The Need For Disruption

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TME-Becky-BarbaraDisruptive Technology seems to be everywhere these days. This phrase has been bandied around by consultants, advertisers and individuals looking to distinguish their products and/or services from all the others with whom they are competing. However the definition of what this actually is or whether or not an organization should even be concerned about it is not readily acknowledged. In reality disruptive technology is only one part of a broader business methodology that is becoming the next new idea of how to succeed in business. The basic concept from which this term has emerged is a much broader idea that spans much more than just technology to encompass all types of product and numerous methods of business organization. It is known as “Disruptive Innovation.”

The concepts behind disruptive innovation comes from a professor at the Harvard School of Business by the name of Clayton Christensen. Professor Christensen’s theory is based on the belief that businesses primarily focus their efforts on the innovations that are bigger and/or better than what they offer today. By doing so they retain the most demanding and sophisticated customers and accordingly their profitability. This idea of sustaining their competitive advantage Professor Christensen calls “sustaining innovations”. One way to think of this is that sustaining innovations are just that, supportive of the market where they occur. Disruptive innovations on the other hand result in changes to those markets. However, many times these companies fail to realize that while their focus is turned toward the bigger sustaining ideas they unwittingly open themselves up to disruptions at the lower end of the product spectrum.

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Although these new innovative business ideas are not readily considered viable by large companies simply because they offer lower margin, smaller target markets and products that may not seem as attractive, the reality is that these perceptions are usually viewed in comparison to more standard performance measurements. As a result, they are often ignored and/or overlooked by larger organizations thereby opening the door for other firms.

This type of “low-end disruption” is defined by Professor Christensen as occurring when these high end innovations exceed the rate at which customers can fully utilize and value them. At this point customers look for other products, which fit their need. Companies providing innovations that fit these needs will then emerge even if the product itself has lower performance or fewer technological advances.

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One example Professor Christensen offers is that of Toyota. Once Toyota was able to reach the high-end automotive market they focused their efforts in developing products, which featured top of the line technology features such as GPS and Wi-Fi access in order to retain these customers. While focused on this, new as well as older but smaller competitors, such as Kia and Subaru, began aggressively marketing their own smaller, compact cars that were the original bread and butter of Toyota. These disruptive companies have now virtually taken over this market placing Toyota in the unenviable position of trying to determine where their energies and resources should be placed.

Other types of disruptive innovations are easy to spot in today’s market place once you know what you are looking for. Examples include the development of cell phones that overtook fixed line telephony; Community colleges replacing traditional four year universities while providing a higher education for a much lower cost; discount retailers in both food and consumer goods and retail medical clinics replacing the more traditional doctor offices.

These disruptive products are typically one of two types. One is that which is looking to appeal to the consumers that do not need or want the high end products being offered. For example, the individual who has the need of medical attention for a small problem or just a flu shot. They do not want to schedule an appointment, wait for a doctor and then have him/her have a nurse give you the shot. The second type is the consumer previously underserved or ignored by the current product or product line. Accordingly, an individual without a regular doctor may also want a flu shot but the process of locating a doctor, getting an appointment, completing all the paperwork and determining insurance coverages takes more time and effort than the individual can afford. By going to a retail medical clinic these issues are resolved and both of these customers are perfectly served by retail medical clinic.

These disruptions do more than provide a broader offering or higher-level technology. Because they offer different types of innovation, they tend to provide a different set of performance standards. Traditional performance standards included such facts as usage rates, products sold, pull-through rates and maximization of profitability, disruptive innovations set their own standards. Many of these standards are not ones that are readily appreciated by consumers or other companies, but help drive the disruptiveness of the innovation.

Another element associated with these innovations is the disruptive nature of the associated fulfillment processes. Job functions may be radically changed with many previously individual jobs being merged into one. Workflows change due to the advent of the technology interfaces and employees may find that they are working more independently and have a greater opportunity to express their own creativity as it relates to the position. All in all, these innovations truly disrupt numerous thoughts, ideas, products and performance measurements.

Is the mortgage market vulnerable to this changing business model as well? The answer has to be, of course. We are not an isolated from ideas and changes that impact how organizations work and what they produce. What we aren’t aware of yet is what form these disruptive innovations and technology will take. What we do know is that the focus of our products and services have taken a dramatic shift away from a more traditional approach of producing and servicing loans for the benefit of investors to become more focused on consumers that we work with and managing vendors who provide services to us. Within these segments of the industry there are examples of this type of disruptive innovations.

