why most firms aren’t ready and what holds them back · seek outside help to overcome barriers...

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RESEARCH STUDY

DIGITAL INNOVATION:THE READINESS OF FINANCIAL SERVICES FIRMS

OverviewIn July 2016, Magenic commissioned Forrester Consulting to evaluate how ready financial services firms are to take on the digital innovation imperative. What follows is that report’s findings.

Why Most Firms Aren’t Ready and What Holds Them Back

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Table Of Contents

Executive Summary .......................................................................................... 1

Digital Disruption Has Arrived For Financial Services ................................. 2

Financial Services Firms Overestimate Their Digital Innovation Readiness ........................................................................................................... 2

Structure, Culture, And Process Impede Digital Innovation ........................ 4

Embracing Digital Innovation Delivers Results ............................................. 7

Key Recommendations .................................................................................... 9

Appendix A: Methodology .............................................................................. 10

Appendix B: Demographics/Data ................................................................. 10

Appendix C: Endnotes .................................................................................... 11

ABOUT FORRESTER CONSULTING Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester’s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit forrester.com/consulting.

© 2016, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to www.forrester.com. 1-10Z3THW

Project Director: Nicholas Phelps, Senior Market Impact Consultant Contributing Research: Forrester's eBusiness & Channel Strategy research group

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Executive Summary In the age of the customer, financial services organizations need to reinvent themselves to systematically understand and serve increasingly powerful customers and gain a competitive edge. Customers are empowered by digital tools to research, evaluate, and choose financial products and services. In order to remain competitive, it is imperative for organizations to go through a digital business transformation and use digital offerings to win, serve, and retain their customers.

In July 2016, Magenic commissioned Forrester Consulting to evaluate how ready financial services firms are to take on the digital innovation imperative. Seeking insight into their practices and results, Forrester surveyed 201 decision-makers (director-level or higher) involved in or responsible for digital transformation at their financial services firm.

Forrester found many companies only understand the stakes of digital transformation to a point, ultimately failing to push their organizations forward with a disciplined approach to best practices. Furthermore, a gap is forming between those who apply digital innovation best practices consistently and those who suffer from inconsistent application of these practices. Since the gap represents the opportunity for differentiation, the stakes couldn’t be higher.

KEY FINDINGS

Forrester’s study yielded five key findings:

› Financial services firms overestimate their digital innovation readiness. The majority of firms recognize digital disruption is here to stay and are planning for their response. They believe they already have a mature innovation practice, giving themselves an overall score of 3.4 out of 4. However, digging deeper, we found that the actual application of innovation best practices was inconsistent.

› Most firms fail to apply innovation best practices consistently. Even among firms rating themselves as

highly mature digital innovation organizations, fewer than 40% reported using implementation best practices all the time. Firms must take a disciplined approach to digital innovation centered on established best practices.

› Structure, culture, and process are holding firms back. The obstacles respondents pointed to most often were structural, cultural, and procedural barriers. Cultural challenges have been shown to trump all others, underscored by insular thinking — 67% of firms said they look to competitors within their industry for inspiration. Firms should take an honest look at their main digital innovation barriers and address them accordingly.

› True industry leaders in digital innovation solve for complexity and seek outside perspectives. There is no one-size-fits-all approach when it comes to implementing a robust digital innovation practice. However, those firms reporting the greatest adherence to best practices also reported they are more likely than their counterparts to seek outside help to overcome barriers (51% versus 38% likely). Firms must focus on building successes early by seeking early wins and leveraging them for more digital opportunities and more opportunities to recruit other parts of the organization into the digital innovation journey.

› Digital innovation strategies deliver results, but not always as expected. Firms reported many positive benefits of their digital innovation strategies. Fifty-six percent cited positive outcomes on driving better customer engagement, and 51% said their strategies helped improve customer satisfaction. However, the results don’t always align to expectations. For example, improving customer loyalty or retention was the second-ranked priority for firms, yet it was only the eighth-ranked impact delivered.

