To Be, To Excel, To Profit -- December 11, 2007 (Also appearing in the MBA Tech NewsLink) -- The Continual Challenges with the Financial and Mortgage Industries
The Takeaways -- focus on core, transform fixed costs to variable, sustainability over adoption, and think globally but act domestically -- utilizing compromises, tradeoffs, and sensitivity.
The correlation between poor financial performance and “staffing adjustments” has long been a truism for corporate governance. Domestically, the current impact is pervasive and deep – construction, real estate, mortgage bankers, broker-dealers, investment firms, and a host of market participants servicing the end-to-end value chain. It could be tongue-in-check argued that the only groups not feeling the pressure as a result of the market adjustments are the auditors and legal teams. However, with the widespread adoption of globalized resources, the impacts may not be as pronounced as they have historically.
Whereas the domestic impact is severe and has at least another six months of uncertainty, it is likely that globally distributed operations will experience a windfall of lasting benefits. It is not something that is overtly touted, mentioned on a balance sheet or in interviews with the press – but it is there nonetheless. As the global economic markets continue to shift and as sovereign wealth funds begin flexing their newly minted financial muscles, the impact to domestic operational processes may experience acceleration to offshore locations. Even though the market volumes may stabilize and increase as the cycle turns positive early in 2009, the workforce mix will change not only due to aging baby-boomer populations, but skilled global worker availability, “forced” M&A events, and increasingly specialized process compartmentalization.
A comprehensive discussion of each of the variables is not possible in this format, so let’s take a macro view of the events as they have unfolded and are projected to develop.
The Reality
The lingering challenge within the finance and mortgage industries has not been about a lack of ideas or even the implementation of innovative products. In examining the recent historical creation of complex product and servicing offerings, their development and adoption can yield significant returns, while implicitly introducing substantial downside systematic and financial risks. Moving forward, a risk-mitigated balance must be achieved that facilitates correction of prior decisions yet ensuring a reemergence of growth and prosperity for the financial exchanges and their instruments. In simple terms, this is what the Fed and our elected politicians are striving to obtain.
Whereas these improvements may take months and years to reach robust maturity, the need for organizational operating viability cannot be left in doubt for the same period of time. As a result, marginal and quality pressures will continue to be on financial executives agendas well into 2009.
Couple this with more stringent regulatory compliance demands by federal, state, and political activists, and the pressure for quality-driven profitability becomes the key goal for every divisional leader. Of the announced $30 to $35 billion in downgrades and write-offs currently attributable to complex market instruments, this number may represent less than 20% of the total market exposure that may reside not just with commercial banks, but insurance companies, pension funds, hedge funds, and commercial institutions. Worldwide projected subprime exposures currently exceed $400 billion, while the “contagion” affect is still being determined. Net Take-Away – risk mitigation, marginal pressures, and contingency planning will be the mantras of the executive teams and their consultants.
The Challenge
After three years of unbridled optimism and ostrich-like management techniques in trying to comprehend the full extent of poor-quality lending standards, the credit quality debacle has been hatched. To address the realities of skyrocketing commodity prices, skittish financial markets, escalating regulatory compliance, and decreasing consumer sentiment, organizations are looking for collaborative partners to take non-core operating burdens from their balance sheets.
So how can changes be made with financial and mortgage firms who have yet to see the bottom and are afraid to make changes in fear of making “matters worse?” Where can operational improvements be made that retain customer satisfaction and quality while reducing capital expenses and fixed costs? What type of operating arrangement properly aligns with organizational culture and principles? No longer will fuzzy arithmetic and off-balance sheet liabilities be acceptable. Net Take-Away – looking beyond the chaos will take vision and commitment to longer goals yet supported by very-short term (< 90 day) achievements.
The Effect
The most likely logical and sustainable economic model that meets the “perfect” storm that is confronting domestic industry leaders is the use of globalized workforces in an effort to improve margins. Whether implemented as captive or third-party arrangements (i.e., outsourcing), the plan-of-attack is well-known and rehearsed. Although systemic and transitional risks require continual focus, the resulting benchmarks are well established over the last four decades.
For investors and consumers, media attention diverts our attention to the exceptions rather than the norm for quality and services – Chinese imports and poor quality control and before this Taiwanese products. In over 95% of the implementations with proper oversight, escalation, and controls, the results are overwhelming positive and sustainable. It is unlikely after nearly 40 years of efforts and increasing momentum that the workforce “clock” can be turned back -- the “Luddite is already out of the bag.”
In general, the end result of a globalized workforce is often a higher standard of customer satisfaction and market penetration supported by increased margins and decreased defects. Using the language of these arrangements, with proper alignment, transition methods, and active governance, global arrangements facilitate an increase in core focus while decreasing fixed costs. For consumers, the result is frequently a higher standard of opportunity due to lower costs and increased choice. Net Take-Away – despite domestic implications, globalization, or delivery the use of international resources will not be consistently turned back regardless of the election coverage as they are already too ingrained in our current and future economic models.
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The headlines are full of the aftermath of improper decisions made months and years ago – much like assumption of an unhealthy personal life-style. Even the trading markets established to take the shock –ABX, “Super SIV” – have not materially aided those seeking “quick fix” lifelines and it is difficult to ascertain they can materially aid the markets during this current crisis. Regardless of whether we like the solutions or not, the most compelling option is to clearly embrace globalization and profit from it. The takeaways -- focus on core, transform fixed costs to variable, sustainability over adoption, and think globally but act domestically -- utilizing balance, tradeoffs, and sensitivity.
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