R&D Comes to Services: Bank of America’s Pathbreaking Experiments

At the heart of business today lies a dilemma: Our economy is increasingly dependent on services, yet our innovation processes remain oriented toward products.

R&D Comes to Services: BOA’s Pathbreaking Experiments

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Published by Harvard Business Review in April 2003.

At the heart of business today lies a dilemma: Our economy is increasingly dependent on services, yet our innovation processes remain oriented toward products. We have well-tested, scientific methods for developing and refining manufactured goods—methods that date back to the industrial laboratories of Thomas Edison—but many of them don’t seem applicable to the world of services. Companies looking for breakthroughs in service development tend to fall back on informal and largely haphazard efforts, from brainstorming, to trial and error, to innovation teams. Such programs can produce occasional successes, but they offer little opportunity for the kind of systematic learning required to strengthen the consistency and productivity of service development—and innovation in general—over time.

The challenges in applying the discipline of formal R&D processes to services are readily apparent. Because a service is intangible, often existing only in the moment of its delivery to a customer, it is difficult to isolate in a traditional laboratory. And since many services are tailored to individual buyers at the point of purchase, they can’t be tested through large samples. As a result, experiments with new services are most useful when they are conducted live—with real customers engaged in real transactions. Live tests magnify the cost of failure, however; an experiment that doesn’t work may harm customer relationships and even the brand. Live experiments are also harder to execute and measure. Once you leave a laboratory and enter the hurly-burly of a commercial setting, the whole notion of experimental controls has to be rethought. The noise can drown out the signal, making it hard to determine whether the variable you’re testing for is the one that actually causes the effect you observe.

Given such challenges, it’s no surprise that most service companies have not established rigorous, ongoing R&D processes. But now there is an important exception to that rule. Over the past three years, Bank of America has been running a series of formal experiments aimed at creating new service concepts for retail banking. The company has turned a set of its branches into, in effect, a laboratory where a corporate research team conducts service experiments with actual customers during regular business hours, measures results precisely and compares them with those of control branches, and pinpoints attractive innovations for broader rollout.

Bank of America’s program is a work in progress—it is in itself an experiment. Refinements have been made at every stage of its development. Some of its elements have proved successful; some haven’t. But through its successes and its failures, the effort has revealed an enormous amount about what a true R&D operation might look like inside a service business.

The Growth Challenge

The end of the twentieth century was a time of rapid consolidation in the U.S. banking industry, and Bank of America was an eager participant. Through a three-decade M&A effort, culminating in a $60 billion merger with NationsBank in 1998, the bank transformed itself from a regional West Coast operation into one of the country’s largest national banks, operating some 4,500 banking centers in 21 states and serving approximately 27 million households and 2 million businesses. But as the twenty-first century dawned, Bank of America, like other large U.S. banks, faced a new challenge: With the opportunities for further acquisitions narrowing, it would need to find ways to grow organically, to expand its existing business by attracting more customers and fulfilling a greater share of their banking needs.

When Kenneth Lewis became the bank’s chief executive in 1999, he saw that winning the battle for customers would require fresh approaches to service development and delivery. The old modus operandi of the banking industry—provide the same services in the same ways as your competitors—was a recipe for stagnation. But Lewis faced a major obstacle in achieving his vision: The bank had never made innovation a priority, and as a result, it lacked any formal infrastructure for developing new services. Innovation, Lewis saw, would require a revolution in thinking and in practice.

The instrument of that revolution was the Innovation & Development (I&D) Team, a corporate unit charged with spearheading product and service development at the bank. The team’s immediate goal was to pioneer new services and service-delivery techniques that would strengthen the bank’s relationships with branch customers while also achieving a high degree of efficiency in transactions. Recognizing that service innovations should be tested in the field, I&D Team members, together with senior executives, decided to take an unprecedented step in the conservative banking industry: They would create an “innovation market” within the bank’s existing network—a set of branches that would provide, as bank executive and I&D Team leader Amy Brady put it, “a test bed for creative ideas to increase customer satisfaction and grow revenues.” The test market, the team realized, would have to be large enough to support a wide range of experiments but small enough to limit the risks to the business.

Bank of America decided to take an unprecedented step in the conservative banking industry: It would create an “innovation market” within the bank’s existing branches.

