Controlling costs has always been central to the mortgage business, even if it may not have seemed that way this time last year. Back then, lenders couldn’t hire enough people to handle the volume of borrowers coming through the doors.
But today is a perfect storm of soaring interest rates, record inflation and plummeting volumes that have many lenders once again slashing payrolls just to keep their heads above water. Many are doing so fully knowing that such measures carry hidden repercussions that impact performance and their ability to give customers the experience they deserve.
A few mortgage executives, however, are embracing a more holistic strategy that goes beyond these all-too-familiar and destructive tactics—cost transformation. But what is it, exactly? More importantly, how can it help lenders operate more efficiently regardless of market shifts?
A New Idea, Defined
Cost transformation involves completely rethinking cost structures from the ground up, examining the gaps in ROI on internal and external resource allocations, and determining the best technologies or resources to fill those gaps. With cost transformation, organizations can gain a better understanding of the impacts of their short-term and long-term spending decisions, enabling them to better sustain profitability in any market cycle.
We call it a cost reset, as it is a completely different approach than the current M.O. of most lenders, which is to address market shifts reactively rather than proactively. Usually, lenders try to control costs by targeting individual processes and systems in silos, without truly understanding the larger impact of their decisions on the larger business.
Cost transformation, on the other hand, involves resetting a company’s entire operations to build something that is highly responsive to changing market dynamics. The point is to understand the long-term effect of their spending decisions on their business, and installing scalable, flexible processes and systems that mitigate the risks and costs of recruiting, hiring and firing.
Cost transformation is not a one-size-fits-all type of thing. It forces organizations to focus their attention on where their resources will have the largest impact given the state of the business and its competitive advantages. It’s also not a set-and forget type of endeavor—it’s an ongoing exercise to optimize the business by making incremental changes.
What it Looks Like
When adopting a cost transformation initiative, the first step is to obtain deeper optics into all spending across the board.
Typically, organizations that want to reduce costs want to do it immediately, so shedding capacity becomes the first lever they pull. In doing so, they may neglect to take a closer look at technologies that aren’t producing the ROI they expected.
With cost transformation, the idea is to examine everything an organization is spending on and seeing the true impact. Do they have the right infrastructure in place? What about the right business rules? Is everything optimized as it can be? To help answer some of these questions, it helps to bring analytics into the picture and take a deep dive on a forensic level end-to-end.
The second step is modeling a new, better way of working, determining the look of that cost structure, and then bringing that to life. This involves understanding existing gaps in processes and finding the best tools and resources to close them. In a sense, it’s taking two steps back to rebuild an operation with greater agility so that it can be highly responsive to changing market demands.
For example, one major lender we work with adopted cost transformation by identifying key drivers across its fulfilment functions, then segmented all its transaction activities and roles to more thoughtfully re-orchestrate who, what, where and when these activities get done. The lender then redeployed its cost savings toward strategic initiatives, which included adopting intelligent technology to pilot its processes.
Ultimately, the lender was able to slash its fixed expenses by 31% and reduce its cycle times by 50%. This led to a 29% improvement in the company’s C-SAT scores and a 14% increase in pull through. At the end of the day, the lender cut costs, improved borrower response times, and positioned itself incredibly well to gain market share at a time when most of its competitors were retreating.
Getting from Here to There
At a glance, it may seem that a robust cost transformation initiative may be out of reach for smaller or mid-sized organizations that lack the capital and leadership experience. But that’s not the case at all, as help is available.
For organizations that are new to cost transformation, a strategic partner with an outside perspective and experience creating and facilitating cost transformation initiatives can help right from the start. However, such a partner shouldn’t have expertise on just one piece of the mortgage production process but in-depth familiarity with the entire fulfillment chain, from front to back. They also need well-rounded abilities and deep analytical tools to provide a forensic, end-to-end visibility of the entire operation, including customer journey mapping.
While cost transformation may be a relatively new concept in the mortgage industry, there is no better time to embrace it than now. Lenders can start by asking themselves some tough questions. Where do we want to go? Is the goal simply to survive the storm, or cement our future position as a leader? If your goal is the second, do you really want to go back to your old playbook? Another question to ask is, if now is not the time to innovate and change the playbook, then when is the right time?
There’s a reason I bring this up. Last year, when lenders were experiencing record origination volumes, few were trying to innovate and build better businesses. At that time, the name of the game was finding enough processors and underwriters. It was pure chaos. Any company would be hard-pressed to evolve and improve in that kind of environment unless they were already ahead of the game.