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The power of empowered teams.

The secret of registering major new gains in servicing productivity may lie in moving to an empowered team approach. One thrift that tried the approach saw its number of loans serviced per employee soar from 752 to roughly 1,300.

THE MORTGAGE servicing industry is investing an increasing amount of resources in its quest to squeeze additional productivity--and thus profitability--from mortgage servicing. To date, the focus has been on applying current and developing technology and on increasing the scale of operations in the hope of reducing unit costs. That focus is well placed, as institutional investors have been investing in the servicing business and demanding venture capital-type returns on their investments. Technological improvements are readily identifiable, and if applied effectively over an increasing scale of operation, they can bring significant improvements in productivity and in servicing costs.

Despite the increased focus on servicing efficiency, however, reports have not surfaced of any real "quantum jump" increases in productivity, that is, the kind of major improvements of, say, 50 to 100 percent seen in other industries in recent years as American industry is reengineered. The mortgage servicing business still exhibits the kind of productivity gains seen in mature industries--relatively slow and incremental. Indeed, the data in the 1990 Cost Study published by the Mortgage Bankers Association of America (MBA) on servicing costs shows productivity, as measured by loans serviced per servicing employee, flattening out at about 900, even for the larger servicers.

To be sure, a few firms have exceeded significantly the 900 loans per-employee barrier, some even reporting as much as 1,000 loans serviced per person, or more. However, as we all know, comparing servicing productivity across firms must be done carefully. Productivity, as measured in loans serviced per employee, is highly dependent upon several factors, such as product mix, delinquency/foreclosure experience and the number of investors involved in the portfolio being serviced. The inherent variability in portfolio management performance caused by these factors means that comparative productivity data must always be qualified. But after reasonably accounting for differences in portfolios, it seems that the very best servicers of medium-difficulty portfolios still achieve considerably less than 1,000 loans serviced per employee, with the vast majority of servicers falling short of 800 loans per employee in servicing productivity. The critical question, then, that follows is: "Is this all we can expect in productivity improvement short of the ultimate paperless factory?"

Technology gains

The largest servicers, long ago, recognized and implemented many technology improvements in their operations, such as:

* power dialing and automated collection systems;

* customer service systems--answering, routing and message tracking;

* work-station concepts to permit individual employees to access all servicing modules;

* automated foreclosure tracking and reporting; and

* insurance company electronic interfaces and the like.

These firms are now exploring and/or using bar-coding and imaging to enhance further individual servicing productivity. They are pushing at the envelope of achievable productivity through current technology and will probably realize a gradual upward shift in reported productivity performance through continued technology investment during the next few years.

Major roadblock--behavioral

As desirable as these investments in technology are, they are not producing currently what could be termed truly major breakthroughs in servicing productivity. Indeed, most of us in the industry might question whether major breakthrough opportunities actually exist. Myopically focusing only on mortgage servicing, there seems to be little evidence to suggest major breakthrough opportunities, considering only scale and technology factors.

However, if we begin to focus on the human side of the equation--personal worker motivation--there may, in fact, be breakthrough opportunities. Social psychologists will tell us that monetary incentives have only limited value in stimulating sustained productivity increases. Moreover, the functional organizational structure employed by virtually every mortgage servicer can be, and usually is, a major discouragement to high productivity. Functional specialization creates:

* multiple hand-offs of information, requiring more handling time and reducing productivity (thus, we optimize individual function productivity only to lose those gains through cross-unit inefficiencies);

* lack of ownership of the total process and absence of a sense of responsibility (that's not my problem); and

* boring jobs, once the function has been mastered.

The sum of these negative characteristics serve to counter much of the productivity improvement we attempt to introduce through scale economies and technology. In fact, the evidence from other industries would suggest that the negative impact of functional, hierarchical organizational characteristics may be far greater than most of the positive benefits derived from technological innovation.

