Open Innovation at the Bank of Canada
The Bank of Canada’s implementation of open innovation through PIVOT.
The Bank of Canada (BoC), Canada’s Central Bank, accelerated its foray into open innovation with its October launch of the Partnerships in Innovation and Technology program (PIVOT). PIVOT aims to deepen the BoC’s knowledge of leading-edge technologies and its engagement with innovators globally through public submissions to Bank posted challenges. Three initial challenges have been posted focused on the need for improved real-time assessment of the Bank’s policy effectiveness, cybersecurity threats, and improving the BoC’s day-to-day operations.[1]
Due to the increasing number of emerging policy challenges, the BoC has recognized that traditional closed-approaches to innovation are insufficient to understand and keep pace with the impact that digitalization, the digital economy and emerging technologies will have on the future of monetary policy decisions and the Canadian economy.
The BoC’s responsibilities as an economic steward[2] mandated with promoting Canada’s economic and financial stability through its application of monetary policy, issuance and distribution of Canada’s bank notes, and its responsibility to act as a fiscal agent for the Government of Canada, limits its tolerance for experimentation risk.[3] The BoC is also very cognizant of reputational risk if its actions result in unfavorable outcomes.
The BoC’s Medium-Term Plan, which outlines the Bank’s 2019-2021 strategic priorities, includes its commitment to creating a culture of innovation, enhancing business innovation and knowledge sharing, and increasing its transparency and communications with stakeholders.[4] Although, the BoC’s innovation agenda is primarily focused internally, it has begun to include outside-in[5] innovation strategies.
PIVOT, the BoC’s main open innovation program, will likely increase the Bank’s collaboration with individuals, start-ups, established companies, educational institutions and other organization both within and outside Canada, and is expected to achieve the following:
- Solution Generation without Resource Commitment: Allows the BoC to manage its resource constraints, generating new solutions without the trade-off of increasing public expenditure or committing internal resources.[6]
- Tap into Global Intelligence: Facilitates access to talent and ideas both inside and outside Canada’s boarders.
- Increase Transparency and Knowledge Sharing: Signals the BoC’s commitment to the Medium-Term Plan by increasing transparency on challenges facing the Bank and improving its business innovation and knowledge sharing processes.
Although PIVOT represents a unique way to pilot open innovation projects among Central Banks, it is not without its challenges. The following are five key challenges that the BoC will need to consider going forward:
- Link to Strategic Objectives: The BoC has no clear criteria through which it selects its topics for collaboration. The Bank may wish to develop a well-established method to maximize the opportunity to focus on meaningful innovation and value capture.
- Success Criteria and Measurement: The measure of expected value versus received value needs to be more clearly defined as there appears to be an insufficient understanding of how to evaluate PIVOT’s success.
- Implementation: Sustaining and capturing the value of innovation will need commitment of BoC resources and will carry a specific risk. Both will provide important inputs to an overall business case for solution implementation. Outlining the business case as an intrinsic part of the innovation stream will need to be performed in collaboration with the external parties involved.
- Value-for-Whom: PIVOT’s value to the BoC is clearly defined, whereas the outside innovator value is not.[7] The BoC may want to strengthen PIVOT’s incentives to encourage submissions to challenges. At present, there are no compensation-based rewards associated with submitting a solution. Successful submissions are rewarded through the prospect of collaboration with the Bank and the opportunity to leverage their partnership to attract potential investors or clients. This creates opportunity for reputation risk, when a participating party tries to leverage information asymmetries or benefit from the perception of having an inside edge.
- Security: Since many challenges are intimately linked to improving and altering how the BoC makes sensitive monetary policy decisions and its internal approach to cybersecurity there is a potential threat of malicious global organizations and individuals using information to pose a threat to Canada’s financial system.
Despite the challenges facing the program, the BoC’s implementation of open innovation through PIVOT has the potential to improve the Bank’s understanding of the Canadian economy, improve timeliness of monetary policy decisions and even increase Canadian’s trust in their Central Bank. Going forward, there are two questions that should be considered as the BoC iterates on and assesses its open innovation program:
- What organizational changes should the BoC implement to help sustain outside-in collaboration and ensure the effective implementation of solutions generated?
- What areas should the BoC focus PIVOT challenges on and what criteria should they use to evaluate the potential value/impact of each area?
