Electronic Mortgage Bottlenecks, Part 7 – An Outsourcing Q&A with Industry Leaders (A manager’s view on the adoption implications of straight-through mortgage processing) -- June 19th and 26th, 2007 (Also appearing in the MBA Tech NewsLink)
Make no mistake about it, the outsourcing markets are rapidly maturing anchored by legacy approaches, services, and well known institutions. Recent studies have clearly shown a topping out of the large, historical outsourcing contracts in favor of highly specialized, shorter duration arrangements. These new agreements are more collaborative or “win-win” supported by continuous improvement performance measurements and compartmentalized (i.e., niche) industry-driven service solutions.
However, there is a new challenge that has presented itself for the lender and provider markets– eMortgages and the end-to-end processes that support these nascent offerings. For those buyers of outsourcing services seeking discrete provider competency and direction, there are considerable obstacles in evaluating third-party capabilities, performance criteria / SLA’s, and even continuous improvement of contractually outsourced back-office operations.
In a fitting end to this seven part series surrounding eMortgages, we asked four very well known organizations and their leader’s key questions surrounding outsourcing market dynamics. In alphabetical order, contributing their experiential knowledge and insights, we have:
- Marvin Newell, Principal, Financial Services Practice, Everest Group
- Chetan Patel, Executive Vice President of ISGN, and co-founder of MortgageHub
- Sriram Srinivasan, Vice President, Banking, Wipro Technologies
- Greg Sullins, Executive Director, IBM Lender Business Process Services (LBPS), Inc.
In total, eight baselining questions were asked (due to the length of the article, they are hyperlinked here to the answers below):
- While much has been made from an industry standpoint on the value and benefit of electronic mortgage processing, what advantage should lenders and clients anticipate from outsourcing providers as the market begins to accelerate?
- Some industry specialists argue that with the adoption of straight-through mortgage debt processing, mortgage processes will become increasingly streamlined and less labor intensive. The result would be a reduction in the need for traditional outsourcing services in favor of technological solutions. Would you agree? Why or why not?
- How will the outsourcing industry which provides mortgage solutions, change their operations, SLA’s, and OLA’s to match the market shifts during the next 12 to 18 months?
- With the shift to STP for mortgages (including the country recorders, electronic notaries, and secondary markets not to mention MERS, GSE’s and other channel players), what new benefits, challenges, and risks must be accounted for by executives seeking to outsource these functional processes?
- Given the specialized nature of electronic mortgages and the in-depth industry knowledge required, how will third-party outsourcing advisory services be impacted? Does this increase or lessen the need for advisory services?
- What will be the unique governance and transition challenges when partnering with an outsourcing provider (e.g., domestic, international, or blended)?
- What are the top four success factors or evaluation criteria that clients should actively address when seeking a partner for electronic mortgage processing
- What client type will receive the greatest benefit from partnering with a proven eMortgage provider (even during this evolutionary and transitional time)?
The Q&A Responses
- While much has been made from an industry standpoint on the value and benefit of electronic mortgage processing, what advantage should lenders and clients anticipate from outsourcing providers as the market begins to accelerate?
Marvin Newell: Electronic mortgage delivery and STP should allow the end customer to receive services both of better quality and in the manner that they prefer. For the lender, administrative costs should come down providing they have a progressive outsourcer and a contract that motivates the supplier to make the investment while sharing the resulting cost savings. End customers will also likely see an increased flow and richness of new products as they move to leverage management time and resources to enhance their differentiation.
Chetan Patel: The advantage they should be looking for when outsourcing is the ability to reduce the time to process the loan and reduce the total cost of processing the loan. Going from a mortgage bank that it is spending $2,200 to close, we can go down to $700 to $800 a loan. If a service provider was able to couple their cost advantage with business process automation, the lender can achieve streamlined processes that drive additional efficiencies, which is what we provide here at ISGN.
