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How Good Ideas Become Sunk Costs

This piece originally appeared in the September 2022 edition of MReport magazine, online now.

The mortgage industry is experiencing the “Age of Automation.” For perhaps the first time, lenders and mortgage-related businesses, pressed by production costs, have finally begun to implement digital solutions throughout their operations. Substantially declining origination volume has likely only accelerated this process for some.

However, some businesses are still reluctant to make major investments in new technology, clinging to older, outdated, or proprietary systems that do not optimize their workflows. One does not need to talk to too many executives to hear a horror story here and there about the “shiny new technology” they had once invested in, only to have that solution turn into a sunk cost, or worse, an investment that never even went live.

It is a legitimate fear, albeit avoidable. Nonetheless, it breathes life into a reluctance by some to invest heavily in innovative technology. CIOs, COOs, and CEOs have lost their positions because of massive tech investments that never approached the expected return-on-investment (ROI). It is still not uncommon to come upon Los or processors, empowered with a pricey new tech, who still choose to use unauthorized third-party apps, manual workarounds, or even the replaced technology, all because they find them more effective than the new tool.

While it is possible that a failure of modern technology to produce is the result of sales puffery or overselling, it is also possible—in fact, likely—that the sunk cost began its decline long before the technology was even purchased. The good news is that these failures are quite avoidable.

In all probability, a tech investment that is well-planned and installed wisely will go live, and in fact, return the ROI expected.

Do Not Start at the Demo
Just as any solution requires a challenge or problem, a strategic technology investment needs to start with a clearly defined and understood challenge within the operation. There are plenty of solutions out there seeking to create business needs, but decision-makers who start the process or get the idea to buy new systems after taking in an impressive demo may already be on the road to failure.

Lenders and firms enjoying the optimal results of innovative technology start by clearly and objectively mapping their workflow and identifying their biggest chokepoints, flaws, and needs.

The key word is “objectively.” It can be difficult for owners and executives to see their own flaws after spending so much time trying to build something successful.

So, if needed, bring in a qualified third-party consultant or firm to assist with your self-audit. Only after methodically and comprehensively determining the need should you begin to shop for solutions. Again, in an era when there is no time for anything, it is tremendously tempting to cut corners in this process or be won over by an excellent sales professional on the first contact. Resist this urge. Be sure to review multiple potential solutions. Understand the tech solutions you are considering, and understand how, specifically, they are supposed to address your business need.

Craft a Realistic ROI Formula With the Right Metrics
Another reason some mortgage technologies have the proverbial plug pulled quickly is that ROI expectations are formed hastily or even unrealistically.

Perhaps the metrics selected are not directly applicable, or perhaps the formula is founded on excessive metrics. Again, if a professional consultant needs to be involved, it is worth the expense. Additionally, be sure that the period during which ROI will be measured is sufficient. Remember, no matter how good the technology or how well trained your staff, it will take time for everyone to adjust to the new process. Build that into your timeline, as you are not likely to achieve your maximum results within days of going live.

Understand, also, if and how any new technologies will (or will not) interact with, collaborate with, or even overlap with, any existing tools you plan to continue utilizing. One of the biggest obstacles to a truly optimized operation is the creation of the dreaded “silo.” Silos begin with a poor understanding of the various pieces of the tech stack.

One more word about outside consultants. It is understood that, as you would for any service provider, you will want to thoroughly vet your potential partner.

Be aware that, at times, some consultants or consulting firms may have tried and true solutions or firms that they recommend more than anything else, no matter what. Insist that they offer you multiple solutions—even if one is clearly inferior—and multiple brands and technologies. A recommendation with one option is almost as dangerous as chasing the demo. If a consultant purports to have the single, universal solution to your need or does not truly hear you out as to your objectives, think about getting a second opinion.

Building Up to Going Live
A botched or failed “go-live,” while often growing out of a lack of planning, can also come to be during the implementation period of new tech. If the entire management team is sold on the new solution, but does not put a significant effort into building buy-in at the ground level up, the tech is as good as dead from the get-go.

Similarly, it is great if the leadership team is enthusiastic about a new system at the time of purchase. But they will quickly forget about it as it becomes part of the daily operation. Be sure to build in (not just the occasional check-in) a systemic feedback channel from the staff about the performance of the new system.

Also make sure that management is regularly updated on the performance of the system as well. Management solely by spreadsheet often leads to management by exception, which is never a recipe for tech success.

Consistency can also help mortgage lenders and firms avoid sunk costs in new technology. Specifically, unless specifically planned for, old systems should be sun-setted or used only as absolutely needed. All too often, we see frontline staff and processors reverting to a previous system, often for the sole reason that they are more familiar with it.

Good, continuous, and consistent training and feedback will help the team make full use of the expensive new tool you have just invested in and help them become comfortable and proficient with it as well.

Inconsistency or no enforcement of the new tech standards is an extremely effortless way to ensure that your investment never reaches its intended ROI.

After all, if you have invested thousands of dollars in something designed to be an improvement over previous solutions and tools, yet allow the team to continue using workarounds, hacks, and old tools, you have really just added to your production costs. To the extent possible, sunset or limit old solutions.

Be clear in your expectations that the employees designated are mandated to use the new tools. Systematically monitor and enforce those expectations, and allow for regular feedback where any issues or challenges with the new tools arise. Sometimes, additional training may solve the roadblock. If not, good technology providers should always be willing to learn client challenges and update the technology accordingly.

Finally, also keep in mind that there is no perfect plan. Perfect is the enemy of good. Some lenders go too far and attempt to optimize for any remotely possible contingency—even if it is utterly unlikely to happen. There has yet to be a “perfect” implementation or go-live process. Yet, the road to improvement is usually incremental. The point is to have a well-reasoned plan, rather than trying to shoehorn a solution into a process it was never going to fit in the first place.

It is likely that our industry will continue advancing into its “Age of Automation,” especially as new and improved technologies emerge and significant market pressures come to bear on operational expenses. The coming months and years will force some firms, hesitant to make a substantial investment during a period of declining revenue, to face their fears.

Fortunately, the vast majority of tech failures that slow such decisions are not caused by shady sales techniques or shoddily produced systems. Instead, most botched implementations and failures to go live at all start at the leadership level with a failure to implement the process using the planning and effort they normally would with any other strategic decision.

About Author: Jim Paolino

Jim Paolino is CEO and Co-Founder of LodeStar Software Solutions, managing day-to-day operations, overseeing business development, and charting the long-term strategic direction of the company. LodeStar develops a range of compliance-driven products for the mortgage lending and title insurance industry. Jim has more than a decade of experience developing software solutions, specifically for the mortgage and title insurance space, and speaks frequently on tech trends as they relate to compliance, operational efficiency, and sales growth.

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