Innovation … You Know It When You See It

How Innovative Is Payments?

No one really knows how to consistently define or measure innovation.

Hear me out.

Tuesday (Sept. 9) is finally the day that Apple, a company that has topped just about every chart imaginable that measures innovation over the last three decades (but especially over the last seven years) will reveal how it plans to enable payment using its mobile devices and mobile operating system.  Of course, this is just one of several things that Apple is expected to show the world tomorrow.  Although the topic of payments was all but missing at the WWDC in June, that two-hour reveal was filled with an abundance of clues about its plans to tackle the Health and Fitness markets.  So, tomorrow, we’ll surely see more specifics about how the iPhone 6 and yet-to-be-named smartwatch will disrupt those segments; shortly thereafter, we’ll see how the ecosystems that will emerge to support them will enable these platforms to scale.

Suffice it to say that many news outlets are positioning tomorrow as sort of the tech world’s version of the Second Coming, and touting Apple as an innovative genius in, yet again, reinventing broad swaths of our economy.

But what’s most fascinating about all of the media hype is just how much their tone has changed from a year ago when many of those publications were singing a very different tune about Apple.

Last year was filled with article after article about Apple’s alleged fall from its storied position as the world’s most innovative company. There were reports that the Apple board was “concerned” about how quickly Apple was bringing, or rather not bringing, innovative products to market.  Some hypothesized that Tim Cook was going to be the next Steve Ballmer, the heir apparent who was ousted because the innovation streak had withered under his command. Others said that Cook was just too focused on profits to be innovative, implying that if a company was innovative, then profits should be  non-existent. (Note to media. See Alibaba’s S1 for proof that innovation and profits can co-exist.) An interview with the guy who invented the Mac with Steve Jobs, Hartmut Esslinger, said that the Apple of 2013 had become too much like the Sony of the 1980’s – an innovative company whose visionary CEO was replaced by a leader who couldn’t see beyond  incremental improvements and profits and who was, therefore,  killing the innovation culture.  In May of that same year, Forbes even presented a chart that showed how Apple’s reputation for innovation had been in decline since 2010 in an article entitled “Why Apple is Not The World’s Most Innovative Company.”

In January of this year, there was a lengthy piece in The Guardian that laid out the need for Tim Cook to prove to the world that he was capable of keeping Apple at the top of the innovation pyramid.

So, why, a year later, has the media done a very abrupt about face on Apple’s ability to drive innovation – before we’ve even seen what they’re unveiling tomorrow?  Especially given that they must have been working on all this “innovation” when the media was saying they weren’t innovative anymore?

See what I mean? This is, in part, because no one really knows how to consistently define or measure innovation.

Everything today is described as innovative.  There isn’t a conference in the market that doesn’t reference “innovation” in the title or subtitle to describe the companies it’s assembling. A Google search on the word “innovation” last weekend produced 123 million results. It’s just everywhere.

“Innovative” is how every executive describes her projects to leadership to get buy-in and funding. There are now Chief Innovation Officers at companies. Boards of Directors want to know from their CEOs what their innovation roadmap looks like. Innovative is how startups describe themselves and their products or platforms (usually also paired with the word “disruptive”). Seriously, have you ever heard anyone say something like, no, what we’re doing isn’t really that innovative, but it’s still really great so you should buy/invest/believe in it/approve budget for it?

That has reduced innovation in some sense into a rather elusive concept, a visceral reaction to what everyone sees. It’s sort of like the old saying on obscenity  –  you know it when you see it – and everyone has a very different filter for whether or not what they see delights, offends or falls somewhere in between.

Economists and academics have been trying to measure innovation for decades  They’ve tried to standardize and model inputs (like R&D) and outputs (like patents and productivity) to create a model for what an innovative company should look like and therefore, what every other company with innovation ambitions should strive for. Not much useful has come from those empirical models since ecosystems and platforms are incredibly tough to measure in absolute terms.

The US government even tried to define innovation in 2007 when it gathered 15 CEOs (Ballmer from Microsoft and Palmisano from IBM, for example) and a bunch of academics to form a “government sponsored brain trust” under the direction of the Commerce Department Secretary at the time. The result was, well, no result. They, too, discovered that using the very standard measures of “input and output” were inadequate for benchmarking innovation and disbanded.

So, we’ve been sort of left flopping around now for a very long time, living largely in a world where we judge companies as either innovative or not, based on not a whole lot more than what we all individually think is innovative, once we’ve seen it, of course.  And, we certainly can’t recognize innovation before we see evidence of it so have no real credible and consistent way of identifying whether a company is, in fact, innovative, their own spin machine’s use of the word, aside. We’re  even less equipped to credibly benchmark how other companies in a particular segment are at having the capacity to innovate.  We all believe that we’re going to see incredible innovation tomorrow from Apple and, naturally, we’ll all know it when we see it J. But will it really be that innovative? Everyone will have an opinion.

