Conclusion
SP: I think the book and the concept have captured business leaders’ attention because social physics offers an entirely different way to improve businesses at a time where technology and change are putting extreme pressure on organizations.
Simply put, social physics is a new way of understanding human behavior by using big data —essentially the “digital breadcrumbs” of society—to tell us more about all aspects of human life and how ideas move, evolve and spread. For businesses, this unlocks all sorts of amazing possibilities and offers a path towards building more cooperative, productive and creative organizations. And that means more resilient and more profitable organizations as a result.
Today people tend to view management as an “art.” Social physics takes this art and turns it into a science by allowing decision-makers to qualify things, find the patterns, visualize them and then manage toward them. In other words, it’s adding discipline to the art by taking a “major” in interaction and understanding the patterns of interaction that lead to innovation.
DS: Banks are certainly feeling pressure to change in today’s environment. Are there ways that banks can benefit from using social physics?
SP: I think banks, in particular, have a real challenge in that the fundamentals of their business model haven’t changed much over the years and—as a result—everybody thinks they know what it means to be a bank. In fact there may be various ways to successfully organize a bank, but people haven’t thought of them yet because they’re constrained by preconceived notions of how a bank traditionally works.
The idea behind social physics is to understand how people interact not only with organizations (such as banks), but also with each other and to use that information to find new ways to inspire innovation. Even at the more operational level, banks can benefit tremendously from social-physics approaches.
DS: In your book, you show some very compelling examples of how social physics has been practically applied at a variety of organizations. Can you give a few examples of how banks might use social physics to solve a current challenge?
SP: One of the clearest practical examples of how social physics can be applied in the banking sector relates to credit scoring. As part of our research, we looked at a large body of bank data from developing countries and found that we could achieve almost 50 percent more accurate credit-scoring than the bank could because we were looking at the social physics—the behavior of the people—rather than traditional bank data, such as age, income or repayment history.
What we found was that you can get a much more accurate prediction of whether someone will pay back their loan by looking at the space and time pattern of how they spend their money, irrespective of the amounts of money. So knowing where the person goes and how often they go there will often provide more insight into their future activities and creditworthiness than simply knowing how much they made that year.
The same approach can be taken for assessing small medium sized enterprise loans. Instead of looking at their business income and collateral, banks should instead be trying to figure out where that merchant sits in the network. What we do with social physics is use Big Data to identify who the potential customers of the new enterprise would be, understand what other stores they go to and then find out if those stores are also regularly profitable. If they are, chances are very high that your new enterprise will be, as well.
DS: I think it’s fair to say that the mainstream banks struggle with innovation, largely due to organizational size, complexity and fears that any change in the model may bring unwanted regulatory scrutiny. Are banks too big and constrained by compliance concerns to apply social-physics concepts to the business?
SP: Not at all. We’ve worked with some really big banks to improve their customer-facing channels with really huge effect. In fact the concept of social physics and the sort of things we talk about actually help big, complex organizations break down their silos and become more agile. And banks could certainly benefit from breaking down the silos.
That being said, banks are certainly struggling, in part because they tend to manage themselves very rigidly. And what that means is that you tend to cut off all of your latent capabilities—all of your “green sprouts” for growth as it were—and that dulls the ability of the organization to change and innovate.
But it’s exactly this sort of exploration that banks will actually need in order to succeed in the long term. Yes, it may cause some disruption in the model and it may take some thinking to get there, but when market conditions start to change again, or when times get tough, those that have adopted social-physics approaches will be the ones that know where to go, how to change things and what to do next.
DS: Culture is clearly an important aspect of incorporating social physics into the enterprise. Do you have any advice for banking executives?
SP: Culture is very important and banks really need to start building up a culture of innovation within which these “green sprouts” can grow. This is about looking for wisdom from the leaves of the tree, not from the top of it. The top of the tree needs to be able to say what direction it wants to grow in, but coming up with the right way to achieve those goals requires creative solutions from the people that are actually spread right across the organization, doing the day-to-day stuff.
