Transparent Shorelines – The Profitability Challenge, Part 2 -- September 2007 (Also appearing in the MBA Tech NewsLink), "How can the mortgage industry leverage outsourced relationships during times of turmoil?"

In Part 1 of this series, we discussed the foundation leading up to the three waves of outsourcing, ending with a description of Wave 1 efforts.  In this continuation, we will examine the more advanced and complex Waves 2 and 3 efforts and the impacts they will have on future collaborations between the sourcing organization and the outsourcing provider.

“The alignment of the provider with the organization is a challenge for today’s outsourcing arrangements.  Confronted with geographic, cultural, and communication issues, managers are facing on-going issues dealing with post-deal transitions.  The governance risks with these relationships are creating a new mindset within the organizational ranks to leverage the benefits while minimizing the downside losses,” according to Jim Dowell, COO at MortgageFlex Systems (MFS).

Mortgage Outsourcing Markets – Wave 2

Within those organizations fighting for survival, there will be a rapid adoption of military principles for “slash and burn” activities.  For these unfortunate few, low-cost providers will rule their decision making and enterprise relationships -- they will deliberately adopt Wave 1 attitudes and operating principles for the foreseeable future.

However, for those organizations who have prior outsourcing expertise and view the recent correction as an opportunity to build upon prior successes, Wave 2 represents outsourcing process expansion.  In Wave 2, many third-party relationships are being expanded through sole-source means due to successful results with the “one-off” process adoption techniques characterizing Wave 1.  Here more complex mortgage activities surrounding loan management and processing, underwriting, settlement, funding, and servicing are outsourced resulting in improved scale, knowledge transfer, and organizational acceptance. 

Jason Marx, the General Manager of Wolters Kluwer Financial Services’ Mortgage Segment advocates, “An effective outsourcing provider should be part of your overall planning process.   Part of their role requires listening to the market demands and constraints and providing thoughtful guidance on your plans.  You’ll want to ask thorough questions about their current solutions, technology roadmaps and investments to support those strategic initiatives.”

Wave 2 also signifies a shift from organizational need (i.e., we have to get this done) to one of expansion and growth for complex BPO initiatives.  Clear performance benchmarks, operating limits, and complex change management set the tone for proactive transition and governance teams.  In adhering to the sourcing lifecycle of adoption, sustainability, growth, and adaptation, Wave 2 organizations embrace the organizational discipline and rigor necessary to establish truly collaborative operating arrangements. 

Wave 2 organizations recognize that the landscape is littered with well-wishers, advisors, experts, and providers all seeking to “assist” the enterprise with baselining, alignment, savings, deal structures, SLA’s, transition, and of course governance.  They use this information as a framework for their “Smart-Client(1)” dealings rather than as a substitute for their active involvement and on-going “adult supervision.”  Albeit significantly less than presourcing levels, Wave 2 mortgage service buyers also recognize that outsourcing requires continued investments in mortgage processes.  It is not simply about throwing the process “over the fence” to a provider.

Mortgage Outsourcing Markets – Wave 3

In adapting to the future or third wave of mortgage outsourcing, mortgage professionals are struggling to internalize the best-practices and lessons learned required to address the complexity of multi-faceted, multi-year relationship mortgage service models.  Needless to say, this information is difficult to obtain let alone leverage.  In Wave 3 much like Wave 2, the implementation options are no longer binary as specialization of provider’s capabilities increase coupled with shorted organizational ROI expectations all underpinned by increased risks and exposures. 

Examples of this sourcing sophistication is evident in Wave 3 processes encompassing securitization and secondary markets and exception delivery processes’ -- default management, foreclosure, collections, REO, and bankruptcies.  Risk management, regulatory challenges, growth, competencies, and profit management are key overtones within Wave 3 outsourced areas, as they clearly represent the knowledge process outsourcing (KPO) growth areas for mortgage providers. 

Mr. Marx continues, “Today’s highly complex regulatory environment coupled with investors increasing aversion to risk is encouraging lenders to look at compliance and risk management in a new light.  They are shifting away from the highly expensive and inherently risky approach of managing compliance in a fragmented manner across the organization to an integrated centralized approach that relies on the advanced technology and services from recognized industry experts.  An integrated approach increases compliance intelligence and automation across the enterprise to enable greater control and effectiveness.  The advantageous outcome of this strategy is that it enables a financial institution to redefine their long-term growth strategy, continue to innovate and thrive.”

While the transition, governance risks, and obligations are not-trivial with Wave 3 processes, experienced sourcing organizations have recognized that to prepare for the new wave of industry demands and customer offerings, the adoption and adaptation of complex KPO arrangements will be necessary.  This can clearly be demonstrated in the growth projections for the mortgage KPO market that is estimated to increase at a yearly compounded growth rate of nearly 50% to over $17 billion by 2010 employing nearly 300,000 individuals(2).

Jim Dowell concludes, “New controls are required to take advantage of third-party relationships.  Sourcing managers need to proactively engage the supplier to incorporate improvement measurements, on-going education, and organizational change into the arrangements.  Without flexible controls, the arrangement will stifle and collapse under issues, animosity, and poor quality of results.”

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At a recent news conference, the CFO of Bear Stearns stated that the credit conditions are the worst he’s seen in 22 years(3).  Yes, it appears that even the liquidity brokers in the Financial District are not immune to market dynamics.  Within this landscape of chaos, the selection, adoption, and sustainability of these evolving or collaborative outsourcing relationships appears more bewildering than solving the current credit cycle.  For the next two years of sourcing, focus, baselining, organizational discipline and rigor, the alignment of relationships will be critical to transparent shorelines and improved operational profitability.

Outsourcing is about business, results, process, people, and an ability to grow.  The opportunities recognized by mortgage organizations through increasing experience will have a marked impact on their capabilities in BPO and KPO for Waves 2 and 3.  Those organizations whose outsourcing relationships are poorly structured, failing to leverage progressive process adaptation will be forced to travel “Thousands of Miles Before You Sleep…(4)” 

 

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. 

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