Trade and Financial Supply Chain Innovation Challenges

In difficult economic times, all banks attempt to be innovative as a way to grab marketshare and right now we are seeing a lot of hype around innovation. However, corporate clients are adopting new technology or techniques in quite a different way than before the economic crisis: basically, the risk threshold is much lower.

As a result of extremely tight budgets, many innovative ideas have turned into a ‘make-or-break’ decision for someone’s career. Even if a project is a good idea for the company as a whole, that individual will not take a casual decision on innovation. Whereas previously companies did things to be leaders and expected payback to be measured in years, today this is not the case: everything has to see immediate returns. And if projects don’t go as planned, that decision-maker can find themselves in a very difficult position.

Financial services providers need to understand the client’s perspective and consider how to deliver a proposition that meets that decision-maker’s requirements for achieving their objectives, without exposure to what they would consider elevated, career-level risks. Providers need to understand and balance what the corporate wants/needs, their risk tolerance, how able they are to absorb change, the type and scale of changes they can adopt, and – outside of what their wishes may be – the reality of whether they can do these things.

An Adoption Risk Paradox

Many financial supply chain (FSC) offerings have been enhanced through increased integration: financial institutions have moved their offering upstream from financing and settlement towards procurement and order fulfilment; and technology companies, which were mainly focused on procurement, are now moving down into the working capital area, historically the banks’ domain. In addition, various players are expanding their offerings to include logistics or other services, in order to create a more comprehensive solution.

On paper this seems like a good idea but in practice a more complex solution effectively means an increased number of corporate departments that need to be involved, which in turn means longer decision-making and sales cycles. This adds complexity and risk to the overall sales cycle.

As a general maxim, the more innovative a solution is, the more it can cost to develop and implement. In addition, it tends to be more disruptive to the client, which makes it harder to adopt. Therefore in order to increase adoption, a provider will typically create pilot programmes (a euphemism for cutting price) and provide the solution at a loss in order to generate traction and market momentum. However, cutting price can put a question mark over the solution’s economic viability, which in turn causes clients worry about whether it’s sustainable and further hampers adoption. Therefore the provider goes full circle in trying to deliver something that’s quite robust and – in theory – should meet the needs of the marketplace, but often has difficulty finding buyers who are willing to pay a price that will assure the solution remains economically sustainable.

There are many financial institutions that have gone to clients with large, complex solutions and the clients have underappreciated the complexity of what they’ve signed up for, whether that is IT resources, implementation complexity, systems integration, etc. The return on investment (ROI) isn’t there and, as a result, that customer – as well as many other customers who have had similar experiences – are much more sensitive about how they adopt innovation. They are more likely to go with a proven solution, a proven leader and equally importantly – if not more importantly – someone who is very disciplined and focused on their core competency.

In trying to anticipate client needs, many banks or other service providers can be tempted to whiteboard a highly complex and customised solution that goes end-to-end and delivers comprehensive integration of all the various steps and components of the transaction lifecycle. But the two questions they should be asking themselves are:

  1. Is it our core competency to manage all of those steps in the process?
  2. Do we think we are good enough to add value without introducing an unnecessary amount of risk?

And as clients go through their evaluation selection process, they should give careful consideration as to whether this is something that the provider is good at. Is this something that is core? Is this something that they do strategically or is this just something that they want to move into because of the hype?

Innovation: Evolution Versus Revolution

Due to client aversion to risk, innovation that is achieving rapid adoption tends to be smaller, less complex and lower cost. It is evolutionary innovation, rather than revolutionary. It’s about measured enhancement: moving from a two-blade propeller engine to a three-blade propeller, instead of moving to a rocket engine. It is innovation that delivers value but does so with less cost and less risk to everyone or innovation that does not require the client to change existing processes and is simple to use and implement

This is not to say that revolutionary innovation has no place in today’s market, but rather that the more conservative buying patterns dictated by the current environment makes rapid adoption of revolutionary innovation a significantly bigger challenge, and one that fewer corporates are comfortable betting on.

The Fear of Being a ‘First Mover’

As an example, SWIFT’s Trade Services Utility (TSU) is an innovative step for driving, standardising, accelerating and amplifying non-documentary trade.. And while most would agree that this is a great idea, with pilots underway, in today’s environment of reduced investment spend, adoption will likely be slower.
. Enter the catch-22: how to get critical mass if no one wants to adopt until there’s critical mass? Today this is a serious challenge because investment dollars are tight, clients are expecting rapid ROI, and they want that ROI to be delivered with minimal risk. It’s back-to-basics, as decision-makers change their behaviour to better align their own aversion to career risk with their organisation’s limited tolerance for economic risk.

Engaging the client to better understand their needs and their objectives is essential to helping the client gain comfort with a proposed solution. But to build scale, the provider should be looking to understand how many of that client’s requirements are common to others in their industry, and based on those findings look to identify a core offering that can be delivered in scale. Solutions that are scalable tend to cost less and tend to draw greater adoption, providing clients with solutions that add value while increasing longer-term economic viability and reducing risk. Direct client engagement is also essential in understanding a client’s capability and tolerance for change in addition to risk.

Driving Innovation Through Client Interaction

Deutsche Bank recently launched a social media campaign called ‘DriveDB’, with the aim of strengthening client engagement with an innovative communication channel. Clients can directly influence and steer product design and development through online voting, debates and information sharing with other clients and with product, sales and service experts at Deutsche Bank.

Part of the innovation focus is around the ease of use and user friendliness of transaction banking solutions, so in a sense this is innovation in order to make things less complex. The pilot will start with Deutsche Bank’s e-commerce platform to create a single access channel from which the client can view and interact with transaction banking, as well as investment banking.

Conclusion

As corporate clients look to mitigate risk associated with adopting innovation or technology, it is in their best interest to be very focused on working with partners who provide services that are core to their offering. These partners should have significant experience, subject matter expertise, a track record of successful execution, ample resources, and the discipline to offer products and services that are economically sustainable. Clients should look well beyond the front-end cost of acquisition and truly understand the total cost of ownership (TCO) including the complexity of implementation, as well as the costs associated with change if the project fails.

This analysis should also include a greater understanding of economic impact the deal has on the service provider to ensure long-term economic viability. After all, it’s not a great deal for anyone if the provider reduces service quality, stops investing in the product, or discontinues the service all together because the provider can no longer justify it financially.

Thoughtful consideration in defining the project scope, selecting the right partner, and ensuring that the value proposition is equitable to all parties will enhance the probability of success in adopting innovation, and mitigate economic and career risks that may otherwise be associated with a failed project.

To read more from Deutsche Bank, please visit their gtnews microsite.

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