Are Innovation Labs Worth the Time and $?

Yesterday, BS&T covered the Citibank Innovation Lab's venture into the public domain.I realize bank executives, bank tech vendors, and industry observers are all entitled to their opinions on the value of "Innovation Labs." Over the past 35 years, I have had the pleasure of visiting vendor-sponsored labs as well as a few big bank-sponsored labs. For the most part, these labs all combined a physical (read branch, back office) environment and application-centric (read platform automation, check imaging, ATM) capability. Have you ever wondered how the effectiveness or value of these innovation labs was measured? Ultimately, all of the innovation labs I visited over the years, except one, have now been shuttered. New, or replacement ones, like the Citibank one referred to above, are launched periodically, but with less frequency than in the past.

So, what does this trend line suggest -- that the innovation labs were ultimately not worth the time and money? Or, that the value of the labs literally reached a point of "no return"? There is a range of possible explanation for the closing of a lab, starting with the drive to cut operating costs during lean times (like 2008-2009). But that quest for why a lab was closed still begs the question of was the lab worth the effort at all. I think vendors and banks answer this question differently.

I believe one tech vendor has excelled at running an internal "Innovation lab" -- Apple. The impact of the innovations coming out of Apple is touching the banking industry in ways that were not contemplated just five years ago. Who would have expected that dozens of banks would produce a mobile banking application for the three-year-old iPhone? As I noted in an earlier column, the iPhone, was "a 'significant' change to the mobile platform which has become a game changer. This multi-channel, multi-function handheld platform is the key to transforming the mobile platform/channel into a meaningful venue for retail banking and payment capabilities." Apple could not achieve there product innovations without an innovation lab initiative.

Closer to the banking industry's traditional vendor community, IBM has maintained customer-facing innovation labs, sometimes referred to by vendors as a center of excellence, in New York and elsewhere. While these facilities have a horizontal flavor to the technologies that IBM delivers, there are industry-specific capabilities on display (or demo) to illustrate the potential for innovation. One such application I observed was the grid computing implementation by Charles Schwab, circa 2003-2004. Other large vendors like HP and Cisco have their own lab versions.

When the "worth" question is applied to bank innovation labs, the answer is less clear, or can be downright muddy. A true innovation lab, which should be about experimenting, refining, and testing that leads to a new or significantly improved capability, is usually a sign of the time of its launch. The lab life can be relatively short compared to a vendor's lab. It can be difficult for bank executives to value true R&D spending. Since vendors do spend on R&D, most often only larger banks can find budget for their own labs. Citibank's history with an innovation lab is like a graph of an improving earnings cycle and the arrival of new technology capabilities.

Bank innovation labs are not a waste of time or money if the bank is able to learn from the lab's work product and either take the lessons into their production environment or terminate a project destined to fail in a production environment at a much higher cost. Another benefit to a top-notch bank innovation lab is the dynamics at the institution -- which is like saying, "We want to be a leader, not a follower." A well-run bank-sponsored innovation lab must be focused, and capable of recycling itself, terminating some programs and launching new ones. Staying focused and recycling are hard to do because the skills and business requirements may not be a match for current lab staff. Managing the staffing of the lab's eco system is an area that banks have not yet mastered.

Bill Bradway, founder and managing director of Bradway Research LLC, analyzes the business strategies and IT investments of US banks and credit unions.