What Can FSI Executives Learn from Fintechs Already Operating at the Digital Transformation Target State?
Also in this issue - From the Driver's Seat: Insights of the Head of New Business at MIB (Life Insurance)
What Can FSI Executives Learn from Fintechs Already Operating at the Digital Transformation Target State?
"Oh, yes, we have cross-functional value stream teams focused on top-line KPIs," confirmed the divisional CIO of a $30-billion revenue North American FSI. Well, I was tickled pink to hear that, as the saying goes. Finding a value stream team organized around revenue-linked KPIs is extremely rare, with only a few best-performing fintechs as exceptions. "Can I spend an hour with them to validate it and help close any gaps?" I offered. As is often the case with such claims, the offer was declined, and I later learned that the company didn't have such a team.
Reaching the final level of digital maturity, known as the KPI-centric operating model, poses the ultimate challenge for any FSI. It is highly unlikely that most financial services and insurance companies will achieve this level within the next 10 or even 20 years. Even executives from the largest FSIs may find it overwhelming to fully grasp and implement the sophisticated playbooks required to attain Level 5 of digital transformation maturity.
The good news is that many FSI executives do not necessarily need to understand what operating at this level entails for the following three reasons:
The Supremacy of Business Model in Digital Transformation of FSIs - operating at Level 5 digital maturity does not guarantee a path to market leadership;
If FSI Has Doubts About Digital Transformation, It's Probably Fine As It Is - digital transformation makes sense only for some FSIs under certain circumstances; and
Can FSIs Leapfrog Digital Transformation Steps? - a great majority of FSIs are two-three levels away from the target state with each phase taking 2-10 years.
In other words, if the business is performing well, most FSI executives should focus on optimizing their current level of maturity rather than worrying about what the world’s best fintechs are doing much more effectively. Similarly, while I may be curious about Magnus Carlsen's training regimen, I don't necessarily need to know it in order to enjoy being a decent chess player.
For ambitious FSI executives aiming to reach the target state before retirement, let's explore the practical tactics employed by fintechs operating at that ultimate level. If you have any doubts about whether a KPI-centric operating model truly represents the target state, I recommend reading this newsletter first: Singularity and Aberration of Operating Target State in FSI.
1. Ramp: the fastest-growing SaaS startup
Ramp is a corporate card business that claims to be the fastest-growing SaaS startup, not just among fintechs. It reached a $100 million annualized revenue run rate within the first three years of its existence. Even Revolut, another Level-5-maturity fintech, took longer to hit that milestone, and Wise (formerly TransferWise) took twice as long. Ramp's legendary velocity is ingrained in its playbooks that cover various processes, including seemingly trivial matters like enhancing employee calendaring effectiveness.
All of Ramp's playbooks place a strong emphasis on data, precision, and automation. One notable operating principle is the tracking of milestones in days rather than weeks or months. This 'days-since' mindset is deeply ingrained in internal meetings, Board discussions, and even on the company website at https://days.ramp.com/. The playbooks are continuously refined as Ramp progresses through its major growth phases: pre-product market fit, scaling identified product-market fit, and scaling multiple products.
2. Employee Effectiveness
At Level 5 of digital maturity, companies employ 10X performers compared to traditional FSIs. This is not a clickbait expression; it is a literal comparison. For example, imagine a traditional FSI deciding to develop and scale a new customer-facing product, such as travel, billing, or expense management. How many engineers would they need to build and scale that product in-house? Perhaps 30-50? In contrast, Ramp achieves the same with just 3-5. engineers. This level of efficiency is reminiscent of how Elon Musk scaled more features at Twitter while reducing the staff by 90%.
Ramp's remarkable employee effectiveness, rather than mere productivity, cannot be solely attributed to an extensive library of accumulated use case knowledge or employees working long hours, although it certainly helps. What sets Ramp’s employees apart is the unique combination of a) high IQ, enabling them to navigate sophisticated playbooks based on complex data analysis, and b) a pragmatic sense of what creates significant P&L-related impact in the real world.
