Businesses need to take the right risks in order to innovate for tomorrow: Q&A with Vivek Chaudhri

Vivek Chaudhri

In the lead-up to the World Business Forum, Industry Moves talks to featured speaker and academic director of Executive MBA programs at the Melbourne Business School, Vivek Chaudhri, who shares his insights into Australia's banking and finance industry. He tells us why 'business as usual' is no longer going to cut it for Australia's banks, shares his key pieces of "bleedingly obvious" advice for senior leaders and tells us why we should do away with traditional benchmarking methods.

What do you feel are the main reasons behind the poor governance standards that have been revealed in the recent Royal Commission into Australia's banking and financial planning industry?

Governance is largely about regulatory mechanisms and methods, and the banking Royal Commission is highlighting a deep-seated problem of culture. There are certainly things that need to be done better in terms of financial regulation and oversight of behaviour and performance, but I think the problems are largely about culture and that can't always be regulated and is a harder thing to fix.

What do you think these institutions need to do in order to change their culture?

A lot of these issues surround the fact that our banks have become far more complex and unwieldy than before when they used to run the simple task of retail banking. Because they are now involved in far more risk-taking ventures, the returns that come from those ventures are often realised by individuals that may not understand the systemic cultural implications for the organisation as a whole when things go badly. This isn't just happening within Australian banking but is shown within the global financial crisis across the world.

These organisations have become so complex that those participating in the sector themselves don't fully understand where the risks and uncertainties lie. I think that's part of the issue that needs to be tied back to culture. Fixing culture is a big ask, but it has to come from the top and the expectations need to be set by the senior management and the board in order to be realised down the organisational chain.

"These organisations have become so complex that those participating in the sector themselves don't fully understand where the risks and uncertainties lie."

Previously, you've said, "even our currently very profitable banks, are far closer to extinction than much of the Australian business community would believe." Can you expand on this statement and what do you predict the Australian banking industry will look like in 10 years?

Innovation in the banking industry, and the financial services sector more broadly, is something that's being talked about all over the world, but I think we're quite conservative in Australia. The banks are probably amongst the most conservative of our institutions, not when it comes to risk-taking, but conservative in regard to the old way of doing business.

I think we've lost the connection between the role of finance, as enabling real economy investment decisions to be made that allow intertemporal value transfers, to one in which investment banks and retail banks have ended up becoming risk-taking entities.

One of the major threats to these banks is innovation; fintech, peer-to-peer lending and what blockchain and bitcoin may bring to the market, which all require a re-think of the very nature of banking itself. It doesn't change the importance of financial intermediation per se, I think banks will still serve some function, but they probably won't be the grossly oversized entities that we currently have.

We have to re-think what they are and aren't allowed to do and consider what financial innovation means for the banks. There's a lot of work to be done.

When do you think these changes to the banking system will occur?

Changes are already starting to happen. You can see that by looking at payment systems, lending or other complicated financial instruments. I think it's unlikely that 'business as usual' is going to be enough for Australian banks.

The challenge for Australian banks is to be one step ahead and I'm not sure that we currently are because we are quite conservative in how we think about change and innovation.

If you had all of Australia's decision makers in one room and you could offer them one piece of business advice, what would that be?

The key piece of advice that I would offer to them is the bleedingly obvious; you can't predict the future by just looking at the past. Australian business in general has a conservatism that comes from the success that we've had in the past, which is partly because we've been a small, closed economy and now we have the reality of global forces around us.

Businesses have to be willing to take the right kind of risks in pursuit of innovation for tomorrow. That's something that we're not good at. In most sectors, we only really look at incremental change, and the big drastic innovations that change the world tend to require a risk-taking appetite that we don't have. The question is, what are the 'good risks' to pursue in an uncertain future?

The American military coined a term called VUCA - volatility, uncertainty, complexity and ambiguity - which describes the uncertain world in which we live. I think most businesses are good at dealing with volatility, uncertainty and complexity but it's the areas of ambiguity that see senior leaders struggle. We need to develop certain skill-sets to think our way through these ambiguities in an innovative way.

"The challenge for Australian banks is to be one step ahead and I'm not sure that we currently are because we are quite conservative in how we think about change and innovation."

Who should we be looking to emulate when it comes to tackling issues of ambiguity in business?

There are a number of firms who have thought of innovation creatively, in terms of this ambiguous environment. The ones that come to mind tend to be the big tech firms, like Amazon, Google and Facebook, who have thought about how they construct their organizational architectures. The idea of organisational architecture is thinking about how incentives, contracts, culture, structure, can link together.

What we don't want to do is just follow the Silicon Valley 'sell fast' mantra, which says that the way to get to the frontier is to experiment and innovate your way into the future. This approach works for some businesses but in other arenas, you have to be willing to stick it out and not change just because you hit a barrier.

You have spoken about changing traditional benchmarking methods to discover non-obvious value maximizing outcomes. What would be one of the outcomes that a large business may not traditionally benchmark?

One of the problems with benchmarking is that it limits our vision. This goes back to what I was saying earlier about the conservatism of Australian businesses. What we tend to do, when we benchmark from a strategy perspective, is look at the leaders of the pack, those who are outperforming the market, and try to do what they're doing. The logic is, if we follow what they're doing then we will do better.

The problem with that logic is that it's no longer necessarily true that the leader of the pack is heading in the right direction. Often, the big ideas that change a business, industry or the world, aren't coming from the leader of the pack, they're coming from new start-ups that are thinking about things differently.

We should be trying to move away from benchmarking for lots of things, outside of process, because it enables us to look more widely. Benchmarking is a way of looking backwards and what we want to do is look forward.

"I think we've lost the connection between the role of finance, as enabling real economy investment decisions to be made that allow intertemporal value transfers, to one in which investment banks and retail banks have ended up becoming risk-taking entities."

What has been the best piece of business advice that you have received?

Success is often a function of many, many preceding failures. You have to be willing to get back up. A willingness to fail is a necessary ingredient for success. You can see that in successful entrepreneurs and businesses all over the world.

As part of your presentation at the upcoming World Business Forum, you are speaking about methods that organisations can use to construct strategy as a 'portfolio of bets'. Can give a brief overview?

In the realm of this risky, uncertain future that we're now navigating, it's no longer straightforward for firms to simply move in one direction. Strategy used to be about looking at the observable peak in the distance and working out how to get there. Now, we don't really know where it is that we're going, so strategy as a portfolio of bets is thinking about how to construct a portfolio approach to strategy itself.

Want to hear more from Vivek? Click here for more details about the World Business Forum. Industry Moves is a supporting partner of the World Business Forum, which will be held on the 30th and 31st of May 2018 in Sydney. Industry Moves' readers can use the promo code IM10 when purchasing their tickets to receive a 10% discount.

Read our Q&A with Shara Evans, who is also a featured speaker at the World Business Forum, here.