London, UK - 9 February 2006, 14:39 GMT - ATCA: "The Asymmetric Threat and Opportunity from Disruptive Innovation" or "Confronting Failure from Mavericks - He not busy being born, Is busy dying" by Mike Harris

Dear ATCA Colleagues

We are grateful to Mike Harris, Chairman, Group Innovation, Royal Bank of Scotland for submitting his inspirational thoughts on "The Asymmetric Threat and Opportunity from Disruptive Innovation" or "Confronting Failure from Mavericks - 'He not busy being born, Is busy dying'".

Mike Harris's ground-breaking comments -- based on the "ab initio" reinvention of financial services solutions TWICE -- are particularly relevant given the ATCA concentration on opportunities and threats arising from climate change, radical poverty, organised crime, extremism, informatics, nanotechnology, robotics, genetics, artificial intelligence and financial systems. All of the 10 complex global challenges of the 21st century identified by ATCA, depend on the elixir of "Disruptive Innovation" and "Confronting Failure from Mavericks" to address and to begin to resolve some of the seemingly intractable yet interlinked confrontations. As those inherent confrontations accelerate and feed off each other's momentum they possess the capability to damage and to disrupt the delicate global dynamic equilibrium. Faced with this unpalatable prospect for humanity in the coming two to three decades or less, it is necessary to rethink strategically because "He who is not busy being born, Is busy dying".

Mike Harris is the Chairman, Group Innovation, at the Royal Bank of Scotland (RBoS). He is the founding Chief Executive of Egg (part of The Prudential), a leading internet bank in Europe known for providing a broad array of financial services with an unprecedented level of excellence; Harris built a financial services organization that continues to experience profitable growth. As founding Chief Executive of Firstdirect (part of HSBC), Harris built a bank with unprecedented levels of customer loyalty. He has led companies that consistently stand out from the competition. As CEO of Mercury Communications, Harris created an exciting, fast growing consumer brand. Upon leaving Egg, in August 2005, Harris has taken on two new challenges. He is a co-founder and Executive Chairman of Richmond Informatics Ltd - a start up aiming to build a global consumer business based on next generation internet technology known as the semantic web and he is Chairs Group Innovation at RBoS. He writes:

Dear DK

Re: "The Asymmetric Threat and Opportunity from Disruptive Innovation" or "Confronting Failure from Mavericks - 'He not busy being born, Is busy dying'"

Martin Scorsese’s documentary of Bob Dylan "No Direction Home" recently shown on television has generated a lot of comment on news web sites. I could identify with this post from a woman who like me was at school in the 60s and a Dylan fanatic: "We all just loved everything he did. A real quirky, charismatic individual had come into our lives to stir us all up and give us a soundtrack to live by. I’m still going strong with the man. In moments of stress I’m known to lapse unconsciously into Dylanese."

· Well me too! And for me the song that pops into my head is "It’s all over now Baby Blue" Why? Well if you take on radical change whether it’s business change or career change you are going to constantly be confronted by the prospect of failure - the prospect of it being all over.

· What Dylan has to say about this:

Leave your stepping stones behind, something calls for you.
Forget the dead you've left, they will not follow you.
The vagabond who's rapping at your door
Is standing in the clothes that you once wore.
Strike another match, go start anew
And it's all over now, Baby Blue.

Although he’s writing about a failed relationship I think his words have strong meaning for anyone confronting any sort of failure. To me he’s saying at times you need to accept defeat, leave the past behind and move on. An individual can always do that, which should give everyone the strength and courage they need to take on whatever challenge is exciting for them. A company can’t always move on so easily , but it’s the nature of business for companies to come and go, to thrive and decline. It always has been and probably always will be.

§ We live in a world of constant change, constant innovation. The vagabond who was rapping at your door a few years ago (think of the lightweight Vodafone of 1992, the impossibly tiny Google of 2001, the unknown Finnish Timber company and manufacturer of televisions called Nokia) that vagabond is now wearing the clothes that others once wore – Vodafone is now the global giant and BT the local player, Google is dominant in search and attacking the Desktop – the very heart of Microsoft’s strength , Nokia came from nowhere to dominate mobile technology.