And, that’s the issue my MPD colleagues and I have been noodling now for the last year: how to credibly and consistently define the capacity for a company to deliver innovation in its segment, to do it before we see tangible evidence of its products in market, and to do it consistently over time.  Our hypothesis is that it isn’t always the case that companies aren’t innovative just because they don’t show evidence of it in the market at a particular point in time.

Look at Macy’s. This 156-year=old department store (according to Macy’s own history) operates in a retail category that is like the S.S. Titanic of retail – department stores. Yet, it’s been working deliberately over the last several years to leverage its assets so that it could be a retail innovator – embracing omnichannel, mobile apps, beacons and other tools and technologies that deliver value to its customers, and therefore, itself. Yet, a few years ago, and maybe even today, most people would look at Macys, look at the category in which it operates and label it as just another giant retailer destined to fail.

There are many similar analogues in payments – the perception that the bigger and older a company gets, the less likely they are to be innovative because their CEOs don’t wear hoodies, don’t crank out “new” products once a month, actually show profits, and aren’t headquartered in Silicon Valley.

We think we’ve come up with a way to take much of the mystery out of defining the state of innovation for the payments and commerce ecosystems. We’ve done it with the help of a high level academics who are global authorities in the field of entrepreneurship and innovation and survey design and regularly advise firms about how to identify and then make investments in the companies and innovations that generate an ROI for their funds and their shareholders.  With their guidance, we’ve developed, we believe, the first ever fact-based model for assessing the degree to which companies in the payments and commerce sectors are, in fact, innovative.

We’re calling this the Innovation Readiness Index (IRI) and we’ve identified more than 100 companies in 10 sectors of the payments and commerce ecosystem that will be part of this Index. Since what we really want to measure is the degree to which the more established companies are innovative, we have chosen companies that have been in business for at least 7 years.

The IRI Model uses a variety of inputs to benchmark where the industry is as a whole and the individual players are individually in their capacity for innovation.

We’ll be looking at the foundation that a company has laid for innovation by using proprietary (and patented) methodologies to measure how many payments-related patents they have but most importantly how influential those patents are.  Payments companies will be surprised to find out how far ahead some of their rivals are how far behind other rivals are.  This is a strong predictor of future innovation as well as an indication of how innovative companies have been in the past.

We’re going to be incorporating detailed input from the companies themselves using our proprietary Innovation Readiness Diagnostic Kit.

We’re looking at what the company has been doing to see if they have a track record of real innovation—new products introduced and ones that actually secure traction and have an impact.

We’re taking on board the opinion of the broad payments community around the world which will be ranking all of the companies against each other.

And we’ll be incorporating many other metrics of company performance into the model.

This 360 degree look at payments companies will be rolled into the Innovation Readiness Index.

We’ll also be issuing the Innovation Readiness Report which will present the insights we will glean from doing this work. Like the J.D Powers report, we’ll report the company that scores the highest in each sector but will blind the identities of the others. Companies can purchase the report as well as access to the anonymized dataset. All of this work, like the J.D. Powers work, is done under a rigorous NDA, and will be done by Market Platform Dynamics so won’t be covered by PYMNTS.com aside from reporting high level trends at a segment or ecosystem level provided to it by the MPD team working on this project. We’ll disclose who tops the list for each of our segments at, appropriately enough, The Innovation Project 2015, March 18-19, 2015 in Boston (same time, same place, hopefully better weather!).

Do we expect that IRI will change your view of the state of innovation in payments and commerce?  Yes, we do. In fact, we’ve done some work already as part of our beta test and the results are pretty remarkable. As interesting as the results for a particular company is the size of the gap between the lead performing company and the others in the segments.

Do we think that will help us identify the “Apples-in-waiting” before they release product in market. We hope so. The whole point of the model is to disband the notion that you can only judge an innovative book by its cover (or use of the word at least 100 times in its annual report).

More to come on IRI in the coming days and weeks.

Now, let’s all get back to what’s really important: handicapping Apple’s announcements tomorrow.  Will NFC be the only way that payments will be enabled?  Are all of the networks included?  What merchants, aside from Apple and Nordstrom, will participate? Will its Smartwatch be something that I would consider buying and wearing? On that one in particular, I really have my doubts…even though Apple is said to have invited fashion editors to its event tomorrow.

Only one more day….

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