Goldman Sachs Consumer Bank Failure And The Dangers Of Idea Addiction

Corporate Explorer
Goldman Sachs Consumer Bank Failure And The Dangers Of Idea Addiction

This article was originally published on Forbes.

Last week came the news of layoffs at Goldmans. Below these headlines is the story of Goldman’s failed attempt to enter consumer banking. Many will see this as evidence of the same old story for corporate innovation: big company with big dreams that get cut as soon as the going gets tough. This conforms with conventional wisdom of why corporate innovation struggles. Large, successful organizations are too slow-moving, prefer to protect existing profits, and are unwilling to commit significant investment to unproven projects. There are lots of facts to support this assessment. However, the Goldman Sachs example shows us another, more common problem that often goes undiscussed. That is, our obsession with supposedly great ideas that causes us to lose sight of what it takes to convert them into value.

Goldman’s consumer bank failure

In 2016, Goldman Sachs launched a consumer banking division with the goal of creating a new revenue stream that could even out the cyclical nature of its trading business. Investment banking is highly profitable but tied to large transactions; in contrast, consumer banking is more consistent and would even out the company’s quarterly performance, which is valuable to any public company. Competitors such as JP Morgan have these more diverse businesses and Goldmans concluded that they could leverage their elite brand reputation to good effect. However, with losses of over three billion dollars in the last three years, Goldman is now starting to withdraw from the market.

Goldman Sachs will ride this out. At 3% of its overall revenues, a storm in its consumer business is an irritant, not an existential threat. What makes the saga interesting is the question of why and how they failed. This is not an obscure organization; this is one of America’s premier financial institutions, leading the category of investment banking in terms of growth rates and prestige. This failure is not one of capability or access to resources. When David Solomon, Goldman’s CEO, described the new venture to investors in 2021 he said, “We are a big bank with a big balance sheet, we’ve got a big capability to invest in technology and therefore [to] invest in disruption.” People inside Goldman referred to the consumer banking project as the CEO’s “Science Experiment,” referring to his obsessive focus on building and deploying the most advanced technology available. Solomon pumped money into the new venture, making its technology platform the centerpiece of his strategy. This powered the diverse set of businesses that they are now seeking to untangle.

What was painfully lacking in Goldman’s strategy was an understanding of the customer problem that they were seeking to solve. How were these customers underserved by existing banking models and what could Goldman bring to transform that experience? What was the value proposition that Goldman thought would differentiate them from the competitors? When we look at the number of strategic options Goldman considered – brand cards, third party loan provider, current accounts – it looks more like a shotgun approach.

Humans have a compulsion to create new possibilities. Some researchers suggest that it is an evolutionary impulse that has helped Homo sapiens to adapt and survive. Corporate innovation gets into problems when it uses its superior resources to pursue untested ideas without discipline. As anyone familiar with the venture capital world knows, startups are not immune to the same phenomenon. However, relative scarcity of resources forces startups to work harder to validate their value propositions early on. They are more likely to focus on a problem where they can get customer traction, rather than pursuing the Goldman-style scatter gun strategy in the belief that being a “big bank” with a “big balance sheet” would generate success by itself.

Disciplined innovation approach

The alternative for Goldman Sachs and others is to see innovation as having three disciplines: ideation, incubation, and scaling. Ideation is important, though it is better to start by defining the customer problem you want to solve, rather than racing around trying to find applications for the technology you can invent. The German engineering firm Robert Bosch GmbH has built a “validation engine” to prove out new business concepts before committing too much investment. This forces teams to immerse themselves in how customers view the problem that the teams are trying to solve. The result has been a 6X improvement in ROI of projects coming out of their legendary R&D labs. (See our new book, The Corporate Explorer Fieldbook for a case study from Bosch.)

Once you have good evidence that there is a customer problem to solve, you need to incubate your solution, so that you can refine it to increase the likelihood of market success. Firms that succeed at corporate innovation are willing to move slowly to test every element of a business model before investing. This evidence-based approach to incubating a business model does require patience. Companies like Siemens, General Motors, and Panasonic are all adopting this more iterative, experiment-based approach to innovation to reduce the risk of expensive failures like the one suffered by Goldman Sachs. They design small scale experiments with the goal of spending little to learn a lot.

Then, when there is evidence that you have a solution that generates market enthusiasm, you can scale it to its full potential. This discipline is where corporates should have the edge over smaller, more nimble startups, because the corporates can make their resources and customer base count. One great example is the US retailer, Best Buy, who are building a healthcare unit that connects hospitals with people’s homes to enable remote patient monitoring. As a result, the patients can be cared for outside medical facilities.

Impatience is the enemy

There is no organization on the planet better placed to commit resources to innovation than Goldman Sachs. That it should fail so spectacularly shines a light on a core problem for corporate innovation in America. Executives can be too ready to commit resources to pursue a bright shiny object, instead of adopting the mindset of a learner. David Solomon’s recent comments on the consumer banking business suggest he has finally learned his lesson: “We tried to do too much, too quickly, and as a result some of our execution wasn’t good…you look at what you’ve done, you learn, you correct, you adapt, and move forward.” He, like many others, was obsessed with ideation at the expense of the hard, slow, and boring work of incubation and scaling. But it’s incubation and scaling that are the disciplines where value is created.