The Operatives behind the Cloth
Recent events within the FS and mortgage industries reminded me of the movie clip from the Wizard of Oz where the Wicked Witch of the West was “inadvertently” splashed with a bucket of water. As she melts into the porous rock of the watch tower, she screams “What a world! What a World!” In seconds the only thing that remains is old clothing, a burnt broom, and a “magic” hat. That classic imagery struck a chord with me regarding the ugliness of the markets’ unwindings – too many melted corporations that never thought they would be splashed with an “unholy” market correction leading to their catastrophic demise. Indeed, what a world it has become. However, unlike the movies, few sing, some smile, many, many weep.
So rather than rail and hammer against the past, let’s focus on some key questions facing our future and industry growth (see Figure at bottom for question context).
- Have technological advancements been a root cause of the widespread financial collapses?
It is an interesting question in retrospect. It is estimated that $350 to $400 billion in annual FS expenditures are budgeted and spent globally against operational expenses that total $2.3 to $2.7 trillion. That annual IT spend is roughly one-half of the total write downs incurred to date against MBS securities and valuations. Stated another way, this amount is about twice the value of the MCI bankruptcy and about two thirds of the estimated $600+ billion in Lehman Brothers failure.
So given its value in FS as a catalyst for process improvements, business model achievements, and customer accessibility (including their information), has it unwittingly been one of the facilitators of risky products? Has the ability to interlace and analyze vast quantities of data along multiple dimensions created insight, while supporting hazardous behaviors of investment and banking firms?
The web of financial instruments could not have grown to the size or complexity it is today without years of technological investment and increasing user sophistication. The growing intelligence of IT solutions has indeed created the opportunity for channel and product “greed and abuse.” The orchestration of best-in-class technology, data, and process integration in support of new market, regulatory, and business models will ironically be the key to rightsizing the sinking ships.
- What technologies will be required to leverage prior investments, while meeting new market demands?
The obvious winners in this category will be regulatory compliance groups that are on the leading edge of overlapping mandates and conflicting special interest groups. Additional success stories will be witnessed in capital light installations that not only include SaaS options, but also server virtualization, data compartmentalization, multidimensional aggregation, and niche driven customer services.
In general, products will become less risk-based – driven by markets and more draconian regulators – creating differentiation options not with exotic, risky offerings but with comprehensive consumer integrations, individually tailored interfaces, and trust and privacy.
Therefore, implied winners will also include real knowledge orchestrators, security specialization, proactive advisors, and network aggregators needed to bring vision into continually evolving realities. The days of implement and forget are long past – so are traditional BPO and ITO contracts and the order taking mentality that spawned country-sponsored industries.
- Can organizations be “rebirthed?” How and with what urgency? What does it entail?
It is said that birth is a powerful and risky natural event -- re-birth must be analogous to hatching a thermonuclear device. Yet rebirth is exactly what faces many lenders, FS firms, and of course, every supplier or vendor in the sourcing and delivery chain. The key beneficiaries are the customers, employees, investors, and even the economy (let’s hear it for more jobs!).
Poor humor aside, there are many options for rebirthing of organizations – restructurings, redefinition, segmentations, and like the manufacturers, orchestration. There is not a singular recipe for success, but it can incrementally and iteratively be achieved in steps.
Rebirth requires new and innovative business models. It must be pragmatic and achievable using collaborative partners, proven solutions, and operationally aligned processes and personnel. Using the framework of the aforementioned, technologies, automation, and diligence must be “programmed” into the delivery structures – not bolted on as an afterthought.
Look at the state of the industry over the last 18 months. Do you think we have achieved a sustainable and adaptable set of rebirth operations? With rapid failures and global pressures mounting the urgency cannot be any greater unless the end-to-end markets completely collapse. It takes leadership. It takes a blueprint. It takes action aligned with the plans. It is driven by results and adjusted from the markets. The pieces are all there – except the aggressive “new school” leadership.
- Can operational discipline be expanded or displaced in the face of anticipated stringent regulations?
There is a multi-million dollar question. Even at my advancing age, I am bewildered by the crisis “dog pile” being echoed by nervous politicians – either they are trying to gain favor to get elected or they are trying to deflect criticism that “it didn’t happen on my watch.” Some have argued that capitalism has failed and others hail the need for re-regulation similar to the 1950’s. All fail to understand the 21st century needs – so far only Bernanke and Paulson have demonstrated any “clue” and they are just mitigating the crisis – not fixing it.
Regulatory guidance, audit standards, and regulators are going to get tough – very tough. Some of it is overdue. However, the opportunity for institutions and vendors that can mitigate the burden on operations will be the real enablers. Let us hope that new oversights will not incur the same costs as SOX did five years ago (e.g., annual audit increases that have reached 500% since enacted). If housing loans are expensive and difficult to obtain now (even after a “conservatorship”), imagine what the fee-based income charges will be averaging out just the audit costs – what about the implementation and on-going compliance costs?
Bottom line, operational disciplines will be expanded. There is no choice as the oversight pendulum swings to the extreme. The cost-efficient mitigation of needed and excessive regulations will spawn entirely new industries and businesses. Look for not only origination requirements (which many are already working on), as the new challenges will be in bi-directional linkages, data, processes, and technologies among multidimensional servicing and securitization workflows and products.
- How can profits be obtained using process and technological solutions? Today?
First, there is an order of precedence that must be adhered to for lasting viability – business, then process and data, then needed technological solution sets. So does it sound like a linear, waterfall method? No, it is a matrixed approach with various components having a greater weight. Think of faces on a multi-dimensional cube and the intersection points within the interlinked building blocks.
To obtain value and potential profits today, approaches must be comprehensive, compartmentalized, and iterative (i.e., achievable in self contained programs and projects). Incremental successes gain survivability and a runway for future efforts and more advanced solutions. Locking into a discrete, yet robust one-off solution set may be the end goal, but if it cannot yield benefits all along the implementation curve it may not be the right solution for operations staring at default or junk write downs.
To take advantage of near-term profit potentials, operational management must adopt the discipline of orchestration and instill accountability and responsibility accordingly. Archaic behavioral attitudes have little use in nimble orchestration as it seeks to implement in segments best-in-class processes and technologies. It represents an entirely new way for many FS and mortgage operations – it is a very different discipline and should not be confused with collaboration. Collaboration is a delivery method or technique whereas orchestration is a complete strategy and series of approaches to achieve incremental operations builds and profits.
Much more could be addressed in the previous questions. Many more questions need to be asked and answered. Historically, bravado, brinkmanship, and raw nerve have built many FS and mortgage institutions. It appears that this monolithic recipe has failed for those operatives behind the curtain of organizational leadership.
Perhaps it is, like the movie states, “There is no place like home.” However, until the comprehensive housing industries (including FS and mortgage) finds their footings and accepts their bi-directional, end-to-end implications, the real issues will be unresolved in determining if we are living in the house – or permanently resting underneath it.
Figure Below
For 2008 MBA entries, click here