Forrester defines the age of the customer as “a 20-year business cycle in which the most successful enterprises will reinvent themselves to systematically understand and serve increasingly powerful customers.”

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Digital Disruption Has Arrived For Financial Services

Financial services companies are facing an inflection point, where their customer relationships and competitive landscape are fundamentally shifting. Financial services customers, empowered by digital technologies, are capable of exercising more choice than ever before over the companies they want to work with. And financial services firms are facing stiff competitive headwinds — both from disruptive digital upstarts and increasingly sophisticated traditional competitors that are using digital innovation to transform their business.

FINANCIAL FIRMS ACKNOWLEDGE THAT THEIR INDUSTRY IS BEING DIGITALLY DISRUPTED

In our study, business leaders representing retail banks, wealth management firms, and life insurance providers have shown they realize this shift is well underway. Seventy-percent of the firms in our study overall agreed that consumer adoption of digital technologies is disrupting their industry, including 73% of retail banking leaders, 72% of wealth management professionals, and 62% of decision-makers from life insurance firms.

FIRMS ARE RESPONDING BY INVESTING IN DIGITAL TRANSFORMATION STRATEGIES

In response, these groups are investing resources to develop and execute a digital innovation and transformation strategy — where a company undergoes changes through the application of digital technology to all aspects of the business. The decision-makers in our study were overwhelmingly gearing up for digital innovation, as 98% of firms said they had allocated budget, and 95% of firms said they had dedicated staff to digital innovation or transformation initiatives (see Figure 1).

Financial Services Firms Overestimate Their Digital Innovation Readiness

In order to gauge the digital innovation readiness of financial services firms, we asked firms to “self-assess” themselves on digital innovation maturity. Respondents were asked how well different statements covering innovation practices, culture, organization, and measurement described their firm. Responses were then averaged and scored across all dimensions.

FINANCIAL FIRMS BELIEVE THEY ARE MATURE DIGITAL INNOVATORS

We found that financial firms believed they were doing really well — they gave themselves an overall rating of 3.3 out of 4 points across all dimensions. They rated their abilities to evaluate new ideas and communicate results across their organizations most highly (3.4), and they rated their implementation and measurement abilities somewhat lower (3.2), but overall the results were quite positive (see Figure 2).

FIGURE 1 Financial Firms Are Responding To Digital Disruption

Base: 201 US-based digital transformation strategists in the retail banking, wealth management, and life insurance industries Source: A commissioned study conducted by Forrester Consulting on behalf of Magenic, October 2016

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THE REALITY: MOST FINANCIAL FIRMS ARE NOT MATURE IN HOW THEY EXECUTE DIGITAL INNOVATION

As a follow-up to asking firms to rate their innovation maturity, our study asked respondents to provide insight into how they are executing their digital innovation strategies — specifically, how often they are using best practice innovation techniques. We found that most financial firms in our study, including those that believed they were highly mature innovators, are not taking a consistent, disciplined approach to their use of innovation techniques.

When it comes to innovation, we found that on average (see Figure 3):

› Only 26% of firms used best practice idea generation techniques consistently.

› Only 25% of firms used best practice idea evaluation techniques consistently.

› Only 27% of firms used best practice incubation techniques consistently.

› Only 32% of firms used best practices implementation techniques consistently.

LACK OF CONSISTENCY IN EXECUTION INDICATES FIRMS ARE NOT AS MATURE AS THEY MAY THINK

The sporadic application of best practice innovation techniques across the organization, or across digital initiatives, indicates that most financial service firms are not as mature as they may think.

Even those firms that rated themselves as more mature digital innovators struggled with applying best practices innovation techniques consistently. Of the firms that believed they were mature innovators, less than 40% said

FIGURE 2 Financial Firms Rate Themselves High In Digital Innovation Maturity


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FIGURE 3 Use Of Best Practice Innovation Techniques Is Inconsistent


they followed implementation best practices all of the time, compared with 23% of lower-maturity firms. While the firms that believe they are mature innovators are more likely to exemplify best practices in digital innovation strategy execution, these efforts are still largely scattershot.

