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Innovation Updated: 22 Aug 2017

Henry Chesbrough: “Innovation must serve the needs of people”

Henry Chesbrough, made an informal visit to the BBVA Innovation Center, where he talked to different members of the staff about Open Innovation –term promoted by himself– in the fintech world. The professor of the University of California, Berkeley, highlighted different aspects related to financial entities: the approach to the young unbanked people, the disruption from the inside, the need to be riding on the “crest of the wave” or the collaboration with startups.

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Should there be any limits to sharing business knowledge to others talking about Open Innovation?

To me openness is a better way to innovate, it is not however a religion. So even a company like Google, which in many ways is very open, there are some things that Google does not share. It is not shared its page rank algorithm to rank all the presentation of the search results, it does not open up the auction mechanisms to choose the bids from all the companies that submit, just to give two examples.

Openness is a very good way to innovate because it harnesses the energy, ideas and passions of much, much wider group of people, who collectively know a great more than even the strongest organizations can know.

At the same time, there will be moments where you want to keep things much more restricted, maybe because that's where your profit will come or if you believe, Google, they want to control the user experience, and if they open up the PageRank algorithm, people will game their web pages to try to improve their order presentation and that would create more confusion and a worse experience for users.

So whether for user experience or for profit reasons, companies will sometimes keep some elements closed.

P2P systems, crowdfunding and crowd-lending, they’re all based in transparent sharing of knowledge and openness... What are the pros and cons of these systems?

The purpose of innovation in any sector of the economy has to be to serve needs of people that are not being met today, so in financial services there are entire groups of people that are really excluded from the formal financial system, whether they’d be at the bottom of the pyramid, in rural or small town areas or, think of young people today who are having trouble getting full-time jobs… they are having tremendous challenges getting into the formal financial system. And how will these people save for their retirements in the period where they have difficulties holding down a job. For these groups some of these innovations can be an important part of bringing them into the financial system. My own daughter, when she was in high school working with friends rise a small amount of money to make a movie, and for them it was a way to get the funding to buy the props to shoot the scenes.

So investors are never going to see a return of the investments, but my daughter has now more experience in organizing a project, and having to put together a budget, having to execute this budget... So these are things that I think are important steps into the formal financial system. So I see a lot of the innovation that we are describing at the edges of the industry for the people who are not currently included, and I think it would actually lead to better growth and health for the formal financial sector to be doing these things at the edges of the financial market.

Should be Open innovation applied to new banking practices, one of the initiatives to compete with to other non- financial players that are disrupting the banking sector?

If you were analyzing the cell phone market in 2005–2006, you would see very strong companies like Nokia, Motorola, who were global companies, with global brands, global distribution, global manufacturing, very low cost, very capable... and you would think of them as very powerful companies, and that it would be difficult for any competitor to take over. And yet, in just a very small amount of time, entirely new players from outside the industry have come in, really riding that digital wave. And I think it’s wise for the banks to also be alert to this. And to me this is why open innovation is a very good innovation strategy in the financial services area because you don’t know where is going to come from and you can’t predict in advance. The best way to participate is to experiment and engage with a variety of actors in a variety of spaces, so you are able to see these things sooner than you otherwise would see them, and then you have the opportunity to decide how best to participate with it.

Ultimately we know that no organization wants to be disrupted, but it is much better to disrupt yourself than to pretend that you can be immune from disruption. There are too many examples in too many industries where that does not work, so I think it’s wise to use open innovation precisely as an early warning system, to detect both the risks in the environment but also the opportunities for new business, new growth.

What basic steps should be taken in order to implement an open innovation approach in a big company?

I've seen these two different kinds of ways organizations are adapting to open innovation. One is from the top down, where a senior leader in the company says “we must do this”, often as a response to some sort of crisis, and in that case, the organization really changes quickly because of the leadership from the top and the insistence that the organization move in this direction.

What’s more common is for people in the middle of the organization to say “we have to change”, but there is not yet a commitment at the top of the organization. So in this second case, the group in the middle has to do some pilot projects, some early experiments to show the value of this approach, and then convince their senior managers that this is useful for us in our business. And that takes a longer period of time.

And in both cases one thing that’s very important is an early demonstration of success. It is not have to be a big success, but it has to be something tangible that shows managers in the organization that open innovation really works here as well… and if you can achieve that demonstration, that really helps building momentum to continue to change.

On the other hand, if your early demonstrations all fail, that can cause the organization to give up hope and to give up open innovation as well.

What would be your tip or advice to startups and entrepreneurs?

As an entrepreneur, the place you want to start is some need in the market that some customers have that is not being satisfied today. And if you understand those customers well and you can move much faster that any big company can move, then you will be assured of having some success. Large companies, in turn, are starting to put more work into how to collaborate with start-up companies and they are creating processes and mechanisms for start-ups to work with the large companies, without having to go through very long meetings every time a decision has to be made.

It’s a very fruitful area for both, because a large company can be a great partner for a startups, when a start-up wants to try to get to scale, wants to try to serve a bigger market.

And the start-up is a great partner for the large company because the start-up can do many more experiments with the same amount of time than a large company can do.

So if they work together, you get a lot more learning thanks to the start-ups and then you can take the results of that learning and put it into the market and scale thanks to the large companies.

What would you highlight from this casual visit to the BBVA Innovation Center in Madrid?

I’m impressed with how many visitors you get, and the internal diversity as well: how many people have come from other business, other countries… This way you get a very rich set-up of experiences from external visitors coming in, and also from your internal team. I really like that combination both internal and external!