Title News - March/April, 2006

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March/April, 2006 - Volume 85 Number 2

Transforming Into a Bundled Services Provider

by Dwayne Waite

There are many phrases that keep title executives awake at night, and they are being thrown around liberally these days. “Market normalization.” “Industry consolidation.” “Price compression.” “Bubbleburst.” It’s popular right now to speak of bundling services or offering packaged services as a catch-all solution to decreasing volume for traditional title companies, but the gulf between talking about bundling and taking the steps necessary to do it well has never been wider. The decision to become a bundled services provider should not be made lightly. It involves taking accountability for and investing heavily in services for which your company may or may not (yet) have a core competency. The transformation can be difficult—it takes more than a marketing flyer announcing that you now bundle services. However, done well, the metamorphosis from traditional title company to packaged services provider can improve your geographic footprint, your order volume, and, if done efficiently, your profits. Here is a look at a few decision points you are likely to encounter on the road to bundled services.

TO BUNDLE OR NOT TO BUNDLE . . .
Some feel the market’s move to bundling was precipitated by the Department of Housing and Urban Development’s 2002 proposed amendments to the regulations enforcing the Real Estate Settlement Procedures Act (RESPA). Now, almost four years later, RESPA reform has yet to happen. It seems that market forces, and not the demand of regulation, are leading lenders to choose packaged settlement services, which means that packaging is not going away any time soon.

Many experts agree that the first decision point facing the owner of a traditional title agency is whether to be a part of the package assembled by another entity (vendor management company, title insurer, realty company, etc.) or to become the “packager.” As the last echoes of the re-fi boom fade away, it is becoming very clear that title customers—especially mortgage lenders—will be looking for every and any efficiency available in delivering the mortgage product to borrowers. That means turning the settlement products faster and paying less for them. The title business is very likely to become a volume business in short order. Margins will then take on an even greater importance in the business plan of the successful firm.

If your company is thinking about forming affiliated business arrangements and joint ventures with Realtors®, homebuilders, and lenders, these groups will more than likely want more products running through the business than less. The products these groups will want are those with the highest margins, which are typically vendor-based services such as appraisals, home inspections, surveys, and pest inspections.

Although it may be easier and cheaper to be part of someone else’s bundle, it also means that your company will not be calling the shots. Although your company stands to gain volume as part of another entity’s package, it may also be more vulnerable to price compression. Your customers, after all, want the services faster and cheaper. Being the middle person in the transaction is not the ideal position to maximize your profits.

Choosing to be the provider of the package is not without hard work, sweat, and perhaps a few tears. Bundling is neither a winning lottery ticket nor a silver bullet to the pressures of a changing market. It is a conscious and strategic decision to accept the likelihood that price compression is coming. It is a choice to trade profit per order for volume. Above all, it means that you will be forced to focus on the efficiency of your processes like never before.

In making the decision to provide bundled services, ask yourself the following questions:

• Do I have access to a network of vendors or suppliers such as abstracters, flood or tax specialists, and appraisers, or do I have a plan for building one quickly?
• Am I ready to learn about the new services (e.g. appraisal, pest inspections) I intend to offer? If not, am I ready to add product-management experts I can trust to maintain the quality of the new services I will offer?
• Do I have inroads—or a solid plan to make inroads—into any new geographic markets for which I plan to provide service?
• Am I aware of my competitors and potential competitors in those markets? Are they vulnerable? Are the barriers to entry substantial?
• Do I have the capital necessary to invest in what will essentially be a new business?
• Am I ready to adjust my staffing, workflow, and systems to manage my vendors efficiently? Am I ready to objectively review every aspect of my business to ensure maximum efficiency?
• Realistically, when do I need to see a return from my “new” bundling business?

If you don’t like the answers you get, think carefully about your decision to bundle. The return on investment is rarely instantaneous. Not every technology or business plan will simply provide you with a ready-made network of quality vendors on the spot. Your vendors, after all, ARE the service you offer to your customers. And you may not be the only packaged services provider going into a new geographic market. There may be several already there.

GATHERING YOUR "INGREDIENTS" TO PROVIDE BUNDLED SERVICES
If you find the answers to the aforementioned questions acceptable when making the decision to provide bundled services, then it is time to build your business plan.

One of the most important things you will need is a network of efficient, high-quality vendors. In all likelihood, your company already uses a variety of vendors. Take an objective look at those existing vendors and ask several difficult questions.

• Is the vendor’s service or product competitively priced?
• Will the vendor be willing to trade a discount on its services/products for volume?
• Is that vendor capable of handling a dramatic increase in order volume without deterioration in its quality of product?
• Is the vendor’s product or service of high (not “acceptable” but high) quality?
• Does the vendor already serve any new geographic markets you may look to enter?
• Does the vendor’s product or service meet your customers’ needs?

