Episode 43 of “What is Innovation?” is out! Jared talks with Luiz Zorzella, founder and principal of Amquant. Luiz shares on the contrast of Venture Capital and S&P. He also shares more about taking on the leadership role and different perspectives on the financial industry.
Luiz Zorzella, founder and principal of Amquant. Luiz shares on the contrast of Venture Capital and S&P. He also shares more about taking on the leadership role and different perspectives on the financial industry.
More about our guest:
Luiz Zorzella, through his company, Amquant, works with banks, insurance companies, investment and other service firms worldwide in the areas of growth, profitability and innovation. In his podcast, The Strategy Taken, he interviews business leaders on how they make and implement difficult strategy decisions. He is also the author of the book Revenue Growth and publishes a monthly newsletter where he examines the growth drivers of the financial sector. Luiz is a former consultant and expert with McKinsey & Co. and investment banker with JP Morgan Chase.
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Episode Guide:
1:26 - What is Innovation?
2:28 - Venure Capital sector underperforimg the S&P
4:45 - Class movements: Outperformers, averages, underperfomers
5:51 - What is efficiency?
7:46 - S&P from 500 to 310
9:04 - Competitive advantages/capabilities
10:02 - 'Not' creating value: 2 situations
12:26 - Leadership development space
14:01 - Coaching leadership perspective: Signal and Noise
15:41 - Financial Services: decisions on innovation through data
17:19 - Changing perspectives and fine-tuning
19:25 - Investing in people: solving classic value-metric problems
22:54 - What isn't Innovation?
24:51 - Company identifiers: Good or bad at innovation?
26:28 - Advice for innovator
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Resources Mentioned:
Luiz's personal ventures:
Book Mentioned:
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OUTLAST Consulting offers professional development and strategic advisory services in the areas of innovation and diversity management.
Jared Simmons 00:05
Hello and welcome to What Is Innovation. The podcast that explores the reality of a word that is in danger of losing its meaning altogether. This podcast is produced by OUTLAST Consulting, LLC, a boutique consultancy that helps companies use innovation principles to solve their toughest business problems. I'm your host, Jared Simmons, and I'm so excited to have Luiz Zorzella.
Jared Simmons 00:30
Luiz Zorzella works with financial service companies that have a strategy but are not achieving the results they expected. His firm Amquant works with banks, insurance companies investment and other service firms worldwide in the areas of growth, profitability and innovation. In his podcast, the strategy taken he interviews business leaders on how they make and implement difficult strategy decisions. He is also the author of the book revenue growth, and publishes a monthly newsletter where he examines the growth drivers of the financial sector. Luiz is a former consultant and expert with McKinsey and Company and investment banker with JPMorgan Chase. Please welcome to the show. Thank you for joining us.
Luiz Zorzella 01:10
Hi, Jared. It's a privilege to be here. I really enjoy your show.
Jared Simmons 01:15
Thank you so much. Thank you so much. I enjoy yours as well. And I'm looking forward to talking with you. Likewise. So why don't we dive right in? Tell me in your mind, what is innovation?
Luiz Zorzella 01:29
Innovation is what I was ready to say that innovation is a very inefficient way to create value. I think that when people talk about innovation, the first image that comes to mind is the thing that startups do. If you look into the startup world, I think we can see the venture capital sector as the gold standard. That's what they do and they're very good at that. I am sure that most of your listeners will have heard some scary statistics about the venture capital sector. That a lot of companies fail, that gets a lot of volatility. My favorite one goes like this, when you invest in 10 companies, six will flop three will be so-so, one will actually pay for the other, the other nine, the true number is actually closer to one in 20. 'm gonna give you even an even scarier statistic about the sector. The scarier statistic is that in the past decade, the venture capital sector as a whole has returned pretty much the same thing as the s&p.
Jared Simmons 02:38
Wow. You took a broad D general, sort of sector level investment, in either of those sectors, it would pan out about the same. That's unbelievable.
