Mortgage Processing: Why current operations won't deliver future profit and growth objectives Consolidation and centralisation are not new themes in lending operations. During the 1990's most lenders moved new business (and in many cases also account) processing away from their branch network, into centralised units often organised around either channels or products. Undoubtedly these operations have been more efficient than the branch activities they replaced and indeed represented radical changes in lender's culture, way of working and indeed their relationship management with customers. Technology advances and experience from other industries however now challenges the validity of continuing with these models and poses questions such as: Did the "centralisation": - Really deliver on the promises of operational excellence and flexibility via multi-skilled resources? - Increase service and improve performance to customers and partners, as well as lowering the cost of operation? - Harness developments and instil continuous improvement? Or does the operational model simply: - Continue to provide non-value added activities such as servicing reactive calls from customers and partners seeking updates on their applications and accounts? - Render your employees still unable to manage the single customer view and deliver the company's Customer Relationship (CRM) strategy? Increasingly, demanding customers are pushing for changes to deliver low cost, high value and high convenience service propositions. How can lenders achieve this, what appears to be, an impossible task? By exploring the components of mortgage processing against the core aspects of Shared Service Centres (SSCs) this article aims to demonstrate how, with certain underpinning principles, an evolved version of SSCs are a real option for lenders seeking to reduce costs, increase efficiencies and achieve revenue/profit growth. The article is based on the premise that SSC concepts can now be applied to lending operations. Though their origins lie in support processes and "back office" activities, a SSC focused on core lending processes, combined with CRM principles, offers much more scope to lending organisations than the current centralised processing units. A SSC Environment for Customers (not just Mortgage Processing) Many lenders may argue that they do indeed already have a SSC handling their mortgage processing. Few would argue the contrary, however using the key characteristics of a SSC (see blue box overleaf), the centralised processing centres used by lenders to process new business from origination to completion, on different mortgage products, from multi-channels, does not meet the definition of SSC in the customer context. By example, centralised processing units: - Manage products and channels separately. There is no matrix structure between products and channels, hence co-ordination and coherence between the two are difficult to maintain - Do not embody or deliver corporate strategies such as "single customer view" and "agile operations" - Are run as cost centres (rather than profit centres) - Do not have multi-skilled resources able to process residential mortgages as well as savings accounts for example A true SSC is a "facility" or organisational model that manages all channels, products, and elements of the relationship with the customer - cradle to grave. Though mortgage operations remain central to the discussions in this article, the concept enables similar and linked products to be included in the facility. These may be for one or more subsidiaries within a group or indeed something that an outsourcer offers as a "utility" to clients. The illustration below represents the differences between a SSC and a centralised processing unit: Centralised Processing SSC - Processing/contact centres that handle new business application and some CRM activities. - Remote from typical Head Office functions such as Risk and Marketing - Reporting line to individual business/product operations. ORGANISATION - Operations that manage the entire customer relationship. - Strong communication links to all up- and downstream activities - Reporting line to corporate/grouped business operations - Different contact points for their products - Have to be proactive in managing their own portfolio of products CUSTOMERS - Holistic and proactive customer management. - All products, all communications managed once and right first time - Specific product and process element responsibilities - Quality or quantity focused (not both) PEOPLE - Multi-skilled, operating across channels and products. - Greater job variety, retaining and developing talent of the future - Product and channel focused. - Disconnects and handoffs. - Reactive changes in response to operational issues. PROCESSES - Clean, value adding, continually evolving. Few hand-offs. - Streamlined and integrated in the eyes of the customer - People empowered and central to process change and implementation - Managed and developed separately meaning that synergies are not identified and coherent policies may not be in place PRODUCTS - Cross selling and "packaging" approach to product management. - Ongoing product portfolio management - Geared to specific products and channels. IT/SYSTEMS - Integration across products and channels - Common platforms The Case for SSCs So what is it about the loan process that specifically lends it itself to a SSC environment? Quite simply it is volume driven, and transaction based with a high degree of commonality across channels and products. This is also true of the other products a lender offers, for example savings products. In essence, mortgage processing can be distilled into 4 key stages; receipt, prepare/progress, decision and completion, followed by a series of diarised and reactive events in the downstream activities of account and debt management. Below are some thoughts on how a SSC could be used to improve current mortgage operations and specifically why all the different stages of the process could be included in a SSC: Application Receipt Recognising that application formats and medium may vary for products, customers and channels, and that applications may be packaged, unpackaged or with part information, there remains a common basic requirement to ensure all available details are captured on the processing system and hence a customer file can be set up and tracking can commence. The process to undertake this has many common activities - as does the post room and admin team in each individual processing centre. Subject to disaster recovery considerations, a single post/document receipt room across products, channels, and subsidiaries offers efficiency and economic gains. Greater proximity to "downstream activities" (underwriting and