How Innovation Projects were Scaled within a Large Mortgage Bank

Businesses avoid innovation from fear of not understanding how to effectively manage the unknown. The leaders of these organizations see the value of being innovative, but are disincentivized by the uncertainty and by their lack of expertise and commitments in time and resources to make new ideas scale.

While the temptation is to simply hire someone to “handle” innovation by bringing in consultants or outside vendors as a cost-effective way for new growth (which can just lead to innovation theater), a better way to execute a successful innovation plan is to first start from the inside. Begin by clearly defining what it means in your organization and set a vision for how to manage innovation investments properly regardless of structure. This is not to say outside support is not useful in this pursuit, but if your organization is really committed, it must start with you first.

Yes, this means at least one dedicated internal resource to have the capacity to focus on and drive results – You know, “if it’s everyone’s job, it’s no one’s job” to innovate.

At American Pacific Mortgage (APM), a top-10 private mortgage bank originating approximately $10 billion annually, we created a role within the organization called the Director of Innovations in charge of new initiatives and tasked with differentiating the company from our competition. As a leader in this position for nearly four years, I was responsible for creating clarity around our innovation vision and the organizational capacity to execute that plan.

Whether we were co-creating with internal departments, or partnering with outside startups, part of the biggest obstacle was just how to get started and to commit to figuring things out as we went. However, despite this flexibility we still leveraged processes for guiding our direction and creating certainty that organizations and people innately need to see.

The two frameworks for how we managed innovation inside a large corporation and how we successfully managed new investments are: Innovation Accounting and Portfolio Management.

Innovation Accounting

Successful innovation projects and new ways of doing business can’t solely survive on the optimism of fresh ideas. Moreover, the traditional way companies allocate resources for projects is not necessarily applicable here either. What I mean by this is that even the way innovation is measured and the way innovation is funded needs to be just as dynamic as the new ideas themselves.

For example, don’t let lack of revenue be the sole metric for defining success. In my experience, this often didn’t come until months or sometimes years down the road, and it’s quite possible you initially had the wrong strategy and that system simply didn’t work. Ultimately, you will need to be strict with your success metrics, but nimble in how you execute.

For these reasons, it’s important to have an objective accountability system. This is what Eric Ries refers to as Innovation Accounting. This is especially critical when the outcome of a project has less certainty of surviving. For example, one of our first projects inside of APM was to leverage alternative business model practices.

Traditionally, within a mortgage retail business one would leverage the distributed outside network of sales professionals to grow the operations. Typically, this is great for establishing a local brand with strong relationships in the marketplace. However, with the founding of new real estate portals like Zillow and Realtor.com, it became imperative that we leveraged inside sales best practices (instant response and long-term nurturing) to adapt to changes in new home buyers’ behaviors in their need to start the process not with their local realtor, but online instead. To make this pivot, we operationalized a significant shift in the way we did business, which received heavy pushback. Had we given in to the critics and late adopters, we wouldn’t have accomplished the success the company experiences today.

Our commitment to measuring early success differently and consistently investing in our growth over a longer period of time became the way we would sustain our new growth. Now, the call center that stemmed from this innovation effort manages many thousands of new internet leads a month of potential new home buyers searching for homes or pre-approvals, and within a few seconds a representative of the company responds to their initial inquiry and transfers the consumer over to a local, licensed professional ready to deliver the high-touch and local experience only possible by combining the two business models together. As a result of three years of rebuilding and investing in the process, this call center represents a substantial part of the direct and indirect production of the company today, and its partners love it as well!

As for funding and measuring financial success, we came up with the following strategy: The company allocated a portion of their reserves to continue to fund this program, which took about two years to break even. (Partially because we set up the cost model as a not-for-profit in that we weren’t looking to charge our loan officers and their referral partners what it costs. Instead, we focused on the incremental loan volume created by offering this unique service.) Ultimately, the corporation floated the bill until the subscription fees and overrides created a breakeven point, or net surplus, affording this sustainable program even today.

In addition, we utilized these key steps, adopted from the Innovation Accounting model:

1. Use a minimal viable product and commitment to continuous improvement.
2. Create success metrics based on current circumstances and financial measurements based
   on future goals.

Commitment to these steps, in addition to what is called "Metered Funding," allows for a greater chance of innovation investments to be successful. As for metered funding – think of this like incremental payments based on milestones for holding a project accountable. It forces project leaders and entrepreneurs to come back with learning milestones before any more funds are granted.

When it comes to innovation, it is all about starting with a small investment, earning buy-in and then scaling it as success comes and ideas get bigger over time. More on innovation accounting can be found here.

Portfolio Management

When an innovation investment turns into many investments, you have to begin to think about how to manage them all. The concept of Business Model Portfolio management, which was popularized by Strategyzer, is all about assessing if a company has a healthy mix of business models, the ability for it to be disrupted and how to make it sustainable. This is done on a Business Model Portfolio chart, which is an X-Y axis chart that plots out the “Innovation Risk Level” on one axis and the ROI on the other.

From the chart, you can clearly see as the investments and projects develop over time, you mature from the “invent” phase to the “improve” phase. Think of these as two operationally different organizations whereas the innovation department is tasked with idea creation and integration, and the production department is tasked with scale up and growth.

This was the case with the call center (mentioned earlier) and a subsequent innovation project– a loan officer training program – the innovation department helped to develop at APM. Initially, we had to create the idea for how the innovation team was to envision the newly developed training department for training and licensing new-to-the-business loan officers. As we tested and iterated the best way to deliver newly licensed loan officers in partnership with our branch network, we became more integrated with the entire organization as a whole. Once the program matured and direction was clear, we moved to fully launch the program within the production organization for scale and growth.

Remember, each new initiative was sparked by a vision for how our unique offerings would ultimately provide a solution for growing opportunity in the industry and how to solve the economics for sustained growth in the future. And as each investment grew, we hired a team of well-qualified professionals to manage, and ultimately, integrate back into the “execution” side of the business.

In Summary

In order to sustain long-term growth, you must maximize operational efficiencies that currently exist in the business model of the company, while examining and continuously experimenting with new ways to grow. A company does this in two phases, as illustrated by Strategyzer: The Exploit Execution Engine phase, and the Explore Innovation Engine Phase. More on this here.

What it boils down to is there is a method to what some may perceive as the “madness” of innovation. Innovation Accounting and Portfolio Management are two useful frameworks for how we scaled innovation effectively inside a perceived “old and slow” industry. A lot of decisions were made to determine if investments fit within the larger company’s main business model, and as the investments grew in impact we institutionalized them when necessary.

In reality, it takes buy-in from leadership, the right innovative culture and strategies (Innovation Accounting and Portfolio Management) to launch new ideas and dedication to make sure the innovation investments pay off.

[Graphic via Strategyzer.com]

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