Innovative Relevance® -- MBA Articles

We’ve had all We’re Going to Take! ” -- October 2007 (Also appearing in the MBA Tech NewsLink), How can BPO and KPO be used to gain profitability and promote organizational sustainability?

Sometimes when you look at your spam filter and glance at the email headlines, you just have to chuckle. Other times, you look at these soon to be deleted messages and wonder if organizations and their agencies have ever moved beyond the “I want to be like Mike” ideas. All summer, new messages piggybacking on the Web 2.0 moniker have appeared – a sparse few truly compelling and interesting, but most are not (1) .

It is this idea of distinction supported by much needed innovation that feeds the marketing machines and ad agencies. For the mortgage industry currently in the midst of a year-long correction, this seeking of the next “wave” of prosperity and profit cannot be built singularly on slogans, catch phrases, or a lowering of credit standards. This can be clearly shown by MBA data that during the last four years loan productivity decreased 40% and costs per loan originated fell to a new low -- under $250. Meanwhile, costs to originate reached a five year high and volume continues to plummet.

The same lessons and analogies are true for mortgage outsourcing. Surprised at the market moves occurring in 2007, many outsourcing providers are left wondering what their prospects and clients really need to be profitable and survive. How can the sourcing organization be adequately served during periods of chaos and uncertainty? Additionally, fueled by an upcoming Presidential election that already promises to put globalization on public trial, the challenges of determining THE answer is formidable.

Yet, therein resides the real issue masked in the many red herrings put forth in talk shows, radio addresses, and even printed media – there is more than one solution and the real problems are not binary or “cookie cutter.” Just as innovation must be relevant to the situation before it can be adopted, mortgage outsourcing solutions must also be uniquely applied especially when considering BPO or KPO offerings. As 2008 shapes up to be “more of the same,” it appears that both sides of the outsourcing contract are seeking new common ground, which is beyond the dogmatic labor arbitrage response. The questions for tomorrow are not singularly “what is next?" and “where do we begin?” It involves a holistic review and comprehension of the market changes taking place including:

How can operational arrangements be structured and managed to consistently deliver results during a market correction? Can these methods be utilized to restructure existing outsourcing provider relationships?
How does the outsourcing lifecycle of adoption, sustainability, growth, and adaptability work for various mortgage processes?
What organizational discipline and rigor must be applied not just in structuring the outsourcing arrangement, but also for risk-laden frameworks of transition and governance?
How can “smart-client” relationships be established and supported by gain and risk sharing arrangements? Do we possess internally the experience for sustainability?
What risks or caveats must mortgage companies anticipate not only within the known relationship characteristics, but also with an ability to grow and adapt as business requirements change?
Given the varied complexity of mortgage processes, which ones should be outsourced? Should we adopt multi-process outsourcing? Can we profit from a “leap” by injecting advanced BPO and KPO operational techniques?
How can BPO and KPO help deal with my current problems, while providing a path for profitability in 2008? Where can we turn for solutions without incurring substantial professional services fees?

Indeed the questions are compelling and market justified, yet at the same time, the answers are daunting. For organizations seeking an immediate “fix” by using outsourcing services and “virtualization” arrangements to prop up a failing operation or risk exposures, the results will not meet with the starry-eyed expectations. To use BPO and KPO within the mortgage industry is hard work – regardless of what the advisory market or providers are currently prophesizing. It is no longer about throwing work to a third-party with the mistaken belief that benefits are just around the corner.

Many individuals and organizations who started this year believing the end was in sight are suffering from a crisis of confidence. It is widespread reaching beyond mortgages into the global equity markets, CDO’s, M&A’s, secondary markets, and of course, anything associated with “risky debt.” Many billions of dollars were quickly and permanently lost in August and as the real market exposure continues to reveal itself, the projected losses could be multiplied by several factors before the end of the year.

