In conversations with LIXI ‘veterans’ over the years, I’ve learnt a lot about the history of the Australian lending industry and how things have changed. Converting participants to the LIXI way required a change in thinking for many – by taking them from the belief that their loan application systems and business processes gave them a unique competitive advantage, to the realisation that their competitors all do basically the same thing.  Hence these activities offer no competitive advantage at all and were obvious targets for standardising and streamlining.  Real competitive advantage in this part of the process comes from the ability to launch and execute new products and features and to respond to changes in customer behaviour and expectations quickly.

[Anecdotally I still hear of resistance to business standards adoption (in related industries, not lending!), on the grounds that incumbents believe that their way of processing forms provides them with a competitive advantage!   Any organisations that believe this must also realise that such an advantage cannot be sustainable and really should have a good hard think about where they are going!]

But back to the adoption of LIXI standards and the general movement to automated processing is also giving rise to some fairly dramatic transformations in the industry. For example:

• A marked shift from paper forms to electronic loan application submisssions – up to 80% of all loan originations are now lodged electronically based on LIXI standards.  Further, according to the CBA’s Michael Harte, with their new online platform they have cut approval time for home-loan top-ups from around 20 days to 15 minutes (this comes from Australia’s Digital Economy: Future Directions (c)  Commonwealth Bank of Australia and the Commonwealth of Australia, 2009).

• Consolidation of valuer and broker channels into aggregators and/or via electronic gateways, movements that don’t sit comfortably with everyone!

• The appearance of AVMs, or automated valuation models, yet another threat to the traditional business of certified property valuations.

Our team started working with LIXI in 2005. We produced the first reference model for the formal approval process – building on LIXI’s vocabulary work to try to address standard conversations of lending. In 2007 we developed and published the first reference implementation for the LIXI valuations process, and in 2008 we provided the architecture and samples for the ‘Visible Loans’ concept – a mechanism to package loan information (including product features) into RSS news feeds, to provide up-to-date information to brokers and loan customers.

In 2010 we continue to support LIXI’s efforts in integrating the settlements process with the newly-emerging National Electronic Conveyancing System (NECS).

LIXI, and the lending industry as a whole, continues to be a great source of use-inspiration for us. It builds our domain expertise, embedding our team within real business problems, and it informs the directions of our R&D. We look forward to further engagement with LIXI and its members, and we also look forward to working in other types of business ecosystems, in which we can apply some of the lessons we’ve learned from the lending industry.

But when you unpack this there is much more complexity here than first meets the eye. Mortgage brokers, aggregators and bank mortgage sales people are all competing for the buyers’ business (because they’re usually chasing commissions, of course). A good broker will collect all of the applicants’ details and make a recommendation about which loan product(s) is/are most suited to each applicant’s circumstances (the cynics among us will suggest this is not always the case), before forwarding the application to the lender, usually a bank. The lender then runs a standard credit check (in Australia this is done almost exclusively through Veda, formerly Baycorp Advantage) who have retained this monopoly for decades).

Assuming this test passes, the lender then gets a valuation done on the property.  If the loan amount is a high proportion of the property value (usually 80% or more), they will require mortgage insurance and that means yet another transaction. Assuming a loan application makes it through these steps, it may be ready for settlement, a process involving your conveyancing solicitor, the lender and the seller’s solicitor, sitting in a room together checking the paperwork and signing forms to finalise the transfer of the land title. That last step also requires transactions with the state revenue office (for stamp duty) and the land titles office to keep the relevant records of property ownership up to date.

Simplified loan approval process steps and parties (click to enlarge)

That’s at least nine different, operationally independent parties involved in handling your new property purchase, and clearly a classic example of a business ecosystem. Those with an eye for process efficiency will also recognise at least nine sources of transactional (Type 1) friction, not counting those activities within an organisation that may also be friction-loaded. (This, and the other forms of friction were described in the previous post.)

LIXI is Australia’s business standards organisation for the lending industry. LIXI standards provide the vocabulary for these interactions and also describe the structure of messages used for transactions in processing home loan applications – hence they are concerned directly with reducing friction in the mortgage business.

As a complex, archetypal business ecosystem, the Australian lending industry is therefore an excellent domain for our research to draw its use-inspiration. And as a business enabler concerned with reducing friction, LIXI and its members are obvious partners for us to be teaming with.

Everyone in this space acknowledges there is still an enormous amount of work to be done and plenty of challenges ahead, and some of these challenges will be the topics of future posts. In the next post I’ll describe some of the changes we’ve already seen in the industry and some of the achievements made by LIXI.

