Those of us who work in the banking industry are blessed with a strategically simple business.
Unlike building passenger planes or developing ethical pharmaceutical drugs (where one must determine what products will be required five and 10 years out because of the long lead times for research and development), most products in financial services can be developed fairly quickly and are generally just new ways to invest or borrow money. Thus, there is little need for a crystal ball, just an ability to see around the next corner.
Why have so many financial companies missed the curves in the road in recent years, and why have so many failed? The answer most people jump to is execution. We are in a business of producing and selling commoditized products, and those companies that possess the time, focus and patience to execute well will triumph. However, excellence in execution on its own does not really explain why some companies made it through the crisis.
I believe the differentiator that enabled the winners to outperform the losers was having a mechanism in place for gathering and evaluating information from employees at all levels of the organization in addition to customers.
Many people involved in the subprime mortgage explosion claim they were caught completely by surprise; I believe this is true for many of the participants. The reports these lenders and investors received, and the credit analyses they did, boosted their comfort level.
Those lenders and investors who took the time to talk with customers and employees on the front-line got an entirely different perspective.
They heard about liar's loans and soon learned that much of the data being used, though accurately gathered and transmitted, may have been missing some crucial element that went beyond the report's scope. They also learned that many salespeople could not explain the products they were selling such as pay-option ARMs. Those who communicated with their front-line staff and customers had insight into the real story. With the crisis moving further out of view while regulations are popping up to protect consumers, why is this observation significant? New regulations unavoidably create unintended consequences and opportunities.
Regarding unintended consequences, a company's control systems are most effective at managing known problems. With the world in flux, the likelihood rises that an institution will get hit with a problem not captured by its control system. The recent problems in mortgage servicing are an example.
Also, changes may create opportunities that may not be immediately evident because they require looking outside current data gathering and testing procedures. As a result, it is more important than ever to have open communications with front-line employees and customers.
Those who keep listening and execute well will catch the early warning signals of the next crisis or spot the next big opportunity and come out ahead.
