In the world of software solutions, especially when it comes to loan servicing, there is an ever persisting question that seems simple on the face of it, but is worth analyzing at a deeper level: should I acquire a pre-build solution or a solution that can be customized to my every need?
In reality, there is no right or wrong answer, and as with many other things in life, it depends on a number of factors. Let’s explore the differences and similarities in hopes that this will help make the decision easier.
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Customizable loan servicing solutions
Imagine for a moment that you have purchased a property that is very appealing because when you take possession, it will fulfill most of your wants and needs. It is located in the perfect neighborhood, and it has lots of land for future projects, great shopping malls, grocery stores, and schools are located nearby. On top of that, it is just an 8 minute drive or 10 minute bike ride to work.
What a dream, right? Well, yes!; however, this property needs to be customized, which means it only has the foundation and the demarcation of the land. The real estate agent and the contractor said not to worry because with great planning and enough budget, the house of your dreams could be ready in just a few months. In fact, by looking at the foundation you can get a good picture of the layout and one can see how large and well designed this property will be.
In terms of structure, you can easily picture the large, open-concept kitchen at the end of the lower floor and next to the door out to the pool. You can also see that the guest bedrooms will be in the back house and the main two rooms will be at the end of the staircase that is clearly demarcated on the foundation. In fact, you can also see where the games room will be located in between the master and bedroom and the stairs.
Similar to the house analogy, loan servicing solutions that require customization typically only offer a foundation and structure, but major pieces of functionality and workflows still need to be designed and built. This requires planning, budgeting, and project management in order to complete the project. On top of that, you need to devote a team to oversee (or babysit in some cases) the deployment team. Unfortunately, it is not uncommon to spend hundreds and even thousands of hours working with the vendor team. In general, a loan servicing solution for banks, financial institutions, and alternative lenders, takes at least 16 and up to 36 months to implement, and between 600 and 2,000+ man hours of your team’s time.
What questions to ask when acquiring a custom loan servicing solution
Looking back at the real estate property analogy, it is clear that even though building a house to your liking has great appeal, it does warrant some pretty important questions before making such a big decision. Conversely, purchasing a customizable loan servicing solution to manage loans for a bank, credit union, or even alternative lending, begs the following questions:
- Can I dedicate hundreds of man hours to this project?
- Can I wait several months or even years to implement a solution?
- Does the budget include 20-40% for delays and scope augmentation?
- How will I maintain my solution post-implementation?
- How will my solutions get updated with new features and functionality?
- What is the budget needed to maintain my custom solution?
It is a well-known factor and as mentioned in a report by Mckensey about delivering IT projects on time and budget: 45% of IT projects run over budget and 7% over time, and they all usually deliver 56% less value than anticipated. In summary, selecting solutions that require customization can be risky and the decision needs to account for a realistic budget and timeline, rather than idealistic expectations.
Pre-built loan servicing solutions
Now let’s imagine that you’re acquiring a house, only this time the house is move-in ready. The place is fully finished and well equipped with hardwood floors, central heating and A/C is working, kitchen appliances, and even a grill in the backyard. After looking closely, there are a few things that you would have done differently like the tone of the flooring is slightly darker than you like, and there is a wall between the living room and the den that if you could only tear down, oh! and the shower in the guest bedrooms have curtains rather than nice glass doors.
So you really like the house but it is not exactly what you had in mind. At this point you start considering asking for modifications like bringing down some internal walls, changing the floors, and other modifications to make it more to your liking. After all, this is the place you’ll live in for the foreseeable future and you want to make sure that you feel comfortable and happy in it.
You went ahead and asked your contractor to price out the updates to the place and the results are not really what you expected. For starters, the walls you wanted to tear down are load bearing, which makes them untouchable, and the floors you wanted to update can be changed but the color you had in mind is 3 times more expensive than the original and is of lesser quality and lasts a lot less. In the end, it doesn’t really make sense to replace the floor for a higher cost, less durability option, just because it seems nicer. The only updates that can be made without spending months and a fortune are replacing the curtains and appliances.
What to consider when buying a pre-built loan servicing solution
You are struggling to decide whether to buy the house that is move-in ready but cannot be customized to your exact liking (without spending a significant amount of time and money), so you start weighing the pros and cons. Conversely when purchasing an out-of-the-box loan servicing solution for your bank, credit union, or alternative lending institution, it may not offer every feature or functionality you could hope for, or these may work slightly differently than your team is used to.
Considering these factors, there are a few things to keep in mind when purchasing an out-of-the-box loan servicing solution:
- How many years of loan management experience does the vendor have?
- How does the implementation timeline compare to a custom solution?
- Is the solution adaptable to my needs through configuration or is it rigid?
- Will the cost over 3 years be under the cost of a custom solution?
- Does the solution offer integrations?
In the end, these concepts about budget, timeline, technical difficulties, etc., are simple to understand; however, in practice, it is not that simple. When it comes to deciding whether to go the custom route or an out-of-the-box solution, there is no simple formula to follow but there is a clear distinction and that is the investment in time and budget is much greater in the custom route, and if these two variables are scarce, perhaps a SaaS solution with enough adaptability is the way to go.
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Sam Arias, CRO
Sam is a tech professional with 20 years of experience, half of which he spent doing IT / Cybersecurity consulting work with Deloitte and EY, and the last several years he has executed go-to-market strategies for SaaS companies.