According to Eduard de Wilde, author of this blogpost, many corporates are struggling with the development of new business models. Looking outside the insurance industry, many corporates have set up an innovation lab, but quite a few have closed these again due to disappointing results. Alaska Airlines, Coca-Cola and the New York Times are a few examples. Interesting to see what insurance carriers can learn from this. In this blogpost he will discuss
- Three levels of innovation at corporates.
- Reasons why quite a few corporate innovation labs fail.
- BMW’s successful approach, as presented at the previous DIA edition.
Three levels of innovation
We live in an era of digital transformation. Developments accelerate because all big drivers have become full grown by now. Everybody is connected to everybody, all platforms are connected to each other, all consumers carry their computer with them in their pocket 24/7, and computing power is still on the rise. Meanwhile, corporates still have organisational structures, processes and systems that are tuned to the last industrial revolution, not to the digital era. They compete with digital entrants who carry ‘business agility’ in their veigns and think in terms of world dominance, rather than market share per country. To compete, corporates have to change on several different levels at the same time:
- Digitising existing processes
- Renewing the existing business model
- Challenging the existing business model
1. Digitising existing processes
The most important driver is cost reduction, combined with customer satisfaction. Companies with extensive customer relations, such as telcos, banks, insurance carriers and energy companies can save massive amounts by digitising customer relations. At the same time there is considerable pressure from their customers to simplify their customer processes; new entrants set the pace, and corporates have to move along.
2. Renewing the existing business model
Existing products are becoming less and less distinctive. Who knows the difference between mobile phone subscriptions, energy contracts and insurance products? Corporates are at great risk to vanish behind a wall of intermediaries (e.g. comparison engines) who will attract customers based on pricing. The only way to avoid this trend towards uncontrolled competition is by renewing the existing business model. This can be done by creating a service layer on top of the existing product range that offers added value that is relevant to the customer. Think of smartphone banking apps that offer a better overview in your daily spending or apps that help you finding a nice new home to live in rather than just a mortgage. These new service layers, ‘branded utilities’, all make use of the same technology that digital entrants apply: speedy interaction with customers based on self-learning algorithms. These enable the corporate to build a direct relationship with the end customer, and to gain from the knowledge derived from customer behaviour. Starting from there, they can experiment with new revenue models and service concepts.
3. Challenging the existing business model
It is questionable whether existing business models will retain their right to exist over the coming decade. Companies are going to have to experiment with new business models to avoid having an unexpected entrant or technological development take them by surprise. Most companies have set up a corporate innovation lab for this. These participate in start-ups, or create their own start-ups. However, this is not always successful. On the contrary; within three years most innovation labs are disbanded again.
Why quite a few corporate innovation labs fail
An important reason why quite a few corporate innovation labs fail is because they are run by managers, not by entrepreneurs. In starting a business, entrepreneurship is a requirement. A lot of managers are used to big budgets in an existing business. They are unaccustomed to having to work with a limited budget and to continuously ask themselves whether the investment in a certain feature will pay off or not.
Apart from this, if you don’t have deep pockets, the chances of financial success are slim. Suppose you have a budget of a just a few millions. That will help you to establish about ten start-ups. Usually you are lucky when two are profitable, and one a genuine success. That is a relatively risky operation for a corporate normally more aimed at risk management than entrepeneurship.
Of course investing in start-ups shouldn’t necessarily be about financial returns, but certainly how these initiatives accelerate innovation at the mothership. Now, most innovation labs are set up separate from the established insurance carrier itself. As if having an innovation lab is the same as being innovative. Innovation, however, must be in every vein of a company to make innovation labs successful. Strategies to secure transfer of solutions as well culture should be in place to get the most out of corporation with start-ups. Check the blogpost by DIA founders Roger Peverelli and Reggy de Feniks, ‘Seven symbiotic relationships with insurtechs’ for such strategies.
BMW’S STARTLING VIEW ON INNOVATION
BMW Start-up Garage
One of the speakers at the previous DIA conference was Gregor Gimmy, Head of the BMW Start-up Garage, that aims to accellerate innovation within BMW. Gimmy spent 12 years at start-ups in Silicon Valley and Europe before joining BMW five years ago.
