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Innovation in financial services is causing creative destruction of established products and services at a faster pace than ever before. As a result, banking leadership must find a way to encourage innovation at all levels of the organization, including accepting higher levels of risk, allowing more time for ideas to mature, positioning failure in a more positive light, encouraging innovation champions, and investing in new ideas.
It is usually assumed that people tend to avoid doing things that can result in a negative perception in and out of the workplace. This can negatively impact how much risk a person is willing to assume, how ideas may be presented to others, and how people will interact in a team setting. If a person doesn’t feel the environment is psychologically safe, they may avoid presenting new ideas. The result can often lead to maintaining status quo.
Making matters worse is when leadership does not actively encourage innovation and risk-taking, managers and employees will follow their lead, avoiding the introduction of new ideas, and discouraging others from doing the same. To foster innovation and to encourage a ‘challenger mindset’, many of the most progressive organizations have made failure part of their business model. For example, Booking.com says they fail nine times out of ten, with their status quo being to fail fast and often.
Trends paint an alarming picture for the future of banking, and U.S. banks now face an ultimatum: Grow and get bigger… or die.
Fail Fast and Fail Often
The concept of ‘Fail fast and fail often’ is not meant to encourage short-term thinking or to quickly move from failure to failure as quickly as possible. It is supposed to encourage rapid iterations, learning from mistakes as we test, tweak, and reset as needed. Financial institutions that encourage this iterative mindset test as much as possible with the customer, making adjustments until an optimal result is achieved. Making mistakes are not taboo, but considered simply an important component of the innovation process.
The real aim of ‘fail fast, fail often’ is to be iterative, learning what needs to be improved to achieve success.
“Fail fast, fail often,” is not a new concept. Most will agree that Thomas Edison was an early pioneer of this thinking, ‘failing’ 9,000 times before he was successful with his light bulb invention. More recently, Elon Musk is an example where creativity and critical thinking has been the foundation of iterative innovation within the SpaceX project.
The key is not to have a goal of failure, but to fail intelligently. Failure is not good. The goal should be to take risks to learn with each step, being willing to move away from ideas that are not working and invest in innovations that show promise.
The Fear of Creative Destruction
Creative destruction is a concept where an organization introduces a product or service that could destroy the market for an existing product. When such an innovation is considered, leadership may decide not to move forward to introduce this innovation because demand has not been proven, or profitability has not been assured.
When there is a fear of risk and radical innovation, the door opens for a competitor to seize the opportunity and to gain a first-mover advantage. Alternatively, the ability to accept the destruction of a profitable business line allows for the creation of a new market. For example, every September, Apple introduces new products that creatively destroy their existing products. By building a market for the new product instead of a competitor’s allows Apple to control the marketplace.
While many studies take a negative view on the impact of fear of failure, some research contradicts conventional wisdom, showing that fear of failure may also function as a positive force, providing drive to push and persist in the face of challenge and extreme adversity. Furthermore, this research argues that fear of failure may help unleash dormant creativity and innovativeness in people, which may also help improve performance.
The research indicates situational opportunities, but reinforces that leadership plays an important role in encouraging risk taking and embarking on innovative thinking.
A financial institution’s leadership has a direct impact on the ability to create innovation and the success of innovations undertaken. This includes both the top leadership of an organization as well as those in a lower supervisory position. With a culture that encourages new ideas and a challenger mindset, there will be greater exchanging of ideas, accepting outside feedback, and potential third party collaboration. This will reduce fear and increase the acceptance of risk within an organization.
If management punishes failure and discourages risk taking, this will stifle both creativity and innovation. While taking risks is usually considered counter-intuitive in banking, risk taking is required for new ideas to be generated and innovations to mature. The ability for leadership at all levels to accept risks when exploring new ideas and trying to develop them into marketable concepts is a valuable leadership trait.
“There must be concrete examples of encouragement and acceptance of radical innovations for people to become part of the innovation process. Employees will only take risks when there is little threat of significant negative consequences to their work or their career from a failure,” states research from the Journal of Strategic Leadership. “Leadership must demonstrate their commitment through their behavior, including providing the necessary resources, structures, processes, and rewards.”
To be successful going forward, banking leadership must change their response to failures from a source of fear and punishment into a learning tool to improve innovation. Once new ideas are encouraged, and barriers are removed, the ability to transform the innovation process will be in place.