§ If you have been beaten at the change game, beaten at innovation, then it really can be all over baby blue; there’s often no way back for your company – but you personally, well as I said before you can always leave the past behind: Leave your stepping stones behind, something calls for you. Forget the dead you've left, they will not follow you; strike another match and start anew – now that’s the entrepreneurs motto.

§ I want to talk about change and innovation - how it works , what its effect has been over the past few years, and what lessons those years have for us now. This is going to be a very personal story – the last 10 years of change as experienced by me!

§ Do you remember the summer of 1997 in London? It was a hot lively celebration of Cool Britannia, full of energy: as the wave of political change fuelled by the new Blair Government promised to put the grey Major years behind us; and as a wave of business change fuelled by deregulation, liberalization and developments in telecoms, media and technology promised to blow away the final cobwebs of the early 90s hangover from the ultimate overindulgences of the Thatcher/Reagan era.

§ If you were involved in either of those waves of change London was a magical place to be then; for me, never more magical than one steamy July night in the heart of Soho. Just looking out of the window of the restaurant onto the crowd moving towards the Jazz clubs in Frith St one could feel the energy, feel the hope.

§ Reluctantly I turned my attention back to my dinner companion. Ervin Lazslow had words of caution to moderate my enthusiasm. Egg, he said, for we were discussing the concept that was to launch a year later and rapidly become the biggest Internet Bank in the world, Egg does have a chance. It’s impossible to say how big a chance – you see we are facing a change which will have as much impact as the revolution which created the modern Industrial age but in a matter of a decade or so not centuries. The pack will be well and truly shuffled in the next 10 years for sure .

§ I always listened carefully to Ervin who was a famous, now retired, philosopher and futurologist whose views were widely respected. By then he had authored over 70 books – one of the most recent being on the new science of complexity. I had participated in a small way in a think tank (The Club of Budapest) he had created.

§ Trying to engage him more in the debate about what it would take to make Egg successful I said well the complexity guys at Sante Fe seem to think with all the barriers to competition coming down – geographical and political, then the winners will be the already big companies – success to the successful they say. The systems dynamics guys at MIT on the other hand seem to think most innovation comes from new companies albeit at least half the time the innovations are later adopted and exploited better by large companies. I hope the MIT guys are right!

§ He responded that whilst anticipating future challenges and opportunities was a useful strategic tool, trying to predict the future was futile; determined leaders and entrepreneurs however could shape the future by their own actions and that was what was worthwhile. Wise words indeed.

§ Let’s just get some context by looking back to 1997 for a moment:

. In computing the PC model was dominant, the mighty IBM temporarily on its knees; competition was driving much innovation in telecoms but if the internet was stirring almost no-one appreciated its ultimate power and email was still a tool for the few. The letters www and .com meant nothing to the vast majority of consumers.

. The mobile phone had become ubiquitous in business but not yet an indispensable social tool

. In banking, in the UK, we still talked about the big 4: Natwest, Barclays, HSBC, Lloyds/TSB and we kept an eye on the emerging giants: Abbey and Halifax. The only real change in 10 years was Midland had been taken over by HSBC, Lloyds and TSB had merged and mutuality was slowly dying.

· In those heady days of 1997, Tony Blair was still the future, the word Russian and billionaire did not naturally fall together let alone have an association with Chelsea. The English language did not include in common everyday usage the verbs to Google and to text let alone to Skype

· Really the environment in 1997 was not that different from 1989 when Firstdirect attempted to attack a saturated market with the innovation of “banking without branches” – fuelled by the new digital telecommunication technologies which enabled call centres to thrive.

