Transparent Shorelines – The Profitability Challenge, Part 1 -- September 2007 (Also appearing in the MBA Tech NewsLink), "How can the mortgage industry leverage outsourced relationships during times of turmoil?"

Stating the obvious, as the media headlines scream defaults, foreclosures, layoffs, and bankruptcies, the mood of the financial markets has turned decidedly negative – we are in trouble.  Combine this sentiment with a general market aversion to risk of any type, it would appear on the surface that the willingness to lend money has moved beyond its frenzied zenith -- the downside complexity of “synthetic” financial CDO instruments and the peaking of the leveraged buy-outs and private equity investments.  Perhaps the markets are becoming logical once again using their inherent self-correcting mechanisms – time will tell.

Whereas Wall Street firms and investors sweat out their real exposure, nearly everything touching the mortgage channels and processes will be impacted.  As the market unwinds the complex and interlinked financial instruments created by global “irrational exuberance(1)” and layered obligations, the mortgage professionals and the vendor markets will be striving, longing to find their footing.  It won’t be easy or pleasant well into 2008.  There will be new faces in the crowds filtered through the absence of old friends.

In spite of this turmoil and uncertainty, does this cadre of events really spell the end of innovation and expansion for the financial markets, and in particular the mortgage industry?  Lacking robust credit supplies, will organizations be forced to embrace new internal and external “third-party” relationships (e.g., captives, BPO, and KPO) to restore profitability and promote growth?  As these reactionary market drivers and directions continue, how will they impact individual corporate mortgage life-cycle sourcing efforts for origination, securitization, and servicing? 

Jason Marx, the General Manager of Wolters Kluwer Financial Services’ Mortgage Segment states, “Given the recent subprime woes, many lenders are working hard to rebuild investors’ confidence in their origination practices. For example, outsourcing many of the regulatory compliance and operational risk management processes tied to loan origination, especially with providers who have established acceptance within the secondary markets, is an extremely effective way to regain that trust.”  By choosing not to build or maintain specialized and expensive skills, sourcing organizations can achieve efficiencies while injecting innovating into traditional processes.

For today’s mortgage organization and the industry in general, we continue to utilize three waves or sequences of sourcing and outsourcing.  These waves are being accelerated by market conditions, electronic mortgage delivery and processing, and an aging domestic population resulting in organizational uncertainty and “what should we do next?” 

Jim Dowell, COO at MortgageFlex Systems (MFS) says, “From our earlier experiences, outsourcing can be used to augment and increase the efficiency of selected service operations that span multiple processes. This can be done only if they are repeatable and measurable -- unstructured outsourcing processes significantly increase organizational exposures and risks.”

In the forthcoming Mortgage BPO and KPO Outsourcing Markets Sector Report, nearly 60 outsourced mortgage processes are profiled, ranked, and assessed across numerous operating parameters.  The process analysis demonstrated three clear waves of clustered outsourcing opportunities for mortgage organizations to consider as they assess their current arrangements and forecast others for future consideration. 

Mortgage Outsourcing Markets – Wave 1

According to MBA published data, since 2003 the industry has experienced a decrease in loan officer productivity approaching 40%, while the origination costs per loan have more than doubled.  Furthermore, the average income per loan for 2007 is anticipated to be under $250, while origination volume is projected to continue to slide(2).  It is a recipe for continued industry consolidation and shakeup — significantly declining volumes and margins resulting in organizational restructurings and expansion of sourcing relationships.

For an industry who believed that 2007 would bring about a second half turnaround, outsourcing and its internal cousin “captive center” were traditionally techniques used to reduce expenses and increase margins.  These outsourcing relationships represented the first wave of globalization seeking lower production costs in functional areas such as call centers, information technology and document management.  Achieving critical mass in the mid to late 1990’s, these operations were self-contained, easily transferable, and fit nicely into geopolitical regions with pockets of trained, low-cost workers. 

Mr. Dowell concludes, “While earlier waves of outsourcing represented singular processes that were driven by cost avoidance, smart organizations recognize that active customers and intensive knowledge processes cannot be solely left to third-party providers.  Even though costs are important, they should not be ‘the deciding factor.’”

As a result of the industry’s early successes, our public debates still focus economically and politically on the shorelines -- “do we look offshore or onshore?”  While always being influenced by costs, the market reality is that the use of captive, outsourced, or hybrid relationships are no longer just about labor arbitrage and the shorelines. 

As the first wave of shoreline usage faced diminishing returns, skyrocketing costs, and extensive turnover early in 2004, the experienced “globalization” professional began questioning if the procurement mentality selection of the lowest-cost provider was sustainable.  This change in attitude was driven by new, complicated operational process requirements centered on skill sets, quality of service, declining domestic populations, pandemics, and consumer complexity.  Additionally, implementation results consistently challenged the corporate transition manager and governance body -- growth and collaboration could not singularly be achieved at the end of a “stick” or punitive contract. 

Jason Marx articulates, “Lenders must be focused on their core competency, first and foremost of which should be superior customer service that results in continued revenue growth. Managing regulatory compliance and operational risk is often not a core competency, so partnering with a leading risk management provider makes a lot of sense. The provider needs to understand quality data management, compliance content management, and change management and deliver it through experienced subject matter experts trained in best practices methods. Furthermore, to keep costs and risks low the provider must employ technology that corresponds with industry standards. Without proper methods and technology, operational costs and compliance risks rise as workers are left to manage complex work loads with insufficient tools that are not designed for the complexity of today’s lending environment.”

In Part 2 of Transparent Shorelines, we will examine Wave 2 and 3 processes and the compelling events that surround their implementation.

The information presented above is a selection from the Mortgage BPO and KPO Outsourcing Markets 2007 - 2009 Sector Report sponsored by WNS to be released at the 94th MBA Annual Conference in October by authors Mark P. Dangelo and Rick Grant.  This multi-chapter mortgage report will contain over 50 supporting diagrams, numerous case studies, lessons learned, and guidance for mortgage decision makers seeking to implement or adjust their existing and / or future collaborative BPO and KPO arrangements. 

 

For 2008 MBA entries, click here

For 2007 MBA entries, click here

For 2006 MBA entries, click here