Investment bankers, especially in markets with cut-throat competition, dream of the product or service breakthrough that will help them break out of intense rivalry and live happily ever after, secure behind the barriers of first-mover and other advantages. Innovation in investment banking, however, is often unrewarded because it fails to provide an edge at all.
Irrelevant innovations in investment banking come in four varieties: [1] those aimed at markets without (enough) clients, [2] those that generate client value but not (enough) firm profits, [3] those that are too easily copied, and [4] those that can be better exploited by others who control more relevant capabilities.
☐ Markets without clients. In considering a potential new product or service idea (in a relationship-driven industry), it always pays to ask five obvious but frequently overlooked questions: [1] who are the true clients, [2] do they have a real incentive to hire/use us, [3] do they have the means to pay us, [4] inspire us (client development = people development), and [5] use us again (relationships need more than one transaction)?
☐ Client value without profits. Investment banks often assume that generating client value will automatically lead to profits. However, this assumption is flawed because revenue distribution along the total client experience is not always determined by the value created at each stage. Instead, it is often dictated by the relative bargaining power of the players involved. Making money through breakthrough innovations is inherently challenging. For this reason, any investment bank considering a potential new product or service should pause and carefully evaluate before committing significant time, energy/talent, and other assets to the investment.
☐ Fast-followers’ opportunity. In the dynamic world of investment banking, shielding innovations from imitation poses a significant challenge. Does leading the pack with a groundbreaking product or service truly pay off in a specific client niche? Or does the lion’s share of rewards go to the agile, smart, and fast follower?
☐ Lacking lasting advantage. When the next ‘newest new thing’ comes along, the bank’s management will do well to ask a ‘what if’ question or two. Assume the financial innovation succeeds and that peers soon catch up with the bank’s initial lead. Does it, or can it, control the key factors for success so that it can transform an innovative ‘blitzkrieg’ into a long-lasting advantage? If the answer is negative or doubtful, the risk of an ineffective innovation is almost certainly high.
Asking the right questions filters out irrelevant innovations and promotes the development of truly profitable, client-centric, and sustainable financial products and services.