Since further posts here will describe different scenarios of friction, it is timely to recap now and elaborate on its different forms.

In the context of business ecosystems, friction simply refers to those barriers that slow down or otherwise hinder normal business. Most people will recognize as friction those factors that hinder the day-to-day or month-to-month operations of an individual business, but it is important to acknowledge the friction that directly impacts the strategic decision making of companies, and the forms that affect the behaviour of whole industry sectors.

The are three basic types of friction.

Type 1 refers to the most visible impediments to day-to-day activities, and can also be called transactional (or operational) friction. These are the often annoying idiosynchracies of e-business transactions. The fact that not all of your dealings with customers or trading partners work the same way, or involve time-consuming manual steps. This form of friction can also prevent an organisation from responding or adapting to environmental changes in real time.

Having to manually enter your credit card details every time you order something online is a trivial example, as is standing in a queue with a hand-written form, or having to seek out a manager for her signature on purchase orders over $1000 in value.

(Note that governance is often associated with friction, but they are definitely not the same thing – or at least they should not be.  It is possible to have robust, auditable governance practices without crippling convoluted processes that prevent good work from being done.)

Type 1 friction can be addressed in a variety of ways, including process streamlining, well-implemented complex event processing (CEP), creative and new mechanisms for bypassing traditional roadblocks, and the establishment and adoption of business standards.

Type 2 friction is a little higher on the food chain and is the collection of factors that make it hard to deliver on medium-term objectives, like the implementation of new business programs and initiatives, and therefore could also be called execution or program delivery friction. It can also be anything that prevents your business responding rapidly to seasonal changes in the market or the short-term differences in customer behaviour, and includes structural and process factors and occasionally strategic or cultural ones. A classic example is the development of a new internal business system (why is it so hard to go from a set of business requirements to the delivery of a software system that satisfies those requirements?). Another is the enablement of your sales force with hand-held devices for use in the field, or the migration of an internal data centre to a cloud computing platform.

Solutions to this form often involve the use of robust methodologies, but can also be affected by having the right skills in key staff.

Type 3 is the hardest to get a handle on. It includes structural factors that apply to a whole industry sector (like vested interests) and the collective and general behaviours in your customer population, like their ability and inclination to use the web for enquiries and transactions rather than a costly physical branch or a call centre. It certainly also includes business strategy, and cultural factors in personnel, especially as they apply to very large organisations that arguably have the most significant challenges when it comes to cultural change and management.

Some examples were mentioned in a previous post about vested interests for broader business ecosystems. Other examples that come to mind include the apparent difficulty that the traditional media behemoths are having in coming to terms with the new distribution models enabled by the web, and the failure of the Polaroid company to respond to the ‘new’ market movement to digital photography.

There is no one succinct alternative term I’ve heard for this form, although  organisational drag or rust (as in Neil Young’s “Rust Never Sleeps”) might fit some circumstances.

Just as this form of friction is the hardest to articulate, it is also the hardest to fix. Unlike Types 1 and 2, having good processes, the right technical skills and methodologies in your teams are mostly unimportant to overcoming Type 3 friction. Maybe it requires a good dose of serendipity as well as strong planning and vision. I suspect the most important elements are the right type of leadership and organisational culture, and these are indeed rare commodities.

There are vast numbers of other examples of business friction out there, although fewer general solutions to the different types.  I invite others to share such examples, especially those that are quite different in nature to the others described here.

(NB: By general solutions I mean the class or category of the mechanisms to overcome an example of friction, as opposed to specific product names. Of course, specific vendor offerings can be used as examples to help describe the category.)

The challenges with this approach arise when you have many-to-many relationships in a business ecosystem with lots of different suppliers and customers.  Some solutions arise by mandate – the sheer market grunt of one or a few big players that dictate to everyone else what the rules are.  But without such a driving force, you either need everyone to agree on some common standards for describing things like purchase orders and invoices, or you have to engineer custom parsing B2B interfaces for each relationship.  Or, you just live with the friction and continue processing a subset of your orders via email or fax.

In the case of ‘common standards’, the example of purchase orders and invoices seems achievable universally, because they are items that are, in their most raw forms, common to every business.  While such standards might exist in certain industry pockets (RosettaNet for the chip manufacturing industry comes to mind), there is no universal standard for ecommerce transactions.  Furthermore, the challenge becomes even more interesting (to us, at least!) when you go beyond the ‘simple’ of purchase orders and invoices to the ‘complex’ – other types of business forms processing.

