The Rise of ITO and BPO Captive Sourcing -- November 3, 2006 (Also appearing in the MBA NewsLink)

A contemporary concept and set of terms have emerged within the mortgage industry around an evolving practice entitled “Captive Sourcing.”  While it may sound like a horror scene from a “B” movie, it represents a new series of integrated initiatives by origination, servicing, and settlement organizations seeking to reduce labor costs and realize operational efficiencies.  Fueled by the market downturn, captive sourcing can provide security and control for those organizations that resist outsourcing and the challenges associated with contract management, SLA’s (service level agreements), MSA’s (master service agreements), and OLA’s (operating level agreements).

From a macro perspective, captive sourcing resembles outsourcing relationships with one key difference – the operations and personnel are not part of a vendor relationship.  Like traditional outsourcing arrangements using a combination of onshore and offshore personnel and processes, the establishment of captive sourcing may take the form of “for-profit” subsidiaries, joint ventures, holding corporations, or internal divisions that provide lower-cost labor services outside of the current domestic or regional locations. 

Bottom line is that the personnel, processes, and operational parameters are defined and managed by internally “captive” corporate entities that were created to expressly serve and adapt to an organization’s needs.  These entities and their personnel have adopted an outsourcing model for operation within the enterprise to promote accountability and direct cost attributions for those divisions “contracting” for services (i.e., BPO or ITO functions).  Furthermore, unlike the “in sourcing” of the late 1990’s, captive sourcing typically is executed in lower cost labor markets with an established history of global collaboration – India, China, Ukraine, Russia, Poland, Philippines, Vietnam, and many more.  It’s not just about acting like an outsourcer (i.e., “in sourcing”), it’s about achieving similar efficiencies with greater flexibility and control.

The idea of captive sourcing is not a new one, but the operating techniques and methods deployed by progressive mortgage firms do represent significant advancements.  So, why should captive sourcing be preferred over traditional outsourcing or shared services relationships?  Is captive sourcing right for you?  To determine the correct plan of attack, here are a few of the fundamental questions that must be addressed before a proper answer can be derived. 

1. What is your current cost structure, operating characteristics, discipline and rigor associated with targeted business process or IT functions?  Are we trying to assign ill-defined processes to distant captive centers and personnel?
2. What risks and impacts are associated with the potential processes designated for a captive sourcing relationship?  What implicit and explicit implications are being assumed?
3. What discrete metrics are employed to measure delivery, performance, and cycle-times?
4. Does the organization have the history, discipline, and desire to manage and direct remote personnel, profit centers, and global information and process integration?
5. What lead-times, productivity, quality, capacity volumes, and control limits are expected?  Can they be achieved in the desired timeframes without help?  Who pays for the lead time of startup?
6. What technologies, infrastructure, and skill sets will be needed to start, sustain, and expand the diverse operational processes and product offerings? 
7. What governance and refinement processes will be deployed and reinforced to ensure quality, costs, and performance measures?

Please recognize that the above dialogue has been very brief and limiting.  Nevertheless, there is an increasing desire by mortgage organizations to create their own captive sourcing entities as the fear of globalization gives way to the realities of business and vendor relationships.  For many operations, it will be a combination of domestic, outsourced, offshore, and captive sourcing relationships that will provide the desired operating characteristics and efficiencies.  A key lesson learned is that a singular vision must recognize multiple execution strategies. 

For 2009 MBA entries, click here

For 2008 MBA entries, click here

For 2007 MBA entries, click here

For 2006 MBA entries, click here