The Realities of Mortgage Outsourcing beyond 2006 -- October 11, 2006 (Also appearing in the MBA NewsLink)
Once portrayed solely for its economic savings, the use of outsourcing within the mortgage industry has matured to recognize the use of captive facilities, competency compartmentalization, and a ubiquitous need for improved sourcing and delivery efficiencies.
From the lessons learned over the last ten years, several generic axioms are now accepted:
- 50% to 65% of the costs of the back-office and sourcing functions for mortgage processing (non-servicing) are directly attributable to labor.
- 15% to 30% can be claimed to be costs associated with varying regulations, compliance needs, or costs of doing business in a given locale.
- 10% to 20% of the origination costs for sourcing is as a result of technologies, on-going improvements, or general infrastructure maintenance.
- Four to seven percent of the total budgeted yearly cost of business unit or “transaction costs” need to be allocated to the administration of an outsourcing contract and not the one to three percent typically touted by outsourcing firms.
Additionally, the size of the transactions executed with outsourcers has dramatically shrunk as companies seek “best-in-class” solutions that can be combined together for greater efficiencies and reduced cycle times. Forward thinking organizations are recognizing the need for cooperation with vendors and the use of strategic or transformation outsourcing to achieve sustainable gains with less retribution. This is not to say the contracts, SLA, OLA, or JPA (joint performance agreements) are less important, but these are being complemented with KPI’s (key performance indicators), continuous measurements (into the corporate dashboards and scorecards), and transparency of operation.
While some independent advisors continually advocate lower cost for vendor selection, there is a growing realization that price is no longer the determining factor for deals. Pragmatism and partnership are becoming the norm based on collaborative vendor and client responsibilities, continuous improvements, and on-going and required organizational transformations (i.e., organizations don’t stay the same so why should a contract deal?).
So as the mortgage industry begins a painful retrenchment, outsourcing will take on a much different role from the back office and into the boardroom with increased acceptance and visibility. Remember, as I’ve said countless times in publications and my books, outsourcing is an alternative that must be fully integrated with organizational culture, strategy, disciplines, measurements, and capabilities – it is neither a panacea for success nor a formula for national decline. It is about determining the proper mix and value for your organization regardless of what you think the “other guy” is doing...
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