Sriram Srinivasan: Lenders and clients should anticipate, encourage and actively support outsourcing providers to graduate to providing end-to-end platform based lending services. This will help reduce transition time and also leverage standard practices of the outsourcing provider across multiple clients. A welcome side effect of this strategy would be to drive costs further southward. From the outsourcing provider’s perspective, a platform based strategy will provide rapid growth opportunities, while managing the knowledge management challenges effectively. Risk concerns need to be closely analyzed and innovatively addressed for this model to be successful.
Greg Sullins: The journey to widespread adoption of an electronic mortgage processing is well underway. However, it requires significant investments to take advantage of this new technology. Those lending organizations who can afford the investments will increase their advantages over smaller competitors. Leading outsource service providers with a proven track record of delivering IT and business process services are taking advantage of a “clean sheet of paper” approach and are not inhibited by legacy technology platforms. Adoption of web services, enterprise content management, and service-oriented architecture (SOA) has significantly contributed to the increased automation of processes between the diverse participants in the mortgage origination value chain. The benefits of rapid adoption include: 1) reduced costs to originate supported by a movement to a variable cost structure, 2) avoidance of large capital expenditures, 3) increased revenue opportunities, 4) improved customer satisfaction, 5) superior product time to market, 6) risk reduction and mitigation, 7) flexible capacity to support organic growth, 8) accelerated acquisition integration, and 9) maximum automation with a realized lower technology risk.
- Some industry specialists argue that with the adoption of straight-through mortgage debt processing, mortgage processes will become increasingly streamlined and less labor intensive. The result would be a reduction in the need for traditional outsourcing services in favor of technological solutions. Would you agree? Why or why not?
Chetan Patel: I agree that with the right technology you will streamline the labor process with automation (all the processing functions will be automated). It reduces your labor, but you still need labor to validate the data. ISGN currently has the capabilities to provide process automation with MortgageHub’s legacy technology as well as the technology acquired with our Fair Isaac acquisition.
Sriram Srinivasan: To a certain extent the statement is relevant in the emerging scenario as significant amount of automation opportunities will open up. At the same time activities such as sales support, customer service, underwriting, fraud verification etc. will continue to need human touch, at least partly, for subjective decision support. On the other hand, there will be incremental activities due to digitization such as imaging, indexing, verification etc. which will get added to the process. Thus, we anticipate that the nature of work outsourced from a business process perspective will undergo change, but the quantum of work will more or less remain similar.
Greg Sullins: One should first granularly define the “traditional” outsourcing services that have been autonomous tasks within the loan origination and servicing processes, such as loan sourcing, loan processing, and closing and post-closing tasks. So yes, when reviewing the context of what has historically been outsourced along with the advent of technology, there will clearly be less reliance on the human element of processing. Consequently, customized outsourcing solutions leveraging technology will provide lenders with an efficient and rapid ability to expand and contract with cyclical market shifts, while increasing quality and driving down costs. Lenders will continually push for more robust turnkey solutions that can deliver quality loan assets, manage risk and compliance, and deliver superior customer service. As a result of these demands, the need for knowledge based processing (i.e., KPO) combined with state-of-the-art technology will accelerate the growing trend for quality resources supported by continuous improvements.
Marvin Newell: Automation will reduce the labor required, and thus reduce the benefits of labor arbitrage through offshoring. However, one of the primary drivers of outsourcing has always been avoidance of the investments and efforts required to stay current with the technology. Outsourcing firms typically have greater capability in technology development and deployment as well as the opportunity to spread the required investment over their customer base, so many lenders will turn to outsourcing suppliers as a way to quickly deploy STP at a reduced cost.
- How will the outsourcing industry which provides mortgage solutions, change their operations, SLA’s, and OLA’s to match the market shifts during the next 12 to 18 months?