One of these is a new company called About Your Mortgage (AYM), Founded by Tim Allen, a long-time leader in production operations including providing loan officer servicers to numerous consumers. He has developed and patented a program, which is called a “Method for Mortgage Customer Retention”. This program address the fact that consumers often make costly mistakes when attempting to refinance their current mortgages simply because they do not have all the facts they need to make an informed decision. Conversely, mortgage servicers have these facts but do not have the opportunity to compete with loan originators whose interest is best served by obtaining a new loan and a new servicer for the consumer.

To address this issue, AYM provides a Web-based service that allows consumers searching for a refinance to click into their program. Once in, the consumer supplies the name of their current servicer and are then, if part of the AYM program, routed to that organization. From this point, the consumer answers a few simple questions which gets the process started and the servicer has the opportunity to identify jointly with the consumer how to address their needs. Overall the costs associated with this program are much lower for the consumer who is interested in a simple refinance transaction that should not take 30 to 60 days to complete. While much of what occurs during this process seems obvious to mortgage lenders and servicers, the processes itself has not previously been developed most likely because it is not seen as a high profit opportunity.

A second disruptive innovation that impacts the mortgage industry is one focused on the vendor/lender relationship. While most lenders are concerned with ensuring that vendors provide the highest quality of product at the lowest price, few, if any are focused on those services that are seen as simply a cost of doing business. Quality Control services are one such example.

Because of the requirements of housing related government programs such as Fannie Mae, Freddie Mac, FHA and VA, lenders are required to have a quality control program in place. Based on the dictates of these entities, these programs must perform various services associated with determining if the products produced meet the specifications required by the underwriting guidelines. While lenders may choose to maintain this program internally, a large percentage of them use the services of external vendors.

The barriers to entering this service are few; basically all you need some basic knowledge of how conducting reviews and a document to collect your findings. As a result, there are numerous companies offering these services and more entering the market every day. Of course with such an apparently simplistic process it is difficult, if not impossible for companies to differentiate themselves in the market. Furthermore, most executives, the intended recipient of the information derived from this review program typically find little actual value. As a result, the only differentiator is price and as a result success in this endeavor means winning the race to the bottom. At the end of the day, there is virtually no way for lenders to ascertain and/or quantify the return they receive from this product.

There is now a company looking to change that. Mortgage True View is in the process of introducing a product that will allow Quality Control companies to quantify their value and compare themselves to other market participants. This program will give lenders the ability to evaluate the vendor and/or internal program they are using and determine the actual return they are receiving on their investment in quality control.

The program, currently entitled QC View will collect performance data from clients who participate in the program. This data will then be standardized based on quantitative measures traditionally associated with an ROI measure. Additional elements associated with QC services will also be included in the display. Companies that sign up for the service will have their results available for their clients and will be able to demonstrate the effectiveness and value of their service. Companies who sign up will have the ability to look for a value-added vendor that best meets their needs as well as determine the best approach to having this requirement completed, either in-house or externally.

The company further envisions that through the use of this service companies will be able to create a standardized documentation of the types of issues found in files, a standard of capacity and quantify the errors most commonly associated with default and repurchase. This collection of data will add to the lender’s ability to value the services provided by either an internal or external quality control process.

Of course there are other disruptive ideas currently under consideration by members of and providers to the industry. Knowledge-based disruptive analytics is one that has been emerging over the past several years and is seen by the regulators as an excellent way to identify those organizations that fail to meet expectations when it comes to compliance with new and/or existing regulations. The fact that these ideas, data and technologies are developed to serve an underserved market lends itself to the industry and regulators concern about homeownership opportunities. How long will it be before builders begin to produce homes without all the added features that result in unaffordable homes and begin to streamline the production of homes customized to individuals and/or families based on their needs alone?

The idea of disruptive innovations may have been something many lenders, their customers and vendors have never considered, being content to let the products and processes flow as they have for some time. Fortunately there are those individuals who have the ideas and are willing to disrupt the status quo that will expand programs and process that will ultimately keep us moving forward.

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