The business world is being disrupted by the combined effects of growing emerging economies, shifts in global demographics, ubiquity of technology and accountability regulation. Infosys believes that to compete in the flat world, businesses must shift their operational priorities.

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June 19, 2007

Innovations in Retail Banking – Part 1

I have been having conversations with many Banking Industry executives on the Retail side of the business over the past couple of weeks. I was struck by two industry innovations, at either ends of the spectrum – one, impacting sophisticated and well heeled customers; the other, addressing the traditionally underserved segments of the market. I will talk about the first trend here today and cover the second one in a subsequent blog.

How you pay for your purchases - whether at the neighborhood grocery or at a restaurant for that fancy Saturday evening dinner or even online, buying your favorite pair of jeans - has profound implications on the entire transaction value chain. The ‘consumer payments’ area, which is industry jargon for what I just described, is ripe for change!

What we all know: Over the past decade, cash ceded its preeminent position to credit, particularly for large-ticket transactions – there have been varying adoption rates of credit cards across countries, but they are here to stay; in the past 5 years, debit cards have seized significant turf from credit cards and have penetrated what the industry calls the ‘micro-payments’ segment, which are in the nature of smaller, diurnal transactions we make for ‘convenience’ purchases!

What next? The explosion in eCommerce has triggered newer payment alternatives to credit cards. Paypal, by dint of being the primary payment intermediary for buyers and sellers on e-Bay, has now become the preferred payment provider online for millions of shoppers, worldwide! Paypal is playing the role of a trusted repository of confidential customer information like credit card numbers and other personal details for these shoppers. While that in itself will not eliminate the ultimate channeling of a transaction through a credit or a debit card, what Paypal is doing as a next step is to create ‘stored value’ franchise – i.e., shoppers will top-up their Paypal accounts, much like debit cards linked to Bank Accounts or pre loaded telephone cards and use that value to pay for myriad transactions on the Internet. In essence, Paypal becomes the primary owner of the customer and quite literally, of the customer’s wallet! Google (now, can Google really be far behind on any of these new technology-led developments?!) offers Google- checkout with a similar strategy in mind. The math underlying all these is pretty simple – US online ecommerce sales (including travel websites) has crossed $ 150 bn in 2006 and poised to enter the double digits as a percentage of total US retail sales.

Capital One launched a ‘decoupled debit’ card earlier this month. Essentially, it is an extension of Paypal’s online strategy to offline or ‘brick and mortar’ transactions, by offering current customers the option of a Capital One (and MasterCard co-branded) debit card even if they do not have a bank account with Capital One. Again, a solid illustration of seizing ownership of the customer through disintermediation of her primary bank relationship! To the credit averse customer, it is like paying credit card bills at the end of every transaction automatically, courtesy Capital One, while earning rewards for loyalty; and here is the kicker - the merchant benefits as well, with lower overall transaction costs and hopefully increased transaction volumes! And if you thought this was the coolest thing, soon your neighborhood grocer or gas station will probably start accepting your Drivers’ License as legal tender for purchases, based on a back end connection between your License and your bank account!

In my earlier blog, I talked about disintermediation and ‘re-intermediation’ as essential stages of the innovation cycle. What we are seeing in the consumer payments space is just that – technology and heightened industry rivalry have spurred innovation, introducing newer, more agile intermediaries into the mix, while cementing customer loyalty. The Head of Payments and Cards at a leading global bank paraphrased this very well, when he said ‘Consumer Payments is an area which is most susceptible to non-traditional competition as you do not need brick and mortar infrastructure any longer to compete effectively’; this sentiment was echoed by another colleague of mine who oversees Clients in the Telecom Industry – ‘A Phone company is as much a bank as your neighborhood bank branch!’ Granted there are privacy and risk sharing issues that need to be ironed out before some of these innovations truly scale, but I am sure industry standards will evolve to address all such concerns.

Innovations like those discussed above address the sophisticated, 'e-enabled' segment of society and in my opinion, contribute to the overall growth of any economy. How about the segment that does not even have access to traditional financial services like a basic bank account? Is the industry innovating enough to include such underserved segments into the mainstream and ensure balanced economic development in a Flat world? As I mentioned at the outset, there are a few innovations, albeit on a smaller scale, that I am aware of. I would like to hear from you as well and post something soon on the topic!


June 14, 2007

Innovate...or Outsource?

The recent (June 2007) issue of the Harvard Business Review had two insightful articles on the topic of innovation – one titled ‘A Buyers Guide to the Innovation Bazar’ by Mohanbir Sawhney, Professor at North Western University's Kellogg School of Management and Satish Nambisan, Associate Professor at Rensselaer Polytechnic’s School of Management and Technology; the other titled ‘The Innovation Value Chain’ by Morten T Hansen, Professor at INSEAD and Julian Birkinshaw, Professor at the London Business School (Read the articles here – you may need a subscription).

