Is Community Bank Innovation Strategic or Tactical? Yes

Everyone likes to think they’re strategic. And that they can be tactical when they need to. When it comes down to it, though, how many of us are really either?

How often have you heard someone ask what the strategy is, only to be told “this is a tactical project, so there’s isn’t a strategy”?  What nonsense that is! There is no real tactical initiative without a strategy!

“Strategy without tactics is the slowest route to victory, tactics without strategy is the noise before defeat.” —Sun Tsu, Ancient Chinese Military strategist

The same applies to innovation.

Innovation without the context of a corporate business strategy is just a game. It is applying a band-aid to a broken bone. It is trying to keep up with the next guy. But it will solve nothing.

On the other hand, even the best strategic innovation will come to nothing without tactics. These will define how to implement and productionize and sustain the innovative products or processes. In other words, you not only need a good strategy, you also need to know how to execute it.

Strategic Innovation

There is a discipline not-so-commonly known as “strategic innovation”. One consultant says that “Strategic Innovation is a multi-functional approach that brings together all the creative assets, capabilities and disciplines of your organization to work together on producing breakthrough ideas and driving new business growth.”

Scared yet? For this article, all I mean is innovation that arises from strategy.  (This is as against innovation that is somewhat randomly initiated). What are the characteristics of this kind of innovation?

1. There has to be a strategic plan. Specifically, we need to have identified where we are, where we need to get to, and what needs to change to get there. We need to know threats and barriers to success. We need to understand the assets we have or can acquire to help us get there.
2. Our strategic plan will include a prioritized list of challenges to be overcome. It will also prioritize opportunities to be leveraged. Each of these will have an approach for addressing it. By definition, each of these means doing something new, or something different. What is called for is innovation.
3. For each of the prioritized items, there will be at least a basic understanding of what kind of assets can be used to address it. This might be some combination of technology, people, process, or capital, or pretty much any mix of assets.

Strategic Technology Innovation

When most people talk about innovation in banking, they usually have in mind technology-driven change. In particular they are likely thinking about new technologies and FinTech startups. While this is an overly narrow definition, let’s go with it for the moment.

Here’s a likely sequence of events:

1. A friend of a friend introduces a hot new technology provider to you, the community bank CEO or credit union President.
2. In the interests of friendship, or even because it sounds impressive, you refer them to your CIO to “take a look”.
3. The CIO sees lots of reasons why it won’t work (it will cost too much to integrate with core banking, etc). So it gets quietly forgotten.
4. Or, worse, the CIO really loves it and wheels get spun working out how it would fit in the bank. More time is spent on how to make it work, and (almost as an afterthought) testing and rolling it out. But the results don't move the strategic dial (except by luck).

How wasteful is this loop, even if it stops after number 2?

What if, on first introduction, you were able to say “this is all very interesting, but it doesn’t address any of our key strategic priorities”. Or, even better, refer it to the CIO asking them to look at it with a view to addressing a strategic priority?

Shouldn’t the sequence be something more like this?

1. Carry out strategy planning (long-range as well as medium-range). This will cover brand, product differentiation, contingency against down market conditions, etc. This is in addition, of course, to traditional balance sheet and capital factors
2. Identify strategic initiatives addressing priority changes needed (attacking roadblocks, or leveraging opportunities)
3. Invite third parties to show how they would be able to meet the strategic objectives. (There are several ways to do this, such as an “innovation challenge”. See my earlier article Innovation Basics for Community Banks and Credit Unions).
4. Select the most likely partner, and carry out a proof of concept to verify.
5. Create a plan for integration of the new technology solution into the bank. This will include consideration of:
   1. Integration with core banking, web and mobile platforms
   2. Risk management. This should include technology risk (cyber-security, disaster recovery, etc); operational risk (consequences of unexpected results, higher than planned error rates, etc); and where applicable credit and market risk. Not to be forgotten is the third party risk resulting from your new partner.
   3. Regulatory compliance, to the degree that something new is being done. Are there licensing requirements, extended monitoring or reporting requirements, customer due diligence, etc?
   4. Operations processes, staffing and contingencies
   5. Customer service, including integration to service channels and processes
   6. Product management – pricing, profitability, packaging, etc
   7. Sales and marketing
   8. Finance, management reporting, and so on
   9. Carry out a full business case analysis taking into account all initial and ongoing costs. Reflect indirect revenue uplift as well as direct revenue, risk and/or cost reduction.
   10. Complete the contract with the partner. Ensure clarity of expectations and ability to deliver those expectations, on both sides.
   11. Develop, test and implement all the resulting technology, processes and training.
   12. Carry out a pilot (if the risk warrants it) and then roll out into full production.
   13. Execute the ongoing support and maintenance plan in partnership with your new technology vendor.

Some of the later stages you do anyway, or at least in principal you do. Not everybody carries out integration planning beyond the technology implications. This is a false economy.

OK if this is what strategic innovation looks like, what would tactical innovation be?

Tactical Innovation

Tactical innovation cannot take place unless there is a strategic innovation plan in place. But sometimes there is a need to deliver results quickly.

• There are times when an already identified problem has become so acute that it is difficult not to respond to an unsolicited solution.
• Sometimes the tactics that are chosen to carry out a strategic initiative turn out not to work. Then innovation is necessary to get the plan back on track.
• Sometimes something completely new is presented. Occasionally there is only a short window of opportunity to take advantage of it. (This is much rarer that you might think however).

But tactical innovation still occurs in the context of the strategy. Several things must be true for good tactical innovation:

1. It should be clear where in the strategy the tactical initiative fits. If it isn’t, either the strategy is wrong and should be updated, or the initiative is wrong and should be dropped.
2. So-called “tactical” initiatives tend to take fast-track routes to implementation. The sequence of events listed above is still needed however. Some of the steps may be shortened if risk is low. But the risk assessment phase should not be compromised.
3. Budget for strategic innovation should not be eroded by tactical initiatives. This is true no matter how small (“death by a thousand cuts”).
4. The business case for a tactical innovation should still be rigorously worked out. It may be simple if the initiative is small enough. But its contribution to strategic financial goals still needs to be demonstrated.

Banks are often accused of not being agile enough. Implementing new processes, products and technologies in a highly regulated banking environment is complex. This cannot be worked around. However, too often the lack of agility is a result of not having a strategic framework within which to operate. This is avoidable.

So perhaps another way of looking at tactical innovation is in terms of agility. It is the ability to identify needs for innovation, select solutions, plan integration and implement in much faster time-frames. This is possible precisely BECAUSE of the strategic innovation that has already been initiated.

A Word on Your Partners

No matter what kind of innovation is being carried out, community banks and credit unions will still need to engage partners. These may be strategic planning consultants, or technology providers, or banking innovation generalists. They may be specialist clearing houses for financial technology solutions. It all depends on the type of innovation.

But the most important thing with all these partners is that they too need to understand the overall business strategy.

Final Word

Banks and credit unions need to innovate.

But innovation is a part of a larger strategic approach to banking. This will allow banks to respond quickly to changing priorities, opportunities and challenges.

Perhaps you don’t feel you have time for full-blown strategic planning. But it is your strategic innovation framework that will enable you to respond in a timely fashion when you really need to.