Luiz Zorzella 02:49
If you think about what that means, those firms, they have smart people, they have resources, they have connections, they have money, the only thing they do is to source invest, manage, and exit innovators, really good ones. They have very good incentives and they have to deal with very little legacy. Still, they basically return the same thing as the s&p and with much more volatility, which means that adjusted for risk, they're underperforming the s&p.
Jared Simmons 03:25
What this scenario you just described would be what one would assume is very fertile ground for innovation. A lot of times that legacy element of things, the way things were, is a real anchor, and really being able to push and move innovation forward. It's surprising to hear that in the absence of that, it's still a difficult way to create value.
Luiz Zorzella 03:48
It is a very difficult thing. It is first, it is true that the sector is very good advertising their success stories. That's how they get more money. It's true that there are some firms that outperform that even on a consistent basis. But the flip side is that if there are those that overperform there are also those that underperform that with all of those resources, because the number I gave you is an average. I think that the bottom line is that there's innovation that we think about; the first thing, which is very flashy, and makes very good reading, very good books and content is actually very, very hard. Anyone who tells you otherwise is selling you something.
Jared Simmons 04:41
I think it's well put, it's a message that you'll only get from a very few people who actually know the facts behind the numbers and behind these percentages. I'm excited that you're able to speak from that experience. As you think about these different classes, the outperform, the averages, and the underperformers, do people move? Do investors move through these buckets or are there firms that consistently outperform? Or is it more of a function of the investor or the founder? Does that question makes sense?
Luiz Zorzella 05:15
There is some movement, there are those that have been very consistent. Some of them are household names, we can talk about that. There are some that both under the average, over the average, it is true. The interesting thing here is, I would say that if you think of innovation as a way to create value, the model of the s&p, it's not as flashy. But it is a much more efficient way to create value than the model of the C-sector.
Jared Simmons 05:54
When you talk about efficiency, what goes into that in your mind?
Luiz Zorzella 05:59
Again, if you think in terms of all the resources that you put behind it and how single minded the whole sector is in identifying good innovation, creating value from it, helping innovators deliver on the promise and be successful. If you think of all the resources that are directed towards making that happen. It is a very messy and inefficient way. I'm not saying this as a criticism, I'm saying that is the nature of innovation.
Jared Simmons 06:33
It's just the reality of it.
Luiz Zorzella 06:35
Exactly, you have to be respectful of how hard the whole thing is. You have to think that if you want to really be a leader who has a good innovation strategy, I think that it would pay off to be more closer to the model that the innovation of the regular S&P companies and not the Silicon Valley model.
Jared Simmons 07:03
We often hear the best, when it comes to innovation, we often hear the best of the Silicon Valley stories, and the worst of the Fortune 500 S&P models. The things that the GMs and the Fords and the P&Gs of the world do wrong about innovation because they're big, and they're slow. VCs do the right thing, because they are nimble and agile and fast and they create these billion dollar unicorns. You're saying the truth is probably somewhere, somewhere in between.
Luiz Zorzella 07:39
Somewhere in between? Yes, definitely. Don't take me wrong, the S&P is a Darwinian club. In the last decade that I said, the S&P has about 500 companies, 190 companies in the last decade fell off the S&P. So it is a space that you see a lot of innovation and you see a lot of tech companies there. What you don't see is the type of innovation that for example, you read on a book, like Zero to One which is a nice book, but it is not how most of the value is created in the business world.
Jared Simmons 08:16
That's the Peter Thiel book.
Luiz Zorzella 08:18
Yeah, I like the book but that's not how most of the value is created neither in terms of absolute value, total value or in terms of returns.
Jared Simmons 08:31
It's almost a function of innovation as entertainment versus innovation as true value creation. Because the Silicon Valley stories are definitely more entertaining and more inspirational and more energizing, engaging. I agree with you that the hit rate is different. You're talking about true return on your investment of time, resources, money, in order for you to get enough at bats to hit a home run, you're going to pull yourself down to that sort of S&P average over time.
