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Industry in depth
Benefits of outsourcing
14 April 2007
Bob Sturges looks at the benefits and drawbacks of outsourcing key areas of a business
It may not be widely recognised, but a growth sector of the mortgage market is outsourcing by lenders of post-completion mortgage processing operations.
According to a recent report from Datamonitor – ‘Mortgage Processing Outsourcing: Feasibility for the UK Market’, the third party mortgage processing sector has grown at an average annual rate of 8.4 per cent since 2002. Starting from a modest base, Datamonitor reckons the sector was worth almost $219 million in 2006.
Datamonitor attributes the growth in mortgage processing outsourcing (MPO) to a number of factors. Chief among these is a drive by lenders to reduce costs while securing access to a ready-made servicing infrastructure with a non-fixed costs base. MPO, Datamonitor asserts, can also serve as a critical differentiator at a time of increasing coalescence among lenders’ offerings.
While this may be music to the ears of the MPO providers – which includes firms such as HML, Vertex, Scarborough and Crown – it isn’t all good news as MPO has not taken off substantially among mainstream lenders. Datamonitor attributes this to a perception among this group that outsourcing carries a number of disadvantages. It also cites recent relationship difficulties involving some big names, and a forthcoming investigation into overseas outsourcing by the Financial Services Authority as a further drain on confidence.
On the flip side, Datamonitor acknowledges that MPO has proved popular in the fast-growing specialist sector where lenders – including many of the investment bank entrants – have been quick to embrace it. This group, with business models that rely on efficient securitisation-friendly processes, sees MPO as complementary to their other operations.
Datamonitor anticipates no early end to this polarisation in attitudes, and concludes that while expansion is likely, the MPO sector will remain a niche market in the short term.
Outsourcing connection
For intermediaries, the relevance of this may not be immediately clear. But there is a connection. The way in which a customer is treated by a lender may play a significant part in determining whether or not they return to the referring broker for advice. Given that brokers have limited influence over their clients’ post-completion experience, they should take an interest in their lenders’ choice of MPO provider.
Lenders considering MPO need to be clear as to their reasons, the potential benefits and the risks. Management must also have a clear understanding of the basis on which any outsourced arrangement will work, both at a relationship and service level. It is also important to recognise that outsourcing is perceived in different ways by distinct groups of internal and external stakeholders.
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Entering into an arrangement with an MPO provider means they assume responsibility for a range of important post-completion activities. These are likely to comprise mortgage account administration, payment processing, collections, litigation management and data reporting.
Each of these has the potential to impact a lender’s ongoing relationship with its customers and, particularly in the specialist arena, its intermediary partners. The basis of any MPO arrangement must therefore be clear from the start, as must the fundamental requirement to have in place strong management information reporting and a service level agreement to monitor performance.
Advantages
There are several measurable advantages to a lender outsourcing its mortgage processing functions. First, it helps reduce the business’ overall cost base through shared efficiencies and economies of scale. This is achieved by reducing operating overheads and by making more efficient use of fixed costs, such as releasing expensive office space. Further savings are achievable by other lenders using the same outsource provider.
Second, a good choice of MPO provider gives access to a proven centre of excellence for this type of specialised outsourced activity, allowing the lender to draw upon the experience, knowledge and expertise of its partner.
Third, the lender is able to concentrate on developing its core commercial competencies of product innovation and building distribution.
Fourth, it allows the lender to channel its investment in training and development programmes to employees in new business-focused functions. And fifth, it offers the lender the flexibility to respond to changing work flows and pressures. It is, after all, easier to scale up or down with an external provider than it is to adjust internal employee headcounts.
Together, these benefits can add real value in both financial and operating terms. The flexibility delivered also offers great advantages – particularly to smaller lenders competing in an aggressive market – by allowing them to focus resource and expertise on core new business objectives.
Risks
A risk associated with outsourcing any function, but especially a lender’s mortgage processing facility, is the sense of loss of control or abrogation of responsibility. This can be felt equally by customers and employees, and management teams are well advised to treat it seriously when considering MPO.
There is also a danger that employees could be unsettled by thoughts of outsourcing ‘creep’, whereby no job or function is thought safe in what is often perceived as a ruthless pursuit of cost-cutting and improved business efficiency. Management can address these concerns by taking certain prudent steps.
Fundamental to any successful MPO arrangement is a well-drafted and robust service level agreement. This ensures that both parties clearly understand the operational and commercial basis of the relationship, and provides qualitative and quantitative benchmarks against which its performance can be measured and tracked. This can be enhanced through the use of tracking technology to provide real-time data on the performance of customer accounts.
Data and the flow of data are, of course, essential in any MPO arrangement. It is the fuel that powers the outsourcing engine. The lender must therefore ensure customer account information is complete and accurate. Simple but avoidable errors in data can seriously hamper the performance of the arrangement, and can cause unnecessary friction between the parties. For its part, the MPO provider must ensure it provides the lender with regular management information reporting of the highest quality.
The relationship can be made more effective and further bolstered by the lender deploying employees with specialist skills onsite at the MPO provider’s offices. These do not have to be permanent appointments, and even short-term tactical deployments can significantly help improve efficiency and shared understanding.
Critically, both parties to the MPO arrangement must show and demonstrate absolute commitment to legal and regulatory requirements and obligations. But this should not be taken for granted. It must be systemised by embedding a rigorous audit programme in the operating rhythm of the arrangement. This will validate compliance with the prevailing rules and regulations, and will provide stakeholders with greater confidence.