Always review the services and prices of your existing vendors with an eye to the demands of your customers—existing and potential. Never forget that you are bundling to meet the customers’ needs.

You will probably find, no matter how strong your current vendor network is, that you need to grow your network to bundle services. This will be true even within your core competency. While it will take a concerted effort to grow your service network with services you have already been providing (be sure, however, to undertake your due diligence), it will be an even greater challenge to grow your vendor list for services you have not been offering.

If you intend to offer services dissimilar to those you have been providing, it is critical that you take the time, spend the money, and invest the effort to learn the ins and outs of the new service. Talk to as many trusted professionals in your region as possible. Contact the trade association (local and/or national) for the line of service you are adding. Take a class or seminar. Take several, and take your key managers with you. Tour one or several operations, and ask as many questions as you can think of.

You may even consider hiring a consultant or a product manager from within the industry of the new service or services you intend to offer. Quite simply, if you do not understand every step of your vendor’s process, you will be unable to manage that vendor. You will not really understand whether or not the product your new vendor provides is of top quality. You will lose the mission-critical element of efficiency.

GROWING YOUR VENDOR BASE
Once you and your key managers understand all the services you will be providing, you will need to grow your vendor network. Unfortunately, there is no catchall solution for this. Technology may offer the means to connect to vendors, but it won’t necessarily bring you all of the vendors themselves. Like many worthwhile endeavors, this one will take hard work. You can approach several sources as a starting point: your underwriter or your underwriter’s vendor-management division, service and trade directories, trade associations (directories and/or conferences), even word of mouth. Remember, though, that these are only starting points.

“Ask a lot of questions,” says Mary Jo Speier, president and CEO of Total Settlement Solutions, a provider of bundled services. “It is very important that as you cross state lines or add different products to the bundle, you find good partners. Your software provider, underwriter, and colleagues in the business are a wealth of information. But they don’t always share that information on the first date! It is a courting process, and you must be very inquisitive.”

Be sure to spend time with each potential vendor. Ask to speak to past and current customers and to see references. Your due diligence on the front end of the venture will lead to savings and performance on the return.

As your vendor network grows, you will need a means to manage it. Communication, order placement, delivery, and status are critical processes to a bundled services provider. The key to your success is your efficiency, so the phone and fax should become secondary or complementary tools in your office, rather than catalysts. Speier feels technology is a critical ingredient for her business. “Find a software system that not only provides traditional title support but also has a vendor-management piece as well. You must be able to manage and track the different players in the transaction, and you must be able to pay them for their services in a timely and accurate manner.” There are several areas in the traditional title or vendor management workflow that can become choke points to the order if not managed efficiently:

• Updates and orders that can’t be relayed to searchers or abstracters in the field will have to wait until that searcher checks his or her voice mail or, worse, until he or she gets back to the office. This can lead to a delay of up to a day sometimes.
• Paper file management after the search and report are returned can be a sore point. How your office moves (and misplaces) files can lead to delays in the work flow.
• How do you receive your borrower clearance letters? Fax or e-mail?
• What other points in your corporate culture can become delays? A voice mail on the system of a key staff member out sick or on vacation is virtually useless until that person checks his or her voice mail. A centralized status location can eradicate delays here as well.

Speier, who opened her doors as a bundled services provider, insists that the technology decision point was a key to her strategy. “Our business plan was to provide title and settlement solutions to midsize lenders and brokers who originate in multiple states,” she said. “So the one-stop aspect of that plan dictated a bundled services approach. One of our first steps was to decide on a software system that would manage the different vendors necessary to make the bundled services approach successful.”

It is easy to make the blanket statement that technology is an important element in the success of a bundled services provider. But technology is only a tool, not a panacea. Just having a technology platform does not necessarily make your new business efficient. Mark McElroy, president of RamQuest Software, is fond of saying “If your processes perform poorly, good technology will only make them perform poorly at a faster pace.” Always remember that the key to your success will be the quality of your services or products. The right technology can be a fantastic way to trim margins on an already solid product. How much it helps you trim margins will be dependent on how well you understand your processes and services.

Of course “technology” is a blanket term when it comes to bundled service or vendor-management systems. There are many systems available, and if you haven’t purchased or investigated such systems before, you may find it easy to get lost in the sales terminology. It seems many vendor-management technologies are “seamless,” “integrated,” and offer myriad “solutions.” But is that seamless solution a fit for your business plan? You should be very wary of plug-and-play platforms that purport to solve your every business need. For example, you probably don’t hire professionals without training or experience to perform closings. Why, then, install software that may or may not fit your business needs. Like your staffing, your technology should fit your particular situation and business plan.

GROWING YOUR VENDOR BASE
Before you take your first sales demonstration on the technology to lead you to bundled services, you must understand your new workflow. This is imperative. Understand the processes you are about to undertake, and understand where in the process you need to trim time or administrative tasks. Then, it’s time to perform your due diligence on technology. Speier suggests networking as a starting point for your research. Feel free to consult with your underwriter, your local trade association, or other industry peers or contacts. Then, contact the developers you’re considering, and kick the tires.

