Bank CEOs and IT executives take note: Before embarking on another merger and acquisition that will require tackling tough technology combinations, study how GMAC Commercial Mortgage sails through merger after merger with nary a glitch.
Technology tends to be the Achilles heel of bank mergers and acquisitions. Too frequently, failure to meet earnings targets and expense reductions promised to Wall Street analysts just months before are pinned on information technology departments and their inability to smoothly merge different platforms and other communications systems.
Costs skyrocket, customers leave disgruntled-and the resulting mess can take years to clean up.
Not so at GMAC's commercial mortgage division, the Horsham, Pa.-based financing giant that has been the nation's largest commercial mortgage lender for about two years. There, technology innovations have been viewed as crucial to smoothing the way for an extraordinary acquisition spree over the past three years: Its originating and servicing portfolio has grown roughly ninefold, from $5 billion to more than $48 billion. The division has about 25,000 mortgages on its books.
Not only are costs not spiraling out of control; the cost of processing and servicing individual mortgages continues to come down, the GMAC unit's executives say. They say they have by the far the lowest mortgage originating and servicing costs in the industry.
Its substantial number of acquisitions remains largely transparent to customers and investors alike, while employees are benefiting from an increasingly paperless environment where virtually every major document is available at desktops throughout the organization. The unit images virtually everything-original loan paperwork, tax receipts, bills, notes, and inspections, for instance-clearly, a system that would be the envy of almost any bank.
Because of its new technologies, the unit has cut the time needed to process and integrate new portfolios to 30 days, from 90. Employees can access information such as weighted average coupons, tenant information, loan maturities, and loan-to-value ratios. Photographs of all of its properties are available electronically.
And more innovations are on the way. For instance, PricewaterhouseCoopers is working with the division to streamline the production of appraisal reports and develop an automated valuation model; soon data on comparable sales for properties may be available electronically. In addition, the unit is developing a proprietary system that will enable site inspectors to complete inspection forms on-line and route site photos electronically with those forms.
Finally, in the last year GMAC Commercial has demonstrated that, where there's the right opportunity, it is willing to reach out and buy entire companies outright to obtain the technological advantages it wants. For instance, in March it acquired Mortgage Analytics Inc., a privately held firm in West Hartford, Conn., that provides consulting and software development services to the commercial mortgage industry. The firm helps companies produce yield tables and analyze cash flows, risks, and profitability over a range of performance assumptions.
A month later it bought McCracken Financial Software, a private firm in Billerica, Mass., that makes mortgage servicing software. Since 1991, the unit has used McCracken's loan servicing software to service, track, and manage its performing-loan portfolio.
"Our challenge here, quite simply, has been managing growth," says Niraj Patel, the division's senior vice president and chief information officer, whose IT staff totals 45. "The right technology planning has been a major key to our success. We've been growing by leaps and bounds, but we haven't had to worry about capacity limitations because we have built our systems to be extremely scalable.
"Typically in most organizations people spend 20 to 30% of their time putting out fires because their system's architecture was not scalable. That means users are unhappy and business isn't getting done. At GMACCM, we spend just 1% of our time putting out fires."
According to Mr. Patel, the right planning has enabled the unit to beat every important industry benchmark, outperforming competitors both in head count and in IT expenditures. The Yankee Group, a consulting firm in Boston, says those in the commercial mortgage business devote 4.5% of their personnel to information technology; at the GMAC unit, the figure is 3.8%.
Likewise, the industry on average spends 7.5% of its revenues on technology; GMAC Commercial spends just 4.5%.
"We're the lowest-cost producer in servicing because we're lean and mean," Mr. Patel says. "In the areas of head count and expenditures we can't be beat."
Clearly, Wall Street is impressed with GMAC Commercial's technology efforts. For instance, in March, Fitch IBCA, the ratings agency, upgraded the unit's special servicer rating to "superior" from "above average" and affirmed the division's "acceptable" master servicing rating.