completion) would also make it easier to reduce process breaks and cycle times. For example, if lending policy requires proof of income on applications over a certain value, requests can be made at application receipt stage rather than waiting until an underwriter's request at the decisioning stage. Prepare / Progress Communication with customers during this stage falls into two categories - reactive or proactive: Currently most processing centres react to customers and partners chasing progress. In centralised processing centres, inbound call handling teams are in place in the contact/processing centre(s) and tend to be organised around a specific channel (direct/introducer) or process stage (pre-completion/completions). It is not possible to spread resources within the centre(s) due to skill or indeed geographical constraints, where centres are remote. There is little proactive "pushing" of progress information although a few lenders do have on-line tracking tools (such as the Halifax's Mortgage Enquirer). The pooled resources and focus on process efficiencies in a SSC make it possible for customers and the lender to access different channels irrespective of their origination or process status and for proactive contacts to be triggered and then potentially delivered automatically (thus reducing the overall volume of reactive communications). There is a greater cultural emphasis on proaction rather than reaction, and an ability to use different channels to handle the majority of "updating" tasks. For example think of how text messages have been used in retail banking - if defined right, would a similar approach not work for mortgage applications? Decisioning A number of Risk departments, Product Management teams and even perhaps Marketing teams will be inputing to the application format requirements and policy conditions of a lender's suite of financial products. Underwriters too are focused on particular channels and product ranges - when a secured/unsecured lending product falls out of favour with the market, how easy is it for these underwriters to help with the backlog of mortgage applications? Equally, could an integrated, simplified, yet equally effective risk policy not be implemented by your business across products and channels? Risk, Product Management and Marketing are also instrumental in setting demand for these products and shaping expectations regarding levels of service with the customer/partners. Processing centres have to deliver on these targets and promises. Where the supply and demand sides are in different locations (some are known to be in different counties) communication and performance management are made more difficult. A SSC would encourage such functions to work together on drawing up operational plans and to engage in a closer business partnership rather than acting as internal opponents. Understanding the operational impact of a risk and pricing policy first hand and having more direct access to those that are in contact with customers, fosters a culture of congruent policy and procedure innovation. Completions With the decisioning task complete, once an applicant has accepted terms and conditions, there follows a series of administrative tasks, some of which may be regulatory (on property purchase for example), others associated with internal account set-up requirements. Requirements will differ by product, however are common across channels. Completion resource requirements typically also show the greatest peaks and troughs, comparing activity on the last Friday in the month as opposed to other days in the month proves this. Layered also on top of the seasonal fluctuations of house purchasing, this can exacerbate requirements. At this process stage, a SSC could help manage greater standardisation and resource utilisation. Completions would also gain from upstream activity and it's own focus on streamlined processes to deliver earlier release of funds, especially for re-mortgages, and hence increased revenue potential. Account Management Being able to provide a "one and done" (all requirements handled in one call) service presents a compelling argument for pooling account management activities. For example change of details once for all accounts/products and provision of aggregated statements of financial positions, would place a lender at great advantage to competitors. Not only does this offer great service to customers, but it also enhances a lenders ability to both cross-sell other products and package and customise a suite of products. A point of note - this need not necessarily be supported by new technical solutions, though multi-skilled resources are essential. The largest lenders who have grown more recently by acquisition have the most to gain in this area from a SSC. The segregation of product groups, in many cases with different branding, provides no composite picture of the customer. Debt Management There may also be a case for including a lender's collections department in a SSC but for different reasons to those cited for account management. Firstly, both secured and unsecured lending products require very similar debt management activities. Secondly, understanding the composite customer relationship with the bank may lead to innovations in debt management practices. Could a number of the principles applied on mortgage products also be applied to accounts that are in arrears? For example, where a customer has current or savings account with excess funds, with prior agreement, could these funds not be used to offset the debt? Are there other opportunities to devise customised strategies that lead to earlier repayment benefiting both lender and customer? Underpinning Principals The benefits of a SSC can only be realised where certain business policies and ethos' are adopted. Below are some of the key ones by means of example, however others will exist to accommodate the specifics of each lender: - Agile Underwriting Framework: A Risk Policy that balances lender protection with entrepreneurship whereby the risk can be priced correctly, the policy can be implemented operational with ease and the customers current and future relationship potential can be factored in. - Investment in People and IT: Simply consolidating your existing operating centres into a common facility will not deliver the benefits. Although significant IT development may not be required, a change of operational model necessarily means investment in people and their training and development to achieve a change in culture. - Alignment and Coherence of Strategy: The SSC has to embody corporate strategy and deliver the corporate values. This can be achieved through coherent policies in all areas including performance measurement and reward mechanisms. The SSC will not work where its