Experience in other industries--team-based processing

Although possibly overworked, as is typical with management process fads, the current emphasis in management practice on empowered team-based work has resulted in major breakthroughs in other industries in terms of quality, turnover and productivity--well beyond what we might have expected. In certain businesses, this approach has permitted American firms to approach or exceed Japanese performance standards and is feeding a major turnaround in American business competitiveness.

The list of American firms employing empowered teams cuts across a variety of industries and includes some of America's most successful large and small companies. Proctor and Gamble Co., TRW, Inc. and Digital Equipment Corp. have been using empowered teams successfully for more than 10 years. More recently, firms such as 3M, General Mills, Inc., Federal Express Corp., Aetna and Chaparral Steel Company, one of the most successful steel companies in the world, have aggressively implemented empowered team concepts.

The results have almost always included very substantial increases in quality of production and worker productivity. However, perhaps as importantly, there is a marked increase in product innovation, substantially less employee turnover and overall improved employee morale.

Empowered teams are nothing more than organizing all or a major portion of the functions of a production process around teams of usually six to ten people, empowering the teams to manage all facets of the production process and make a majority of the decisions about assigning work, controlling quality and in all other ways managing themselves. It is a very fundamental departure from functional organizations with strict hierarchical control. The empowered team concept relies upon a few very basic beliefs relative to human motivation to produce dramatic performance improvements:

* People respond positively and aggressively when given ownership of final results and control over how to get them;

* Enriching work through responsibility for the whole process, rather than for only one function, stimulates workers permanently.

Successful implementation empowered teams in other industries has led frequently to the kind of breakthrough performance improvement not seen from technological advances. Productivity gains of 50 to 100 percent have been achieved, customer service has improved dramatically and turnover and absenteeism have been lowered to nominal levels. Indeed, in these cases, workers seem to take on a whole new attitude about their work and their responsibilities.

One food processor in Wisconsin, for example, Johnsonville Foods, whose experience has since been made a Harvard business school experienced in excess of 50 percent productivity improvement, starting from a base performance, which the company believes was already good by industry standards. General Mills, Proctor & Gamble and others invariably report 20 to 50 percent better productivity in their plants employing empowered teams, versus those with traditional functional structures.

Application to mortgage servicing--case study

Is team-based processing applicable to mortgage servicing? Are the theoretical quality and productivity improvements realizable? It certainly appears so.

The operating conditions that encourage a team-based organizational structure exist in mortgage servicing--interdependent operations, physical proximity, common product and common customers. The evidence of the absence of strong teamwork, unfortunately, also is too often present--the shuffling of problems without resolution, lack of a deep customer service focus and high turnover usually associated with functionally organized, routine jobs.

Recently, Symmetrix Inc., a Boston-based consulting firm, worked with a major Boston thrift to assist it in improving productivity and service in its mortgage servicing department. The thrift, which services more than $3 billion in mortgages, mostly conventional loans serviced for outside investors, set significant goals to:

* Improve customer service, particularly the timeliness of inquiry response and reduce communication and processing errors;

* Improve its productivity as measured by loans per employee.

Because of the functional organization of the department, the servicing operation was not able to solve problem quickly, with problems routinely handed off from one unit to another.

Symmetrix's expertise lies in helping firms reengineer themselves, addressing the technological, process, human resources and business strategy issues that collectively block significant performance improvement. In this thrift's case, while technological improvement was desirable, the overall lack of a customer results-focus and sense of ownership overwhelmed all other issues. The solution to this overwhelming problem was to reorganize the core servicing operations from functional specialties to empowered teams. All functions except investor accounting and advanced delinquencies were included in the reorganization. Each team was assigned full responsibility for a set of loans from beginning to end, from set-up through payment processing, customer service, insurance and escrow and early delinquency management.

The team's portfolio was selected by states so that the team would become expert in and catch errors more easily in tax processing in specific states. The pilot team's portfolio initially included most Northeast and Mid-Atlantic states, except the home state of Massachusetts.

