Scott Roller: Turning Vendor Management into a Profit Center
(Scott Roller founded 3W Partners LLC and is Co-Founder of Vendor Surf LLC (www.VendorSurf.com), each dedicated to revolutionizing sourcing of vendors in the mortgage and credit union ecosystems. The companies monitor and report on the service provider market to provide participants what they need to excel in today’s market. He is a frequent contributor to MBA NewsLink.)
Author Robert H. Schuller is credited for the saying, “Tough times never last, but tough people do.” As the historic refinancing boom has ended and flips to a purchase market, lenders need to be thinking it is time to get tough.
Mortgage application pipelines are drying up, expenses are way up and margin pressure grows OUCH-fully. loanDepot’s recent earnings were disastrous, and Santander just announced it was shutting down its U.S. Mortgage business, advising it did not see a clear path to above cost-of-capital returns. While I could offer up a wide variety of ugly trending stats across the whole industry, you have likely seen them. Moreover, your own stresses surely provide enough proof.
Surprising to many, some opportunity actually lies within your vendor management (VM) unit. While you will never make up for anemic volumes, it can be part of a comprehensive revenue plan.
VM as a Profit Center
I ran the VM unit at a Top-5 mortgage bank and have had countless discussions with VM leaders. Most agree – It’s a damn ugly role since you can rarely satisfy anyone, especially the sales teams. They expect you to sign-up every vendor that might have potential to refer volume, even when your plan is to reduce such vendors by ‘the hundreds.’ Sales teams often see VM as ‘The Party on No,’ which is hard to dispute, I suppose. It was so ugly I stayed for… well, nearly a decade!
The challenge and opportunity is what I loved. It was the ‘BEST-worst’ job I ever had, so much so I am still dedicated to the vendor marketplace yet another decade later.
Years ago, I distinctly recall a Top-10 bank colleague (competitor) asking my views on a potential plan to turn the VM unit into a profit center. What a lunatic, I thought, and I am quite certain my non-verbals signaled the same. I concede what a visionary I was NOT at the time.
Today, we see such a trend whereby lenders and credit unions are leveraging the many opportunities that exist within VM units, such as:
- End-to-end evaluation of vendor pools
- Upgrading performance, contract terms, price and overall value-add
- Re-bidding services via Requests for Proposals (RFPs)
- Vendor pruning to reduce historic vendor oversight and governance costs; Eyeing vendors with multi-line offerings
- Establishing revenue generating VM profit centers
On the revenue side, the primary action lenders are taking – seeking out joint ventures (JVs) with a select few vendors. While most types of vendors have potential for JVs, the ones we see most often are Title, Appraisal, Credit and Verification Services and Outsourcing. Lenders using middleware ordering gateways (i.e., RealEC and similar) also may provide opportunity. On the front-end, JVs with realtors, builders and other such referral sources have also been quite common for a long time.
The obvious benefit, and usually the main motivator, is sharing revenue. Title insurance is generally the most lucrative, given the high margins for insurance products, compared to razor thin margins in Appraisal and Valuations.
Two of the services mentioned also position the lender to better manage the borrower experience, as a result of JV leadership representation. Title insurance and Outsourcing JVs give lenders more operational influence (some say ‘control’) in the execution of the borrower experience. This can be especially crucial at the loan closing table – the very last and most remembered component of the borrower journey, often just hours before borrowers fill out lender satisfaction surveys.
JVs for Credit and Verification services also might provide some potential for influencing the borrower experience, primarily when there is direct borrower interface, versus just automated pulls of credit and basic verifications (i.e., income, employment, IRS, etc.).
Sounds good so far? Keep reading, as there are some important considerations to help ensure success.
- You need a tactical and/or strategic reason to consider a JV, preferably beyond just revenue
- Engage your Legal, Regulatory and Compliance experts early on, as there are some potential issues to navigate, RESPA included
- Seek JV partners with similar goals, values and compatible corporate cultures
- Maybe consider vendors experienced in running successful JVs
- Demand performance, as too often JVs adopt an entitlement mentality, not having to EARN volume received
- In fact, manage the JV so that their performance will drive the rest of the herd
- Have a champion-challenger model where vendors (JVs included) compete for business
In some cases, I have seen this ‘VM profit center’ model help bring more adequate VM team staffing to help drive requisite performance, control and compliance. When purely run as an expense center, VM units are often budget challenged, even as the regulatory oversight and governance requirements keep growing.
I was also on the Board of a JV. The hardest part was aspiring toward overall success, especially financially – by loading it down with volume – yet still demanding performance. Just one more situation where it was nearly impossible to please anyone.
Advice: I love the JV model, but you must cling to the principals of success, putting performance first – everything else will eventually fall into place. The moment the JV partner realizes it does not have to earn volume, that boulder begins its descent down the mountain, headed straight for enterprise and borrower dissatisfaction. Another pitfall of giving the JV volume it does not earn – your other vendors get completely dejected, likely losing all desire to perform, when results don’t really matter.
Lastly, keep in mind that you share both the revenues and the inherent business risks. Choose your JV partner(s) wisely, with extreme vetting and due diligence. There are many incredibly well-run partnerships out there, and their numbers are growing. Poor such partnerships are not lacking in numbers either.
Thanks for reading.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)