On Open Innovation

My conversation with Dimitrios Salampasis, an open innovation researcher (@dsalampasis)

What does open innovation mean for the financial industry?

For a corporation, adopting open innovation means understanding that there are a lot of ideas in the ways of doing things, processes, technologies that will not necessarily come from the company. For large corporations, and most banks are the typical large corporation, there are three ways of dealing with daily challenges:

The first one is getting the internal department in charge of solving the problem; e.g. hiring developers, hiring risk managers etc. So this means doing it internally. That’s almost the opposite of open innovation. And it’s one of the reasons why many large corporations are quite stagnant because they rely on the ideas and knowledge and network of a very very small group of people. Even if they have e.g. like Goldman Sachs, thousands of developers, at the same time there are millions of developers around the world.

The second one is, traditionally, to work with consultants. We do not know what we are doing, therefore we hire McKinsey or Accenture or … name your different consultant … And the consultant will come and will do essentially the work of the internal team but it is like work being outsourced to another team. Once again in this case, the company (the large corporation) is relying on the network of the consultant. Some of the big consulting firms have adopted open innovation i.e. they know how to look around the world. But not many.

The third one (especially related to IT in banking) is to go to existing technology providers. You buy your credit scoring system from supplier A and you buy your core banking from supplier B and many of them talk about even being innovative. For years, the reality of the equation is that large technology providers talk about innovation but the offerings and the products they put in the market e.g. what a bank like Sberbank could buy, are at least three years old and they do not incorporate the latest technology innovations. It happened so many times with various large companies (I do not need to name them) who did exactly that (from IBM to SAP, to HP, to Microsoft, to Oracle) — while they talked a good “innovation” talk, that was just to induce bank departments to purchase current products. It was really, what I described, stopping innovation.

There is no innovation happening if these are the only ways of doing things. When we try to change this by putting open innovation in front, there are at least two more paths a large bank should pursue:

The first one, and I think that it is the most important one, is collaborative innovation which is a form of open innovation; to participate in forums, in workgroups, where we exchange ideas with similar organizations. For example, several years ago Sberbank joined an organization called Swift Innotribe. Innotribe was designed as a place where senior banking executives with interest in innovation get together and talk. So it is openness and it is an open exchange of ideas; it is still not at the point of adopting, incorporating innovation in banks.

Now, the second one (this is what I have been advocating for years now) is that banks should work with start-ups. By start-ups I mean small innovative companies that have the potential to change the financial services industry. And from what I have seen, and my initial thesis was supported by data — that is the way that any kind of meaningful innovation can happen in a bank.

Now what we have seen, and if you look on what it has been published, and by published I mean both academic and consultants, whitepapers, PR and articles in papers, you will sometimes see one bank or another bank making announcements about innovation, and what they did was developed in-house. If you dig a little bit deeper either find that that in-house is actually copying something done by someone else; which is not entirely a bad thing at all, but many times it was actually a small consulting company or a small product company that their technology was incorporated in the bank and that was the innovation. So from the perspective of open innovation these are the direction that I have seen and I have seen them working as opposed to talking and not doing.

Do you see this really happening, especially in the realms of regulation? Does it really make sense to be talking about openness in the financial industry?

My strong opinion is that banks will have to do it. You see two kinds of changes that are happening in the financial services industry right now:

The first one is that there are many innovative companies that are competing with banks and there are many innovating companies that help the banks compete e.g. they sell innovative technologies to banks. I think regulation is an excuse because if you understand regulation and you understand the intent of regulation there is nothing bad about regulation. There are people saying about having too much regulation. It is like saying there are too many laws and let’s get rid of the laws. People just do what is right. When dealing with people’s money I think regulation is very important. Even with regulation it is very important to keep changing. The companies that are fighting banks are actually forcing banks to change.