Luiz Zorzella 09:07
One thing that I work with some of my clients, I like the idea of looking at competitive advantages, or competitive capabilities. I think that this is a term that is becoming less used, because it's become a little bit washed out and generic. But my definition is very different. My definition is that I look at a concrete evidence that shows that the company has something that in the past, it was actually responsible for creating a lot of excess value that the company created in the past in the past few years. A lot of companies like if you can actually see and you see some cases that somebody that I think they're very good at getting into new markets, where they're very good at launching new services or transforming the relationship, so they can capitalize on that and they can innovate on that. They can be very successful.
Luiz Zorzella 10:02
You also find a lot of stories that companies that are not creating a lot of value. In this case, you have one of two situations. One is that you're actually creating value but somewhere else in the organization, this value is being destroyed. So your total value is actually, you look average but it's because you have a black hole somewhere in your organization, which is actually good news. Because if you find what it is, you can fix it and it means that you still have something that you can capitalize on, and really innovate; or you find that you have nothing. You're actually just returning everything close to the rest of the market, which is also very liberating, because it means that you don't have to keep your secret sauce on the vault, under lock and key. If you don't need to divert so much resources and attention to protecting your special thing, because the special thing is not so special. It also creates a lot of innovation possibilities for you, we can start talking about open innovation and working with people outside the organization in companies outside the organization to change your processes, change your products, change your customer experience. You can talk about not trying to differentiate yourself, like selling something that is probably good, but it's not actually something that is making that much of a difference for you anyway.
Luiz Zorzella 11:25
I worked with a company, they provided very good support to their salespeople. They invested a lot in that. But then we looked statistically and in two thirds of what they were doing, very little... when you account for what would have happened anyway, like, even if you didn't have that supply, they had very little margin or impact on what the salespeople were actually doing. That's liberating, you can actually divert all this attention and resources into more productive activities.
Jared Simmons 12:01
That makes a lot of sense. I love the concept, the way you've teased apart the creating value and destroying it as a form of neutrality almost, and then just not creating it at all. On a net basis, they probably look the same but sounds like what you help clients do is understand the difference between those two and what that means for your innovation strategy going forward.
Luiz Zorzella 12:24
Yes, which is good. If you look in terms of leadership development. That's an area that you look like a lot into. I think that you're talking about a very, very different program, or very different types of objectives when you are working with people who need to, for example, neutralize whatever is destroying their value and capitalize on the things, on the capabilities that they already have, or people who are saying that, 'you know, all those things that we were protecting, you don't need to do that anymore, let's find new ways to do this things that have the potential to actually create business.'
Jared Simmons 13:06
Exactly. I think the other key element in what you were describing is the importance of understanding what's signal and what's noise, when it comes to innovation. As you were saying, looking at the investment that your client was making in their sales organization, normalizing that against "Okay, well, what if you did nothing? or what else might be going on here?" to separate the signal from the noise in terms of... there's a lot of stories you can tell yourself with data, especially in the world of innovation and innovation strategy, because, by definition, we're working in a space that is unknowable. Because we're dealing with the future and creating it and managing it and shaping it. I really like that example of helping people tease apart what signal and what's noise in this space and what should you plan against versus what stories are you telling yourself based on what you're seeing.
Luiz Zorzella 14:00
Yes, for example, like I say, in your line of work, when you have all this, like signal and noise; what is the hardest thing from a leaders perspective on how to deal with that?
Jared Simmons 14:12
Yeah, I think the things that I've seen, tend to be the journey going from what you believe, to what you know, because I think what I usually see is leaders, when they see something, see a set of data or information they draw, immediately go into drawing a conclusion,what do I make of this? what decision should I make next? When you're managing a P&L, that's probably a less problematic way to do it. But if you apply that to innovation, sometimes you can draw problematic conclusions from data that you don't fully understand. That's been my experience with that. I don't know if that lines up with yours. The cool thing about this conversation is you and I occupy the same world of innovation and growth, but we've grown up in different sectors. That's why it's cool to see the overlap in the experience and the observations at a leadership level.
Luiz Zorzella 15:08
I find that doing, like interviewing people is actually that's one of the best things about this. You learn so much about the experiences and the areas of other people.
