Business and Technological Competition in a “Flat World” (Moving Beyond the Despair While Preparing for Growth) -- February 2008 (Also appearing in the MBA Tech NewsLink)
Even after two years, a melancholy and dark mood still permeates the future of the mortgage industry. Saddled with the continual unwinding of financial market instruments, leaders have gone underground – burrowing in for safety and reflection. Meanwhile, the firestorm of excess continues to ravage the a excessively debt burdened consumer base resulting in escalating delinquencies, foreclosures, and repossessions that are no longer confined to just past housing related speculation.
However in spite of the macabre events and sociological reflections, from the ashes, opportunity is conceived. Yes, it is true that more pain will be forthcoming – we have not reached the bottom of the abyss. Look for auditors with recently minted audited financial statements and a continual deterioration of the financial markets to force even more write downs and economic shock – perhaps conservatively adding $200 to $250 billion of additional mark-to-market valuation “reappraisals” in 2008.
Yet to continually wallow in the ghosts of the past is not the most productive use of our time – the politicians and the lawyers will occupy themselves with the historical record for years to come. Stating the obvious, we cannot change historical actions – only mitigate their lingering risks created within today’s operating environment.
So, why focus on the future when the past is still haunting our actions? How can new models be born when we have not learned the lessons from prior actions? Who will be the leaders taking us forward and restoring confidence and integrity? Thus if we are to get beyond the “blame game” where can we look and what should be anticipated?
What shifts??
There are several permanent shifts actively taking place – some technology based and other socio-economic. Addressing the latter first, the world economies are no longer independent financial sovereign entities but microcosms of interrelated domestic products and services loosely cobbled together to make a world economy.
Whereas it is obvious that some nations are major consumers, suppliers, or both on the world stage, what is still evolving are the interdependencies and implications of ever these expanding globalized economies. This can be seen with the rise of the Sovereign Wealth Funds (SWF’s), foreign currency valuations, trade imbalances, and real and relative GDP just to mention a few. The numbers tell part of the story – U.S. GDP is over $14 trillion growing at 2% to 3%, China has overtaken Germany in economic size driven by robust real and relative GDP, and SWF’s in Asia and the Middle East are projected to triple their cumulative size in the next 10 to 12 years to over $10 trillion USD.
Are these shifts to be feared with hostility or protectionism? It’s unlikely that either of these reactionary strategies and visceral emotions would position the U.S. to grow. It may stem the bleeding for a short period of time, but the resulting infection from a lack of open-market strategies and participation will create a potential terminal imbalance which will could be more painful and completely outside of government or political controls.
However, it is the lack of technological innovation that should be of much greater concern and scrutiny. Saddled with arcane and expensive back-office legacy systems and relationships, the U.S. investments and returns are lagging behind European and Asian organizations by nearly 60% . Also readily witnessed with the technology value chain are statistics that show just 3 in 10 American CIO’s would be early adopters of advanced solutions, while 7 in 10 of their Asian counterparts indicated that they would eagerly embrace advanced web delivered and componentized architectural solutions .
The implications of these two challenges are very chilling. Domestic operations will continue fall behind global competitors resulting in even greater regional economic losses without a realization and adoption that advanced iterative solutions and componentization architectures must be quickly implemented in support of evolving business needs. Moreover, failing to utilize technological components as catalysts to secure fundamental business shifts results in a spiral of decay that can only be addressed with pervasive offshore outsourcing, M&A transactions, bankruptcy, or government rescue.
What models?
What is strikingly different today are the widespread, unanticipated financial behaviors consumers are internalizing. Remove the convenient labels of Baby Boomer, Generation X, Y, and D from the vocabulary for a minute. Instead concentrate on the actions and value systems in flux within your customers and prospects.
For some consumers, a new paradigm is being embraced – keep the car, boat, and HDTV, but default or “force a restructuring” on the “upside down” mortgage. Consumers in droves are making choices on their lending payments treating property deals as no more important than a payment on a car, couch, or even a gym membership.
The divergence from accepted and dogmatic lending logic has created a huge wound not only for lenders, but the various agencies who attempt to provide investors with risk ratings . To say we have failed in recognizing this changing sentiment is a kind assessment, and it is a topic that will gain considerable legal and political debate in the ensuing years.
If the consumer is no longer behaving along historical patterns, then the cross-selling, up selling, targeted campaigns and even customer preferences can no longer be relied upon using current logic – not to mention scoring. Furthermore, the ability to securely lend or find individuals worth lending to will require extensive front-end screening, credit counseling, and even new types of default protections.
Within the domestic lenders and their vendors, the blinders of the past have still not been completely removed to meet the new reality. Business and technology energy must focus on the acceptance of componentization and reuse of intelligent solutions. With behaviors in flux, the rapid assembly of iterative data and decision driven solutions will require organizational internalization to ensure viability and sustainability of lending, servicing, and securitization operations across all delivery processes.
New leaders?
Choosing leaders by name is a losing proposition. Suffice it to say, that our next leadership base will be less concerned with how things were historically performed, and more concerned about adaptable processes, market actions, consumer behaviors and models, and of course risk mitigation. Although they cannot disregard the necessities, they will quickly embrace the ideas of operational restructuring and transformation to drive value into the mortgage cycle, while simultaneously jettisoning those tasks, personnel, and alliances that fail to have efficacy. They will be always keeping their concentration on the “force multipliers.”
This is not to say that the prior leaders were bad or evil – it’s just that they performed their actions for decades in a global market that no longer appears relevant. These old-line leaders, like the dinosaurs, are not long for this world. Many lack the proper skills needed to competitively adapt to a “flat, global economic” model and delivery demands – they just don’t understand the touchpoints and operational implications. With the rebalancing of global wealth coupled the compartmentalization and delivery of processes, leadership is more about an “Orchestration Imperative ” then the simple command and control structures of the past.
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In times of crisis, the worst of individuals and businesses come to the surface for everyone to view and comment about. For the last two years, the mortgage industry has learned a lot about its operations and personnel. Yet to continually concentrate on the foibles and idiosyncrasies of groups, government agencies, and organizations in a futile effort to assign blame is counterproductive to moving forward and taking direct accountability for our futures. New leaders will seek to move beyond the morass --recognize and embrace the change while preparing for growth – they won’t fight it. The seeds of opportunity are all around us and they are examining methods and techniques to leverage them.
In 1516, Niccolo Machiavelli wrote, "And one should bear in mind that there is nothing more difficult to execute, nor more dubious of success, nor more dangerous to administer than to introduce a new order to things; for he who introduces it has all those who profit from the old order as his enemies; and he has only lukewarm allies in all those who might profit from the new. This lukewarmness partly stems from fear of their adversaries, who have the law on their side, and partly from the skepticism of men, who do not truly believe in new things unless they have personal experience in them. "
Some ascertain that the financial and mortgage world has become a smaller place driven by interdependent economies and events – or perhaps as a financial executive indicated, “there is just less in it.” For mortgage teams and their operations, the conclusion cannot be more of the same actions as the rules and landscape have structurally changed.
Ask yourself, “Where will you strike out as a player in the ‘next market?’” “How will you grow…or are you still talking about the ‘good old days’ and hoping for their happy return?”
“Last year’s model: stricken US homeowners confound predictions,” by Krishna Guha and Gillian Tett, Financial Times, January 31, 2008.
For 2008 MBA entries, click here