Now, BMW is a huge corporation employing 120,000 people, with an R&D budget of €500 million, 15,000 engineers on the payroll and 50,000 externals. So Gregor wondered if start-ups could contribute to BMW’s innovative strength at all, and if so, how?
To answer this, Gimmy thought it would be interesting to take a closer look at the start-up scene. There are 1.2 million start-ups. This means that there are 1.2 million ideas that are being developed and implemented outside of BMW. Venture Capitalists inject 150 billion dollars into these companies. That means that there is an innovation budget of 150 billion dollars that BMW doesn’t have to contribute to. These VC’s usually spend 3 to 6 months before deciding to invest in a start-up. After that, these start-ups get a budget that is probably about twenty times higher than BMW can afford. On top of that, these start-ups are not only active in the automotive field, but also in other relevant fields such as artificial intelligence, batteries, fuel, cloud solutions, data, etc.
Photo: Gregor Gimmy on stage at the previous DIA edition
Four criteria for successful corporation
His next question was: how can you successfully cooperate with these start-ups? Gimmy shared the following four criteria that he uses:
- You have to be able to secure the loyalty of the best start-ups, a requirement not all corporates succeed in.
- You have to work together at an early stage. After all, you want to be the first to have access to the new technology.
- You have to work with a large number of them. The bigger the number, the bigger the impact. After all, most of them fail, so you will have to have enough of them left.
- You have to be able to bind a start-up to you fast and cost-effectively, and be able to say goodbye to them if it doesn’t work out.
When you look at innovation labs, you can determine that most of them don’t meet these criteria. To begin with, it is very hard for a corporate to identify the best start-ups. The best ones can get funding from the best VC’s whose core competence it is to support them and bring them to the next level. Why would they want to get funding from a corporate? It’s also very expensive. Gimmy’s conclusion was that this was not the best model. BMW is simply not interesting enough as a VC for the best start-ups. And BMW is not good enough at selecting and guiding them.
Subsequently, he thought about a proposition that a VC can’t offer, and BMW is very good at. The solution was ‘BMW as a launching customer’. For start-ups it’s very interesting to have a large player such as BMW as a customer. Because if you succeed there, you will have credibility, and the market will open up for you. Gimmy calls this model Venture Client, as opposed to Venture Capitalist.
His unit selects start-ups with technology that could be interesting, no matter what part of BMW it could be relevant to. After that, they issue a purchase order. In a large corporation such as BMW that can take up to 18 months. Apart from that, his unit will set up the start-up with a business unit within BMW. This unit will work with the technology as if it were a client. That means that Gimmy’s department can remain very small. They only act as a selection instrument and facilitate the purchase process. The business units will actually work with the start-ups. When the technology doesn’t turn out to be a success, there will simply be no follow-up order. So there are no costs from share capital or shutting down a company when it fails.
What insurers can learn from BMW
When you aim to innovate using start-ups, the corporate venturing model is probably the most expensive method you could use, if you don’t have the right strategies in place to link the start-ups to the existing business. It is a provocative thought that the best start-ups would maybe/probably rather have you as a client than as an investor. At the end of the day the corporate’s business units are not interested in taking a stake, but in the actual solutions start-ups offer to solve their problem. BMW’s Venture Client model could be an efficient and cheap way to accelerate innovation within a corporate, also for insurance carriers.
Want to learn more?
Have a look at the full video of Gregor Gimmy’s presentation at the previous DIA edition at DIA TV.
In our interview with Amelie Oudea-Castera, the CDO and CMO of AXA Group shared three success factors of teaming up with insurtechs.
Michael Fitzgerald of Celent did some excellent research on success factors for insurtech-incumbent partnerships
The blogpost by DIA founders Roger Peverelli and Reggy de Feniks, ‘Seven symbiotic relationships with insurtechs’ might be interesting as well.
And of course we’ll pay ample attention for this subject in keynotes, on stage interviews and panel discussions with though leaders at the forthcoming DIA Munich conference at 15 and 16 November. Don’t forget to register!