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Footnotes
[1] Bank of Canada. Partnerships in Innovation and Technology (PIVOT) Program. https://www.bankofcanada.ca/research/partnerships-in-innovation-and-technology-pivot-program/
[2] Bank of Canada. Innovation, Central Bank Style. https://www.bankofcanada.ca/2015/11/innovation-central-bank-style/
[3] Bank of Canada. About the Bank. https://www.bankofcanada.ca/about/#what-the-bank-does
[4] Bank of Canada. 2019-21 Medium Term Plan: Leading in the New Era. https://www.bankofcanada.ca/about/governance-documents/2019-21-medium-term-plan-leading-new-era/
[5] Bogers, M., Chesbrough, H., & Moedas, C. (2018). Open Innovation: Research, Practices, and Policies. California Management Review, 60(2), 5–16. https://doi.org/10.1177/0008125617745086
[6] Sørensen, E., & Torfing, J. (2011). Enhancing Collaborative Innovation in the Public Sector. Administration & Society, 43(8), 842–868. https://doi.org/10.1177/0095399711418768
[7] Chesbrough, H. , Lettl, C. and Ritter, T. (2018), Value Creation and Value Capture in Open Innovation. J PROD INNOV MANAG, 35: 930-938. doi:10.1111/jpim.12471
Works Cited
Bank of Canada. About the Bank. https://www.bankofcanada.ca/about/#what-the-bank-does
Bank of Canada. Innovation, Central Bank Style. https://www.bankofcanada.ca/2015/11/innovation-central-bank-style/
Bank of Canada. 2019-21 Medium Term Plan: Leading in the New Era. https://www.bankofcanada.ca/about/governance-documents/2019-21-medium-term-plan-leading-new-era/
Bank of Canada. Partnerships in Innovation and Technology (PIVOT) Program. https://www.bankofcanada.ca/research/partnerships-in-innovation-and-technology-pivot-program/
Bogers, M., Chesbrough, H., & Moedas, C. (2018). Open Innovation: Research, Practices, and Policies. California Management Review, 60(2), 5–16. https://doi.org/10.1177/0008125617745086
Chesbrough, H. , Lettl, C. and Ritter, T. (2018), Value Creation and Value Capture in Open Innovation. J PROD INNOV MANAG, 35: 930-938. doi:10.1111/jpim.12471
Gamache, S., Gemson, S., & Jerome Lankoandé, Y. (2016). Open Innovation in Canada: Reinventing Collaboration. Action Canada.
J, B. C., & Kempling, J. S. (2009). Implementing change in public sector organizations. Management Decision, 47(2), 330-344. doi:http://dx.doi.org.ezp-prod1.hul.harvard.edu/10.1108/00251740910938948
Kankanhalli, Zuiderwijk, & Tayi. (2017). Open innovation in the public sector: A research agenda. Government Information Quarterly, 34(1), 84-89.
Lee, S. M., Hwang, T., & Choi, D. (2012). Open innovation in the public sector of leading countries. Management Decision, 50(1), 147-162. doi:http://dx.doi.org.ezp-prod1.hul.harvard.edu/10.1108/00251741211194921
Michael D. Bordo & Pierre L. Siklos, 2017. “Central Banks: Evolution and Innovation in Historical Perspective,” NBER Working Papers 23847, National Bureau of Economic Research, Inc.
Sørensen, E., & Torfing, J. (2011). Enhancing Collaborative Innovation in the Public Sector. Administration & Society, 43(8), 842–868. https://doi.org/10.1177/0095399711418768
I am surprised that Canada’s central bank opted to seek solutions to improve processes and counter cyber security threats from the public. Like you have correctly pointed out, there is a massive threat of malicious organisations using this platform to create havoc. But inviting ideas for process improvement from the entire public could be useful in solving problems for business and to get feedback on the performance of monetary policy.
If there is no regulation of topics and no filter segregating ideas from feedback, Bank of Canada could be weighed down with the number of ideas. BoC could instead run contests/challenges with specific problems for which they need innovative solutions. I would prefer if they limited these challenges to process improvements and monetary policy forecasting rather than cyber crime solutions so that my network is not open or scrutinized by anyone.
The other challenge that BoC should be wary of is that this is just a complement to internal innovation. With a large inflow of ideas, focus could move in testing and validating them rather than innovating internally.
Building off of Starwars’s point, it is surprising to see an industry such as banking so open to outside-in collaboration when privacy and security are crucial to the success of the company. I agree it is a step in the right direction for banks to pursue more open collaboration with startups to stay innovative and solve problems around process improvement, product offerings, etc. However, they need to be aware of cybersecurity issues and other malicious acts by outsiders in an increasingly connected world that becomes more dependent on the internet-based economy each day.
