Expert AnalysisJuly/August 2023 EditionTechnology

When it Comes To Choosing New Tech, Should You Buy, Build Or “Rent?”

The mortgage industry’s version of the Digital Revolution has been well underway for a few years now. The need for automation is now a given. Mortgage lenders and business owners have numerous choices today where once there were only a few (if that).

However, we also still hear too many horror stories about investments in new technology gone wrong. Perhaps a decision-maker chased a shiny, new platform which ended up a poor fit for the department’s workflow. Or maybe a business made a costly tech purchase that substantially overlapped the other elements of their tech stack, becoming little more than an expensive redundancy. Just purchasing a new solution doesn’t always mean it will effectively improve the issue it was acquired to address.

While too many technology-related decisions still seemingly come down to drawing solutions out of a hat or throwing darts, there are more objective ways to determine what the best operational fit might be. As an industry, we’ve come a long way from where we were just a few years ago in that regard.

Similarly, there are more ways than ever to realize the benefits of automation. The most obvious is to purchase that new LOS or desktop underwriting solution. Another great solution is utilizing SaaS or making use of vendors and their technology to outsource inefficient elements of a workflow. And we’re all aware of a number of mortgage companies that have found great success building out their own technology. In some of the biggest success stories, those build-outs have led to new lines of revenue in and of themselves. And yet, all three of these options—buy, rent or build—come with pros and cons and, like anything else, there is no one-size-fits-all solution.

Which of these is the optimal path for your technology?  Here’s one simple formula—buy, build, or rent?—that can help lending executives make a technology investment most likely to make sense from a budgetary and ROI perspective.

Should You Buy?

Any solid technology or operational decision starts with a thorough understanding of one’s existing costs and performance. Identifying your most pressing needs or biggest inefficiencies, therefore, starts with a thorough assessment of the weaknesses in your workflow. That includes a detailed understanding of the time that a process typically takes to perform to completion. If necessary, have an employee (or several) walk you through that process. Time it. You should be able to easily generate a reasonably accurate estimate (in minutes) as to the average time consumed completing that function.

The next variable in our equation is cost—what is the cost of the task or function you’re seeking to automate or improve? Typically, the most inefficient processes in a mortgage workflow are minimally automated, if at all. So it comes down to measuring the cost of having people in place to complete those processes. One great way to approximate that is using the national average of loan officer, underwriter and servicer compensation ($38.74/hour according to the Bureau of Labor Statistics at the time of this writing).

You’ll next need to factor in the additional costs that come with labor: benefits, paid time off, office overhead and so on. Of course, those are numbers you’ll need to generate based upon your own experience. That combined number (compensation plus benefits and additional costs) should then be multiplied by the time required to perform the function. This will give you a baseline for comparing/contrasting with a new technology’s advertised (and, eventually, actual) time savings.

Should You Build?

The mortgage industry is home to many tech-based success stories that started with an in-house, proprietary solution. In the best case scenario, not only does an inefficiency get eliminated or improved, bringing about significant time and cost savings; but also that technology may even become its own revenue center or source of ancillary profits. Yet, developing one’s own technology always comes with its own risk—starting with the possibility that development gone awry could bring about a sunk cost.

In reality, the development costs alone usually make building one’s own technology the most expensive option when seeking a tech solution. The businesses that turn new technology into success are almost always blessed with significant resources, whether from investment capital or significant cash reserves built through other lines of business. And then, there’s the cost to maintain that technology. Most of that cost is borne by the vendor when “renting” technology. And maintenance (and upgrades) for purchased solutions can be cost-effectively managed through IT and managed services vendors. But when a firm builds its own technology, it’s typically forced not only to make expenditures to maintain and repair that tech, but also to spend on upgrades and improvements. No technology is fully “future proof,” after all. And then there are the other expenses that come with building new technology: certification audits, cyber threats and security, scheduled (and unscheduled) “down time.”

Should You Rent?

In addition to potential cost savings, one of the biggest advantages of outsourcing or utilizing a third-party service provider (and that partner’s technology) is scalability. That can be especially important during market cycles of volatile or declining volume. “Renting” technology, however, comes with its own challenges when it comes to determining a reasonably accurate ROI.

Estimating the time and cost savings of using a potential vendor starts with a full examination of a vendor’s costs. The formula would be similar to what we’ve already described. However, be sure to include the relative expertise of the vendor’s staff and the impact it can have on the process. Industry knowledge and experience has a very real effect and can bring about time and cost savings at a fraction of the expense of hiring and training. “Renting” that expertise can also bring about cost effective education and improvement for your own team, to the extent that it is exposed to those experts.

In an ideal world, the long-term returns from effective automation vastly outweigh the short-term costs. That’s only the case if your company’s adoption of new tech is truly effective. But even the best planned transformation toward automation will inevitably come with an initial (and long-term) expense as well. In an industry that’s always been challenged by margin compression, choosing the most cost-effective path to automation—buy, build or rent—can be every bit as important as the technology selected.