"Both ratings reflect the company's experienced management team, focus on risk management, commitment to technological development, and employee training and development," a Fitch IBCA report notes. "GMACCM is focused on the use of technology and automation to streamline operations and reduce operating costs. As a result, GMACCM's cost to service is less than one- half the industry average. With its current information systems, GMACCM is operating at roughly 30-40% of total capacity."
Since it was spun off from GMAC Mortgage in November 1994, the company has made eight corporate acquisitions in all, including four in 1997 and four this year, in addition to numerous portfolio acquisitions (among its most recent: in November it bought the $7.3 billion commercial portfolio of GE Capital Asset Management). In the process, the company has diversified into everything from office buildings, hotels, motels and nursing homes to furniture-and, most recently, software.
Since 1994, its total number of employees has jumped from 55 to more than 1,200; it has expanded internationally, having just opened an office in Tokyo. It is considering one in Paris. And its total number of U.S. offices has grown from four to more than 40. Finally, it appears that GMAC Commercial will continue its acquisition frenzy. Reportedly, it is negotiating what would be its largest single acquisition to date, a $100- billion French servicing portfolio.
What has put the company on the right track, putting management, customers and investors at ease? Two specific examples stand out. One is the extensive use of Internet and intranet technologies. The other is the department's scalable networking architecture.
The intranet system, which first went into development in 1997, is the backbone of all of the company's internal and external communications.
"One of the things that I'm quite impressed with is their intranet system," says Scott Metro, a director of real estate systems and operations at PricewaterhouseCoopers in Boston. "They're developing it so that all of their internal applications can be delivered over the intranet, and it's particularly useful that users can access all of the information in the same manner, with the information graphically looking the same wherever the user is.
"Certainly other companies can do the same things, but they're not doing them to the same extent," he adds. "What we're seeing at other companies is that they may have an intranet system but it's not consolidated: For instance, to get the information they want, they may have to enter several different systems each step along the way from origination through servicing. That means that the data for each of these steps ends up being stored in different data bases, so bringing all the data together to get a complete look is difficult. GMACCM doesn't have that problem.
"For instance," he says, "their loan origination system, which it calls Pipeline, tracks a loan from the very first query right through to the time it starts servicing it, and it's all administered through the intranet."
Before becoming a separate division, GMAC Commercial took a few high tech lumps of its own, leading to the development of its current efforts.
"Early on, as our business mushroomed, our local-area network and wide- area network systems were struggling," Mr. Patel says. "Networked communications were often slow and choppy because of steadily increasing use by our departments, regional offices, other lending institutions, customers, and regulators. As a result, at times we had considerable downtime-a serious dilemma because of our constant need for accurate, up- to-date mortgage information. And network snafus also had an affect on our communications capabilities, particularly with some of our newly acquired companies.
"Strained by all of these demands," he says, "the shared media network was unable to transmit multimedia information such as photographs of properties and property inspections. We had to fax hard copies, send overnight mail, we were engulfed in paper. Based on this, we decided to replace our LAN and WAN with a switched architecture that would pave the way for a future of advanced applications."
Clearly, GMAC Commercial needed to rethink strategy. "We were anticipating all this growth, so we wanted to build a high-performance network to support an increasing volume of corporate acquisitions, loan originations and portfolios," says Mr. Patel.
Any network the company built, he adds, "had to be fast, manageable and fully supportive of advanced multimedia applications. In addition, it had to have ample bandwidth so that our local and wide-area network users could access server-based data efficiently using their web browsers. This is what we have today."
Mr. Patel speaks of using satellite technology, for instance, to obtain additional or optimal site photography. "For the moment, though, we have to be constantly vigilant with the technology we currently have," he says. "That vigilance, for instance, simply means making sure that our existing systems, our capacity, doesn't become overwhelmed. The bottom line is that we have an edge now, we've worked hard to build it, we intend to keep it.'