Part of this culture change will come from rethinking the way bank employees are incentivized. The truth is that people don’t actually respond all that well to financial incentives; they work hard to meet their goals, but if they can find ways to cut corners and achieve the same goal, they usually will.
Social incentives, on the other hand, have very different properties. Think of it a bit like the way some sports teams reward their players for being on the field when the goal gets scored. Everyone on the field works together because they all see a benefit when they help each other reach the goal. In fact social incentives tend to be much more sophisticated because you are incentivizing a group of people who are doing a job together and they are the ones that know best whether their colleagues are doing what they need to do to achieve their goals.
DS: As your book suggests, part of the challenge for executives is moving from saying that they want to break up the silos to actually doing it. Do you have any suggestions to help banks move forward quickly using social physics approaches?
SP: I believe that executives and those responsible for catalyzing innovation need to start by piloting social-physics approaches in a way that allows them to really visualize what that means for their organization and their decision-making process.
I also think banks should start thinking about ways to encourage new ideas within the business, possibly by starting new businesses within the umbrella of the overall organization; trying to build groups that have different cultures and different bases of funding, which, in turn, allow them to operate differently than the core bank. Examples of other industries the same are automobile companies and their captive car loan services, or (somewhat differently) banks and the Visa network.
One area where this might deliver significant benefits is in the way banks think about digital technology. Over the past few years, there have been a raft of new technologies and innovations that could easily disrupt the status quo for banks and they often have a very different logic behind them that doesn’t necessarily translate into the traditional business model for banks. You really need to create a new space for them that uses nontraditional banking capabilities and skills to look down the road and take a longer-term view to building an all-digital model.
DS: Can social physics deliver short-term benefits?
SP: There are a number of examples in the book about cases where we’ve gone in and applied social physics principles to a particular problem and delivered some very quick benefits through very simple fixes.
One example we use in the book was for a German bank that wanted to improve their productivity within a certain department but weren’t making much headway. Using social-physics approaches, we showed them that the root of the problem was that they didn’t have enough informal communication between groups in the department, simply because some groups were spread throughout the building. They rearranged the office space to improve communication flow and collaboration and finally fixed some of their major challenges.
But I believe that the longer-term benefits of applying social physics principles can be very significant. It starts with a real change in the level of innovation and the “esprit de corps” within the organization. That, in turn, improves organizational agility and that’s where the “green sprout” will come from. And, when done right, that can happen pretty quickly as is evident from the 1990s with other industry icons, such as IBM, and the change from hardware to services business or Microsoft’s shift from standalone computing to Web computing.
One tends to think of banks as big monolithic structures, but I believe that it’s possible to begin to shine the light in and unfreeze the frozen relatively quickly. At least enough in the short term to be able to start to plot where your organization should be going next.
DS: What struck me when reading your book was that banks really needed to start considering how they can embed some of the ideas you discuss and make their capacity to innovate and transform more consistent, measureable and achievable.
Creating a corporate culture that is socially incentivized to share and adapt will maximize the pace and impact of innovation by encouraging strong creative idea flow within and across the bank. The implications for our global banking clients are significant as it demonstrates the need to think creatively and comprehensively to achieve true business transformation and an enduring culture of innovation.
Thank you for sharing your ideas, Sandy.
Case study
Changing the corporate culture to adopt innovation is a compelling concern for banks but so, too, is their ability to partner externally with clients and partners to move their innovation agenda forward.
An interesting example of how KPMG is creating partner/alliance innovation is our connection with McLaren Applied Technology (MAT) where we combine the engineering prowess of MAT with the academic lens of the KPMG Centre for Advanced Analytics and the business acumen of KPMG.
Partnering with MAT, we are innovating our audit process to allow us to provide McLaren more actionable insights, enhanced quality and greater efficiency in areas of judgment. In turn KPMG is taking the innovation we codevelop in this alliance and applying these innovations to client needs in other sectors, including a new approach to the audit of and loan loss provisions in the financial services sector.
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For more information on this unique approach to partner-based innovation go to: kpmg.com/mclaren
The article was written by David Sayer of KPMG in the UK.
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