What struck me from a detailed reading of both the articles is that innovation is no longer a loosely defined, ‘skunk-works’ activity confined to grubby R&D departments within Companies! There is a rigorous structure and discipline to harnessing innovation for tangible business benefits, especially among large and successful Global Corporations. There have been some blogs written about structured innovation on this site as well.

Sawhney and Nambisan postulate a structured framework for seeking out innovative ideas or products and managing them. The framework is, in their words, an ‘External (innovation) sourcing continuum’ which helps an organization choose from raw ideas at one end and market-ready products at the other; the strategic options along the continuum are moderated by trade-offs along four well established parameters - cost, risk, breadth of choice (of new ideas) and time to market.

I think this is a fresh perspective on innovation – that it can be systematically sourced from outside, optimally managed to fit a particular organization's product/ market strategy and closely aligned to specific business goals. The concept of a ‘marketplace’ or an e-bay for ideas is gaining popularity and firms are harnessing the power of networks (in some measure driven by the Internet); Procter & Gamble and have prospered through idea networks and exchanges.

While it is easy to conclude that networks ‘dis-intermediate’ and reduce the friction involved in commercializing innovation, there is scope for ‘re-intermediation’. Sawhney and Nambisan argue that specialized intermediaries like the ‘invention capitalist’ and ‘innovation capitalist’ are emerging to complement traditional venture capitalists.

My view is that organizations need to develop and champion an internal ‘innovation capitalist’, to borrow from the authors’ lexicon above! The internal innovation capitalist will help breathe more life into raw ideas submitted by employees; it will add flesh and blood through deep dives on specific areas – market potential, segment attractiveness/ profitability, scalability, step-jump in revenues etc. – and help in mitigating some of the risks involved in commercializing such ideas.

The second article by Messrs Hansen and Birkinshaw does an elegant job of structuring the innovation value chain as an end-to-end process, from idea generation through conversion and diffusion. They offer a methodical, almost tool-kit like approach to identify organizational deficiencies across the innovation value chain. And like Sawhney & Nambisan, they incorporate the external sourcing of ideas into their value chain. There is also a list of ‘best seller’ publications on the innovation process, mapped to each element of the value chain in the article!

The internal innovation capitalist is a vital link in an organization’s innovation value chain - a great catalyst as well as a conduit for harnessing the power of new ideas. As the concept evolves, the innovation capitalist entity should broaden its charter to channel external ideas and manage the outsourcing of innovation. Ultimately, it is a healthy concert of in-breeding and external ideas that will make a difference.

As Victor Hugo said ‘Nothing else in the world...not all the so powerful as an idea whose time has come’; if Hugo were around in today’s age and times, he would probably have added a corollary to his adage – ‘Nothing should stop a good idea at the gates of the organization’!

More power to the innovation capitalist and the vast universe of ideas out there!

June 10, 2007

Making Money from the Green Revolution


I am writing this from the 2007 GMA (Grocery Manufacturer’s Association) Executive Conference at the Greenbrier resort in W.Virginia. The conference and the resort are both part of a 100 year tradition of the grocery and food industry event graced every year by the top CXOs of the industry.

One of the sessions today : Wal-Mart Leading the Way in Going Green, was presented by Linda Dillman, EVP handling sustainability for Wal-Mart. If you remember, Linda was the CIO of Wal-Mart until a year ago when she took on this new challenging initiative.

Much has been said and done on the issue of how modern-day businesses are going green but Linda’s speech was momentous as it argued and proved at the same time that going green was not just the right thing to do, it made massive business sense with scorecards measuring the exact ROI from these efforts. Trust Wal-Mart to do that

This methodical, cold-nosed approach to a sustainability initiative is what makes it more successful. For example, Wal-Mart is working with Unilever on their laundry product “All-Small & Mighty”. Compared to the regular bottle (100 oz.) of all detergent, all small & mighty requires only half the amount of plastic and corrugated cardboard to produce. Transporting all small & mighty requires only 1/3 the amount of diesel fuel it takes to transport the 100 oz. bottle of detergent. How does all small & mighty help keep our world clean every year? Every year, all small & mighty helps save: 862,000 gallons of diesel, 50MM square feet of cardboard, 6MM pounds of plastic. And the best part: the smaller packaging helps save Wal-Mart shelf space where it can stock more products and reduce out-of-stocks and lost sales. It makes fantastic business sense to do this. Wal-Mart has numerous other such examples of business initiatives with an internal rate of return of greater than 37% (planned) and producing tremendous far-reaching benefits to the environment.

My guess is that this initiative has gathered a lot of speed because an ex-CIO is leading it. The systematic, disciplined way by which new innovative and lucrative environment-friendly initiatives are being launched is phenomenal. In the new flat-world, as I have always advocated, the CIO will continue to be the innovation champion.

The rest of the event is even more promising and I promise to write further about it.