· Disruptive innovation is a classic way to attack an apparently stable market with entrenched incumbents. Think of Microsoft’s raid on the value generating core of IBM, Apple’s frequent insurgencies against bigger competitors, Orange initially stealing the future from BT and Vodafone, Google leaving Yahoo, AOL, MSN and Lycos for dead, Dell coming from nowhere and defeating the PC manufacturing giants

· Firstdirect had all the characteristics of classic innovation:

- Identification of a segment of customers with unmet needs and open to a new approach, enabled by a new technology. In this case the unmet needs were to have their banking dealt with at their convenience by people who occurred to them as highly trained, intelligent and helpful

- A small committed, cash strapped, entrepreneurial team working with urgency – brainstorming solutions which were then rapidly proto-typed with customers until we knew we had a winner

- Everybody, especially my mother, telling me why it couldn’t possibly work

- A massive debate amongst the team about the best way to actually make it work – everybody being convinced it would only work if we did it their way

- A pilot to hone to the service prior to launch

- A launch with powerful communication which touched an emotional need in consumers as well as meeting a functional one.

· The incumbents response to Firstdirect was also classic – dismissal as irrelevant followed a couple of years later by a large investment in telephone banking which turned out to be a great growth area for them. Other new entrants emerged, often from adjacent industries like insurance. Finally telephone banking itself became saturated and market shares became stable.

· I have for many years been studying and indeed participating in the work of the Sloan Business school at MIT on the way markets cycle through successive phases of innovation and change and the story I have just told you is repeated again and again:

- Change starts with disruptive innovation often from a bunch of industry outsiders or mavericks

- Incumbents dismiss it at first and then either absorb it and become major players as new products are scaled for the mass market (like the banks response to telephone banking and indeed everything else that has ever been thrown at them) or incumbents find they have missed out on the new wave altogether and are heading for decline (like the direct sales life companies). If you do miss out on a wave of innovation it really is all over baby blue

- Eventually market shares stabilize and change slows down and the market consolidates often with a new set of winners, until of course another wave of disruptive innovation starts the whole cycle all over again.

· Think PCs, mobile telephony, digital photography, internet shopping, satellite TV, low cost airlines mutual funds and credit cards; even further back the motor car, the electric light, the telephone and you will find perfect examples of this pattern

· Now here’s an interesting point, with acknowledgments to Laszlow – years ago these change cycles played out over decades – now it can all happen in less than one decade

· In 1997, just 8 years after the launch of Firstdirect the telephone banking market had gone through the complete cycle from first innovator to stability. At this point Pru bank entered the market with a new attempt at disruptive innovation which at the time we called double direct - leveraging the man from the Pru, the awesome and feared direct life assurance sales force that had made the Pru mighty, alongside telephone banking. A great idea in theory but as strong in practice as its weakest link: the man from the Pru who was rapidly regulated out of existence soon after we launched.

· It really was all over baby blue for Pru bank and time to strike another match and start anew and we responded with the Internet inspired Egg:

· Egg is another classic innovation story by the way:

- Remember change starts with disruptive innovation often from a bunch of industry outsiders or mavericks (tick)

- Egg identified a segment of customers and a new technology (this time the internet) with which to meet a set of currently unmet needs (this time for a larger degree of self direction) (tick)

- A small committed, entrepreneurial team working with urgency – brainstorming solutions which were then rapidly proto-typed with customers until we knew we had a winner -

- Everybody, telling me why it couldn’t possibly work (tick)

- A massive debate amongst the team about the best way to actually make it work – everybody being convinced it would only work if we did it their way (tick)

- A pilot to hone to the service prior to launch (tick)

- A launch with powerful communication which touched an emotional need in consumers (a financial services company that speaks my language and seems like its on my side) as well as meeting a functional one (tick)

- Incumbents dismiss it at first (it’s very funny to look now at what large banks said about Internet banking in 1999) and then absorb it and become major players as new products are scaled for the mass market. Eventually market shares stabilize and change slows down and the market consolidates often with a new set of winners (Internet itself only provoked a minor shuffling of the pack in banking - other forces ie globalization and consolidation were more powerful) (tick)

· Now let’s just reflect on other innovations we have seen in the last few years:

- Genetic engineering has started to rewrite science fiction

- The mobile phone and email from being a complete nothing for most employees and consumers have come to dominate our working and social lives

- The internet has grown from the trivial to the biggest most impactful creation of mankind and is now growing faster then ever as individuals take over its development through blogs and other similar services .