3. P&L-driven operating model
Even indirect metrics at Ramp are translated into their P&L impact. This sophisticated modeling allows for accurate comparison of initiatives across different teams during quarterly prioritization sessions. The intense focus on P&L impact is evident in Ramp's preference for the Payback metric over more conventional metrics such as customer long-term value and acquisition cost (LTV and CAC). The LTV metric relies on uncertain assumptions about customer longevity and long-term cross-sell potential. In contrast, Payback provides a simpler predictor of the short-term P&L impact before a customer becomes profitable. This mindset is consistently applied when defining objectives for any team at Ramp:
In another newsletter, we discussed the rarity of FSI executives being comfortable with defining KPIs and underlying assumptions for digital initiatives. The good news is that understanding Ramp’s approach to defining KPIs does not require a rocket scientist-level IQ. Developing these muscles takes a few exercises, and I have witnessed progress even after just a couple of hours.
4. Data-driven learning
Even among the most effective fintechs, digital initiatives with the potential to generate significant impact often face a high likelihood of failure. Convincing customers or employees to adopt new features on a large scale and achieve profitable outcomes necessitates continuous iteration of techniques. Consequently, each initiative generates a multitude of data points throughout the planning and execution phases. Merely relying on a traditional business background is insufficient to fully leverage this data. There are no longer pure sales experts or marketing gurus who solely focus on human interaction, creative designs, and process management.
At Ramp, every individual must feel comfortable performing data analytics themselves, rather than relying solely on a separate department. It is essential for every team member to understand how their work aligns with their product's specific financial model and the company's overall metrics (OKRs).
Ramp's data-driven approach significantly reduces the number of iterations needed to determine the success or failure of an idea. This stands in stark contrast to the learning process of a digital team in a traditional FSI. As part of my upfront homework, I review the retrospectives of the best agile team from the past couple of months to assess their digital maturity before the meeting. Those product teams often rely on qualitative descriptions to justify their feature prioritization, accompanied by high-level qualitative assumptions. Consequently, the insights gathered for future iterations tend to be inconclusive, leading these teams to pursue additional random iterations of potentially unimpactful use cases.
5. Cross-functional teams
The financial impact holds special importance in a high-velocity fintech like Ramp. If their team works towards the wrong goal, it not only wastes their time but also builds a significant functional complexity that would later need to be dismantled. It is akin to Napoleon, widely regarded as the best tactical general of all time, who faced downfall when he chose to invade the wrong country.
A Level 5 fintech mitigates this risk by consistently anchoring the goals of their teams to a P&L impact (you can read more about Value Stream vs. Platform teams in this newsletter).
In this operating model, engineers from shared services groups actively support P&L-generating teams by fully integrating themselves, rather than relying on a hand-off across organizational siloes. Some of you might respond, "Well, our FSI also has integrated teams, maybe without P&L-driven KPIs, but business professionals and engineers collaborate in one virtual room." While this collaboration is indeed a significant achievement, there is often a crucial missing element beyond the lack of understanding of P&L impact: engineers don't proactively assist or challenge their business colleagues in making strategic decisions. Furthermore, business representatives on these teams are even less likely to make an effort to comprehend the technical aspects of the code being developed.
Contrast that with how Ramp’s Head of Growth explains the secret sauce behind their P&L-driven teams, the interaction between engineers and their Sales colleagues:
Strictly data-driven sales decisions with maximum automation
Engineers’ main KPIs are around pipeline & payback, not software delivery
Engineers proactively advise Sales colleagues on finding prospects and crafting communications
The Lenny Rachitsky interview with Ramp's executive is definitely worth your full hour, but the relevant part is the next three minutes from 10:55 to 13:55.
