Resilience in troubling times

In the midst of every crisis, lies great opportunity!!

This quote, often attributed to Albert Einstein, is certainly applicable to the current financial services industry. As you may know, the US housing market has been struggling in recent years. Mortgage rates have soared to their highest levels in over 23 years and home sales have fallen to 13-year lows. A long list of mortgage firms have either closed down, merged, or announced mass layoffs. The industry is generally in a state of gloom and doom, with some comparing it to?the house market crash of 2008.

In response to the rapid changes in the industry, most businesses have taken the obvious steps, such as mass layoffs, branch and operation closures, project cancellations, investment cessation, and cash hoarding. While these measures improve liquidity, they ultimately just postpone the inevitable. Businesses that do not see the crisis as a hidden opportunity will become trapped in a vicious cycle and perish, while those that weather the storm and swim against the current will emerge victorious in the long run.

How can companies survive and thrive in this market disruption?

Companies can adopt a variety of strategies to be more resilient in times of major market disruption. By questioning preconceived notions, exploring all operations and functions for improvements, exploiting transient market dislocation, being nimble, streamlining processes, eliminating tasks or automating work, refocusing workforce on operational excellence, and aligning compensation to performance and new goals, companies can transform their entire business model to capitalize on the new opportunities created by the market disruption.

Digital technologies can also help companies become more resistant to disruption in a number of ways, including by improving the performance of existing products, developing entirely new digital services, lowering costs, or increasing barriers to entry.

Let us examine these strategies in more detail and investigate how digital technologies can help.

Business Model Innovation

Many employees have innovative ideas for improving operations, products, or services, but these ideas often go unheeded due to inertia and a general resistance to change during good times. Market disruption, on the other hand, can create an existential crisis that opens the door to new ideas and risk-taking. This is because it challenges preconceived notions and encourages exploration of all possible improvements. When the future of the company is at stake, there are no "sacred cows." Customers may be willing to put up with minor inconveniences such as cumbersome paperwork or lengthy processes if it means they can qualify for a lower mortgage or a specialized product such as state bonds or federal downpayment assistance.

Digital tools can be used to create self-service options for customers, which can reduce the cost of products and services, efficiently scale back-office operations, and build flexibility in the overall business to withstand any fluctuations in market conditions.

Digital and Technological Resilience

Processes that are manual, labor-intensive or tedious should be reviewed, as the tasks could be automated or eliminated. Some product features, add-on services, redundant service providers, and other non-essentials can be trimmed to reduce costs and streamline processes without significantly impacting KPIs or service levels.

Many back-office operations are well-suited for task automation using robotic process automation (RPA) tools such as UiPath’s Automation Cloud and Microsoft’s Power Platform. Meanwhile, workflow automation tools like Pega and Appian can help streamline overall business operations and provide visibility and analytics on workforce performance and further optimization opportunities.

Financial Resilience

Companies can differentiate themselves by offering unique products and services instead of just competing on price. This will help them stand out from the competition and avoid margin compression. Margin compression can be addressed by focusing on profitability rather than market share growth at all costs. Instead of chasing higher loan volumes and units through heavy concessions, the firm can ensure that each loan originated is profitable and meets a minimum base margin.

Digital tools can help businesses set dynamic, value-based prices that are competitive in the primary market and that maximize profits in the secondary market. FinOps tools can identify excessive overhead, unnecessary redundancy and waste in Cloud operations that could be optimized to reduce operational expenses.

Brand Resilience

When times are tough, the strong persevere. Unfortunately, the worst of times also bring out the worst in us. Organizations can protect themselves from reputational risks, brand damage, and loss of trust from malicious actors and unscrupulous competitors by always acting with integrity and staying focused on their mission. This requires frequent, proactive, and honest communication, both within the organization and with various stakeholders, as well as addressing threats head-on.

Digital brand management tools, which include built-in sensitivity analysis and social media analytics, can quickly notify users of events that could harm the brand and also amplify messages across media to mitigate reputation risks.

Organizational Resilience

Realigning employee goals and performance metrics with a renewed vision of operational excellence can improve operations and help reduce production costs. By implementing a streamlined process, production costs become more predictable and can be factored into the overall pricing of products and services.

Big data and advanced analytics can be used to create real-time operational dashboards that help businesses to be more agile, align their goals, and optimize their pricing to achieve profitability.

Operational Resilience

Companies can also prepare for upcoming market disruptions and emerging opportunities by investing in predictive analytics and forming new industry partnerships. With interest rates expected to fall from their current highs of 7-8% to around 5-6% in 2024 and 2025, there will be a temporary opportunity to refinance higher-rate mortgages for qualified borrowers, offer alternative products such as HECM, HELOC, or a traditional second mortgage, or counsel those experiencing hardship to mitigate losses and qualify them in the future.

AI models can be used to identify potential borrowers and prepare them for various opportunities through a drip campaign. This can be done by running the predictive models for various scenarios.

Summary

Companies can not only survive the current storm but also thrive in the resultant market disruption by using a combination of defensive strategies such as business model innovation, digital and technology, and financial resilience, as well as offensive strategies such as brand, organizational and operational resilience.

References:

1. U.S mortgage rates soar to highest in more than 23 years | Reuters
2. America's frozen housing market: Sales hit a 13-year low | CNN
3. A Long List of Mortgage Layoffs, Mergers, and Closures | The Truth about Mortgage
4. 2023 housing market projected to have fewest sales since 2008 as mortgage rates rise | Fox Business
5. Beating Disruption - How to win in the fight to be first | Pragmatic Institute
6. Resilience during uncertainty: What industrial leaders must know | McKinsey

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