Innovation: it's not just about technology...

In 1985 a Royal Bank of Scotland start-up called Direct Line transformed the British insurance market by selling car insurance direct by phone. The achievement was underpinned by a business model with three clever ideas: the first of these was to use the phone network to disintermediate inefficient third-party brokers charging big commissions to their customers.

The reason the phone transaction worked so well, though, was that the start-up team had recognized that only a few of the questions asked on a conventional application form were necessary to assess most of the risk. By slashing the number of queries and taking on a little extra risk they could massively simplify the application process and, having taken out the middleman, still undercut the competition by a big margin. The third piece in the jigsaw was a simple brand idea built on accurate customer understanding: 'Go on' said Direct Line advertising, 'Pick up the phone'. And because, as the company knew, people distrusted shady High Street insurance brokers and - contrary to the current marketing wisdom - were comfortable with buying financial services by phone, that's exactly what customers did.

Innovation more often arises out of connecting ideas than by inventing new technologies. Here, Direct Line applied an innovative actuarial idea through an existing technology (the phone) combined with an emerging form of business organization (the call centre) and so was able to exploit a new mood amongst customers.

Direct Line flourished because it had critical advantages that most companies don't enjoy: it was a green-field business with a blue-sky idea, the competition was asleep and the audience understood the offer and was both comfortable and familiar with the means of delivery. The service, the system that produced it and the communication that gave it meaning were in perfect alignment. The majority of innovation attempts, however, are much less successful (as much as 96%, according to The Institute of Design at the Illinois Institute of Technology, fail to meet their financial goals). They fail because most businesses are organised to do the same thing accurately, efficiently and repeatedly - and not to do something new - and because change is introduced piecemeal, without regard for its impact on the wider system that constitutes a business.

Next... Why innovation fails