Three Horizons Framework
for Other activities auxiliary to financial service activities (ISIC 6619)
The 'Other activities auxiliary to financial service activities' industry is characterized by rapid technological shifts, high regulatory scrutiny, and a constant need for innovation to stay competitive and relevant. The Three Horizons Framework is exceptionally well-suited as it provides a...
Strategic Overview
The 'Other activities auxiliary to financial service activities' sector operates within a highly dynamic landscape, marked by continuous technological advancements, evolving regulatory demands, and intense competitive pressures. This environment necessitates a strategic approach that simultaneously optimizes current operations, invests in emerging capabilities, and explores entirely new business models. The Three Horizons Framework offers a structured methodology to navigate these complexities, ensuring that firms can defend their existing market position while building and envisioning future growth.
This framework is particularly vital for mitigating 'Market Obsolescence & Substitution Risk' (MD01) and addressing the 'Continuous Innovation Imperative' (MD01). By allocating resources across short-term (H1: optimizing existing compliance platforms or payment gateways), mid-term (H2: investing in DLT for faster settlement or AI for risk management), and long-term (H3: exploring DeFi infrastructure or quantum computing applications) initiatives, organizations can manage the inherent 'High R&D Investment & Risk' (IN05) and the 'Rapid Obsolescence of Innovation' (IN03). This balanced portfolio approach is critical for sustained relevance and growth in a sector where stagnation quickly leads to competitive disadvantage.
The framework aids in overcoming challenges such as the 'Talent & Skill Gap' (MD01) by providing a clear roadmap for capability development aligned with future needs, and helps in managing 'Fee Compression & Value Demonstration' (MD03) by fostering continuous value creation through innovation. By systematically categorizing and managing innovation efforts, auxiliary financial service providers can strategically allocate capital and talent, ensuring both operational excellence today and disruptive potential for tomorrow.
4 strategic insights for this industry
Strategic Balancing of Core Business vs. Future Innovation
Auxiliary financial services must concurrently maintain highly stable and efficient H1 operations (e.g., payment gateways, core compliance systems) while dedicating significant resources to H2 (e.g., DLT, advanced AI) and H3 (e.g., quantum finance, true DeFi integration) innovations. Failure to balance this can lead to 'Market Obsolescence & Substitution Risk' (MD01) as competitors introduce more advanced services, or instability in core offerings if H1 is neglected.
Addressing the Talent & Skill Gap for Emerging Technologies
The push into H2 and H3 technologies like DLT, AI/ML, and quantum computing necessitates a workforce with specialized skills. The 'Talent & Skill Gap' (MD01) is a significant barrier, requiring strategic investment in upskilling, retraining, and targeted recruitment to build the capabilities essential for future growth and avoid 'High R&D Investment & Risk' (IN05) without adequate expertise.
Navigating Regulatory Ambiguity in Horizon 2 and 3
Innovation, particularly in H2 (e.g., blockchain for securities) and H3 (e.g., entirely new financial protocols), often outpaces regulatory frameworks. Firms must proactively engage with regulators and industry bodies, influencing policy development, to mitigate 'Development Program & Policy Dependency' (IN04) and reduce the risk associated with investing in unproven or unregulated areas.
Optimizing R&D Investment for Value Creation
The 'High R&D Investment & Risk' (IN05) in auxiliary financial services requires a disciplined, portfolio-based approach. The Three Horizons framework helps organizations categorize and manage these investments, understanding that H1 R&D focuses on incremental improvements, H2 on scalable growth, and H3 on creating long-term 'Innovation Option Value' (IN03) rather than immediate returns, to combat 'High Operating Costs & Margin Compression' (IN05).
Prioritized actions for this industry
Establish Dedicated Innovation Hubs/Labs for H2 and H3 Initiatives
Creating separate, agile teams or 'skunkworks' allows for focused development and experimentation with emerging technologies (DLT, AI, quantum) and new service models, shielding them from the daily pressures of H1 operations. This fosters a culture of innovation, accelerates time-to-market for H2 solutions, and explores high-risk, high-reward H3 concepts without jeopardizing core business stability. This directly addresses 'High R&D Investment & Risk' (IN05) and 'Rapid Obsolescence of Innovation' (IN03) by providing a dedicated space for future growth.