Sriram Srinivasan: Expected turnaround time will undergo dramatic change, so also the number of people required to support traditional business processes will come down. All these changes will naturally have a cascading effect on SLA’s too. Thus activities such as data boarding will get automated while discrepancy verification could continue to need manual intervention but with reduced time allocations. The nature of processes outsourced will undergo significant change over a period of time and definition of SLA’s and OLA’s will be part of that evolution. The biggest challenge though will be re-training the people.
Greg Sullins: Lenders want the ability to process or send the information required for a mortgage application to a variety of functional and data sources including loan officers, call centers, Internet sites, correspondents, and brokers. Within IBM’s LBPS division, we leverage leading technologies and architectures (e.g., SOA and Palisades’ impact LOS) underpinned by approved technical standards within the mortgage industry (i.e., MISMO) to facilitate this efficiency. This includes the importing of standardized, discrete loan data, augmenting it with data from third parties like appraisal and title, while delivering a quality, saleable asset (e.g., “securitization” of a residential mortgage -- RMBS) with predictable customer satisfaction results. The direct impact to SLA’s and OLA’s will result in service levels that can be highly customized due to the configurability of the application. Therefore, lenders can expect service levels to vary and become much more granular to measure and continuously monitor overall success of high customer satisfaction, risk management, zero-defects, and maximize profitability.
Marvin Newell: Lenders will likely include new metrics in their service level agreements as these outsourcing offerings with these new technologies enter the market. Moreover, requirements for year on year improvement in productivity and cost due to the use of these technologies will become standard parts of agreements. One of the greatest and most common shortcomings within the outsourcing industry is lack of innovation. Everest is seeing movement across sectors to include innovation-driven metrics in contract provisions.
Chetan Patel: If you look on the SLA side, ISGN is providing SLA’s to their loan processing customers, where we guarantee turnaround within 48 hrs through automated process and labor. As technology improves over the next 12 to 18 months, that 48 hrs will turn into 36 hrs. We are using a written guarantee that the work we complete is accurate and meets the guidelines of the investor. We always strive to achieve a quicker turnaround and improved accuracy.
- With the shift to STP for mortgages (including the country recorders, electronic notaries, and secondary markets not to mention MERS, GSE’s and other channel players), what new benefits, challenges, and risks must be accounted for by executives seeking to outsource these functional processes?
Greg Sullins: First, lenders need to determine the strategic intent including, a) does outsourcing complement growth and diversification strategies; and b) understand how customers and business partners will perceive shift to outsourcing. Secondly, governance requires a clear partnership approach to ensure overall adherence to common set of goals with the outsource provider. Third, financial implications must be discretely defined to ensure the outsource provider has the capital and staying power to support the business while ensuring success. Finally, there is the often underestimated and complex area of risk management. Lenders and providers must clearly understand what is being outsourced, and what is and what is not being outsourced (i.e., in- scope and out-of-scope). Of course, both parties need to identify the key local, state, and federal regulations which need to be addressed supported by stringent retention mandates and compliance systems.
Marvin Newell: Benefits, as described above, cut across the dimensions of faster cycle times, higher quality, and lower cost. Challenges center on managing new interfaces across the channel. Strong, effective governance of the outsourcing relationship(s) can ensure that these challenges and risks are managed both near term and long term.
Chetan Patel: A new challenge this presents with straight-through processing is still the validation of data. The benefit is that with outsourcing the validation is guaranteed by the service provider.
Sriram Srinivasan: This needs to be further analyzed based on how the bigger picture evolves.
- Given the specialized nature of electronic mortgages and the in-depth industry knowledge required, how will third-party outsourcing advisory services be impacted? Does this increase or lessen the need for advisory services?
Marvin Newell: While these types of contracts are still being signed, there are now a broad range of industry-specific functions such as mortgage processing, insurance policy administration, claims, asset management, etc., all of which have capable outsourcing suppliers with strong domain knowledge. Suppliers without this industry knowledge recognize that their long term success depends on building deep capability. In fact, many are acting to strengthen their domain knowledge by acquiring industry-oriented professional services companies in the US.