Jared Simmons 15:22
I would imagine when, as I'm looking at it, it's people looking at toothpaste or batteries or milk or something and looking at the data for it, or the consumer reaction to it are the technical data for it, enjoying conclusions about innovation; what's the analogous data set in the financial services world? Or what data do they gather to try to make decisions about innovation?
Luiz Zorzella 15:49
That's a good question. For example, one that you will find a lot of leaders in financial services, they will tell you that one of their differentiations, or one of their competitive advantages, or capabilities, is the relationship they have with their customers. In most cases, you will see that this is actually a little bit of like, I don't know, I don't know what to say so I can say about something that is very diffused as like, a good relationship. Then what you do is that you can apply some statistical models to see, okay, this does actually holding true, can you actually link this to increase loyalty, or increase profitability or increase the growth or something that you can tie to a value metric? In a lot of cases, you can. In a lot of cases, if you just ask the customers, their customers are gonna say, Yes, I love you. I love the attention, the relationship, give it to me. But when you actually tie this to results, you see that it's not the customers fault. It's not that they were lying. They truly believe that, that they appreciate that. But you'll see that often how happy they are with the relationship has very little correlation with growth or loyalty, or an NPS score profitability, or anything like this.
Jared Simmons 17:19
Interesting. It must be very difficult to help a leader think beyond that. If I've got this data in my hand that says, my customers love me, why would I change anything?
Luiz Zorzella 17:30
Yes, exactly. I worked with a bank. Their clients love them and because they had very long relationship with those clients, and it was true. You can actually verify this, the data was actually saying that the clients logged in, and they had very good, stable, long term relationship with them. The problem is that, because they had long term relationships with these clients, all of their processes, culture, capabilities, systems, everything, the bank, was fine tuned to the existing business. Every time you wanted to get into a new market, or bring new clients, they were not fine tuned for that they were fine tuned to deal with people that they have been dealing with in the past 20-30 years.
Luiz Zorzella 18:21
That's true in any sector, that efficiency is a very big driver of performance. Probably, if you are in business, everything that you have is fine-tuned and specialized to what you have today. Recognizing this and having a program to deliberately rely on what the data and what information your insights are telling you, and changing this, it is difficult and requires a lot of of people development and relationship lead development, and requires a lot of working with the stakeholders.
Jared Simmons 18:59
I can imagine, you getting engaged with clients focused on growth, thinking about their valued metrics and things like that. I can imagine that based on your description of where the challenges often line, there's a people element to that, that could require some effort and investment. How do you help? I find something similar in my work. How do you help clients think about investing in their people to help solve their classic value metric problems?
Luiz Zorzella 19:33
I will answer this with an anecdote. I tell you that I have throughout my career as a consultant. I've been a consultant for 20 years now. Throughout my career as a consultant, the single most common advice that I gave to my clients has been, they should focus. This is where the magic happens. Focus on this. Try not to get distracted by other things. A few years ago, I had someone, a coach, help me with my business. The first thing that he told me was that I had to focus that my own consulting firm was not as focused as it should be and it was a hard pill to swallow. But I think that the big advice that I would give is that, yes, it is difficult, even a lot of things that you know, that you have to do are difficult to do, to have someone who is very well structured, and can provide you with guidance through this period and be an accountability partner and push you to actually make those difficult strategic decisions is actually quite valuable.
Jared Simmons 20:44
I can attest to that as well, having similar support has been very important to me as well. The broader environment, corporate culture and environment, around investing in leaders and investing in people, I think it's starting to shift such that people are starting to understand that it does have an impact on the bottom line. We've been thinking about leadership culture, we've been thinking about decision making and professional development and all those things for decades now; and people are starting to draw some more longitudinal conclusions that can help with those conversations. But there's still always that initial, like you said, that difficult pill to swallow of, there's no process that's going to fix this. You can't go implement, from in my world, you can't go implement LEAN, you can't go implement Value Engineering, you can't go implement these other things, and expect those things to just to solve your problems because the people that operate them are the governing factor in how impactful they are. Sounds like you've seen similar things.
