New Product Development causes great anxiety in many businesses.  Asset Management is not immune.  As in other sectors, the questions asked about NPD relate both to its output and also to its structure. But above all, observers are now asking whether innovation is something that should be be sole responsibility of one team, or the job of everyone.  Questions, questions.  In this piece, Magnus Spence poses what he considers ore the main 5.

1. What is the difference between 'innovation' and 'product innovation'?
When people in the investment business say 'innovation' they generally mean 'product innovation'. This way of thinking is evidence of the product-driven nature of our industry. It is also convenient for those seeking consciously or unconsciously to avoid the challenges which innovation can generate by subcontracting all innovation to new product development (NPD) teams.

In reality, most leading businesses beyond the investment world now see innovation as a constant and all-encompassing theme - innovation is required in all that these businesses do, in all of their processes and the way they act in all areas, not just in NPD. Innovation headaches are not to be avoided, but tackled. Such businesses are innovative from the top down, not the bottom up. Some recognise this - in February of next year Reed MIDEM is running the third of its well-regarded invitation-only "Thought Leadership Summits" on the topic of 'Innovation in the Asset Management Industry', and has not invited a single NPD Executive to it.

2. Why is asset management so good at creating new products but so bad at innovation?
The main output of many NPD teams in asset management is new fund products. Since there is a huge proliferation of new products, with more than 3,000 being launched every year in Europe, and since a majority of new money into funds comes in through new products, it could be argued (and is) that NPD teams are doing a great job. However, there are others who see this fund proliferation as a symptom of a problem not a success.

The real innovation in providing investment solutions to customer needs is tending to emerge from insurers, who are proving that competitive advantage can come from packaging. Insurers may not have the investment skills but they are much better equipped to listen to customer needs. Their packaging mentality has led them to develop (for example) the wrap platforms in the UK, guaranteed and other structured fund products, variable annuities and other packaged (often tax driven) offerings which are meeting client needs in a holistic sense. The analogy that is being used is that packagers are developing cars, whilst fund suppliers are merely supplying (say) brake cables or exhaust systems.

The real customer need is not for the component but the car – and packagers understand this. In future the innovations are much more likely to come in the way in which components are packaged than in the subtleties of the component. Or put another way, insurers are starting to prove that competitive advantage may lie in the way you package and deliver, as much as (if not more than) the way you manufacture, investment products.

3. How can NPD innovate better?
The following is taken from an article by Nils Johnson of KAE Marketing Intelligence on Product Innovation, to be published in The Fund Business (January 2008), since I could not put it better myself. "To produce a new product in the good old days, a CIO simply convened his brightest fund managers and analysts in a room together and brainstormed their ideas into a new collectivised investment strategy. Apart from a couple of boxes ticked for charges and compliance, there would be few rules for screening out of ideas, market testing of hypotheses or modeling of market demand. The new product would make its way to launch stopping quickly for a fine tuning of the communication pitch and marketing mix.

This example reflects a product-centric industry that believes in product led innovation. This explains why, in fund management, so much emphasis is placed on the pre-launch end of the product development cycle. It is believed that the marketing mix is where you get the biggest bang for your marketing buck. However, if it is true that there is very little genuine product innovation in the fund industry, the emphasis on tactical marketing is, at best, missing a trick and, at worse, perpetuating a damaging myopia.

This is because the real source of value sits with “how” products are developed rather than “what” or “how many” products are spat out at the end. Indeed, it is surprising how many fund managers still think that the example described above is called innovation when in fact it bears no resemblance to the rigorous process of idea generation, proposition development, market testing and product lifecycle management that is typical for top innovators in other industries."

4. Who is listening to the voice of the customer?
A key element in the NPD process described by Johnson above is Market Testing. This is worth more exploration. Essentially it means bringing the voice of the customer into the product development process. But because NPD and customer needs are separated by a structural gulf, as described above, the voice of the customer is often not heard in the product innovation process in asset management. The booming voice of the factory predominates.

This is a mistake ironed out in the 1960s by most consumer driven businesses outside the investment world. Market research of various types was developed at that time to let the customers be heard. Asset management is only now beginning to let customer voices be heard, through customer research, and even then it is mostly research into the needs of distributors rather than end users. Arguably the asset management industry is therefore 40 years behind the commercial curve.

The irony is that just as asset management starts to use these 40 year old customer research techniques, this technology itself is now being questioned. The most advanced innovation thinkers, one example being Doug Hall (www.eurekaranch.com) now argue that innovation should NOT be driven wholly by customers in the classic sense, and should be driven instead by your internal values. There is a severe danger that this complex development will be latched on to by some in asset management as a good excuse for avoiding starting to do any real customer listening.

5. Where should the NPD function fit in an organisation?
There is significant debate across many industries about New Product Development and where it fits. It is certainly a debate within asset management. Sometimes NPD teams report in as a separate function to CEO level, and sometimes they report in to other functions such as Marketing. In high tech businesses such as Mobile Phones, NPD teams are essentially technicians rather than marketers, and NPD is usually seen as separate function, often more responsive to the needs of the factory than of customers.

This is the model used by most asset management firms, where NPD frequently reports in to CEO or Strategy functions quite separately from Marketing and Sales. I have even seen one business planning process where the goals of NPD and Sales were set without any reference to each other's needs or views at all. If NPD is listening to the needs of clients, it is very often doing so quite separately to its sister functions in Marketing and Sales, a mismatch that is either inefficient or horrifying, depending on your perspective. In many consumer driven businesses NPD is a function within Marketing, which is then able to act as a bridge between customer needs and factory capabilities.

This model is very rarely seen in asset management. In my database of asset management industry contacts I have 443 contacts who have the word Marketing in their title, and 110 with the word Product (as in Product Development), but only 8 of them have responsibility spread across both the Marketing and Product areas. Whatever model is used, NPD must at the very least be seen as part of a process driven by customer insight and needs. In too many asset management firms NPD and customer needs are separated by a structural gulf.