The home loan and conveyancing industry sectors, groups with which we’ve had some involvement already, are ecosystems in which the electronic exchanges are far more fiddly and fraught than online purchase order processing.  The National Electronic Conveyancing System (NECS) will attempt to address some of the efficiency needs in Australia.  In this case you have seven or eight state jurisdictional land titles offices, each with their own similar-but-different language for describing business activities, such as transfer of land title ownership. One NECS approach could be to mandate that all state offices use the same language for common transactions.  But this would require massive and disruptive changes within those agencies, some of which have been processing documents their own way for over a hundred years.

A more palatable alternative is to let the agencies continue to maintain their own language and create an 8-way dictionary -  a giant look-up table, or “universal translator” that supports not only human readability, but (eventually) software integration as well.  While a thorough and robust solution would accommodate modern semantic techniques and standards, it is a simple concept and certainly achievable.

We believe the same approach could apply in other industry scenarios too, although we don’t know what they are yet.  We would welcome any thoughts about other possible applications of this approach and/or industries where such needs exist, so invite our readers to post them here, or contact us by email (if you’d prefer to keep them quiet!).

For a business (or government agency, etc.) that makes or manages anything in volume (producing and marketing widgets, processing forms and cases, etc.), processes form the operational core of a business.  They dictate what happens when and by whom, and are often integrated deeply with capital equipment and/or major software systems.  Good processes allow the organisation to hum along like a well-oiled machine. Poor processes can become a millstone around the neck, weighing down the business and preventing it from providing the best customer service and responding quickly to threats and opportunities in its market.

For those who work in the business process world, this is simple, obvious and old-hat.  The business process management (BPM) techniques and business process management software (BPMS) markets are extremely crowded with vendors and consultants eager to help companies through these decisions (note that BPM is quite different to BPMS; look to the writings and references of BPTrends and Paul Harmon, its founder, for more depth on this).

At NICTA, one of our perspectives in the field of business processes is to look at them in light of web 2.0 technologies and business models. Consider business processes (or their parts) that are important to your business, but not necessarily core – activities that might be appropriately outsourced to someone else if they could do the job better and/or cheaper than you.  Or alternatively, what about process activities you do better and cheaper than anyone else in your industry (whether or not those processes are core to your business) – could it make sense to offer yourself as a provider of that process as a service to others in your industry?  Then imagine breaking up every aspect of your business, or in fact your whole industry, into a collection of processes or process fragments.  Imagine the power of being able to chop and change process fragments relating to your business activity at a whim, to uncover new efficiencies or to explore completely different and new ways of working and delivering value within your ecosystem.  The well-oiled machine metaphor then takes on a completely new meaning…

This is the vision of ‘business process mash-ups’, an active area of research within our group at NICTA.  Our researchers are exploring the ways and means for organisations to decouple process fragments from their existing infrastructure and increase their power and flexibility.  They are also using the inherent architecture of the web as a platform for implementing prototype solutions, with the lending and conveyancing industries providing some of the use-inspiration for the work.  As usual, we’d like to hear from others who recognise the challenges and benefits of approaches like these, as well as any solution experience you might have that addresses and/or debunks some or all of our vision in this space!

A few weeks ago I attended a special NICTA guest presentation by Dr. Matthias Kaiserswerth, Director IBM Research Lab Zurich, who talked about strategies, solutions and responsibilities for ‘creating a smarter planet’.  By and large, the messages here were not particularly new to me.  After all, I work in an institution that has a similar vision and ideals.  But one assertion that I was surprised to hear (although in hindsight, shouldn’t have been) was that in the healthcare industry, so many people “live” off the existing inefficiencies in the system.  Ie., there are livelihoods vested in bad practices and processes.

According to Kaiserswerth, a move to ubiquitous electronic healthcare records (EHR) could save a hundred thousand lives per year – presumably through error reductions and timeliness of processing.  Apparently EHR could have been introduced years ago.  It hasn’t because such a move would upset the status quo and make redundant so many existing processes and therefore companies and people.

During discussion time in the presentation another example raised was in the transport and logistics domain: Why improve efficiency in the handling of refrigerated freight when such a move just eats into the margins of the container company who holds a monopoly?

Dr. Kaiserswerth had no particular insights to address this type of problem, conceding basically that such status quo will likely only change “when the pain becomes great enough”, ie., when regulatory or competitive pressures force it so.

I’d be interested to see in comments here other examples of vested interests holding entire industry sectors back in 20th century thinking and efficiency.  In the meantime, such cases are a reminder that powerful and even obvious technologies are not sufficient by themselves to reduce friction in many industries.  In some cases a major campaign around managing and phasing out vested interests may be required.