Innovating from the inside before moving to external innovation

Interview with Erik Luts, Senior General Manager at KBC, responsible for 'Klant 2020' – KBC’s digital change & innovation programme

Interview by Bjorn Cumps and Marion Dupire, Vlerick Centre for Financial Services

In general terms, what does innovation mean for you and for your company?

“Performance and innovation go hand in hand, but both are at the same time somehow contradictory. A company has to perform well in the market in which it is operating and has to be innovative at the same time. This means maintaining the balance between today and tomorrow. And unfortunately “yesterday” does not give you any benefit in this game.

Every company that exists today has been innovative at one certain moment. Otherwise, it would never have been able to conquer its part of the market. Some companies have been innovative 30 to 40 years ago. Others are going through that phase today: they come up with ideas when things move fast and can be done in an experimental way. Later on, when they reach some kind of maturity, their focus has to shift from innovation to performance. And that brings us to the paradox: that shift might also lead to the beginning of the end of the company because the strengths the company has today not always appear to be the ones needed to succeed in the future.

Today, the entire sector is being challenged by paradigms which were never taken into account before: everybody has the potential to enter into the banking and insurance sector. The internet has not only created a very low entry-level for those who want to develop a certain service, it has also changed peoples’ expectations and comfort. And so opportunity enters the game.

So innovation has become much more important than 10 years ago. In a mature banking and insurance company, we often create new products that can easily be copied. Therefore, innovation has slowed down and we became lame ducks. That makes us vulnerable to companies who focus on market share before they even start thinking about profit. They are not at all playing the same game we are.

At present, a lot of money is going around in those companies. That leads us to another aspect of innovation: how can we deal with companies that don’t strive to be profitable in the first years, but are only obsessed with providing better services at a better price?

For companies like KBC, it is not only important anymore to be a strong player today, but also to understand and react on a game which we never played before.”

Being performing well both as an organization and on certain innovative niches is therefore a big challenge as you explained. How do you deal with that and how difficult is that in your organization?

“Our key task is driving innovation at KBC, I indeed experience this challenge every day.

Today, we are playing two games at the same time:

  • performing well: a game we are good at and we know how to play.
  • being innovative: a game in which we are only as good as our new competitors or perhaps even worse because we experience the handicap of having been doing the same thing for years.

If we miss this second game, we might destroy our performance in the future. You can understand this causes a lot of discussion. A discussion that cannot be solved by simply destroying our current business model in the name of disruption. We have to be more careful. It is a discussion about choosing our battles and act on time, knowing at the same time that evolutions are always over-estimated in the short-term and under-estimated in the long-term.

Let me give you an example: Crowdfunding was for us an opportunity which we wanted to grasp, but of which we knew it might be disruptive for our regular process of lending money. We did it anyway to capture the evolution and to learn from it. At the same time we improved our lending processes, but we didn’t throw them away.

We are convinced that if we succeed in being innovative, we will still be in time to make it harder for our competitors. We therefore hope to make some hits in different kinds of business over the years to come.”

Why do you choose to do that within your organization? Because we see some others who do not keep that tension within the organization but move the innovation into a different entity. Is that a deliberate choice to keep it within your company?

“KBC has chosen for a mixed model: we innovate from the inside. Our model is not to replace the so called tanker with speedboats, but to tow him with tugboats to the correct position. I can assure you that we have had a tough time explaining this concept, especially the first year was difficult.

Since we are managing the innovation projects within our own company, we are disturbing a lot of people. That caused pressure and lead to people wanting to eliminate the programme. A lot of managers saw their favourite playground disappear. So they complained they did not understand why we received part of de budget they were asking for or why we were allowed to work in a different way. Our first concern then was how to position ourselves and then how to get them on board.

We built a new methodology and another way of thinking, but we also focussed on creating acceptance. We did not want KBC to turn into a company in which 5% of the staff got used to a new concept and 95% did not feel any change. Therefore we invested a lot of energy in communication and in spreading the change gradually through the whole company. After a while, we contaminated people and they started to accept what we were doing. Even better, they started to be proud of the change and of the results we achieved together and from that moment on changing mind-set and behaviour went fast.

Our next challenge is to influence our sales force. It is not because we deliver an exciting product that we have a sales organisation that follows. The challenge we are facing now is to sell our services to both existing and new customers. Our distribution network is putting a lot of effort in changing its mind-set and also has to convince our customers of the benefits of change and the advantages of innovation.