Structure, Culture, And Process Impede Digital Innovation

In many organizations, digital executives are in a prime position to lead the innovation charge, having spent years honing the exact skills that enterprise-level digital leadership and innovation requires. But simply establishing an innovation team will not spur creativity and break down barriers to innovation. Firms face a number of significant barriers to adopting digital innovation best practices.1

We asked firms which digital innovation barriers they faced, across structural, cultural, and procedural elements, before

asking which of these barriers were most significant to try and resolve (see Figure 4 on the next page).

STRUCTURAL BARRIERS

Financial institutions undoubtedly face a wide array of structural barriers, which include large, inflexible departments; siloed product and channel teams; legacy enterprise systems; and senior executives resisting change. Additionally, the industry faces mounting regulatory and compliance hurdles that further hinder agility and innovation.

The most common structural barrier firms in our study faced was overcoming internal siloes and divisions in order to get teams to work together on digital innovation initiatives —cited by 32% of firms. The most significant structural challenge they faced was a tie between a lack of executive support and lack of incentives for pursuing initiatives. Twenty-four percent cited each of these as one of their top two challenges.

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CULTURAL BARRIERS

Cultural barriers encompass the informal patterns and behaviors that have become ingrained in the organization. These can include aversion to risk, unwillingness to think outside established ways, an innate fear of failure, and even formal, rigid hiring decisions that do not value creativity highly. Cultural issues prevent employees from speaking up with ideas that deviate from current operations and instill the belief that innovation is someone else's job.

The most common cultural barrier firms in our study faced was a lack of innovative staff or employees, cited by 25%. The most significant cultural challenge they faced was a risk-averse corporate culture that suffocated digital innovation, which 26% listed in their top two challenges.

PROCEDURAL BARRIERS

Procedural barriers refer to the policies in place to accomplish tasks within the company, including the processes needed to approve budgets and projects as well as the internal metrics that measure and reward the status

quo over customer experience or cross-functional collaboration.

Our study found that the vast majority of firms had allocated budget for digital transformation; however, when we dug deeper, it became clear that they haven’t allocated enough. Twenty-nine percent of firms in our study said they ran into too many hoops when trying to innovate at their companies, and the most significant challenge they faced was a lack of budget devoted to digital innovation or transformation, which 13% said was a top challenge.

THREE CULTURAL CHARACTERISTICS HOLD BACK MANY FINANCIAL FIRMS

Our study found that firms that struggle with digital innovation initiatives typically share one or more of the following three characteristics:

› Risk-averse. Financial services firms have reason to be conservative, if for no other reason than the stringent regulatory environment they operate in. However, risk aversion is largely incompatible with delivering digital

FIGURE 4 Most Common Versus Most Significant Innovation Barriers


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innovation for your customers. Twenty-nine percent of firms in our study told us that risk-aversion and fear of failure block innovative ideas from being explored or adopted, and 24% said that executives at their company fail to encourage or even sometimes punish individual initiative.

› Stuck. Another area where conservativism can hinder innovation is in how financial firms conduct hiring. It’s difficult to innovate when companies struggle to hire employees with digital skills. Half of the firms in our study reported their companies favor financial expertise over digital expertise when hiring, and 35% said they tend to have very rigid hiring practices and job descriptions.

› Insular. Firms in our study struggle to adopt external points of view. For one, they tend to look at firms within their industry for inspiration, as 67% of firms in our study claimed. Furthermore, they tend to consistently lack procedures for listening to customers and applying feedback to their processes and products. Customer expectations are set holistically — they aren’t just comparing your experience with their other banks; their expectations are driven by every digital interaction they encounter. So insulating yourself from customer expectations and a broader view of the digital offerings and experiences more innovative industries provide can hold back innovative initiatives.