The bank settled on Atlanta as the site for its innovation market. Atlanta represented a stable region for the bank—its last major acquisition in the area occurred in 1996—and it was near the national headquarters in Charlotte, North Carolina. The Atlanta branches were also technologically advanced, even equipped with broadband communication lines. Twenty of Bank of America’s 200 branches in Atlanta were initially dedicated to the innovation market, most in wealthier neighborhoods with sophisticated banking customers interested in a wide range of services. (Five more branches were later added to the project.) The managers of each of these branches agreed to work closely with the I&D Team in carrying out the research effort, and they also agreed to provide much of the required funding out of their own budgets in order to get the early benefits of the resulting innovations. Integrating the program into normal operations at the branches was a risky step—experiments, after all, necessarily carry the potential for disruption—but the team saw it as essential. Only by carrying out experiments under realistic conditions—organizationally, operationally, and economically—could the I&D Team ensure the reliability of the results.

Designing Experiments

The I&D Team quickly realized that it would be very difficult to conduct a diverse array of experiments within the confines of a traditionally designed bank branch. Experiments require frequent changes in practices and processes, which neither the branch employees nor the physical facilities were prepared for. So the team decided to reconfigure the 20 Atlanta branches into three alternative models: Five branches were redesigned as “express centers,” efficient, modernistic buildings where consumers could quickly perform routine transactions such as deposits and withdrawals. Five were turned into “financial centers,” spacious, relaxed outlets where customers would have access to the trained staff and advanced technologies required for sophisticated services such as stock trading and portfolio management. The remaining ten branches were configured as “traditional centers,” familiar-looking branches that provided conventional banking services, though often supported by new technologies and redesigned processes.

The group unveiled its first redesigned branch—a financial center—in the posh Buckhead section of Atlanta in the fall of 2000. A customer entering the new center was immediately greeted at the door by a host—an idea borrowed from Wal-Mart and other retail stores. At free-standing kiosks, associates stood ready to help the customer open accounts, set up loans, retrieve copies of old checks, or even buy and sell stocks and mutual funds. An “investment bar” offered personal computers where the customer could do her banking, check her investment portfolio, or just surf the Internet. There were comfortable couches, where she could relax, sip free coffee, and read financial magazines and other investment literature. And if she had to wait for a teller, she could pass the few minutes in line watching television news monitors or electronic stock tickers. What that customer probably wouldn’t have realized was that all of these new services were actually discrete experiments, and her reactions to them were being carefully monitored and measured.

To select and execute the experiments in the test branches, the I&D Team followed a detailed five-step process, as illustrated in the exhibit “A Process for Service Innovation.” The critical first step was coming up with ideas for possible experiments and then assessing and prioritizing them. Ideas were submitted by team members and by branch staff and were often inspired by reviews of past customer-satisfaction studies and other market research. Every potential experiment was entered into an “idea portfolio,” a spreadsheet that described the experiment, the process or problem it addressed, the customer segments it targeted, and its status. The team categorized each experiment as a high, medium, or low priority, based primarily on its projected impact on customers but also taking into account its fit with the bank’s strategy and goals and its funding requirements. In some cases, focus groups were conducted to provide a rough sense of an idea’s likely effect on customers. By May 2002, more than 200 new ideas had been generated, and 40 of them had been launched as formal experiments.

Once an idea was given a green light, the actual experiment had to be designed. The I&D Team wanted to perform as many tests as possible, so it strove to plan each experiment quickly. To aid in this effort, the group created a prototype branch in the bank’s Charlotte headquarters where team members could rehearse the steps involved in an experiment and work out any process problems before going live with customers. The team would, for example, time each activity required in processing a particular transaction. When an experiment required the involvement of a specialist—a mortgage underwriter, say—the team would enlist an actual specialist from the bank’s staff and have him or her perform the required task. By the time an experiment was rolled out in one of the Atlanta branches, most of the kinks had been worked out. The use of the prototype center reflects an important tenet of service experiments: Design and production problems should be worked out off-line, in a lab setting without customers, before the service delivery is tested in a live environment.

Going Live

An experiment is only as good as the learning it produces. Through hundreds of years of experience in the sciences, and decades in commercial product development, researchers have discovered a lot about how to design experiments to maximize learning. We know, for example, that an effective experiment has to isolate the particular factors being investigated; that it must faithfully replicate the real-world situation it’s testing; that it has to be conducted efficiently, at a reasonable cost; and that its results have to be accurately measured and used, in turn, to refine its design. (An overview of the qualities of good experiments is provided in the sidebar “Learning Through Experiments.”) These are always complex challenges, and, as Bank of America found out, many of them become further complicated when experiments are moved out of a laboratory and into a bank branch filled with real employees serving real customers in real time. To its credit, the I&D Team thought carefully about ways to increase the learning produced by its experiments, with a particular focus on enhancing the reliability of the tests’ results and the accuracy of their measurement. As Milton Jones, one of the bank’s group presidents, constantly reminded the team:

“At the end of the day, the most critical aspect of experimentation and learning is measurement. Measurements will defend you if done right; otherwise they will inhibit you.”

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