Let me give you one example that I am deeply involved in right now. There is the field of, let’s call it alternative lending, which is not traditional lending done by banks, and it goes all the way from peer to peer lending to lending to small and medium businesses. There are innovative ways of collecting the money, there are many ways of assessing the creditworthiness of the recipient, there are innovative ways of finding the recipient; so there is a lot of innovation. Some companies in the field, even going IPO, are competing with banks. Other companies are building the technologies, the platforms that the banks can use to fight back. Now, without regulation, you will see interest rates in the 700% per year. For example where I am in this country I talk with a company doing extremely well and the interest rate for the loans is 2% per day. At least it is not compounding but still… In the UK, recently, there has been a new law that sets the limit on this i.e. 100% per year. So if you take 5000 £ the maximum you can take back in a year is 10.000 £, i.e. double. So that’s a step in the right direction, good regulation. Both the regulator and the legislator are coming and say, yes we allow you to deal with money from some people individually, to act as an intermediary, you are getting rich in the process. But, there are some limits that the society will accept. So within this regulation there are hundreds of companies all over the world that are doing extremely well and they have new ways of dealing with lending and especially after 2008 when banks thought that the only way to survive was to stop lending, this was a very important element missing from society. Society cannot work without credit, we cannot also sit on banks full of cash (maybe some people do that) but credit and the new cost of money is something that technology has allowed to be done in different innovative ways. So, yes regulation makes it a little bit more difficult but when dealing with money it cannot be done without regulation. And even with regulation hundreds of companies do very very interesting things.

Which do you think are the main elements from an organizational point of view that allow the shift from a closed to an open innovation paradigm in the financial industry? (Organizational readiness)

I have been fighting with this for quite a while. There are two options:

  1. Top-down: from the CEO you say everybody has to innovate
  2. Create an innovation department

Both of them have pros and cons. The plus that everybody has to innovate is that if they really do it, there are a lot of spontaneous ideas and things that happen. The disadvantage of such a model is that depending on culture, departments start fighting on e.g. “I do mobile banking”, “no, I do it”, they fight and at the end nobody does mobile banking well.

If you have a department that is in charge of innovation, this kind of structure may work because people will say, again depending on culture, “no we do not have time to take care of these things”; “we have a real business to run”. So if you have a department that has protected budget to try new things and experiment with new technologies, then new ideas will happen. The disadvantage of such a structure is that, and this is what had happened here is that we had very interesting projects and everybody was enthusiastic, but nothing really went over to production because we were treated as a foreign object that the organization was trying to kill within its entire body. So I wouldn’t say one or the other is better but it depends on the organizational culture.

Now, the question is what is the culture and how do you influence that, how do you change that. Unfortunately, there is no easy answer. It takes time and it depends a lot on the cultural background of the country, of the organization itself, of the top executives and the examples that they give, both on what they say and what they do; it happened here many times, I had support, but when any time a business executive would complain that things wouldn’t deploy into production our innovative pilot because it had a “real business” to run, so the top of the organization “said solve that and the then come back”. Of course they would never come back. What I have seen working and I have suggested but it has not been implemented here is to give KPIs that says e.g. out of the 40 initiatives of the business unit 5% need to deploy into production technologies developed by the innovation team/experiments team etc.

I have seen that when working in IBM, where that was the end result of many of the projects in my innovation team; but of course IBM is a different kind of organization, different history, it is a techy organization with a half a million employees worldwide, so that one was quite a different structure. Here Sberbank is a huge bank, a sense of a Soviet-bureaucratic legacy, all in all different culture.

Do you see the HR function playing a role towards changing the existing organizational culture?

I think there is a way. I have not seen it happen wherever I have worked. When I was working in IBM I was managing close to 400 people from all over the world. They were all collaborating around one portfolio. Of course e.g. the team in Poland had one product; the team in India had another product; the team in Austin had another product; the team in Toronto developed a common core used by all of them — and everybody was trying to blame the others … I am doing my job for the others … my thinking at that time and that proved to be correct is that with those people at that time and for the specific product was to put half of everybody’s bonus dependent on the mark that was his individual contribution and half, and that was really half, of the mark for team-playing. How do they collaborate with others, how have they helped each other succeed? So I was in the position for 4 years: in the first year it was a huge outcry; I had been escalated to my boss and my boss’s boss and like three levels up because I did that. Because some people said “I did a fantastic job, I filed two patents, my code is fantastic, who cares that I did not help the other person in Austin?” I do … And you do not get your bonus because you worked just on your own.