The aspiration of having a T-shaped profile for every team member combined with P&L-driven goals may seem daunting for even the largest traditional FSIs. Moreover, engineers who work for companies like Ramp, Wise, or Elon's Twitter are unlikely to join traditional FSIs. However, you have continued reading this newsletter because you are an ambitious FSI executive who aims to achieve a target state before retirement. Begin by identifying ten top-performing employees within your company who are eager to give it a shot. While achieving 10X effectiveness may take time, having that team reach P&L impact twice as fast in the first year would be a great starting point.
If you are interested in gaining broader insights into digital capabilities beyond the FSI industry, I highly recommend reading Lenny's newsletter and exploring his interviews with practitioners.
From the Driver's Seat: Insights of the Head of New Business at MIB (Life Insurance)
In 2020, Trey Reynolds joined MIB, a utility data business owned by Life Insurance manufacturers in North America, with the role of identifying and launching new business opportunities. At that time, MIB, a 120-year-old company, offered a single solution used by all North American insurance carriers to detect customer fraud and misrepresentations. The new CEO assembled a team of executives, including Trey, with the objective of transforming MIB into an insurtech with high-demand solutions and rapid revenue growth. The goal was to generate 40% of MIB's revenues from new solutions within the first five years.
"Going in, our simplified vision was to identify meaningful opportunities and prove to MIB customers that MIB could offer significant unique value through internal development, enhanced by partnerships and acquisitions. As we demonstrate success, market confidence in MIB will grow, enabling us to raise more investments and expand our portfolio with more and more valuable, higher-margin solutions."
1. The beginning
At that point, MIB's operating practices were primarily manual and tailored for a specific purpose. As is commonly observed in traditional FSIs, the IT group was simultaneously attempting to implement advanced technologies and Agile methodologies. The new Management Committee recognized the potential for significant growth in top-line revenue while striving to maintain stable expenses.
"Before piloting new products, we rationalized the existing resources and capabilities. Every process and initiative was assessed for alignment with the new vision. The necessary talent was allocated to the aligned initiatives, and the remaining ones were discontinued. This swift evaluation process led to significant savings across top spend categories, including transitioning away from costly mainframe systems and reducing the real estate footprint by half."
Until that point, the newly strengthened executive team had been operating within their comfort zone, having previously undertaken rationalization efforts on a larger scale. With priorities and expenses now addressed, MIB embarked on a more ambitious endeavor: the identification and launch of data-driven solutions.
The timing was fortuitous as, by 2020, the US Life Insurance industry started to accelerate its investments in technology, despite historically lagging behind other FSI segments in digital capabilities. Well-funded insurtechs, including subsidiaries of incumbents, pursued use cases in real-time underwriting, and the integration of Life Insurance and medical solutions became feasible through health data exchanges.
2. Scaling
To overcome years of undervaluing technology capabilities, a change in mindset was required among executives in the Life Insurance industry. They needed to catch up with more advanced practices in P&C insurance and Banking. However, the development of groundbreaking use cases often necessitated collaboration among competitors and extensive domain knowledge. In the US life insurance sector, there was no independent vendor with the necessary credibility and expertise. This created an opportunity for MIB to provide first-of-a-kind solutions.
A crucial element of MIB's transformation was the integration of business leaders into the value streams. This fundamental change in leadership culture, led by the Management Committee, played a significant role in accelerating the development of operational capabilities and the creation of high-impact products.
"With decades of industry experience, our newly formed management committee not only possessed extensive credibility and relationships across Life insurers but also had specific industry-wide ideas. During our previous roles with incumbents, we were unable to pursue these ideas due to the inherent mistrust among competitors. However, with MIB, we finally had the opportunity to put our thinking to the test."
And they did. Three years later, MIB surpassed its initial aspirations by generating nearly half of its revenues from the new higher-margin solutions, all while maintaining similar expense levels. To achieve this remarkable success, MIB focused on three key factors from the start:
Addressing clients' specific problems directly, rather than developing solutions based on internal biases;
Collaborating closely with clients from the beginning, integrating teams, and aligning on the expected value creation; and
Providing full transparency on economics and returning 80% of the newly created value back to the clients.
