Doing more with less in a Volatile, Uncertain, Complex and Ambiguous world
We live in an increasingly Volatile, Uncertain, Complex and Ambiguous (VUCA) world of accelerated change, where economic actors can no longer project 5 or 10 years ahead with reliable investment programmes. The traditional approach — multi-year programmes, multi-gate decision processes, long cycles — is no longer fit for purpose. Frugal innovation proposes a response to this paradox: investing in multiple directions while minimising financial risk.
The VUCA world calls simultaneously for greater caution (difficulty in estimating the NPV of investments given systemic risks) and greater boldness (the need to change one’s mode of thinking, overcome cognitive bias, and think laterally to innovate holistically). It is this apparent contradiction — the need to invest in multiple directions without prejudging success, alongside the need to minimise financial risk and guarantee returns despite uncertainty — that establishes frugal innovation as a paradigm.
The first pillar is the adoption of short, iterative development cycles built around the Minimum Viable Product (MVP) concept. Rather than committing to lengthy programmes with their inevitable tunnel effect, these cycles reduce required investment, execution risk, and maintain permanent proximity to perceived market needs, minimising the probability of market introduction failure.
The second pillar is developing a trial-and-error culture that allows exploration of possibilities and better apprehension of ground-level reality through experimentation. The corollary is the organisation’s ability to reduce the marginal cost of experimentation. Such an approach is economically sustainable only if the cost of failure (and the associated learning gain) remains acceptable: Fail Safe = Fail Quick & Cheap.
Frugal innovation transforms companies along two axes. On organisation: flat hierarchies, rapid decision-making, empowered actors, silo-breaking, cross-functional collaboration, even holacracy — a leaner, more efficient and less costly structure. On culture: favouring principles over rules, accepting constructive failure (lessons learned, post-mortem, pre-mortem), sharing a global value chain perspective to create meaning, and not being paralysed by uncertainty.
PwC and the CSFI identified two major technological risks for banks: the obsolescence and extreme heterogeneity of banking IT systems (legacy of external growth), versus competition from FinTechs using Cloud and mobile solutions; and cybercrime (SWIFT system attacks). The banking business model is under pressure from persistently low interest rates, increased regulation, and the emergence of specialised competitors ($38 billion invested in FinTechs in 2015 according to VentureBeat).
FinTechs are structurally more agile: they have no “cash cows” to maintain but “question marks” to develop. Their efficiency rests on three levers: specialisation in banking functions with deep expertise, lowered capital barriers through Cloud (CapEx to OpEx transformation via pay-per-use), and a natively agile organisation and culture.
Large banks are characterised by deep hierarchies, linear and sequential budget execution, matrix structures, inflexible processes, and a status quo culture. Yet in a VUCA world, the status quo is challenged by macroeconomic trends, new generations (Y and Z, digital natives), and the emergence of IaaS/PaaS/SaaS models enabling sustainable exponential growth.
In 2011, Babson College anticipated that 40% of the Fortune 500 would disappear within 10 years. Professor Richard Foster (Yale) estimated that the average lifespan of large companies had dropped from 76 years in 1920 to under 15 years. The CIO must become the Chief Innovation Officer, and the CTO the Chief Transformation Officer: same acronyms, disruptive perspectives on roles and responsibilities.