Chetan Patel: I think the specialized nature of servicing the mortgage industry increases the need for the service provider to offer advisory services. At ISGN, where we have deep knowledge of the mortgage industry, we have started an advisory services group that will assist mortgage lenders in the outsourcing arena. That domain knowledge is critical as opposed to the outsourcing of more horizontal functions, such as finance or accounting.
Sriram Srinivasan: Due to emergence of e-mortgages the primary business model will not change; the delivery infrastructure will. We expect an initial spike in advisory activities until organizations refine their delivery infrastructure to include operational models as well as IT infrastructure. Since the external infrastructure such as electronic notaries etc. is still evolving, it will mean increased scope for advisory services until things stabilize. But as the initiatives mature, we expect things to settle down and continue as they are today.
Greg Sullins: The need varies based on the expertise of the client in the lending business. Likewise, the scope and complexity of a transaction has a direct impact on the potential need for a solution. With known service providers who have a track record of delivering, the need for such advisory services are most likely not warranted.
- What will be the unique governance and transition challenges when partnering with an outsourcing provider (e.g., domestic, international, or blended)?
Chetan Patel: To manage outsourcing relationships, lenders need to make sure your SLA’s are in place; confidentiality info is secure; and that the service provider is SAS 70 compliance and SOX compliant. Lenders should select an outsourcer who specializes in the mortgage industry — it’s not simply traditional financial services outsourcing. Lenders need to look for someone who has deep industry knowledge.
Sriram Srinivasan: The governance and transition models will evolve and mature along with renewal of solution offerings. As outsourcing moves from rules-driven business processes to intellect-driven knowledge processes, the governance model will also mature. Clients may feel a greater need to setup governance teams alongside the vendor’s delivery teams offshore.
Greg Sullins: Establishment of a successful and adaptable governance model must be mutually agreed upon, and supported by service levels, scorecards, resource requirements, and a communication structure. In addition to key actions and milestones, there should be 1) mutually agreed-upon SLA’s for quality, profitability, and speed, 2) collaboratively defined scorecard(s), timing for evaluations, and actions resulting from performance, 3) identification of teams that will concentrate on specific areas including production, compliance, audit, transition processes, and 4) mutually agreed-upon resources, timeline for delivery, data available, objectives, and frequency of meetings for each team. Of course, the basic, on-going outsourcing components will still be required – a steering or stakeholder committee (s), escalation procedures, identify change management processes, a process for introduction and evaluation of change, a project and/or program management process, and comprehensive identification of resources who will lead projects for all stakeholders.
Marvin Newell: A client entering into an outsourcing relationship with a supplier of STP (or related) services will face many of the same governance and transition challenges as with other outsourced services. Our experience suggests that a client needs to ensure that it interfaces effectively with a supplier at the strategic, tactical, and operational level. Clearly defined service level agreements and processes to deal with the inevitable changes in the environment and the client’s business are essential. Many of the publicized failures of outsourcing relationships can be traced to poor governance practices that were not tailored to the specific goals of the client’s situation.
- What are the top four success factors or evaluation criteria that clients should actively address when seeking a partner for electronic mortgage processing?
Sriram Srinivasan: The focus will now be on vendors with end-to-end outsourcing capabilities, that is organizations with IT, BPO capabilities and established partnerships with settlement service providers to ensure single stop services, thus the key factors for evaluation will be:
- Ability to provide blend of integrated IT and BPO services.
- Ability to provide platform based services.
- Tie-ups for settlement services including established backward and forward integration with third party service providers to ensure a tight combination of the entire value chain. (e.g., appraisal, title, and insurance).
- Compliance to regulatory requirements.