Early September has brought a relative calm to the global financial markets. Yet the prior issues and challenges of dealing with improved efficiencies of mortgage operations and processes are still relevant. The benefactors of this industry correction and transition will be more than the “vulture” investors swooping in to buy quality assets at distressed prices. Outsourcing firms are recognizing the opportunity that is unfolding before their eyes and are re-channeling their frameworks and personnel to provide “distressed” operational assistance.

It is already being demonstrated that there will be a significant amount of marketing hype created by the outsourcing industry in an effort to gain attention. However, the issue is no longer about the ITO markets and early Wave 2 BPO mortgage processes. Ignoring these new media messages, the real value for lenders and servicers will be not just an augmentation of compartmentalized processes, but enjoining of a strategic partner that shares in the risks and profits from the rewards. This new contractual arrangement is increasingly termed as gain or risk sharing for advanced BPO and KPO arrangements.

For the mortgage process sourcing team, the challenge will be to avoid this hype and concentrate on the compelling business requirements the organization needs and that the provider can collaboratively deliver. Critical imperatives and lessons learned include:

Understanding the three “waves” of outsourcing is a critical imperative to assess the potential benefit for any organization considering initial or increased adoption of BPO and KPO. Organizations seeking to implement Wave 3 processes without first adopting (or experiencing) Wave 1 and 2 will severely limit their chances of success.
Experienced or “smart client’ organizations clearly understand the need for proactive governance that serves both as an oversight function and results in a highly collaborative relationship between the sourcing team and the provider.
New consumer models, driven by Generation X and Y selection and buying habits, will place a greater emphasis on knowledge sharing and multi-process integration. Whereas traditional approaches were on ITO, HRO, or FA, new products and their servicing cannot be viewed as this simplistic. To truly “attack” the mortgage cost basis while improving margins, organizations must rapidly move beyond the aging ideals that made them previously successful.

For those firms “waiting for the right time” to use BPO or KPO, the time has arrived with Category 5 characteristics. If there is such a thing as a “perfect mortgage storm” where all the conditions align to promote eMortgage, Wave 2 and 3 BPO and KPO multi-process shifts, and an industry desperately seeking innovation, this is it.

As the title implies, we cannot take anymore of the same old solutions and status-quo answers simply disguised in a new wrapper. We must move beyond the traditional to the innovative. Organizational change, outsourcing transformation, and governance are inherently difficult and full of risks. BPO and KPO provide an acceptable alternative to aid any sized organization with not only efficiency, but growth and adaptability – as long as preparations, baselining, transformation, and governance are proactively addressed.

With the existing mortgage processes and historical approaches quickly “sinking,” ask yourself, where will you, your organization, and BPO / KPO outsourcing provider be when the historically shuffled “deck chairs” sink into the ocean? We cannot continue to think, act, and behave the same way – “We’ve had all We’re Going to Take!”

The information presented above is a synopsis from the Mortgage BPO and KPO Outsourcing Markets 2007 – 2009: Securing Profitability and Efficiencies in Troubled Times Report sponsored by WNS to be released at the 94th MBA Annual Conference in October by authors Mark P. Dangelo and Rick Grant.

Title excerpt attributed to John Connally, famous Texan politician – “…Better to be prepared to sit on the docks of Shanghai in your little cars while you stare at your own little television sets and eat you mandarin oranges, because we’ve had all we’re going to take!” as put forth in the Financial Times, Stefan Stern, September 4, 2007, Page 14).

A primary reason for this association resides with the 800% increase in VC and equity investments during the last four years to over $800 million for “Web 2.0” firms – Financial Times, September 6, 2007, Page 13.

Although, there is considerable “enthusiasm” by global groups in purchasing these troubled assets from financial institutions during this time of tight credit and illiquid positions. According to a Financial Times article of September 6, 2006, page 13, nearly $250 billion may be raised on the private markets to acquire these “banking positions” at severely reduced ratios – aka “fire sale” pricing during the remainder of the year across the global markets.