Banks’ attempts to “digitize what they have” isn’t going to work. They need to massively reduce the scope and complexity of what they are involved in first. Then digitize. Then grow.

Banks are like Cruise Ships

Traditional banks have a lot in common with large cruise ships. They have lots of passengers who have to date been largely happy to stay on board and enjoy the comfort and extensive facilities available on the cruise ship (swimming pools, casinos, cabaret acts). The problem with cruise ships is that they are very big and find it difficult to change direction quickly. Famously the Titanic saw an iceberg in its path but was unable to change direction fast enough to avoid catastrophe. 

Some cruise ship owners have heard rumor of a new type of speed boat which has a more “agile” steering mechanism so have tried adopting this steering mechanism on their big ships. Unfortunately they discovered that these agile steering mechanisms were no better than the old mechanism at changing the direction of their big boats. It seems that big boats have a large amount of something called angular inertia which means the laws of physics won’t allow them to change direction quickly regardless of how cool their new steering wheel looks.

Some younger people recently got bored with cruise ships and decided to try out the new speed boats. Fortunately for the cruise ship owners, old people don’t like travelling by speed boat - it gives them a migraine. In fact the oldies seem to enjoy the nostalgia of the old fashioned entertainment on the cruise ships and have a warm feeling that their money is being held in some kind of iron vault below deck. They know in reality that the iron vault doesn’t actually exist, but at least the big cruise ships look like they might be big enough to have a real vault inside them.

Optionality is the opposite of agility

In fact, big banks are not like cruise ships. They are more like a cruise ship bolted together with a cargo ship attached to an oil tanker attached to a sail boat:

In other words, banks are running a number of different strategies at once. This maximizes their optionality or to put it another way gives them a lot of degrees of freedom. This approach clearly has some advantages. They have a diversified set of revenue sources and can exploit opportunities in many different areas. But all of these extra degrees of freedom come at a big cost to agility. For example, imagine the mega tanker spots a new and growing revenue source that is currently out of reach based on their current strategy and they need to adapt quickly. Let’s illustrate this opportunity as follows:

Clearly a smaller more agile boat is going to be better placed to exploit this opportunity than our multi-strategy mega tanker. The mega tanker is not only too big, but the fact that it has lots of degrees of freedom means that it is going to have lots of parts flailing around in the wind. Attempting to get everything moving in the same direction at once (strategic alignment) will be a major challenge.

But perhaps the above illustration is an unfair comparison? Maybe most of the revenue opportunity is out in the open ocean rather than trapped down a narrow river. In this case some ideal combination of size, speed and agility is going to be optimal. But I’m hoping the above diagrams at least illustrate that size and complexity needs to be traded off against agility. You simple can’t have it both ways.

Adopt a more humble strategy. Then digitize. Then grow.

So, rather than adopting "agile working principles”, I believe that the only way to increase agility is to reduce the size and scope of your operations (you need to reduce your boat’s angular inertia). “Digitizing what you have” doesn’t increase agility since you are effectively just creating a more automated version of your current size and complexity. Moreover, keeping your options open (trying to be good at everything) typically leads to doing nothing well.

Surely the optimal strategy for ships trying to navigate the new digital ocean is something like the following:

• Understand what is core to your business and make sure you do that well (e.g. most boats will probably benefit from having a powerful engine room)
• Understand where you have a competitive advantage and be known for doing that very well
• Jettison all the cargo and functionality that that is not core to your strategy
• Once you have shrunk down to your core strategy, digitize the hell out of what remains
• What you are left with should be a lean, mean, green, fighting machine (cf. Shrek) which is primed for future growth

The idea of identifying what is core and non-core is not a new idea but I’m thinking about something more radical where you cut a lot of functionality with the express intention of achieving a gain in agility. It’s not so much about shedding legacy loan portfolios but rather shedding legacy functionality and capabilities. It should be done with an attitude of preparing a new set of lean foundations which will enable the pursuit of future growth opportunities some of which might not yet be apparent. This is a very different approach than thinking you know where the growth lies and setting sale.

As a final word, if cutting operations/functionality back to your core strategy doesn’t feel like a humbling process then you are probably doing something wrong. Having moved through this humbling process will you be ready for a new phase of growth. Or to put it more poetically:

“From the withered tree, a flower blooms”. Source: unknown