An effective communication process is also essential. Regular dialogue between the management teams of the respective MPO partners will help keep problems containable and to a minimum. It also provides an opportunity for sharing ideas and ways to improve the arrangement.
Ongoing communication between the lender and its employees and customers is similarly vital. This will help manage expectations while ensuring the rationale behind the decision to outsource is understood. In many instances, the customer will see their lender and the MPO provider as one and the same. But it is paramount that this does work in any way to cloud or diminish the customer’s ongoing relationship with the introducing broker.
There are a number of key messages to understand when considering MPO as an option:
- Outsourcing does not mean an abdication of responsibility.
- Both parties to the arrangement must strive for continual process improvements.
- Their commitment to customer service, compliance and regulation must be unequivocal.
- They should look to provide increased benefit by sharing economies of scale.
- A credible audit review programme and the exchange of management information are key.
- Regularly review outsourcing options and alternatives to ensure the business – and its employees and customers – are being best served.
- Communicate with stakeholders both inside and outside the business.
Andy Young, TBMC
The general principle of outsourcing is that certain key areas of a business can be subcontracted to other third party companies with greater expertise. There are many benefits to outsourcing and a prime example of an industry in which this business practice works is the mortgage industry.
There are several reasons why companies will outsource divisions of their business operation, but the most prominent advantage is that it often saves money. Many of the companies that provide outsourcing services are able to do the work for considerably less money, and have fewer overhead expenses to worry about. Furthermore staffing requirements will be less volatile. For instance if business volumes increase or decrease, it will lie with the outsourcing provider to manage the variations in workload and fluctuations in staff numbers.
Looking specifically at the mortgage industry, outsourcing providers are able to combine their market experience and knowledge, offering service driven solutions to satisfy the requirements of a constantly changing market. Outsourcing operations generally support a range of products and processes, both residential and commercial, including prime, non-conforming and second charge sectors, new business origination, new business processing, underwriting and completions management as well as data warehousing, and financial reporting.
Several of the above functions are typical of a mortgage packager’s role. In recent times, as the mortgage industry has evolved, rare are those lenders which carry out all areas of their business in-house. Some lenders currently conduct their businesses in collaboration with a panel of mortgage packagers who will process mortgage applications for them. Some lenders even have in-house underwriters established within packaging firms as a satellite. The lender will therefore never actually see the paper-based application at all which proves far more cost-effective, enabling them to keep overheads as low as possible.
Cost aside, by outsourcing certain divisions to a panel of experts the whole lending process becomes far more professional and efficient. An area where outsourcing seems essential is commercial finance. With relatively low conversion rates and the extensive time and administration required to complete a commercial finance deal, outsourcing is a far more productive and time efficient way for mortgage brokers, with little or no experience within the commercial mortgage market, to conduct a very intricate transaction.
Within the Buy to Let arena outsourcing has also proved to be a tried and tested method for lenders. The historic link between Verso and TBMC is a prime example of outsourced packaging. Verso, a ground-breaking lender within the Buy to Let market opted to outsource its whole administrative section to a partner with expertise in Buy to Let processing and thus chose TBMC.
The growth of the mortgage industry has led to a surge in the mortgage application workload, namely for lenders. Gone are the days where the processing of a mortgage application, from the sale to the completion of a case, is carried out completely in-house. Lenders no longer need to be a jack of all trades and packagers have emerged offering expertise and cost-cutting solutions.
By Nat Daniels, managing director Mortgage Angels
Lenders have for some time appreciated the benefits of outsourcing. One area that they have embraced is business process outsourcing where technology is utilised to streamline everyday business processes. Whether or not the intermediary market has the economies of scale to invest in these processes is for the individual firm to decide. However, for firms to remain competitive they most constantly be looking to identify where savings can be made in the organisation. To that end companies should identify strategic activities that must be controlled internally, then look to outsource non-strategic activities that can be processed at lower cost without affecting their business plan. There are several main ways it can help add value in both financial and operating terms. First, it helps reduce the business' overall cost base through shared efficiencies and by making use of the economies of scale. Reducing operating overheads and making more efficient use of fixed costs achieve this. A partnership with the right third party provider will give access to a proven centre of excellence. The intermediary is free to focus on doing what it should do best – servicing their clients. It is usually easier to change working arrangements with an outsource provider than it is to scale up or down the employee headcount, and this can be a big advantage. However, fundamental to any successful outsourcing arrangement is a robust service level agreement. This will ensure that both parties understand the operational and commercial basis of the relationship, and provide benchmarks to measure and track performance. One area that lends itself to outsourcing in the mortgage broking sector is lead generation. More and more brokers are using web-based lead generation firms to source new business. Most intermediaries understand that it is preferable to leave it to the lead generating firm to do the hard work of sourcing leads rather that doing it for themselves. But it is necessary to carefully select the firms they work with and also to ensure that leads are followed up as quickly as possible to make the tactic profitable. Interestingly, as the lead generation market becomes more competitive prices are tending to increase. That’s because increased competition is making it more expensive for some firms to generate leads, forcing prices higher. It therefore pays to shop around. Leading lead generating firms have now made the process even easier for brokers by utilising software that revolutionises the way brokers can buy leads, even a one-off lead. Advisers can now ‘cherry pick’ leads in the advisers’ immediate vicinity. This puts the adviser in control as they can make the decision to buy a lead on an adhoc basis. In taking the decision to outsource some of their processes and business areas, brokers must be confident with whom they sign up to do business with. At the end of the day, it is their brand and reputation that will be at stake. However a successful partnership should prove profitable for both parties.