unexpected results. “Discovery is the act of detecting something new, or something ‘old’ that had been unknown.” says Wikipedia. Implied in this is that the discoverer has an evolving theory, but no fixed image of the end result. Discovery is a completely different mindset than either creation or execution.

With the startup-in-a-box team thinking in discovery mode, and the bank management thinking in execution or creation mode, the stage was set for confusion. As Thomas Kuhn described, the transition of a group of people from one paradigm to another creates conflict. The heart of that conflict is that the same information can be seen in entirely different ways depending on ones paradigm. For example, writing an in depth user journey analysis is progress in the creation paradigm, and is waste in the discovery paradigm. If creation is the current game then user journeys are an important step on the critical path. But if discovery is the current game then detailed user journeys are wasted effort because they rarely yield new facts nor help to validate hypothesis.

Unfortunately, conflict emerges when the members of a team work together without sharing the same paradigm. Imagine a research scientist and a manufacturing engineer discussing how to deliver the cure to Alzheimer, and each thinking they shared the same profession. The engineer might as, where is the blue print for the production process? The scientist would get a quizzical look and answer “I don’t use a blueprint, I just keep accurate notes as I go along.” Then the scientist might initiate, “what’s your next experiment?” and the engineer would also look confused, saying “umm, I suppose I’ll experiment with the building configuration.” The point here is that the vocabulary doesn’t sync up. And even when they are using the same words, they are meaning different things. This is not simply a disagreement about how to proceed, it two different worldviews struggling to collaborate.

In our case, the turbulence first became clear on the topic of planing. In discovery mode the plan is simple, guess, test, learn and repeat. In the creation mode the plan in much more detailed and projects into the future. Here’s the conversation the ensued when the business model discovery team delivered their version of a plan.

“Ha, are you joking?” asked the bank management. “This isn’t a plan. We need x, y, and z details. We can’t get budget for this project without a plan. Please try again.”

“Ugg” says the discovery team. “We haven’t yet discovered y or z. And x is just a guess right now. We can’t write the plan you want without completing the project that we are being asked to plan.”

This paradigm conflict is inevitable until everybody involved shares the same paradigm. But the startup-in-a-box model has to involve both the entrepreneurial team and the bank management. Hence it won’t work, at least not without a lot of patience, learning and experimentation with a mindset that has little place in the day-to-day management of the bank.

There must be a more direct way to address the bank’s need for innovation. Time to pivot.

Lessons Learned

  • The paradigm conflict that ensues between entrepreneurs in discovery mode and a business in execution mode is inevitable. Best to avoid it.

Plan C: Investment In a Box

Customer: Bank management
Need: Innovation
Unique Value Proposition: Invest in a bespoke startup that you can then acquire as innovation for your bank
Solution: Startup-in-a-box (Analog: innovation at Intuit)
MVP: A client engagement
Revenue model: Initial “investment” and exit bonus

This pivot addresses the interface between the bank. The idea is to give the startup-in-a-box more independence so that fewer decisions need to be made jointly with the bank. With fewer shared decisions the paradigm rift be less problematic. In order to minimize shared decisions, our idea was to have the startup team put skin in the game to align their interests with the banks. Then the bank could trust that the startup team would make appropriate decisions and it need not get involved at the day-to-day level.

Unfortunately this approach hit a wall right away. The banks procurement process does not do “investments”. They only buy things, and when they buy things they need to know what they are buying (hence the previously discussed need for a detailed project plan). This pivot has no legs.

Lessons Learned

  • Selling round pegs to a square hole procurement department isn’t going to work.
  • The uncertainty of a business model discovery service makes it very hard for the bank to buy.

Plan D: Inside-Out Incubator

Customer: Bank management
Need: An innovation ecosystem
Unique Value Proposition: Seed a ecosystem of innovation by having bank leaders try entrepreneurship for a few months. In doing so they will also learn what’s needed to nurture the ecosystem.
Solution: Incubation-as-a-service for training (Analog: running lean bootcamp)
MVP: A trial run of the innovation experience

This pivot zooms out the value proposition and solution. Previously we’d been working on the unstated assumption that we needed to deliver innovation. But this creates culture clash, among other challenges. And it is unlikely to yield a self-sustaining increase in the rate of innovation. What if instead we help the bank to build an ecosystem of innovation?

When considering this pivot we thought about a variety of companies that have thriving ecosystems of innovation. Heroku, for example, has pulled away from all their competition by attracting over a hundred highly innovative startups to their platform. And many of the startups have launched just to service Heroku customers. Amazon is a much larger example. They’ve built ecosystem in both their core business (Amazon and the Amazon Marketplace) as well in their web services business. And the Apple and Android app stores are perhaps the largest examples in the tech world.

Launching and managing an ecosystem is a huge topic, well beyond the scope of this post. But there are two fundamentals that are important here. First, a company must provide a innovation-friendly platform around which an ecosystem can form. And second, ecosystem building requires momentum. Innovators are drawn to platforms where they can see other innovators succeeding.

In this business model our aim is to deliver a service that enable a bank to build these two essential ingredients for an innovation ecosystem. We will infuse the bank’s leadership with an understanding of entrepreneurship and the challenges of innovation by having them actually play the game. Trying to launch a startup for a few months will give them understanding and experience that they would not get within the standard bank career. And without this understanding it’s unlikely that these leaders could nurture a growing ecosystem.

When bank leaders launch startup ventures they will also build momentum in the ecosystem, and help to push the bank into being more supportive of new initiatives. At the moment all the big banks present an almost impenetrable wall to new innovative ventures – I know from personal experience of trying to launch an alternate online payment system. It will take people who know the bank from the inside to find, expose and expand the ways that the bank can interface with innovators.

In practice, the program would could be akin to a sabbatical for a bank manager, or perhaps part of the training cycle for future bank leadership. Each class would split into pairs or threes and have 3 to six months to launch a new venture related to the bank and it’s ecosystem. The teams will proceed based on the lean startup methodology (see here and here). The teams will be able to draw on incubator-provided resources like designers and developers so that they do not get bogged down by production or technical details.

Although most ventures will not gain traction, the experience of trying to innovate in a safe, but real, environment will be worthwhile in and of itself. And if a few of the ventures hit it will be a welcome bonus.

Unfortunately the incubator initiative is beyond the scope of the project for which I was originally hired at the bank. So, testing this model is on hold for now.

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