objectives are mutually exclusive and counter-active to targets elsewhere in the company. - Matrix Management: A SSC brings together a number of variables - products, channels, and process-lifecycle stage and requires that each be specifically managed to give greatest benefit to customers. This requires certain aspects of matrix management that is generally more complex than functional line management. Sponsorship and advocacy from the most senior management are required to shift the organisation to this approach. Managing Compliant Mortgage Operations Compliance and regulatory monitoring will also be an important aspect of future mortgage business that could be managed more easily with a SSC. Thinking forward to the forthcoming regulation on arranging and advising on mortgages - given your current organisation how would this be rolled out? With a SSC in place, how could you be rolling it out? Surely ongoing compliance to, and monitoring of, all regulatory aspects would be simplified with only one "location" with pooled advisors and product developers? Will segregating advisors on the basis of product knowledge continue to work? All interesting questions that mean the regulation of mortgages akin to and alongside other long-term products, could be one of the key business drivers for a SSC. Understanding Whether A SSC Is Right For Your Organisation Although this article has focused on arguing the case for a SSC, the individual circumstances of the lender (strategy, customers, attitude to investment, approach to resourcing etc.) will determine whether a SSC is the most suitable, or even a viable option. SSCs need to be compared against the relative merits of other operational solutions such as insourcing, outsouring and more basic process improvement programmes that can also deliver similar benefits. Be mindful however that with the exception of basic improvement programmes, the other solutions also represent a "step-change" and demand similar commitments of an organisation. To determine what is right for your organisation you need to understand the requirements of your specific business context and business operation. In doing so you will analyse your current and future desired business competencies and activities, and test whether each or any of the operational solutions could deliver them better than your current operation. Ultimately it is your business case comprised of financial and non-financial aspects that needs to stack up before a decision to proceed can be taken. Conclusions A SSC does create opportunities for smarter working, customer centric/proactive processing, improved resource utilisation and better cross-product management. Equally it requires a culture change for all employees, a change in management style and in all likelihood significant investment of resources to establish it. In effect, this means that there are as many requirements placed on the lender, as there are benefits to be gained. Each needs to be considered on balance and compared against those that exist for other operational solutions. The fact does remain however that SSCs are a well-established solution to operational issues in other industries, and, as this article has demonstrated, lend well to mortgage processing. As lending managers, the next time you bump into a colleague in another product area or function in your organisation and you discuss the similar operational issues you are experiencing in your respective sections pose the question- could a SSC work for you, your organisation and most importantly your customers? Origins & Definition A trend of the late 1990's, SSCs were in main a result of decentralising activities undertaken in the previous decades. The concept describes a number of operating units/operational areas consolidate into a shared facility to deliver elements of business processes. Generally internal (inter-group for example) but can also be run by an external outsource service providers as a "utility". The main examples of SSCs are focused in support or back office processes such as accounting and finance processes. To date few organisations have realised how SSCs could also benefit core business processing and typically use false barriers such as perceived differences in products and services and "prohibitive" investment requirements to stop investigations in their early stages. Characteristics of a SSC in a Core Business Process Context - Specialised in delivering business processes - Pro-active in continuous improvements across channels, products, and processes - Leverage investments in technology, people and process across all activities to deliver economies of scale - Operated as a profit centre that balances costs with investment in customer service - Larger pool of multi-skilled resources with flexible work patterns - Streamlined relationships and interfaces with other functions and de-duplicated management effort across products, channels and processes - A performance management system that rewards and incentivises desired behaviour and achievement of SLA targets that deliver ...Benefits - Allowing functions such as product development and branch network to better focus on their core objectives. - Cross product and channel best practice. Focus on value adding and extended services and an improved ability to make and implement improvements quickly. - Provide existing services at lower cost and respond to market changes. Business growth or entry into a new market can be more readily accommodated in the existing centre. This itself fosters a spirit of product innovation and a "let's try it" attitude that does not carry the pre-requisite of significant investment (after the SSC has been established). - Greater transparency and comparability of information allowing resources to be allocated on the basis of business benefit and customer value - Ability to move resources between products, customers, channels, and process stages to manage the peaks and troughs of the business. Also scope for enhancing service such as extended opening hours. - Clear lines of accountability and roles and responsibility with overall reduced management effort. - Easier dissemination of information - for example on new products - Easier management of the desired balance between efficient processing and quality service When to swap your processing centres for a SSC - Pressures on operating margins - Capacity constraints - Functional hand-offs which are resulting in process issues - Issues with recruitment and retention of employees - CRM strategy not being delivered - Perceived lack of control and coherence between products and channels - Unable to effect changes quickly / convoluted communication channels - Real (e.g. legal) barriers that prevent other options such as outsourcing to be considered