Innovation ambitions across regulatory authorities and central banks have reached a new scale. Many authorities have visibly embedded innovation and/or digital transformation as a core pillar into their strategic objectives and increasingly institutionalize their innovation efforts through the creation of units dedicated to external and/or internal innovation and the appointment of designated chief innovation officers.
At a global level, the trend towards greater innovation-centricity is being paved by standard setters. Through the creation of its Innovation Hub Centres, the Bank for International Settlements (BIS) has established a global innovation infrastructure, adding to the innovation initiatives of other bodies. This is complemented by a growing ecosystem of private sector players with offerings focused on the development of new solutions in the areas of regtech and suptech as well as other non-profit organizations that champion regulatory innovation.
While the commitment to innovation is unprecedented, authorities recognize that the shift towards becoming an innovation-centric organization is a longer-term journey that is realized in incremental steps and often calls for a fundamental rethink of existing modus operandi combined with deep cultural change. Despite the transferable experience and insights from other public and private sector organizations, for many authorities the innovation journey to date has remained a highly exploratory process.
This article lays out three levers that authorities can consider as they look to enhance the effectiveness of their internal innovation management. The levers are defined in broad-based terms, not distinguishing whether innovation processes are targeted at internal organizational or market-facing innovation initiatives.
Minimize barriers to innovation engagement
Effectively embedding innovation across the organization critically relies on employees’ engagement in innovation initiatives and their experience throughout the process. Setting the foundation for this involves creating an environment that minimizes the potential mental and other barriers to engagement, both holistically and at the individual stages of the innovation lifecycle from ideation, design, experimentation, and implementation.
From a holistic perspective, the cultural dimension is critical. In many people’s minds, innovation often is still associated with large-scale, radical change and transformation as brought about by technology pioneers. In a financial sector and regulatory setting, given the nature of transformation experienced, this notion is often reinforced by equating innovation with advanced data science and technologies, fintech, suptech and other areas that are predicated on specialist expertise. Positioned in this angle, innovation processes may be viewed as being exclusive to certain types of individuals and solutions and inadvertent barriers to engagement induced. By adopting and actively championing an innovation concept that is framed in broad-based and technology-neutral terms and promoting the benefits of diverse teams to drive innovation, authorities can proactively reduce this perception and consequently make innovation initiatives accessible to a broader internal audience independent of their profile or skill set. Beyond this, authorities must culturally also invest in calibrating risk appetite expectations to build acceptance and normalize the notion that innovation projects are not free from failure or may not lead to the desired outcomes. Through consistent reinforcement of this message, this too will reduce the barrier to engagement for those employees who have been operating under a more conservative risk appetite.
At the innovation ideation stage, an effective way to broaden innovation engagement is through the implementation of a multi-channel approach to ideation. This means establishing a combination of virtual communications channels and other collaborative virtual and physical settings where employees can contribute to and exchange ideas to the broader pool of innovation ideas, thereby catering to different preferences for anonymity and ideation models. Here too, the practical implementation and cultural dimension is critical. To that end, it must be ensured that independent of the channel or setting, an environment is created where ideas regardless of their nature and potential are encouraged, and the process for putting these forward is pragmatic, focused on a few key information as opposed to a detailed essay, and otherwise free from undue burden and bureaucracy.
Participation during the solution design and development stage is often a function of the required skill set. Where concentration is on technology-based solutions including those involving advanced technologies such as artificial intelligence, the expanding portfolio of no or low-code solutions provide new opportunities for involving those employees with a limited technology skill set given the often minimal prerequisites they require. While ultimately the organization as part of its longer-term innovation journey must invest in the design and implementation of a sustainable innovation-centric skill and competency development plan that also involved the build out of advanced technology capabilities, these solutions can be an effective interim measure to drive engagement.