§ Somebody told me the other day that the web now contains more words than have ever been spoken in human history – How they know that I have no idea but it does give a sense of unimaginable scale and it’s certainly the biggest construction project ever undertaken by mankind – and from effectively nothing 10 years ago

§ we have been up and down the dot com boom and bust and the pack has been well and truly shuffled; the internet allowed disruptive innovators to attack almost every industry and the battle for dominance as new business models emerged has been fast and fierce - the winners are impressive indeed – honed by a battle of unprecedented ferocity which they have won.

- They survey their empires now from apparently unimpregnable heights and I reflect that the complexity scientists who turned their minds to predicting the effect on business of the digital revolution were right. Success to the successful they said. Look out for a small number of very large dominant players in each industry. Everything will accrue to them – they will attract the best people, be able to afford the best R and D, buy anything they want, outspend all others, get bigger and stronger, be untouchable. Think football – think Chelsea and the other handful of clubs now forming a global elite. Oh yes the giants will get bigger and more successful.

- These global giants do, and with good reason, fear each other – in many of their significant markets they are in a fight primarily with each other.

§ In UK banking we have two of the top 5 banks in the world fighting it out in our market, and two others of the top 5 looking greedily at how they might join in

§ In telecoms we have four of the top 5 global mobile operators fighting for share of our market: all dwarf BT by the way – victim of a global strategy which failed

§ Tesco vs Wall mart is another battle in the UK of two companies with global operations and global scale

§ Globally Microsoft fight IBM for operating system revenues and Google for the desktop

§ Oracle fight IBM for database dominance

§ Oracle fight SAP for Enterprise software

§ IBM and Accenture are the only games in town for large scale organizational reinvention

I can tell you what these global giants are good at:

§ Growing shareholder value, managing the bottom line, managing market expectations, governance, regulatory affairs, execution - getting unimaginably complicated things done to budget on time, efficient and effective use of resources; exploiting their scale; mergers and acquisitions; strategy

§ They had to be good at this stuff to win the battles of the last 10 years

· So where might the battle grounds lie in the future – assuming the winners all have global scale and are all excellent at pretty much everything Harvard teaches you and are all fighting each other?

· How about skills at dealing with unknowable threats?

- The emergence of China and India as global economic powers and the renaissance of Japan

- The interconnected and uncontrollable nature of global politics

§ From climate change to terrorism through famine and ethnic cleansing to corporate scandals and regulatory overkill responses - to world trade and climate agreements thru the EU budget and Israeli politics: one country’s action affects every other; one companies action affects every other, one person’s action affects every others

§ For example I heard Tony Blair say poverty and famine in Africa fundamentally blights every Western economy and so it’s in our interests let alone a moral imperative to deal with it. I don’t understand that in detail but it does make sense to me intuitively

- The entrepreneur in a garage somewhere, connected via the internet to the accumulated wisdom of mankind and creating new wisdom in real time with a network of collaborators all over the world - constructing a new product which turns out to be a silver bullet with your companies name on it. The unknowable threat the vagabond who’s knocking on your door might indeed end up wearing the clothes that you once wore.

· So a competence in continuous innovation might well be critical in repelling the vagabonds don’t you think?

- Big companies often got big by being innovators but the bigger they get the worse they become at it. Innovation thrives on urgency, lack of controls creativity, powerful expressions of the human spirit, risk taking. Big companies stay big by controlling things. Big companies don’t like disruptive influences. People don’t get on in big companies by delivering the set of small failures which almost always provide the learning for a major successful innovation.

- According to research at the Sloan school big companies that develop a competence in innovation, despite many committed and well funded attempts are remarkable and few.