Here are a few of the questions you should ask the sales representative for your potential technology platform:

• What can I expect in the way of technical support? Will you come out to the site to train? To provide supplemental training after the installation?
• Will your team provide configuration services? Is this included in the initial purchase price?
• How often should I expect upgrades to the technology?
• Will I be assessed a variable per-use cost for the system, or will I be charged an inclusive license fee?
• Do you offer an “ASP” or off-site hosting option (which may spare you the additional expense of hosting the system’s servers on your own site)?
• If I choose the ASP program but later outgrow that system to the point where it would be more cost-effective for me to host the system’s servers on my own site, will I then need to purchase the software necessary to make the change at full price, or will you provide a discount?

You will also want to look for these features in your potential technology:

• Can the technology be scaled or customized to fit my workflow?
• Can the system easily be integrated with other critical systems, such as accounting, VPNs, or even e-mail?
• Does the system integrate your nontitle services with your core competencies? You will need order management and tracking capabilities for things like flood certification and appraisal to keep your new operation at peak efficiency.

When you are satisfied with the answers to these questions, be sure to schedule a demo. You may want to have key operations people available for this as well. After all, these are the people you will entrust to use this system every day. Is the system intuitive and easy to use? Does it perform the functions you need it to handle? Once you and your key managers are comfortable with the answers to these questions, you will have found your technology. Just make sure you understand your new business and how it will work on a day-to-day basis before you set out to understand your new technology.

As you gather the “ingredients” for your new bundled services business, you must also install a process of quality control. Always be aware of your liabilities—for services new to you, and for services or products you have comfortably delivered for years. After all, you will likely be using new processes or technologies to deliver even the services with which you are most comfortable. You will also be working with higher volume, meaning a greater opportunity for mistakes. There are several ways to maintain quality control from order to delivery. Technology can help, although you shouldn’t depend solely on your system to ensure that the process is spotless. Making sure that staff and management are comfortable and competent with each service in your bundle is also critical to ensuring high quality for your product.

Speier also points out something the industry is becoming painfully aware of with each new lawsuit or settlement. “Compliance and integrating compliance into the processes your employees perform each day is vitally important. You need to stay informed at a regulatory level (federal and state-specific), as well as being aware of litigation developments.”

MAKING THE TRANSFORMATION - WHAT TO EXPECT
It is also important to look at your transformation as an investment, and not as a silver bullet. Bundling services is a volume business. How you control your costs and efficiencies will determine the strength of your profits. So how much should you expect to invest in order to make the transformation? This is a loaded question, the answer to which can vary depending on your market, your client base, the size of your operation, your business model, your technology, the types of services you offer, and more. However, some costs you shouldn’t overlook as you set up your operation include the following:

• Personnel. Even with a great technology, you may need to increase your staff to meet the higher order volume. Also, you will need expertise for the new products you offer (consultant or product manager). This expertise will be critical from a standpoint of customer service as well. If a customer complains about the value of an appraisal, you will need personnel able to work with the appraisal vendor who can understand why the appraisal may be lower or whether your vendor is not working at the standard your customer expects.
• Legal and compliance expenses. RESPA compliance is a confusing and ever evolving endeavor. Cutting corners on the front end of your compliance program could lead to unfathomable costs if your misstep is noticed by the increasing number of RESPA enforcement agents. Spend the time and money now to ensure that you are operating within the parameters of federal and state law.
• Technology. It’s not a “nice-to-have” in the vendor-management business anymore.
• Sales and marketing. Just because you have the capability to provide a bundle doesn’t mean your customers—and prospects—know about it. If anything, a professional sales and marketing effort will be necessary to overcome the market inertia of your previous, traditional brand. Until you let the world know otherwise, you are a traditional title provider. This misunderstanding could cause you to lose business you didn’t even know was on the table.

Finally, in making your decision to bundle services, be ready to be patient. You are, in essence, rolling out a new line of service or product. This will take some time to gain traction in the market. Your decision to become a bundled services provider is a strategic decision, not a short-term decision. But not every factor in the transition works against your profit. For example, a company that is able to build its operations on volume-related costs—such as a provider of bundled services—faces less exposure when cyclical changes affect its order volume. As a bundler, your company will only be paying for the outsourced services that are ordered.

Efficiency is the key to a successful bundled services operation. The most important step to achieving efficiency is to know one’s operation inside and out, and to know how to trim fat or inefficiency immediately. Master these building blocks, and you will be on your way to building a successful bundled services business.

Dwayne Waite is the president and chief technology officer of Y-Waite Solutions, a Pittsburgh-based systems strategies consulting company and the developer of the Magellan Bundled Services System. He can be reached at (412) 604-0980 or dwaite@ywaite.com.