Our sales force has made a switch and has become adherent to the necessity of change and the new services we deliver. They also understand that the direct services we are developing are not a competitor, but an ally.

Meanwhile, we also develop projects in external co-operation:

  • Start-it @ kbc has become the most important incubator in Belgium. People are confronted with start-ups in our premises and look at the opportunities they offer. And this leads to a different mind-set within the company.
  • We also joined forces with Mobile Vikings, a totally atypical partner for us. Our environment tried to persuade us to team up with a traditional provider. We chose for Mobile Vikings not only because of their know-how of social media, but also because they have a total different way of approaching the market and developing services. We launched CityLife, a new payment/loyalty concept, with them and we learned from them. That made people understand we can create added value in working closely together with external parties.

KBC has chosen to organise the change within the company and not create an external entity. This has only been possible by making a very strong innovative manoeuvre that was not afraid of confrontation “within”. And by doing that, we strived for a long-term learning effect and not a short-term reaction.”

To go back on the implementation process of external innovation, you mentioned for example Mobile Vikings, what is the reason why this kind of innovation comes from outside your organization?

“Our innovative projects are only 40% technical but 60% about change. Being a human scientist, I understand quite well how change works and why it is so difficult to turn around a company.

Unlearning is more difficult than learning. People are doing things they are trained and rewarded for. If what they are doing is successful, they see no reason for change. That is why companies encounter difficulties trying to change. Company culture is nothing more than the sum of the peoples’ mind-set and so a company is an organisation which reacts the same way individuals do.

I guess people working in a ready-state company somehow are forced to leave part of their brain and enthusiasm at home. They feel they are not allowed to be creative, innovative and do not need to take any risk. Innovation disappeared from their radar. Do not misunderstand me: we need their contribution every day, but a company also needs people who are able to look further, to understand what is going on in the world around them. And when you are lucky, such people are also in the top management, which is the case at KBC.

Change is linked to culture. It is a long-lasting, labour-intensive process. The image Jim Collins uses of a giant management wheel which needs to be pushed by the leaders before it starts spinning by itself, is for me the best metaphor. I cannot count the number of presentations I have given, inspiration days we have organised, discussions that took place … Little by little change in the behaviour is taking place. We believe in 100 small “fires” to create a burning platform, not in “one big flash” created by the CEO’s offices. Change needs to be close and comprehensive.

To avoid this transformation effort, companies often seek innovation outside and buy a company “to win time”. They avoid resistance, but don’t create a habit of change. That is the reason why I feel innovation has to come from the inside. You should search support outside, but your battle is inside. In our case, the spirit of Mobile Vikings was not something we could find within KBC: their experience with social media, their attitude to be disruptive and destroy and rebuild their own model … Working with Mobile Vikings gave us the opportunity to show our people such an attitude can be successful. And that was precisely what we were looking for.”

If you look at possible external partnerships, which one has the most potential for your organization? Is it within the financial sector? Or with other FinTech companies? Or with totally different sectors?

“I respect the entire FinTech evolution and I am convinced it will transform the sector, but it will not kill us if we react properly.

In my opinion, we can still easily acquire or copy any start-up in that sector. The mistake industries make, is that they wait too long before they react. We give new initiatives too much room to manoeuvre and the opportunity to become a competitor, like PayPal for example. It took them years and now they are here to stay, because they solved a problem we easily could have taken care of. If tomorrow disintermediation in lending takes off, it is not too difficult for us to do the same or to acquire them. But if we sit back and wait…

At a certain moment, any start-up needs scale. To reach that scale, it has to play the game of performance and not innovation. And that is precisely where our strength lies: we have learned to play two games at the same time. Yes, we have to change our habits, but we still need to be performing today. And so, “innovators” should be grateful to the “performers” because they give them the opportunity to play their game.

If we team up with a third party, it will be one working outside our own industry. We will never find disruption within our own industry peers. We need people with a different view on banking and insurance to challenge us, to open our eyes. Furthermore, they often have skills we cannot develop. Partners for us might be telecom providers, editors, energy suppliers or healthcare.  For me it is obvious “change must effect your entire company” and this is a long and winding road. However, it is worth to “walk the talk”.”

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