Similarly surprised by BOC’s use of open innovation, but think some of the risks may be mitigated since this is a one-way flow of information. As you pointed out, BOC clearly needs to be cautious of “Malicious global organizations and individuals using information to pose a threat to Canada’s financial system.” I feel like they have mitigated most of their risk by only receiving information rather than contributing to the open source as well. Potentially they can vet and hire those who’s contribute meaningfully to PIVOT.
I really like the idea of using open innovation at the BoC. I do agree that cybersecurity as a topic for one of their first three challenges is not what I would have expected, but feel that a diverse set of ideas on the topic can help the BoC internal cyber team to build stronger protections against threats. I do not think that open innovation can replace internal innovation and controls, but believe it serves as a great complement to internal initiatives, and requires less resources and capital. In today’s environment of rapid advancement and innovation, I think that the BoC should focus their next few PIVOT challenges on evaluating the best-practices of international central banks. I think evaluating other economies, their history of bank policies, and the public/stock market reactions to various policies, and especially how those banks are innovating in today’s environment, could spark new innovation within the BoC across a variety of topics from cybersecurity to communication to policies.
Your point about the weaknesses of the incentives for innovative solutions is well said. It did not seem immediately clear what outside entities had to gain from expending resources to improve BOC. Additionally, a central bank must continually make efforts to maintain a reputation as a neutral player. Perhaps by rigorously sourcing the academic sector for solutions to BOC challenges, the bank can maintain a dispassionate stance towards industry while retaining an inflow of positive ideas for its own process improvements.
It’s interesting to compare and contrast this with the open innovation program that I wrote about (US DoD). In both cases, the organization is a steward of some hugely important component of the national interest, and with limited resources recognizes the need to welcome external innovation. Organizationally, I agree with your idea that they should better define the scope of the solutions they are looking for; the DoD states very specific scope in terms of the cybersecurity problems/solutions it wants outsiders to tackle, mostly driven by the sensitive nature of the data at hand. It seems the Bank of Canada has more room to play here, but should also be motivated to define scope more specifically if only to make sure people aren’t interested in things they don’t want the public (especially the non-Canadian public) to be investigating too closely.
Given that this program is very much looking for in-bound ideas, and the outbound/exchange aspect is a little less clear, I think they’ll also need to very actively demonstrate to the public that the selected inbound ideas are being taken seriously and being acted upon in a timely matter (could be a challenge for a bureaucratic central bank). This is especially important given the lack of compensation/incentives currently tied to idea submission. I actually think that public recognition of successful initiatives by the BoC could be enough incentive for people who are motivated by contributing to the public good to continue providing an inflow of ideas, but to your point about reputation risk, they’ll need to have a more rigorous vetting and evaluation process in order to use this as an effective incentive.
This initiative sounds like a promising one if carried out in the right manner. There are a number of extremely talented macro economists, practitioners and other academics who could provide insights into the potential interventions that BoC can carry out and I believe that PIVOT should aim to focus on reaching out to these. While I would not be able to tease out exactly how it can do so, a framework that comes to mind is that of the innovation funnel. It could start by collating ideas from a multitude of research institutes, financial institutions and universities across the world and through an iterative process, filtering out those that make the most sense in the Canadian context.
The question of the areas of focus for PIVOT is important as innovation cannot be an end in itself. A good starting point to determine this would be BoC’s mandate as an ‘economic steward’ which is still a broad one. Historically, the role of central banks worldwide has been that of maintaining financial stability. At the end of the day, the key pillars for its success in implementing monetary policy is based on enhancing trust, reliability and consistency. Innovative measures could therefore be judged against its mandate as well as the 3 key pillars. In order to do so more informatively, perhaps the BoC can take stock of the evolution of its monetary policy regimes over time, taking note of the changing role of different meanings of financial stability over time. Moreover, they can extend PIVOT to look into how to address times of uncertainty as a central bank; moments which tend to be those of make or break. Any potential initiatives would demand an in depth analysis of the costs and benefits, the opportunities and risks of each.
This open innovation topic is not new to organizations. I completely agree that they should clearly define the outsider innovator value in this context. Many silicon valley organizations run these kind of open innovation programs. One that I’ve been part of was specifically focused on finding software security bugs in code-base of Facebook, where they give out monetary awards to the outside innovators. [1]
I agree with many comments above that open innovation does open the gate for malicious attackers as well and hence BoC should protect their data (specially their IP) with utmost urgency and be very careful in execution of this open innovation program – always be highly critical of what you receive from the outside world.
[1] https://www.facebook.com/BugBounty/