· In my companies: Firstdirect, Mercury and Egg I gave huge priority to creating an environment where people felt it was safe to bring their humanity to work with them, not check it in at the cloakroom on the way in. I encouraged them to express themselves and not worry about how it looked. Worry about being extraordinary, don’t worry about looking good or being politically correct I used to tell them. Don’t worry about honest mistakes we all make them and no-one here is going to ask who’s to blame if something goes wrong - we will just get on with fixing it and honour those with the courage to get on the pitch and give it their all – win or lose.

· As a result I was rewarded with all human beings have to offer: wisdom, courage, commitment, creativity, stupidity, anger irrational emotions – everything. You can’t have one without the other – every human being is a flawed genius in one dimension or another – I set out to find the genius in people and I was prepared to ignore the flaws.

· It certainly made for an interesting life! And it got some success – each of my start from scratch consumer businesses grew to a substantial size – all over a billion dollars in value one way or another. But for all the human genius that seemed to get liberated in these companies none of them could beat larger scale competitors over the long run. Firstdirect and One to One became valuable parts of the global giants HSBC and DeuscheTelecom. The Mercury consumer business was sold for cash to NTL. Egg has been reabsorbed into Prudential where the CEO says it will be his source of innovation in the future. I don’t feel too bad about this – when the mighty MBNA can’t prosper stand alone and is absorbed by B of A almost no-one short of the real global giants can feel secure as a stand alone company.

· That’s an interesting model – perhaps larger companies will buy in innovation by spotting and buying the small innovators as Yahoo and Google do regularly.

· Even then they need to develop the skills of allowing the acquired company to thrive and not be stifled.

· So there you are – my business model for the 21st Century. The winners will be big and global and they need to develop the essentially human skills of mastering innovation and coping with unknowable threats. Perhaps the phrase "our people are our greatest assets" might actually start to mean something. Mastering the art of human motivation, human insight, human wisdom and human courage may become sought after skills. After many years of false starts are we finally witnessing the birth of an age where the winners will be companies who compete by creating an environment in which the human spirit can flourish where natural commitment and creativity can be harnessed, where essentially human values are given equal weight with financial values. Doing this at global scale alongside a continuing competence in performance management is a real challenge and one that will really separate the sheep from the goats.

Finally let me return to Dylan and another song - It’s alright Ma (I’m only dying) - from the same Bringing it all Back Home album which contained “It’s all over now Baby Blue”. This song is a 7 minute poetic rant epic which no-one can interpret for you: but for me there is a verse which speaks to all of us about change and renewal

For them that must obey authority
That they do not respect in any degree
Who despise their jobs, their destinies
Speak jealously of them that are free
Cultivate their flowers to be
Nothing more than something
They invest in.
Proves to warn
That he not busy being born
Is busy dying."

He not busy being born is busy dying! True of individuals and businesses. You must keep reinventing, keep creating, keep innovating, always be engaged in the birth of a new idea, a new vision or a new you. Then you are busy being born and not dying.

[ENDS]

We look forward to your further thoughts, observations and views. Thank you.

Best wishes

For and on behalf of DK Matai, Chairman, Asymmetric Threats Contingency Alliance (ATCA)

---

ATCA: The Asymmetric Threats Contingency Alliance is a philanthropic initiative founded in 2001 by mi2g to understand and to address complex global challenges. ATCA conducts collective dialogue on opportunities and threats arising from climate change, radical poverty, organised crime, extremism, informatics, nanotechnology, robotics, genetics, artificial intelligence and financial systems. Present membership of ATCA is by invitation only and includes members from the House of Lords, House of Commons, European Parliament, US Congress & Senate, G10's Senior Government officials and over 500 CEOs from banking, insurance, computing and defence. Please do not use ATCA material without permission and full attribution.

---

Intelligence Unit | mi2g | tel +44 (0) 20 7712 1782 fax +44 (0) 20 7712 1501 | internet www.mi2g.net
mi2g: Winner of the Queen's Award for Enterprise in the category of Innovation

[ENDS]

mi2g is at the leading edge of building secure on-line banking, broking and trading architectures. The principal applications of its technology are: 1. D2-Banking; 2. Digital Risk Management; and 3. Bespoke Security Architecture. For more information about mi2g, please visit: www.mi2g.net