Implement Horizon-Specific KPIs and Funding Models
Develop distinct performance metrics and budgeting processes for each horizon. H1 KPIs should focus on efficiency, cost reduction, and customer satisfaction; H2 on market adoption, revenue growth from new services, and technology maturation; H3 on learning, strategic optionality, and partnerships. This prevents H2/H3 initiatives from being prematurely judged by H1 profitability metrics and ensures appropriate resource allocation tailored to each horizon's objectives, combating 'Fee Compression & Value Demonstration' (MD03) and 'High Operating Costs & Margin Compression' (IN05).
Develop a Proactive Regulatory Engagement Strategy for H2/H3
For innovations like decentralized finance or new payment rails, engage early and collaboratively with regulatory bodies, industry associations, and peer firms. Participate in regulatory sandboxes, pilot programs, and policy discussions to shape future regulations. This reduces regulatory uncertainty, accelerates market acceptance, and mitigates 'Development Program & Policy Dependency' (IN04) and potential 'Market Volatility & Demand Fluctuations' (IN04) that could hinder adoption of new services.
Build a Strategic Talent Pipeline Focused on Future Skills
Invest systematically in upskilling and reskilling existing employees in areas relevant to H2 and H3 technologies (e.g., blockchain development, AI/ML engineering, data science, cybersecurity). Simultaneously, implement aggressive recruitment strategies to attract external talent with these specialized skills. This directly addresses the 'Talent & Skill Gap' (MD01) and ensures the organization has the necessary human capital to execute its multi-horizon innovation strategy, improving 'Talent Gap & Retention' (IN05).
From quick wins to long-term transformation
- Conduct an inventory and categorization of all current innovation projects into H1, H2, and H3.
- Communicate the Three Horizons concept internally to foster a shared understanding of innovation priorities.
- Identify and implement 1-2 immediate H1 efficiency improvements (e.g., optimizing an existing compliance report generation process).
- Launch 1-2 small-scale H2 pilot projects (e.g., a DLT proof-of-concept for internal reconciliation) with dedicated resources.
- Form a small strategic foresight team to monitor H3 trends and emerging technologies.
- Integrate horizon-specific metrics into annual planning and review cycles.
- Systematically embed H2 and H3 capabilities and innovation processes into the organizational structure and budget.
- Establish strategic partnerships or venture investments for H3 exploration (e.g., co-investing in a quantum computing startup relevant to financial simulations).
- Evolve governance models to support continuous innovation and portfolio management across all horizons.
- Horizon Blurring: Treating H2/H3 projects with H1 performance expectations, leading to premature termination or misallocation of resources.
- Resource Cannibalization: H1 projects consuming resources meant for H2/H3, starving future growth initiatives.
- Lack of Leadership Buy-in: Without consistent executive sponsorship, H2/H3 projects will lack necessary funding and strategic direction.
- Ignoring Regulatory Evolution: Developing H2/H3 innovations without considering existing or emerging regulatory frameworks, leading to rework or market access issues.
- Innovation Theater: Focusing on visible, flashy innovations without integrating them into a coherent strategy or demonstrating clear value.
Measuring strategic progress
| Metric | Description | Target Benchmark |
|---|---|---|
| H1: Operational Efficiency & Cost Reduction | Measures the efficiency gains and cost savings in core, existing services and processes. | 5-10% annual reduction in cost per transaction for core services; 10-15% improvement in process cycle time. |
| H2: Revenue from New Services & Market Adoption | Tracks the financial contribution and market penetration of services launched within the last 1-3 years, driven by mid-term innovations. | 10-20% of total revenue from H2 services; 20-30% market share in targeted H2 segments within 3 years. |
| H3: Future Option Value & Strategic Learning | Measures investment in future capabilities and exploration, rather than immediate financial returns. | Number of H3 concepts explored (e.g., 3-5 per year); Number of strategic partnerships/POCs in disruptive technologies (e.g., 1-2 per year). |
| Talent & Skill Alignment | Assesses the organization's capability to attract, develop, and retain talent necessary for H2 and H3 initiatives. | 20% increase in employees with H2/H3 relevant skills annually; <10% turnover in innovation teams. |
Other strategy analyses for Other activities auxiliary to financial service activities
Also see: Three Horizons Framework Framework