INNOVATION DOERS APPROACH CHALLENGES DIFFERENTLY

In order to identify firms that were the most consistent in applying best practices to their digital innovation process, the study created two groups of financial services firms — “doers” and “aspirers.” Doers were more likely than average to adhere to best practices most or all of the time than their aspirer counterparts. The doers in our study, the real digital innovation leaders in financial services, struggle with many of the same challenges. However, they demonstrate key differences in how they address them and are more likely to achieve their digital innovation goals. Forrester’s prior research cautions against assuming there’s a one-size-fits-all approach for digital financial innovation, but the doers in our study had some defining characteristics that differentiate them from aspirers:

› Less insular. Doers were 16 percentage points more likely to look to innovative companies from outside of financial services for inspiration, and they were 37

percentage points more likely to have solicited customer feedback for new innovative ideas. They were 42 percentage points more likely to let customers vote or contribute to the discussion on which new ideas to pursue. Doers were also 41 percentage points more likely than aspirers to solicit customer feedback on initiatives during incubation.

› More likely to seek outside help. Related to their less insular natures, doers are 13 percentage points more likely to seek help from an outside firm to drive digital innovation or transformation at their company. Outside firms, including technology partners and agencies, can help quickly set up innovation labs or boost innovation initiatives. Specifically, doers were most likely to turn to full-service technology providers, followed by digital agencies, for digital innovation help (see Figure 5).

› Organized for midlevel innovation maturity. Doers in our study were more likely than aspirers to have set up a

FIGURE 5 Doers More Likely To Turn To Outside Help


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dedicated internal team devoted to driving digital innovation. Forrester’s prior research states that dedicated internal teams are key to addressing cultural obstacles at organizations. Internal teams are charged with prototyping and facilitating digital innovation initiatives. But just as importantly, they serve to recruit and inform all other parts of the company on the progress of digital initiatives. They do this through methods like crowdsourcing, competitions, and hackathons that eventually help sow the seeds of innovation throughout the organization. Doers in our study were 31 percentage points more likely to hold internal competitions to generate ideas, and 27 percentage points more likely to conduct hackathons than aspirers.

Embracing Digital Innovation Delivers Results

Digital innovation strategies are becoming essential, as more financial firms are gearing up to deliver high-quality digital experiences for their customers and customer expectations continue to rise. Additionally, our study found that companies that had adopted digital innovation strategies were realizing the benefits they anticipated when setting out.

FIRMS SEEK A NUMBER OF BENEFITS FROM DIGITAL INNOVATION STRATEGIES

Firms in our study embraced digital innovation strategies, looking to improve financial outcomes both for themselves and for their customers. Improved customer satisfaction was the No. 1 priority for financial firms. Fifty-three percent of firms said they were looking to accomplish this, followed by improving customer loyalty or retention, which was cited by 46% of firms. Closely behind were better customer engagement, better customer financial outcomes, and new sources of revenue, all cited by 45% of firms.

DIGITAL INNOVATION STRATEGIES DELIVER, THOUGH NOT ALWAYS AGAINST TOP PRIORITIES

Firms in our study were likely or very likely to say that their digital innovation strategies helped deliver significant benefits to their organizations. Fifty-eight percent of firms

said their strategies had a significant or moderate positive impact on driving better customer engagement; 51% said their strategies had a positive impact on customer satisfaction; 50% said they helped drive positive financial outcomes; and 49% said they helped drive new revenue for the company.

Interestingly, some areas of highest priority were not the same areas where positive outcomes were most likely to be seen. Improving customer loyalty or retention, for example, was the second-highest priority for digital innovation strategies, yet it was ranked eighth in terms of impact. Driving change in business processes was the eighth-ranked priority but the fifth-highest area of impact. Finally, driving change in products and services was only the 11th-highest priority, but it received the sixth-highest impact score (see Figure 6 on the next page).