Such a commonsensical approach is often overlooked by established FSIs. It is considered too hands-on, too sophisticated, and too transparent for their comfort. It also necessitates venturing beyond the realm of precision and certainty. For example, the Life Insurance industry grapples with substantial fraud, yet the concrete data to quantify the exact losses is very limited. Who would want to be an executive who confesses to the management team that their department is incurring an annual loss of $80 million due to fraudulent claims, without a clear solution in sight?
"We initially devoted numerous hours to brainstorming sessions with highly knowledgeable executives from top Life Insurance and Reinsurance companies. In between these sessions, each of us would be assigned homework to delve deeper into our respective data sets, validating the emerging assumptions."
Trey and his senior counterparts in Life Insurance companies adopted a hands-on approach to ideation and number crunching, personally driving the process. Having been involved in some of these sessions in 2021, I witnessed a refreshing departure from the hierarchical engagement model commonly observed in traditional FSIs.
3. Playbooks
Trey's efforts to launch new solutions eventually evolved into a playbook consisting of three phases:
Idea Phase (2 months): Taking the lead in qualitatively identifying and sourcing a new business opportunity, quantifying the total addressable market (TAM), and iterating extensively with end-users.
MVP Phase (6 months): Leading the development of a minimum viable product (MVP) data/technology solution to validate its market fit through real user experiences, even with minimal convenience features.
Scale Phase (years): Assisting a dedicated team in establishing a sustainable, high-growth business.
With two solutions successfully completing all three steps, the playbooks and the broader operating model continue to evolve. The Management Committee ensures alignment with each newly formed business team regarding the annual revenue target and approximate operating expenses. Within these parameters, the teams have the autonomy to make prioritization decisions. The Management Committee only becomes involved when team decisions affect other groups, such as choosing between AWS and Azure, to validate and support the teams' choices.
4. Learnings
One of Trey's most significant realizations thus far has been the immense value derived from leveraging shared industry data, surpassing his highest expectations.
"Through the consolidation of millions of records related to customer applications and in-force policy history, we uncovered significant levels of fraudulent activities, even in unsuspected scenarios."
Another positive revelation was the incredible motivation that arose from transparently sharing an ambitious vision with front-line employees and personally accompanying them on the challenging journey. Unlike typical FSI executives, Trey dedicates 2-3 days per week to deeply involve himself in tactical details alongside his teams, in addition to his strategic responsibilities. This contrast in approach may help explain why similar ventures in traditional FSIs often struggle to make a significant impact.
"Looking back, I underestimated how quickly individuals without prior experience in a fast-paced environment would adapt and excel. Contrary to my expectations of resistance, they embraced the challenges and enjoyed overcoming them. Each milestone served as a source of increased motivation, leading to higher job satisfaction scores in employee reviews. My initial, albeit intuitive, but incorrect assumption hindered our progress as I hesitated to assign the team with even more novel tasks."
The leveling-up process for Trey and the team never stops. Even the most brilliant use cases don't guarantee easy millions in revenue. Currently, Trey's primary challenge is to elevate the operational capabilities of his Life Insurance clients, guiding them to become more engaged and cohesive in pursuing significant opportunities. He offers the following advice to FSI executives in that context:
Lead by example: Overcome hierarchical barriers and directly engage with product teams to help them address challenges.
Trust the teams: Recognize and leverage the talent of individuals when launching digital solutions. Empower them to make decisions and collaborate to tackle anticipated failures.
Shift from planning to action: Avoid excessive planning when dealing with the inherent uncertainties of new solutions. Excessive planning often lacks impact.
Iterate in short increments: Strive for regular engagement with end-users, ideally on a daily or weekly basis. Avoid milestones that exceed three months in duration.
I hope this firsthand account inspires more FSI business executives to level up and take the lead in transforming their organizations. You can follow Trey directly on his LinkedIn page. For more detailed tactics on how to start leveling up executive muscles, see this newsletter.
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