So, I think that worked. Of course the moment I moved on to the next job and someone else came and many of those people I had hired and are still friends of mine, they told me that they scrapped what I did. So I think that for the book I am going to write sometime in the future that was a good experiment that was I think something that proved the point that is an example of an HR policy that helps; but I have not seen it anywhere. Of course here when I talked about that they did not even understand what I was talking about. Because everybody has an individual KPI, this is how it is here.

What is the profile of people working in an environment that nurtures open innovation practices?

I think the industry needs more people who are risk takers and willing to try new things and this is almost a contradiction, because people coming to a bank they come for the stability, and I am not talking about the people who would not find a job anywhere else because you know their profession is bank teller. I will give you an example that we’ve tried to apply here: it comes from a US Bank, which has a branch in Manhattan, where every six months they change everything because they experiment. They experiment with new software, they experiment with new layout, they experiment with new ways of conducting the client sessions. Everything is changing every six months. That is good for the bank because they learn, but they had huge problems with the people in the branch because they said “stop changing things for me … you are driving me crazy”! Every six months I have to learn new things, every six months I have to work on a desk that is on the other side of the building … things like that. So it took them about one year to realize that only certain people can do this kind of work and they ended up having quite a comprehensive questionnaire that they used before transferring someone to these kind of activities i.e. to be in that branch.

The same applies in my second life at IBM, my second career at IBM; I was the Director of Innovation and I had a team of 80-90 people that were all working on innovative projects. Every six months they would start something else. And we had two kinds of people: people that at the end of 6 months that would be very upset that they had to start something else, they wanted to continue and those people we transferred to product teams — now they can do it for the next 8 years until the end of the life of the product. But what is interesting is that a lot of people from IBM from all over the world were applying to work in my team for two years because they wanted to try new things all the time. So my conclusion, and of course it is not a scientific one, inovation teams should really be self-selecting, you explain what you have to do, what the job is, and some people will jump into the opportunity, like to be risk-takers, and some people will say oh God give me something, put me in the corner, give me something to do until I retire. So you use the first ones, you move away the second ones … I do not know if such a thing can be taught. My personal experience is that it cannot but I am not an expert of course …

I have been struggling in general with this very question that you are asking me now because it would be good if I could identify values that would act as pre-filters so that people that believe in those values would be the first ones. Some thoughts:

  1. The willingness to learn. I found that one to be very important i.e. the belief in the value of learning. I mean of the typical questions that I ask is what book are you reading right now, what book did you read last week, what books did you read this year? This tells me a lot.
  2. Questions that I am asking during interviews help me try to understand what are the intrinsic values of the person to see if there is a good fit with this kind of innovative work. So it is not only about learning but also about curiosity. Because some people learn because it is needed, because you know they have to get CFA level 1, 2 and 3 otherwise they cannot get the job and certify this and certify that … I have seen people with 2-3 Master Degrees or 2 PhDs. The other one is seeing a problem and start to think how to solve it.

These are two more fundamental character traits and values that someone believes in and I think they would help in identifying innovation team members.

How do you identify if the person in front of you is a fit?

I have told you about a couple of questions about curiosity and about learning. What I am also looking for and this is very important in innovation and the assessment starts from almost the moment we start talking is is this person a leader? Can this person see something in what someone else is doing and say how do I use this … how do I put it in this bank? How do I change things? How do I put in new ideas? So the leader is someone who does that. And I am not talking about the leader who does this superficially but about someone who really believes in changes.

Leadership, curiosity, continuous learning-these are the three most important elements.

Have you ever made a mistake with a person while hiring?

