Reluctant Innovators

Innovation can drive growth, create a competitive advantage, improve customer satisfaction and lower costs. Global research by PwC has shown that the vast majority of financial services leaders see innovation as a key driver of success in the years to come. Yet when it comes to innovation, Canadian financial institutions lag their global counterparts. Why? And what can financial institutions do to close the gap?

PwC’s Global Innovation Survey, released in December 2013, found a clear link between innovation and growth. Insights were gathered from 1,757 C-suite and board-level executives from more than 25 countries, including Canada, across more than 30 sectors. A large segment of Canadian respondents included members of the financial services industry, with representatives from banks, asset managers, insurance providers and researchers.

The research demonstrated the most innovative companies are set to grow 62.2% over the next five years – nearly twice the pace of the anticipated global average (35.4%) and three times as fast as the least innovative companies (20.7%).

It is no wonder that 43% of the executives surveyed reported that innovation was already a competitive necessity – and 51% felt it would become a necessity within five years. Three-quarters of the CEOs polled for PwC’s Unleashing the Power of Innovation 2013 survey now consider innovation to be just as important as operational effectiveness, if not more.

CANADA’S INNOVATION SKEPTICS

However, Canadian financial institutions see innovation rather differently than their peers in the United States, the United Kingdom and elsewhere. More cautious, Canadian firms seem less willing to embrace innovation as a way to grow their business in the years to come.

A focus on barriers, not opportunities

Canadian financial institutions believe innovation is far more challenging than their counterparts in the U.S., the U.K. and elsewhere do. From establishing support structures for innovation to measuring innovation return on investment (ROI) and finding and keeping the right talent, Canadian firms seem to focus on the challenge, rather than the opportunity.

In Insurance Banana Skins 2013, a survey of risks produced by the Centre for the Study of Financial Innovation in association with PwC, innovation and social media were ranked as greater risks in Canada than anywhere else in the world.

Why do Canadian firms seem so wary of innovation? Culture is a key factor. Financial institutions often try to avoid risks that they deem unnecessary. Banks and insurers are large, complex organizations with complex processes and change can be difficult and costly. The regulatory environment is often cited as a barrier to change as well, its many rules and restrictions hindering the efforts of firms to grow and adapt.

It appears that Canadian financial institutions may be reluctant to innovate and change because they do not yet see a compelling reason to do so. Canadian institutions emerged from the global recession relatively strong and unscathed, having successfully focused on improving their cost-effectiveness. Market saturation means that there is little real competition for market share, and firms have generally been able to sustain solid, profitable performance for years. Why change what works?

Hemmed in by a narrow perspective

Canadian financial institutions also seem to view innovation in rather limited terms. The survey released in December demonstrates Canadian executives are focused on innovations in technology (33% of respondents) and systems or process improvements (22%). Canadian firms are much less likely to look at product, service or customer experience innovations.

PwC believes this is because in many organizations, innovation continues to be driven by the IT function. That is not a bad thing, of course – but it does mean that firms are missing out on key opportunities to create new products and deliver better customer experiences. Technology-driven innovation tends to be internally focused and driven by operational concerns. This can lead to the IT function being seen as disconnected from the organization’s efforts to grow revenues and boost market share.

A lack of support

Canadian financial institutions significantly lag their U.S. counterparts when it comes to having support models in place to drive and sustain innovation initiatives. This seems to be an issue of organizational maturity around innovation. Few Canadian financial institutions have innovation-specific roles or the frameworks needed to generate, collect, manage, measure and track new ideas – in part because, as previously noted, these firms have yet to see a compelling case to do so.

In contrast, more financial institutions in the U.S. and elsewhere have established cross-functional teams dedicated to innovation. These teams devote time to developing, exploring and testing ideas for new products, new business models and new ways to interact with customers. It is a more rigorous approach where innovation is a daily effort, not a moment of sudden inspiration.

For example, a Canadian property and casualty carrier has recently employed a dedicated six-member innovation services team that is tasked with employee engagement in innovation initiatives, including providing resources for staff to allocate 15% of their time to innovation.

A question of investment

There is one area where Canadian financial institutions outperform their global peers. Half of Canadian financial firms say they take advantage of government innovation-related funding – more than in the U.S., the U.K. or globally.

In part, this can be seen as a reflection of the fact that Canadian companies enjoy a high level of government incentives and support for research and innovation activities. What is not clear is whether those funds are being used to fund the right kinds of innovation – or whether firms are making the overall investment that they need to in order to remain competitive.

CAN CANADIAN INSTITUTIONS BECOME MORE INNOVATIVE?

Canadian financial institutions’ relative lack of ambition around innovation is concerning, because companies that fail to innovate effectively may find themselves outrun by more innovative, faster-growing players in the years to come. But Canadian firms can take steps to now address their innovation challenges.

First, firms should define and communicate the benefits of embedding the spirit of innovation throughout their organizations. They should adopt a long-term view, as innovation takes time.

And they need to build structures and processes that support ongoing innovation efforts to turn great ideas into reality. The most innovative companies have a well-defined innovation strategy, and a structured, organized approach to uncovering, developing and testing new ideas.

PwC is seeing very encouraging signs in our own work with clients. There is growing interest in training in innovation and innovation techniques, and in how to create the processes and structures needed to build an innovative culture. Leaders are also talking to companies in a range of sectors outside of financial services to discover how others approach innovation – and bringing those lessons back to their companies.

These are positive steps. To make the most of them, firms should also remember that everyone is an innovator. Although the ideas generated by those outside the C-suite may be incremental or have relatively smaller benefits than those conceived by executives, the aggregate benefits of such ideas can be significant and this makes everyone feel involved and responsible for innovation and continuous improvement.

Customers will say what they want and need, and will help to test and refine products and services into something they will use, enjoy and talk about. Front-line staff can be tremendous sources of ideas on how to improve processes and the customer experience.

Vendors and suppliers can also offer their own insights and ideas into how to do business in new, different and potentially game-changing ways.

Canada’s financial institutions have long been admired for their stability and good governance. With the right structures and support in place, they could be just as admired for their ideas and innovations. All it takes is the will to change.