Can open innovation save the financial industry? A new book suggests that this concept may have an important contribution to the change required in setting up more sustainable business models.
The idea of open innovation is still getting more and more attention of managers responsible for innovation. Most of the publications and reports on the topic, however, are focusing on tangible products. But how about open innovation for services? Like financial services? Daniel Fasnacht says yes. In an upcoming book, he regards open innovation as a key concept for change. Daniel Fasnacht is an executive director at Bank "Julius Baer" in Switzerland and the author of the recently published book, Open Innovation in the Financial Services, published by Springer in January 2009.
The book identifies the shift from a closed to an open innovation paradigm in many financial institutions to react on recent financial and political challenges. Open innovation according to Fasnacht's definition is a mindset characterized by openness, flexibility, and customer integration. The book presents open innovation as a broad framework, including also concepts like developing ambidextrous thinking, creating an intrapreneurial attitude, and getting a systemic and holistic view on the firm. The term "open innovation" thus is used as a metaphor to address a wider array of options for strategic change in a conservative industry (Fasnacht uses the term much broader than I do it usually).
I invited Daniel Fasnacht to summarize his thoughts presented in his book. Find his short guest article to this blog in the following. FTP.
Open Innovation in the Financial Services
By Daniel Fasnacht
Banking has traditionally been a conservative industry and resistant to change. The stable industry structure, defined boundaries, clear business models, and identifiable players made change linear and predictable. But the recent global financial crisis have led to an industry with ambiguous structure, blurred boundaries, new business models, intermediaries and market entrants.
Banking and in particular banks have come under great pressure since September 2008 when Lehman Brothers, an institution which traces its roots back to 1850, filed for bankruptcy. Today, change in banking is unpredictable. Speed, efficiency, flexibility, and reliance have all become equally important factors not only for success, but to survive.
These new business rules and the hypercompetitive global environment have wide implications for management. Visionary leaders realized the need for extensive adaptations with innovation as a source of competitive advantage. Beneath the surface of banking, the overall phenomenon that will drive change in years to come is anticipated to be the shift from a closed to an open innovation paradigm.
Within the new paradigm, focus lies on openness, flexibility, and customer integration with the cooperation as the dominant organizational model. Firms in the financial services increasingly adopt open innovation concepts from manufacturing.
One application of open innovation has been adopted by almost all banks in recent years. They embraced open architecture as a model, which offers clients a full range of products, regardless of their suppliers. Openness is an essential prerequisite for the ability of modern financial firms to achieve differentiation, expertise, and specialization on the supply side, while providing superior service to highly satisfied customers on the demand side. To offer such a wide assortment, banks must balance the internal and external offerings. Thus, banks must restructure their client advisory processes as a complementary service to their product portfolio, with the aim of increasing customer value.
But with flexibility I would also like to refer to collaborative innovation. In other words, in a partnership flexibility is needed to control risk, commit limited resources, adapt to changing conditions, and exit easily. Listening to the voice of the customer and differentiating customer needs suitably are vital activities and impact customer satisfaction. Understanding client needs is key for developing new segments and value propositions. Many wealth managers hence today move from client segmentation based on assets to qualitative and psychographic criteria such as behavior type, source of wealth, and the life-cycle phase of the client. These are concepts for the future that help to tighten the relationship between the customer and the bank. Offering open architecture and focusing on servicing rather than pushing products is what clients want.
I am convinced that such approaches additionally increase trust. But managing multiple product offerings, serving, and advising clients across the globe is a huge challenge. By adopting a new open model of innovation, executives are able to cope with strategic change and simultaneously increase efficiency, flexibility and customer service. The capability for open, flexible, and aligned interactions is required for all business practices, but is not only important for expansion strategies in general, but especially during turbulent times.
In my book, I developed an integrative open innovation model (see the figure for an overview). The model illustrates the environmental changes, coming from the market, policy & regulation, customer, technology, and economy. These developments, together with recent incidents such as the financial crisis, have led to the phenomenon – the transition from a closed approach to open innovation. To master the transition, I elucidate the transition strategies observed in a number of firms. Implementing those strategies requires a set of new dynamic management practices and an open organizational culture that fosters the transition and releases organizational energy required to do business in the open innovation paradigm.
About the author: Dr. Daniel Fasnacht, born 1969, is an Executive Director at Bank Julius Baer. As chief of staff for Latin America, he is in charge for strategy, market development, and management support. Daniel has previously worked for Credit Suisse, Accenture and SAP. He has more than a decade’s experience in the financial services industry. He holds a degree in information management, an MBA from the University of St. Gallen, Switzerland, and a PhD in Strategic Management from the University of Nottingham, England. He has published several articles about open innovation and strategy. He may be contacted at firstname.lastname@example.org
Download the table of contents and a sample chapter of the book.