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FIGURE 6 Digital Innovation Strategies Drive Benefits, Aren’t Always Aligned With Priorities


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Key Recommendations

As a result of this study, Forrester has formed the following recommendations for financial services firms as they look to create or improve their digital innovation strategies:

› Take a disciplined approach to innovation. Financial services firms are gearing up for digital innovation, and delivering new, high-quality digital experiences is becoming table stakes. But most firms are still failing to take a disciplined approach to how they innovate. To get results, digital innovation requires consistency and rigor, with a process that incorporates best practice innovation techniques.

› Seek early wins to build experience and prove the value of digital innovation initiatives. Especially for firms with smaller digital staffs, avoid spreading yourself too thin by identifying a small key initiative and executing on it. You will build experience and start to develop a portfolio for securing funding and executive buy-in. Sometimes, early initiatives won’t drive the results you had in mind initially, but they need not be considered failures if you embrace the “fail fast” mantra: Set executive expectations appropriately and ensure you’re prepared to learn from them. Embracing customer feedback in evaluating initiative success is a great tool for learning from both victories and failures. The earlier you can bring the voice of the customer into the process, the better the outcome and greater the opportunity to learn.

› Identify your key barriers — and attack them appropriately. Our study shows that a range of cultural-, structural-, and process-related barriers are hindering efforts. Assess the main challenges that stand in the way of your companies’ digital innovation strategy, and take steps to start overcoming them now. Some barriers, like a risk-averse culture, will take time to get over, so be patient and keep chipping away. Most importantly, collaborate with executives across the business, and develop a strategy and plan for overcoming these barriers that you can put into action alongside your innovation initiatives.

› Make the journey to digital innovation a companywide obsession. Rather than just “check the box” by aligning select employees to token initiatives, seek to move your firm to disperse and embed digital innovation skills across the organization. Keep an eye out for ways to share and create ownership of innovation skills and techniques throughout the organization once your innovation process is established

› Seek partners that can help you get up to speed quickly with a high-functioning, clean environment in which to incubate and execute initiatives. No matter how mature your firm is at digital innovation, the right external partners can help you improve the way you innovate. They can help you lay the foundation of digital innovation excellence in your organization and overcome procedural and structural challenges by helping you implement a disciplined innovation approach and apply best practice innovation techniques. Their skilled resources can complement your team, and they can share knowledge that, over time, will allow your organization to improve its in-house innovation expertise and leadership, setting the stage for deeper cultural transformation.

/ / / / / DIGITAL INNOVATION: THE READINESS OF FINANCIAL SERVICES FIRMS

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This research study is for informational purposes only. Magenic Technologies, Inc., makes no warranties, express or implied, in this summary. Other product and company names mentioned herein might be the trademarks of their respective owners. © 2016 Magenic Technologies Inc. All rights reserved.

Regardless of where your organization is in its digital transformation journey, Magenic can meet you there. Magenic offers the following services for companies at any stage of the innovation path:

• Business Value & Prioritization Workshop – Only 26% of financial firms are using best practice idea generation in their approach to digital innovation. This workshop defines and prioritizes ideas, epics, or features by business value and complexity to make sure innovation best practices are used from the onset.

• Journey Mapping – With customer satisfaction being identified as the #1 priority among financial firms, the journey mapping process focuses on the needs of the customer and addressing the highest impact before investing in more expensive and less valuable activities.

• Product Design and Innovation Workshop – 98% of financial firms have budget allocated to undergoing a digital innovation, but few have the capability to strategize the process. This extensive workshop will connect the product vision to business objectives and chart the right course that drives business impact.

To learn more about these solutions and services and start your digital transformation, call Magenic at 877-277-1044.

* Appendices for this Forrester Thought Leadership Paper are available upon request.

About MagenicMagenic is a leader in business technology consulting. We understand the barriers to innovation companies are facing and apply the right technology to transform their business.

Visit us at magenic.com or call us at 877.277.1044 to learn more or to engage Magenic today.

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http://magenic.com

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