Oh, many times. Dimitrios just to give you a perspective… I think in my career I hired several hundred people, maybe 400-500. In the past 20 years I fired hundreds, I have interviewed maybe 5.000, just statistically that would be impossible not to make mistakes. I did make mistakes and I have learnt from them. One mistake that I made almost repeatedly is with people that show curiosity, learning, leadership but the work ethics is not there. And my work around is, because you cannot see that in the interview, I have yet to find a way to detect that because, references are useless, CVs/resumes are useless, you cannot really see that until you start working with that person and the only thing is that if there is no work ethics, I try to let them go. Of course it depends on the organization like here at Sberbank it is practically impossible to fire someone quickly. But in start-ups, because I built up a couple of companies, it is easier … if they do not do their work … gone!

What is the meaning of ethics in the financial industry?

If there is no work ethics then nothing is ever done. And it is not only in banks but in any large organization … governments are the prototypical large organizations in where almost by default people with lower work ethics will congregate. Things are not being done because almost like the business goes by itself. It is toxic … if you have that and you are not able to get rid of those people then the whole organization will go down.

What does trust mean for the financial industry and for the organization per se?

Without trust inside the organization, the organization will implode. And essentially dealing with innovation is very much dependent on trust. Without trust there is no innovation because inherently new things are not proven so someone needs to trust someone to try and experiment with new ideas.

Within financial services, the whole financial services industry relies on trust. Without trust there is no such thing as a bank. Because, I guess you are familiar with the concept of fractional banking … a bank does not have all your money maybe 2-3%. You trust that someone somewhere will find the money when you need it. I think that it is impossible without financial institutions, how they will evolve and how the concept of trust will evolve. E.g. we are now looking at Bitcoin … the Bitcoin protocol which is a trust protocol — I think that is very interesting and has the potential to disrupt financial services more than people will understand. I mean understand today, even though there is a consensus building, because if there is a way to exchange value through monetary transactions between two parties without having to go through a bank this would be a major disruption and a major destruction. So trust is a big thing, yes.

Balance between senior/mature and junior employees (incl. Younger-looking leaders endorsed for change and older-looking leaders endorsed for stability)

I think that that is correct, I think that is unfortunate. I am the one who is pushing some colleagues to change and I am older than any of them. I am in my mid-50s, senior IT executive, they are in their mid-40s and I have to push them. I think statistically and you know the history of the world shows that the appetite for change and maybe more the ability to absorb change it is larger when you are younger. The ability to invent, to think outside the box – to use a buzzword – is higher when you are younger. But we have seen people who have innovated, who have created huge things in their 70s. So yes in general it is right.

Would you focus a little bit more on the financial industry … do you see any specific elements or do you have any examples that you have experienced of this willingness to change from senior or junior level employees or e.g. what would the financial industry look for? Experience, ability to change/ would senior employees still be part in this shift to the open innovation paradigm?

The main reason we keep on moving forward here at Sberbank is because there is a small number of very senior executives, including the CEO, who are the ones who keep on coming with new ideas, new ways of doing things, they are actively seeking new ways and people coming up with new ideas. I have to tell them all the time what is going on, I go to Silicon Valley they want to know what I have seen, they go to see start-ups etc. It comes from very high up in the organization. And when you have this kind of leadership, the organization moves forward, even though larger masses of people may not be that interested in changes.

Do you see IT being the main driver of the shift to an open innovation paradigm in the financial industry?

The financial services industry does not work without IT. Financial services industry is IT. And what we see is building new capabilities outside large institutions using the latest developed and available capabilities, including, and this is also part of open innovation, including open source applications, it is the only way for financial services institutions to stay competitive. That is another fight … you know … Facebook and Google and Yahoo and actually even HP and IBM, they use a lot of open source, a lot of open components. If that is not moving inside the mindset of the people building applications inside banks and in the lines of code, banks will lose. I mean they are already moving slowly. If they stop, if they continue to create these barriers, walls between what is happening inside and what is happening outside, looking it from an IT point of view, they will be left more and more behind.