A lot of you know that I started my career over 50 years ago by developing computer applications to facilitate mental health research. I realize this dates me, but I have never been embarrassed about my age. I firmly believe that it is important to appreciate the past in order to better understand the points I am trying to make.
Many of the psychiatrists and psychologists that I worked with had very little knowledge of computers. I also recognized that they might have wanted to have a better understanding about computers but I felt the industry was in such an early fuzzy phase that it would frustrate them more than help. I realized early on that my role was to determine the problems or questions that were puzzling them and attempt to understand what they were trying to do. That was a necessary first step before I could focus in on a solution.
They looked at the work that I and others were doing in absolute amazement. I, on the other hand, was in complete awe of their knowledge of medicine and the human brain and the number of years they invested in reaching that level of understanding. Obviously, I wasn’t going to go to medical school, but I could determine how a computer may possibly improve their studies. So, I developed systems to aid the doctors in their research.
This is when I first developed an insatiable appetite to read as many diverse books and articles as possible. Until now, the literature on innovation has focused either on radical innovation pushed by technology or incremental innovation pulled by the market. In ‘Design-Driven Innovation: How to Compete by Radically Innovating the Meaning of Products’, Roberto Verganti introduces a third strategy, a radical shift in perspective that introduces a bold new way of competing. Design-driven innovations do not come from the market; they create new markets. They don’t push new technologies; they push new meanings. It’s about having a vision, and taking that vision to your customers.
Most companies today have innovation envy. Many make genuine efforts to be innovative—they spend on R&D, bring in creative designers and hire innovation consultants. But they get disappointing results. They yearn to come up with a game-changing innovation like Nintendo’s Wii, Apple’s iPod, or create an entirely new category like Facebook. Those innovations overturned our understanding of what a video game means and how we listen to music. Customers had not asked for these new meanings, but once they experienced them, it was love at first sight.
In his book, ‘Change by Design’, Tim Brown introduces the idea of design thinking; the collaborative process by which the designer’s sensibilities and methods are employed to match people’s needs not only with what is technically feasible and a viable business strategy. It’s a human-centered approach to problem solving that helps people and organizations become more innovative and more creative. Different organizations may focus on one of these as it may fit better in their business framework more than the others. What do we mean by that? Think about it this way:
1. Consider the Users: Obviously, these are the people that will be directly interacting with the application. So, I challenge you to think about what is desirable. Too often we assume we can determine what the user needs and develop the appropriate solution. Henry Ford understood this when he remarked, “If I’d asked my customers what they wanted, they’d have said a faster horse.” Take a step back. Focus on the user. What do they like about the current solution? What don’t they like? How would they improve it? How would they change it?
2. Consider the Market: Ask yourself what’s viable? Companies don’t have infinite budgets. It would be great to have unlimited funds and resources to totally reinvent the space every time you come up with a new technology to solve a problem, but that’s not reality. Resources aside, the market may not be ready for your idea. Remember, you’ve only created a good application if people use it.
3. Consider the Technology: Think to yourself about what’s possible? I would love to see the cure for the common cold invented. It would be a huge breakthrough, but for right now the technology doesn’t exist to make that possible. Always think big, but not too big that you can’t achieve your stated goals.
The myth of innovation is that brilliant ideas leap fully formed from the minds of geniuses. The reality is that most innovations come from a process of rigorous examination through which great ideas are identified and developed before being realized as new offerings and capabilities.
Now, let’s talk a bit about our industry for a second. A lot of people equate being innovative with spending a lot of money and not necessarily pulling in a profit. Given that our industry is now in the midst of complying with new rules while we switch away from a booming refinance market to a softer purchase market, I would suggest that if you don’t employ some of the strategies that I’ve suggested, you won’t be profitable, period.
Why do I say that? Look at the proof of what the status quo has gotten the mortgage industry in 2013: Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $743 on each loan they originated in the third quarter of 2013, down from $1,528 per loan in the second quarter, the Mortgage Bankers Association (MBA) reported in its Quarterly Mortgage Bankers Performance Report.
Among the other key findings of MBA’s Quarterly Mortgage Bankers Performance Report are:
>> Average production volume was $391 million per company in the third quarter of 2013, down from $439 million per company in the second quarter. The volume by count per company averaged 1,788 loans in the third quarter, down from 1,921 in the second quarter.
>> Total loan production expenses – commissions, compensation, occupancy, equipment, and other production expenses and corporate allocations – increased to $6,368 per loan in the third quarter, up from $5,818 in the second quarter. Third quarter 2013 production expenses were the highest recorded in any quarter since the Performance Report was created in the third quarter of 2008.
>> The “net cost to originate” was $4,573 per loan in the third quarter, up from $4,207 in the second quarter. The “net cost to originate” includes all production operating expenses and commissions minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums, and warehouse interest spread.
>> Productivity was 2.5 loans originated per production employee per month in the third quarter, down from 2.9 in the second quarter.
74 percent of the firms in the study posted pre-tax net financial profits in the third quarter of 2013, down from 92 percent in second quarter. If this doesn’t call out for lenders to embrace a more innovative approach, I don’t know what does.
About The Author
Roger Gudobba is passionate about the importance of quality data and its role in improving the mortgage process. He is an industry thought leader and chief executive officer at PROGRESS in Lending Association. Roger has over 30 years of mortgage experience and an active participant in the Mortgage Industry Standards Maintenance Organization (MISMO) for 17 years. He was a Mortgage Banking Technology All-Star in 2005. He was the recipient of Mortgage Technology Magazine’s Steve Fraser Visionary Award in 2004 and the Lasting Impact Award in 2008. Roger can be reached at firstname.lastname@example.org.