Greg Sullins: The cornerstone for a successful, collaborative outsourcing relationship is “to understand the right inputs in order to obtain the desired outputs.” Clients must stay focused on what is important. This encompasses measurements such as quality loan assets and delighted customers. With the key performance indicators established, lenders should then seek providers that have the capabilities to deliver, while supporting flawless execution as part of a turnkey solution. From experience, the four key categories for evaluation include: 1) process transformation to enhance straight-through processing and access data more efficiently while concurrently supporting existing production solutions, 2) conversion of fixed cost to variable allowing for rapid scalability and changing market demands, 3) increased speed of execution through deployment of new channels, products, and markets, and finally 4) the overall service offering and platform flexibility, compatibility, and ability to integrate to legacy systems, while adding functionality over time.
Marvin Newell: Everest’s experience suggests that the most important evaluation criteria that clients should address are:
- A demonstrated ability to help transform the client’s services should be a prerequisite for consideration.
- The suppliers’ ability to transform the client’s operations without endangering the business is another primary factor. This assessment should also reflect the supplier’s willingness to share risks.
- Clients must recognize that the economics of transformation deals will vary dramatically by the specific solution that a supplier proposes. Clients should work closely with the suppliers to design a solution that fully leverages the suppliers’ capabilities to meet the buyer’s distinctive needs.
- The supplier’s understanding of the client’s industry and how they can support the client’s specific business strategy is another essential criterion.
Chetan Patel: Lenders should review the provider’s industry knowledge; the clients they have worked with; their training program for new employees; and how flexible are they with different mortgage products and services. SLA’s and OLA’s would be part of those discussions as well.
- What client type will receive the greatest benefit from partnering with a proven eMortgage provider (even during this evolutionary and transitional time
Greg Sullins: We believe the winners in the mortgage industry will be those who channel their resources toward development of key, sustainable differentiators. In turn, these distinctions will provide them with competitive superiority facilitating active alignment between their products, services, and the consumer’s needs – minimally including a powerful brand, products and distribution network. IBM’s utility for the industry will become a more effective ‘back office’ for lenders, helping them drive down costs whereas delivering mortgage products with a more predictable, reliable, and consistent customer experience. In turn, our clients will gain renewed focus on their ‘front office,’ driving the differentiating brand, product development, business rules, distribution network and service culture they need to grow.
Marvin Newell: Clients that want to focus intensely on those activities that enable them to create and sustain competitive advantage.
Companies often assess outsourcing when specific challenges emerge:
- When they are under cost pressure,
- When they want to avoid a large, risky capital expenditure, and
- When a function is performing poorly and they have been unable to fix it.
However, clients should be more strategic and thoughtful in their use of sourcing. They should understand the opportunities involved in sourcing and take advantage of them as fits their business rather than look at sourcing in extremes. The potential benefits of outsourcing and offshoring bear exploration, understanding, and periodic review within the context of the client’s business.
Chetan Patel: Initially, it will be large and mega lenders who will see the most benefit because of their transaction volume. Some mega lenders who have partnered with outsourcers in India have seen a reduction in cost of up to 50%. It will eventually trickle down to the middle market and even down to some small lenders, but that will take some time. As larger lenders reduce their cost and provide better pricing to their brokers and customer that will drive the smaller lenders to start outsourcing their service.
Sriram Srinivasan: The biggest beneficiary will be small to medium scale lenders if they opt to outsource to a platform based service providers.
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Greg Sullins offers his professional lessons learned in closing, “The decision to outsource should be a partnership decision with an organization that you can trust with your crown jewels (i.e., your customers). Outsourcing rationale and decision making should be aligned with the determination to focus on your core competencies and strategic capabilities versus responding to tactical distractions and processes that don’t add value to your customer set. In the end, the decision to outsource should be tied to your growth and innovation strategies – not simply costs.”
It appears that the industry is generally moving away from large, monolithic contracts to those that are shorter in duration and adaptable to meet changing business needs. It is no longer simply about labor arbitrage, but about securing the intellectual innovation relevant to continually changing compartmentalized mortgage business units and processes. If you were to examine your current and proposed outsourcing relationships, how many of the lessons learned have been adopted by your governance models and contractual obligations? What will be your plan-of-attack to achieve a collaborative alignment and operational profitability?
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