Luiz Zorzella 21:50
If you look at this, when you're getting to innovation, most of the challenges are things that will go contrary to you, most people's nature. Ego's contrary to my nature. So I said, we started this conversation saying that, the image of innovation that most people have, is actually not the best one in terms of creating value. We talked about the competitive capabilities and how you can actually see that it's good that you if you don't find any or it's good that you see one thing is being destroyed. You have to trust the data, trusting what the insights are telling you enough to act on that, is very difficult. This is why most people don't do that. This is why having someone to support you on the development side is extremely valuable.
Jared Simmons 22:50
I couldn't agree more. I wonder, in terms of... we've talked a lot about what innovation is, do you have any thoughts or insights about what isn't innovation?
Luiz Zorzella 23:01
Again, I started this saying that innovation is a very inefficient way to create value. Innovation, at least the useful type of innovation, is mostly is not the flashy one. 80% of the innovation is not the one that will drive headlines. Most innovation will be identifying things that you already have that are underdeveloped but has the potential to move the needle, taking a hard look at yourself, and having a good assessment of what capabilities you have, and what creates value in what you're doing and what doesn't and having a plan for that; preparing yourself. Again, all the discussion about you being fine-tuned, you being really, really good at the things that you are doing today, but not at the next thing that you need to do and having a single-minded attitude of pursuing this goal. I like the idea of pursuing a goal rather than the either the traditional plan and execute type of thing. I think that nobody believes in that anymore these days. But I think that also the companies that tried to go to Agile, they run the risk of becoming too reactive. I like the idea of just having a clear goal and having a clear plan to pursue it. You can adjust you can you can adapt. I think that this is a very nice middle term in-between.
Jared Simmons 24:26
That makes a lot of sense. I agree that things exist on the extremes in terms of agile versus this plan and execute mindset. I like your phrasing around pursuing a goal because you set the goal and you start in that direction and as life happens, as the world happens, you make adjustments, keeping that simple but not easy. It is, I think, critical, a great point. Are there other sort of identifiers of companies that are good at innovation or doing it the right way in the sector versus those that aren't? What are their hallmarks beyond some of the things we've talked about?
Luiz Zorzella 25:05
So I think that I gave you the four that are, for me, the very good ones, they have very good statistical correlation with actual value created. Companies that are good at identifying things that they already have, that, if developed the right way, can move the needle; and you can define move the needle in several different ways. For me, it's something that is detectable, even if you didn't publish that, even if you didn't tell anyone about it, it will feel that difference. Two, is to take a hard look at both the opportunity to see that is really there and take a look at yourself as an individual, as a company, as a leader and say that, yes, I do have this capabilities, I can actually create value with these or I can't and I need to plan accordingly. Prepare yourself, which is identify how you are fine-tuned to what you're doing today but not for the next thing that you need to do then have a plan to pursue. Pursue this goal like in the saying as life throws you curveballs you adapt, but you always keep your eye on the prize.
Jared Simmons 26:14
That's perfect. I like it because it's concrete. They're observable and they are not rooted in specific metrics. So you can apply your own situation to each of those. I like that a lot. Any advice, Luiz, for future innovators, or current innovators out there?
Luiz Zorzella 26:35
For future innovators, I think my biggest advice is, as I said, I think I would resist the temptation to look at the flashy, stereotypical image that a lot of people have around innovation. Think about more pragmatical. What are the sources that actually can make a difference and move the needle in your sector or in your career or whatever arena you're playing and believe in those insights and don't believe on the hype.
Jared Simmons 27:06
Well said, trusting insights over the hype is great innovation advice. It's great life advice. Luiz, I really appreciate you making time to share your thoughts with us, your experience over your two decades of consulting and financial services, innovation, growth, profitability, it all came through today. Really, I think I learned a lot. I'm sure our listeners have learned a lot as well. Thanks again for your time and we'll have to do it again.
Luiz Zorzella 27:35
Absolutely. I would love to. Thank you, Jared.
Jared Simmons 27:38
All right. Take care.
Jared Simmons 27:44
We'd love to hear your thoughts about this week's show. You can drop us a line on Twitter at OUTLAST LLC, or follow us on LinkedIn where we're OUTLAST Consulting. Until next time, keep innovating. Whatever that means