The team serviced all loans in its states, whether they were governments or ARMs. The mix of loans serviced mirrored closely that of the thrift's portfolio overall. Conventional fixed-rate loans made up 55 percent of the portfolio, government loans were 25 percent and conventional ARMs were 20 percent of the portfolio.

An initial empowered team of eight people was selected from volunteers from the entire servicing operation. From the backgrounds of the people selected, the capabilities and experience level of the team members appeared to be very average for the servicing department, rather than representing a special group of particularly experienced staff. The single most important factor going for the team was a commitment to change, and a sense of wanting to do their jobs better.

An initial team leader was also selected from the volunteers. This person was previously a supervisor, again of average experience. Importantly, with time, the team leader becomes just another team member, with the team becoming a fully democratic organization and responsibilities rotating based on interests and particular strengths. No functional managers had any responsibilities for the team's activity or performance. A coach is provided to the team to help it through the difficult transition from being managed by others to being self-managed. It is typical, however, for it to take two to three years for empowered teams to make a difficult transition from a traditional organizational structure and settle into the new, fully institutionalized operating culture.


The thrift's initial empowered team has now been in place for more than a year and the pilot now is being extended to the entire servicing operation. The results, to say at least, have been dramatic in every way. The number of loans serviced per employee on the team has risen from 752 to 1,897--a 250 percent improvement.

The 1,897 productivity number must be adjusted somewhat for the centralized functions not included in the teams' scope. Charging the team with its pro-rated share of the investor/accounting and delinquency management staff reduces the overall productivity approximately 30 percent, to about 1,300 loans per employee, a number still far beyond the experience of functionally based servicing organizations. This indication of the achievable productivity boost from this approach is somewhat aggressive, because the delinquency rate of the team's portfolio is less than that of the whole portfolio. Yet, this was achieved despite modest technology support and a heavy investment of resources in delinquency management.

Not only did new productivity increase dramatically, but perhaps as importantly, customer service problems declined to a negligible level. Complaint letters and phone calls declined significantly, as process errors were eliminated. Moreover, turnover within the empowered team has been nil and employee morale has soared.

While results of this magnitude are not always reproducible in every situation, the improvements within this thrift are clearly of breakthrough proportions and appear to be sustainable. Because the results have been accomplished by addressing some very basic human motivational factors, it is highly likely that these results are reproducible. The incidence of sustainability of productivity gains in other industries has been very high, and indeed, the gains have been self-reinforcing, as long as managements have been willing to provide support through the inevitable transition periods. In firms such as Proctor & Gamble and Texas Instruments Incorporated, empowered teams have become a way of life.

Is this risky, fundamental change then worth it? An increase in loans serviced per person of 100 percent from say, 700 to 1,400, provides approximately $500,000 to $600,000 in increased pretax profit for each $1 billion in servicing. The competitive advantage to any servicer that could achieve a sustainable productivity advantage over the rest of the industry of 100 percent is enormous.

Reducing the corresponding cost of servicing from an industry average in 1990 of $89 (MBA cost study data) to from $45 to $50, with commensurately higher quality, sets a whole new competitive context for both bidding for servicing and valuing the servicing business itself. While everyone has access to technology, not every competitor, in fact only a few, have the capability to accomplish and sustain the changes in organization and management that will enable them to realize breakthrough gains in productivity. What other parts of American industry have experienced in the 1980s, the mortgage servicing business appears ripe to begin experiencing in its quest for ever increasing performance.

Fred Portner is a consultant for Symmetrix, Inc., Boston. Jan Beaven is a principal with Symmetrix, Inc.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:mortgage loans servicing
Author:Portner, Fred; Beaven, Jan
Publication:Mortgage Banking
Article Type:Cover Story
Date:Aug 1, 1992
Previous Article:Is big always better?
Next Article:Riding out the refi wave.

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