Technology is affecting almost every aspect of our lives, and the mortgage industry is certainly no exception.
Computer technology has become faster and more powerful, with processing speeds increasing up to 50% every 18 months. New versions of hardware and software are becoming available at increasingly rapid rates.
This surging computer speed and power are offered to mortgage lenders at a time when many functional solutions are being made available, including automated underwriting, electronic data interchange, imaging, point of sale technologies to assist loan officers or to go direct to the consumer, and such ancillary decision-support systems as best-execution analyses.
Mortgage lenders face very important technology investments to compete in today's low-margin business. A common misconception about investments in technology is that the investment alone is sufficient to have a dramatic effect on productivity.
Based on KPMG's annual study of mortgage production performance (MorPro) for 1994, mortgage lenders implementing laptops for loan officers experienced higher cost and lower productivity than nonlaptop users.
Poor training and failure to redesign are a few of the reasons for not achieving improved performance. These companies have since planned to redouble their implementation efforts to obtain the desired results.
How can lenders know they are making the right technology investments? Which investments are strategic? Which investments require a cost/benefit analysis? The following steps outline a few do's and don'ts mortgage lenders should consider when planning their next technology investment:
First, some things to do:
Keep up with technology trends.
What are the latest technology trends - client/server? Relational data bases? Workflow management software? How can emerging technologies help lenders implement strategic initiatives (reduce costs, increase customer service, increase your sales, etc.)?
Making prudent technology investments is impossible if you do not know what the technology trends are and what emerging technologies are becoming available. If you do not have organizational resources to keep up with technology trends and emerging technologies, get outside assistance.
Develop a detailed knowledge of your revenues and costs.
To better understand how your company stacks up competitively, you should periodically benchmark your company's performance to industry and nonindustry companies. Benchmarks include cost structure, product-delivery time frames, profitability, loss mitigation, and technology investments. Understanding your cost structure will likely require progressively more- detailed cost and process analysis. Items such as these may be required:
*Line of business revenues/expenses within the organization (origination, servicing, funding).
*Delivery channel revenues/expenses within the line of business (retail, wholesale, correspondent, consumer direct).
*Function revenues/expenses within the delivery channel of line of business (sales, processing, underwriting, closing, etc.)
*Activity revenues/expenses within a function (ordering a verification, reviewing a verification).
This detailed analysis will provide an understanding of what activities or processes consume most of your company's resources and how your cost structure compares to similar operations. Activity, processes, or benchmark variances are the candidates for improvement through technology.
Define your requirements to implement the improvement opportunities.
Defining requirements is the hard part. Lenders need to define (and document) the specific functional, technical, and vendor requirements needed to achieve their goals (cost reduction, improved customer service, new delivery channels, etc.).
The functional requirements include the desired processes, such as automated interfaces with third parties, that you envision for the new and improved operating environment.
Technical requirements describe your hardware and software needs, such as client/server, operating system, data base, programming language, etc.
Vendor requirements include the financial strength, user base, strategic direction, and migration capabilities for a vendor (if commercially available alternatives are considered). These requirements are the foundation for objective evaluation of potential technology strategies (commercially available or internally developed). Lenders should compare the detailed specifications of each potential strategy to their requirements.
Prepare a cost/benefit analysis.
Cost/benefit analyses are strategic and tactical. Strategic investments are the large investments required to gain a competitive advantage (or to remain competitive). An example may be to migrate to a client/server environment from a mainframe environment. Tactical investments typically require very quick payback (less than six months) because of the rapidly changing technology and business environment.
Costs include detailed design or prototyping tasks, programming resources, acquisition of software and hardware, implementation resources (technical, project management, training, process redesign, testing). A detailed project plan describing tasks, timing, deliverables and responsibilities is a must!
Defining benefits will require the commitment of users for the amount and timing of the improvements (which should include process redesign). Benefits include the timing and amount of improvement opportunities (productivity, marketing gains, higher volumes, etc.). All costs and benefits should be tracked after implementation to determine if additional changes are required.
Involve cross-functional team for major technology investments.
Team members should include user areas (origination, servicing, etc.), technology and financial functions of the organization. This team structure will provide that all of the organization's interests will be addressed in the decision process.
Assign dedicated resources for implementation.
Implementation often fails (exceed budget or late delivery) because of lack of an implementation plan or because existing staff is expected to implement the target environment while still assuming its current responsibilities. Dedicated implementation resources (i.e., project management, technical staff) are typically required for on-time, on-budget projects.
Following are some things to avoid:
Touring the exhibitions at an industry conference to select a technology.
The exhibits are fine for keeping up with technology trends but are a lousy way to select a technology. It is paramount to do your homework first (for instance, what are your requirements?) and to have your cross- functional team (see above) participate in a thorough review of the technology, which would include activities such as vendor demonstrations, and site visits to the vendor and users.
Designate a single group (technology, business users or financial) to be the sole owner of the process.
Too often we have observed companies that have designated the MIS department to select or develop a system for the user group (or vice versa). In this instance, the MIS department may select or develop in a technical environment that is important to them and, in turn, miss key functionality required by the user group. The same is true for a user group that may select a system that's not supported by the MIS department. Once again, a cross-functional team will help address the needs of all departments throughout the organization.
Implement without changing the process.
Implementing new technology is an opportunity to make life better and be more competitive, not to maintain the status quo. Examine every process for improvement opportunities (reengineering), including any area where there is a process "handoff" or interface to another internal or external system.
Sign the off-the-shelf contract with technology provider.
Off-the-shelf contracts are typically written to favor the party authoring the terms, so caveat emptor! Consider every aspect of a contract with a technology for negotiation - prices, service levels, liability, training, implementation support, enhancements, etc. This negotiation may be a major contributor to the cost/benefit of implementing the new technology.
In a thin-margin business like mortgage banking, implementing cost- effective technology will be a strategic advantage. These do's and don'ts provide a foundation for making these cost-effective technology investments. Implementing Technology
What to Do . . .
*Keep up with technology trends.
*Develop a detailed knowledge of your revenues and costs.
*Define your requirements to achieve improvements.
*Prepare a cost/benefit analysis.
*Involve a cross-functional team for major technology investments.
*Assign dedicated resources for implementation.
And What Not to Do . . .
*Tour the exhibition hall at an industry conference to select a technology.
*Designate a single group to be the sole owner of the process.
*Implement without changing the process.
*Sign the off-the-shelf contract with the technology provider.
Mr. Oliver is a partner at KPMG Peat Marwick in Washington and co- director of its mortgage and structured-finance group. Mr. Alcorn is senior manager of the group.