by Mark P. Dangelo
It was a decade ago, at the peak of the NASDAQ Composite, that the world began to truly comprehend the potential of the “nets” (i.e., Internet, intranets, extranets, and more recently the “clouds” and mobile 4G). As new firms rose to trailblazer prominence (e.g., Amazon, AOL, Atomic Tangerine, Egg, and others), the phrase “brick and mortar” increasingly became linked with traditional, unwieldy, hierarchical, and candidly, resistant to change enterprises “destined to go the path of the dinosaur.”
Yet, what was once dismissed out-of-hand (i.e., layering[i]) is now set to become a top-5 strategy challenge for every management team, vendor, and outsourcer surviving in this decade. A critical question remains if organizations have the vision and humility to leverage the past, while innovating for the future.
A Decade for the Record Books
Since 2000, the removal of the old became a classic win-lose corporate context framed by:
· enterprise solutions (e.g., SAP, Oracle, and PeopleSoft),
· consultants, outsourcers, and advisors (e.g., Accenture, TCS, ACS, and McKinsey), and
· channel-specific solution providers (e.g., Cisco, Sun, and IBM).
Within the finance and mortgage groups (FMG’s), the implementation value chain solutions became inverted with technology ideals frequently trumping business models, as volume, any volume drove people, and processes over sound management judgment.
Inadvertently, brick and mortar principles were perceived as outdated and discarded as organizations chased the markets – and the most debt-laden homeowner in history. With 2010 set to produce the largest volume of delinquencies and foreclosures on record perpetuated by a jobless recovery (9%-10% until late 2011), the surface indicators might support the frustration that once again, we need to start over. Throw out the legacy models and lessons learned in favor of new approaches and technologies.
Today, pundits declare that the FDIC interventions, TARP injections, and Federal Reserve market actions are merely perpetuating the foundational decay long hidden within traditional FMG’s, operating on axioms defined back in the 1930’s.
The belief remains that the greatest financial meltdown ever (in real USD lost) was just waiting to happen. It could not be stopped even if we understood what “irrational exuberance” really meant. All it needed for the traditional firms to fail were vast real estate bubbles spread across developed nations to provide the spark that lead to the vanishing of 10%-12% of global wealth (since 2007).
Learning, Layering, and Looking Forward
Indeed it is time for sustainable change, new ideas, fresh industry blood, and elimination of systems that benefited so few. So, why reexamine 20th Century principles that have already been cast aside by 21st Century attitudes and doctrines? In a virtually connected world that never sleeps, who needs brick and mortar dogma when continuous technological innovation is what consumers are demanding? Why indeed.
Nevertheless, when examining those “Jurassic” systems with their layers of front and back office control procedures, history has now shown that the brick and mortar strategic operating principles remained very viable and stable. When glancing backwards, it is the techniques and underlying implementation methods that have been permanently transformed (see Figure 1 for a list of principles, demands, and techniques).
As portrayed in Figure 1, it is precisely those brick and mortar operations that not only survived (albeit slightly dented), but continue to grow – JPMorgan Chase, Wells Fargo, and Bank of America to name but a few. Moreover, each FMG holds valuable lessons learned — as well as publically exposed pitfalls. If the U.S., like the new stress test ordered for the UK banking community, enters a pause or retracing of economic growth in 2010 (i.e., double bottom), the value g leaned from the surviving FMG brick and mortar principles may be the difference between survival – and receivership.
Layering Tackles Strategy, Complexity, and Uncertainty
Layering for 2010-2013 is best defined as the utilization of principle driven models (i.e., process, business, and technology across the mortgage pillars of origination, servicing, and securitization). This often missed strategic approach allows organizations to employ the “best-in-class” solutions, products, and services even if they might be viewed as competitive (see Figure 2).
It is the assembly of these “building blocks” that provides the distinction and profitability so badly demanded within struggling FMG’s. Stated more pointedly, how many of those “pure-play” offerings survive after just five years? With VC investments now just 30%-35% of 2006 levels, you only have to look at their investment web pages to notice the portfolio rot driven by a failure to anticipate consumer change and uncertainty.
If truth be told, the deployment of layering is inherent within all viable business models – domestic or global – as their usage surrounds the assembly of strategies, processes, technology, and people. Analogous to the building of a foundation with stone, cement, and metal, the use of layering for sustainable business resonates with profitable innovators. It is now fundamental criteria in investor minds as well.
As shown in Figure 2, if the “foundation” of layers cannot be assembled properly (e.g., the laying of brick for a wall meeting industry “building codes”), the ensuing channels, offerings, and markets will collapse onto the basement floor – much like investors in RMBS and CMBS experienced during the last four years. Yet, are organizations fully equipped with the skills and abilities to critically examine the successes and failures? What about the performance of partners and channel providers? Or will it become a situation where teams are sent out to perform “bring me a rock” analysis?
Stated bluntly for those who still fail to see the building block challenge and financial opportunities, if everyone utilizes the same standards and electronic delivery strategies, how come everyone isn’t equally successful? The aforementioned are merely the vehicles of delivery – not the layering of complex business requirements that if assembled wrong, lead to failure. In some cases, career ending failure.
In Closing
If you have any doubts on the strategy of business and technology layering, then take a look at the survivors from the companies previously mentioned. What were the key principles that lead them as pathfinders succeed and adapt, while others failed or were acquired? Did they lack technology, people or the “right” idea? Did they shun brick and mortar principles entirely or selectively apply the fundamentals that worked for their business operations and technological implementations? Did they let their egos drive their actions?
So now, 10 years after the great market corrections of 2000, it is the innovative business leaders who are gleaning safe and sound practices from the old brick and mortar. For vendors and outsourcers, those operational leaders that can deliver scalable, interoperability layers of processes and technologies will be the household names across the industry. How many will act? How many will continue to be froze in place holding on to the ideals misplaced and misrepresented? We can all think of a few.
Enterprises (i.e., the core business, their vendors, and outsourcing providers) able to rapidly adapt to changing consumer needs, and more recently, radical mutations of homeowner behaviors will be able to weather any downturn or changing market conditions. It seems the lessons and principles of the past have become the guides of the future.
Funny, sometimes to go positively forward, you must start out in reverse.
[i] Analogous to a “method of propagating plants by covering a branch or shoot with soil so that it takes root while still attached to the parent plant.”