WASHINGTON - The best new idea in mutual funds might start with a trip to the gym.
It was a treadmill that inspired an executive at T. Rowe Price of Baltimore, who hopped on for a run, and finished with an idea to streamline rollover IRA enrollment - all thanks to the "quick-start" button, said Edward C. Bernard, chairman of T. Rowe Price Investment Services.
That's what Tom Kelley calls cross-pollination, or when ideas from one sphere of life influence another, seemingly unrelated realm. And it's a key component of innovation, said Kelley, author and general manager of San Francisco-based design and consulting firm IDEO.
"You can't just look in the rearview mirror to get ahead," said Kelley during the Investment Company Institute's General Membership Meeting, held here last month. "And it's not just about innovation. It's the pace of innovation. You have to out-innovate the competitor."
To do that, Kelley urged fund industry representatives to examine how their businesses run and question whether they could operate more effectively, because, although everyone acknowledges that innovation is important, too few actually make it part of their routine.
"If you keep putting it off, the next thing you know, someone has stolen your market," Kelley said.
In an environment as competitive as the mutual fund industry, innovation is not only important for a company's future, it's critical to today's survival, said Merrill Lynch Investment Managers President Robert Doll.
"One third of the revenues we'll be collecting five years from now are from products and services that [today] don't even exist," he said.
The question, then, is how to devise these new money-making ideas and strategies?
True innovation isn't planned, it's discovered during the course of one's regular routine, said Kelley, author of The Ten Faces of Innovation. It's what Kelley calls "meta-lessons," or the things one learns as a type of side effect of executing other tasks.
But meta-lessons are too often overlooked, so Kelley encourages people to practice what he calls "vous-ja-de." Unlike its better-known counterpart "deja vous," the French phrase describing a person's been-there-done-that sensation, vous-ja-de occurs when someone approaches a task they've encountered countless times before as if it were completely new.
"You have to go beyond the rational. Beyond the facts lie a lot of opportunities to learn," Kelley said. Bernard's quick-start 401(k) rollover story is only one example of the kind of innovations such experiences can yield. In that case, a relatively simple, common sense idea distilled a process that once involved about six weeks or a customer shuffling papers and mailing forms into a 15-minute procedure.
Besides saving customers time, it won T. Rowe Price business, because employees who were leaving their company's 401(k) program liked the seamless transition.
"If you don't do it in 15 minutes, you lose the customer," Doll agreed.
Another problem T. Rowe employees face is that they just know too much, Bernard said. Unlike salespeople and financial advisers, retail clients don't always understand the nuances of a small-cap fund compared to a large-cap fund. "The customer knows it's really important to save," Bernard said. Beyond that they are lost. The challenge was training T. Rowe employees to be able to speak effectively to investors with various levels of sophistication, he said.
Innovators must play the role of "anthropologist" and study how investors react to various circumstances, Kelley suggested. "Experience architects" then take that information and help devise company processes that better address investors' needs in a manner that is both relevant and valuable to clients. Solutions may range from better marketing brochures, to new target funds, to a new layout for monthly statements.
Another simple solution is to encourage clients to schedule electronic fund transfers from their checking to brokerage or IRA accounts.
Besides getting customers to do what they already know they ought to - namely, to save - fund companies must also help their own employees learn what they ought to be doing, but aren't. For that, Kelley calls upon "the hurdler," the person in an organization who identifies obstacles and determines how to overcome them.
T. Rowe Price worked with cognitive psychologists at Johns Hopkins University in Baltimore to better understand how customers feel about investing. Scientists asked a focus group that T. Rowe assembled to look at images and describe what type of emotions about investing they evoked. For their trouble, focus group members received $75.
That's a smart investment on T. Rowe's part, according to Kelley. By involving people in the process of honing strategies and techniques, companies reap various benefits. The primary benefit, of course, is the data the clients provide. The secondary benefit is the type of brand loyalty those involved in the focus group are likely to develop. As a tertiary benefit, he said, focus group members will likely provide free word-of-mouth publicity to their friends, families and associates, discussing how they had a hand in development of the company.
T. Rowe also used what Kelley calls "experimenters" when developing a call center script. Selecting a group of especially personable employees, managers asked them to solicit certain sensitive data from clients, and instructed the "experimenters" to play around with their diction and tone. When call center workers found an approach that seemed natural, they would tell managers, who collectively cobbled together a company-wide script. Once that script is tested, it becomes the company standard.
"Anthropologists" and "experience architects" worked together at Merrill Lynch to better identify the needs of financial planners, who sell the bulk of Merrill's mutual fund business, according to Doll.
After years of inundating planners and other sales staff with new products and marketing materials to support them, he said, "We realized what people needed was not more information, but time and organizational skills."
That realization changed the company's approach when meeting with planners and advisers from explaining products, to consulting them about portfolio balancing and management strategies.
Identifying employees as "anthropologists," "experimenters," "experience architects," or any of the seven other innovation roles Kelley lays out in his book is fine, said Doll, but there is a point at which testing innovation interferes with the processes that already work, he said. Even worse, companies constantly scrambling to experiment with new strategies can lose focus on the business at hand. To keep things in perspective, Doll said, "You need the Devil's advocate.'"
"The Devil's advocate' is the enemy of innovation," Kelley vehemently asserted. The problem with the "Devil's advocate," he said, is that this naysayer is quick to point out potential problems, but never offers suggestions for improvement.
Instead of the heeding the "Devil's advocate," companies can use "the Bobs," Kelley offered. He coined the name for a string of IDEO employees named Bob who shared more than just a name: they loved to fiddle with computer programs or devices. As a result, "the Bobs" would cause technical problems around the office. These are the guys who crashed servers downloading experimental software, reconfigured systems for fun, and stayed late into the night uploading images from their camera phones.
Channelling the energy of "the Bobs" helped Kelley harness their enthusiasm and cultivate people capable of troubleshooting. Given the right puzzle to solve, "the Bobs" would work past midnight, and not even ask for extra pay. This way, new products were being tested, without siphoning significant resources, Kelley noted.
Likewise, employees who constantly offer ideas before they are fully crafted can be asked to take it to the next stage by devising a sample website, or brochure.
The key is to stay dynamic, Kelley said, and constantly question the status quo. With the process fostering brand loyalties, adding future value to the company, and benefiting clients, companies cannot afford to do otherwise.
"If you can nurture this anthropological gene, build it and reinforce it, you will nurture your own culture of innovation," Kelley said.
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