It now seems like there is a daily announcement about the creation somewhere of an innovation lab, hub or incubator. In the U.S. alone, the number of incubators and accelerators has grown from 12 in 1980 to more than 3,500 today. The financial services sector is no exception. Banks such as Capital One, Citigroup and Eastern Bank have made strides to set up labs.
Innovation labs are a way to ignite once-moribund pipelines, foster a culture more conducive to innovation and attract talent. They are also a way to ensure keeping pace with rapid, and often, unpredictable changes in financial services technology.
The rationale for these innovation labs and incubators is clear, but the catch is that success rates vary wildly. The way a lab is structured, funded and run is critical to ensuring that it is able to deliver innovations that can be adopted, while also meeting and foreseeing consumer demands. To help build a successful innovation lab, banks should keep these four tips in mind:
Stay Focused on the Big Picture
Ultimately, an innovation lab offers a bank the chance to stay more current in its tech offerings. But on the road to becoming more innovative, an institution can get sidetracked by problems that are seemingly insurmountable without focusing on trying to make lemons into lemonade.
Essentially, you don’t want to label something in your operation as a symptom of stagnation without recognizing the core issue that is hurting your strategy. A problem can sometimes be a symptom of something else that’s broken — be it a flawed growth strategy, talent problem, or technology gap. Ensure the lab is designed to solve a core problem.
For example, many incumbents are considering disposing of their bricks-and-mortar strategy altogether in the belief that physical branches are now redundant in the face of competition from digital-only disruptors. Instead, those banks should redefine the value of a branch for the digital era – in which there will be different models, tailored to specific purposes such as flagship stores and community centers.
Make Sure to Assess the Lab’s Performance
An innovation lab shouldn’t be left to operate in a vacuum; there is a reason the bank established it and the lab’s performance should be tracked. But what are the performance metrics? Is performance being measured on the basis of how the lab is driving strategy or even revenue, or is it being measured based on the attraction and retention of tech talent? Those metrics and the incentives offered to lab personnel matter, and they should be defined clearly. The count of colorful Post-it notes and tattoos in the lab aren’t the metrics that will give it staying power.
That said the performance metrics and incentive schemes should not follow banking's traditional annual review model. Instead, they should be dynamic and more closely aligned with the innovation project or lab-level milestones, akin to today’s startup environment.
Independent of whatever product the lab develops, its value is also in cultivating the careers of those working in it and attracting innovators who already have a track record. Without world-class talent, you’ll never have a world-class lab. Define performance metrics and incentive schemes for lab staff to nurture an entrepreneurial culture within the lab.
Don’t Forget the Bank
Too much input from the financial institution’s stakeholders can be a drag on the incubation process. The lab needs runway to explore and develop ideas without hordes of executives looking in on a daily basis.
But the lab is not a distinct company, and working in isolation can reduce the odds of incubated ideas successfully being integrated into the bank’s business. Find a way to make sure ideas being developed by the lab can be owned and operated by the parent bank.
Don’t Let Making Overrun Thinking
Find the balance between developing the right strategy and building something. The rush to start prototyping on the latest shiny object can divert attention away from big, unanswered questions around the strategic and commercial value of an idea.
Mark Payne is co-founder and president of Fahrenheit 212, an innovation firm, and author of “How to Kill a Unicorn.”