Kristin Moyer

R&D expenditure and patent filings have tended to follow GDP and slowed significantly during the early 1990s and early 2000s with other market downturns (source:  “Policy Responses to the Economic Crisis,” OECD, June 2009).  The same thing is occurring in the current market crisis, with total R&D investment down 60% year-over-year in Q1 2009 in the US.  The number of Initial Public Offerings and venture capital investment declined significantly in China at the end of 2008.  In addition, business R&D is now generally focusing on short-term, low-risk-innovations, with long-term projects being terminated.

At a market level, a decline in innovation threatens a durable recovery and return to sustainable growth on the heels of the worst global crisis since the 1930s.  The same is true at an individual corporate level.  Incremental improvement will not enable banks to overcome the many challenges they have today, a few examples being the need to:

• Deal with non-performing loan portfolios and the threat of further deterioration in credit quality (for example if unemployment rates increase or remain high for an extended period of time)
• Improve customer trust
• Adapt to forthcoming regulatory changes
• Remain relevant in the financial supply chain as non-banks provide compelling, value added services
• Reach new markets and consumer segments (such as the unbanked) to drive top line growth
• Improve profitability by spending less on “run” the business activities (for example, maintaining aging legacy systems) and more on “grow” or “transform” the business
• Adapt to changing consumer spending habits, such as lower consumer spending and less reliance on credit
• Address changing consumer preferences, such as banking within the context of a social network, using a mobile phone to access a bank account and others

Innovation matters now more than ever.  Innovative firms are twice as profitable (on average) than other firms (source:  “Managing Innovation,” J. Tidd, J. Bessant, K. Pavitt, 2005).  In addition, recessions can act as a springboard that changes laggards into leaders twice as quickly as periods of economic calm.  For example, one study shows that more than 70% of firms that made market gains during a recession were able to sustain those gains through the next boom cycle (source:  Harvard Management Update – 1 March 2008, S.S. Baveja, S. Ellis, D. Rigby; also, see: “IT Intensity:  An Overview for Banking and Investment Services“).  Google is an example of a company that increased R&D spend during the “Internet bubble” in the early 2000s created sustainable advantage as a result.

Despite these and many other innovation benefits, banks are continuing to miss opportunities to innovate.  Banks must stop missing opportunities to innovate and start using innovation as a way to both recover from the market crisis and thrive through the next market cycle.

3 Comments »

Category: Uncategorized     Tags:

Share