Create a flexible, tiered governance model
The internal structures through which innovation processes are governed have shown to make or break the innovation momentum. A traditional governance model that requires to pass through multiple layers of approval processes with an uncertain outcome risks innovation getting lost in bureaucracy and will discourage even the biggest innovation optimist. While governance structures should not be absent altogether, a balanced approach is recommended. This can be achieved through a tiered governance framework under which the level of control and scrutiny is modulated based on certain criteria such as the complexity and resources required for an innovation initiative. Three tiers are conceivable:
- Tier 1: A fast-track approach, catered to small-scale, ad-hoc innovation projects that absorb minimal resources and can easily be pursued alongside business as usual, under which innovation projects are either exempted from undergoing formal governance processes or are subject to a simplified, accelerated approval process.
- Tier 2: A hybrid governance approach, whereby proposed innovation projects of moderate complexity and duration undergo a more structured evaluation to guide their prioritization and resource allocation by a dedicated innovation team that operates and takes decisions independently and outside of the broader organization’s governance apparatus. To ensure consistency, operating principles can be established to guide the innovation team’s decision-making.
- Tier 3: Treatment of innovation projects through established governance processes and committees in the organization if they have grown to a sufficient level of complexity in terms of required budget, resources, and stakeholder coordination, akin to large IT projects.
Authorities should not aim to perfect the governance model design right from the start but adopt a learning approach with careful observations around sentiment of stakeholders involved in the innovation process towards different governance models and appropriate pivoting over time.
Intrinsically linked to the question of governance, is the question of the innovation budget. Subject to the level of independence granted to an authority in the budget planning and allocation process, a desirable approach is a segregated innovation budget. In the face of budget constraints, this avoids the innovation budget competing with other demands, which often comes with the consequence of innovation projects being deprioritized under the argument that their outcomes and potential benefits are uncertain relative to other more predictable projects.
Grow an “innovation proof” workforce by setting innovation expectations at the onset of the employee lifecyle and reinforcing it throughout
Even where authorities have introduced dedicated innovation offices and leads, this should not be construed as innovation being the responsibility of a single individual or dedicated. Indeed, embedding of innovation relies on the contributions of stakeholder groups at different levels of the organization in different capacities. The leadership team in particular has an integral steering role in setting the tone at the top and advocating the importance of innovation. To reinforce and embed expectations for contributions to innovation, innovation should be formally integrated into the employee lifecyle. This must start at the hiring stage to ensure future generations of staff are “innovation-proof” and can be realized by articulating innovation-related responsibilities and values in the job advertisement and conducting relevant probing during the interview stage.
Throughout the employee lifecyle, employees’ contribution to innovation can be systematically monitored and evaluated by integrating innovation-related expectations into the appraisal framework, complementing – not substituting – expectations for the delivery of business-as-usual activities. To the extent possible, expectations should be tailored to different stakeholder groups to allow for a meaningful and fair assessment and dialogue, Important to recognize is that similar to other softer competences, there exist no hardwired indicators for the assessment of innovation contributions. A judgement-based approach applies that combines anecdotal evidence with inputs from relevant stakeholders that are involved in overseeing and leading the innovation agenda and initiatives. Options for rewards should be explored in instances when employees have demonstrated an above-average contribution to innovation while maintaining solid performance on their other duties. This may include features of innovation champions as part of the authority’s internal communication. Finally, the appraisal process should also be leveraged as an opportunity to explore how employees’ skill set can be expanded to enable a deeper engagement in innovation initiatives should this be desired or to lower barriers to innovation engagement.
Getting innovation management right is a challenging task. This applies to regulators and central banks as it applies to other organizations. The optimal innovation path and pace is a function of authorities’ individual innovation goals, organizational characteristics and operating environment. Besides establishing an effective cultural and structural foundation, building continuity is essential in sustainably embedding innovation throughout the organization. While internal and external innovation flagship events, that are increasingly frequently organized by authorities, have proven to be powerful catalysts and a common vehicle for innovation dialogue, they must be reinforced through on-going and broad-based engagement that involves all parts of the organization and that is grounded in a longer-term vision and framework for an authority’s innovation journey.