Are internal start-ups cannibals or category killers?

Internal start-ups are being used increasingly by large corporations to test new ideas and strategies, but their success can be a double-edged sword for parent companies.

The offices at UBank don’t look like a normal bank office. The corporate logo in reception is made from chicken wire, and the table in the boardroom is made from recycled chipboard.

It’s a long way from the mahogany desks favoured by bankers of yesteryear.

But it’s not just the fitout that makes UBank different from other banks, and particularly from its parent, the National Australia Bank. Nor is it the bank’s pure online operating model.

The difference can be found in the UBank Manifesto, a bright green document which talks of UBank changing banking for the better and challenging the status quo.

According to UBank’s chief executive officer Alex Twigg, it is a document that is critical to what UBank is all about.

“It is the heart and soul of the businesses and we try to line up behind that constantly,” Twigg says. “It creates a sense of belonging and a sense of ownership.”

UBank is a successful example of a traditional Australian brand launching its own start-up. UBank now claims 370,000 customers, and Twigg estimates it would sit within the top 10 banking institutions in Australia in its own right. And it has achieved all of this in just five years with only 200 staff.

UBank has also operated as a testing ground for processes and technologies which have found their way back into its parent. For instance, UBank pioneered shifting the traditional 100 point identity check online, allowing prospective customers to start transacting in as little as 10 minutes.

“Now that 100 point check process is gradually being adopted across the bank, and you can see massive customer experience uplifts,” Twigg says. 

NAB has also allowed UBank to operate with a different risk profile -- not in terms of operational or credit risk, but in terms of its market proposition. This meant UBank could happily engage with consumers through social media at its launch, at a time when other brands had yet to test that channel. 

“We helped to facilitate that back into the larger organisation, to the point where we see NAB as one of the leaders now in social media in Australia,” Twigg says. “It’s a great example of how a slightly higher risk profile in strategically selected spaces can provide real value to the group.”

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While Belong is not intended as a testing ground for new ideas, Telstra is also dabbling in the world of start-ups through its backing of the muru-D start-up incubator, which recently graduated nine companies.

Muru-D’s entrepreneur-in-residence Mick Liubinskas says Telstra has non-exclusive rights to negotiate with graduating companies, and Telstra staff are also encouraged to lend their skills to assist the start-ups.

“Everybody in Telstra gets regular communication about muru-D and the companies that are in there, and are invited to volunteer their time and come out and help the companies,” Liubinskas says.

Internal start-ups were much favoured during the dotcom boom of the 1990s, when organisations such as Fairfax, Coles-Myer and PBL created divisions with a mission to explore digital opportunities, and a suitably broader risk profile. Often these are known as ‘skunk works’, after the Advanced Development Program created by aerospace company Lockheed Martin in the 1940s.

Success has been mixed, with stock in PBL’s ecorp bought back by the parent company less than four years after issue at under half of its issue value.

The highest-profile internal start-up of recent times is Jetstar, the low-cost offshoot of Qantas which was launched in 2003. While Jetstar has contributed positively to the group’s domestic results, it has done so in part at the expense of its full-service stablemate -- a necessary consequence when competing against rival low-cost carriers.

Suncorp launched Bingle in 2007 as a low-cost online provider of comprehensive car insurance, although its contribution to the group is unknown. IAG created TheBuzz in May 2009 as a fully-online insurance company, but closed it in June 2012 citing high costs for brand building and attracting customers. 

Business consultant Simon Terry has been involved in skunk works projects with traditional brands. He says it is important that organisations not make their transformation agenda the responsibility of the skunk works alone.

“Because then the rest of the business kills the skunk works, because they are the ‘special creatures’, Terry says. “Whereas if you let the skunk works test the dangerous stuff and push the envelope, if that is successful the rest of the business can be fast followers and copy that in other areas.”

At UBank, Twigg says he is aware that his brand is taking some customers from its parent. But with NAB holding less than 20 per cent of the total possible customer base on average across all products, cannibalisation is not a pressing issue.

“That means that there is at least 80 per cent plus of the market to go after,” Twigg says. “Do we have some customers that we take from NAB? Yes. Do we take significantly more from every other financial institution in Australia? Yes.

“So UBank is positively accretive to the NAB group in a significant way."

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