Taking Care of Business

January 24th, 2012

By Mark P. Dangelo

Innovative Relevance

http://www.mortgagebankers.org/tools/FullStory.aspx?ArticleId=28527#full

Four years after the Great Financial Crisis of 2008, senior
banking officials are continually thrown under the bus as the new Robber Barons—just
as industry captains of old (e.g., Andrew Carnegie, John D. Rockefeller, and
Cornelius Vanderbilt).  History is once
again repeating itself.

The formerly revered and sometimes feared names of Lewis
(BofA), Mozilo (CWF), and Cayne (Bear Stearns) have been ushered out with scorn
and replaced by new leaders seeking vision, directions, and regulators approval—and
a way out of billions in litigation, claw backs, and fervent attorney generals.  Whichever side you take on the financial
collapse debate, constantly shifting politics within a presidential election
year continues to make it a very unpleasant time to be a banker, let alone a
financial institution with nervous investors.  Perhaps by 2015, we can find that elusive “next
curve”.

Moving forward and with increased certainty, financial
institutions, driven by a new patchwork of thorny, disjointed global regulations
including mandated annual stress tests, are turning historically venerated institutions
into ordinary public utilities with commodity offerings.  It is under the guise of safety, soundness,
and deep liquidity where hundreds of billions of investments will be spent on
new infrastructure (i.e., hardware, software, services, security, and networks),
policies, and processes to satisfy the next five to seven years of regulations.  Reminiscent of the go-go mid-1980’s
investments, the war on profit and loss will be waged with diverse technologies
and data efficiencies—not lending and trading. 

As a result of the games being played and the livelihoods
being lost, I for one am growing exceedingly tired of waiting for the next shoe
to drop and the pundits to finally get it right.  How many housing recovery plans have come and
gone in the last 48 months from every constituency—the Administration, Congress,
the Federal Reserve, industry associations, and consumer groups?  Whether some like it or not, it is past time
to get back to finance and banking business. 
Dialogue doesn’t pay the bills—discretely focused and measurable actions
will.  Let’s look at two key actions for
2012-2013.


Loan Origination System Excellence

In an extensive interview with industry mortgage veteran Keith
Kemph, Managing Partner, Shadow Point Consulting LLC, he highlights his 2012 strategy
and operational initiatives for profitable originators and their tightly-coupled
LOS needs.

Regarding the current state of the industry and an ability
to adapt, “One word that has become synonymous with the mortgage industry is
change.  Whether it’s a) change for the
good, b) change for the worse, c) change that helps move the industry forward,
or d) the recent changes we’ve seen that move our industry ‘backward’, today to
survive the new mortgage millennium mortgage bankers must be more ‘agile’.  Bottom line, a mortgage banker’s agility (or
lack thereof) will directly impact their bottom line (cost per loan / net
revenue per loan) and subsequent survival.  Agility is required at both the philosophical
and IT infrastructure level.”

To support changing requirements and industry paradigms, Mr.
Kemph states, “Before we can address how the pending regulatory and compliance
changes will need to be supported by technology providers in 2012 and 2013, we
first need to look inwardly and be certain our ‘business philosophy’ has
successfully made the transition from the traditional mortgage banker thought
process of ‘that’s how we’ve always done
it’ to ‘what do we need to do?’  Once mortgage bankers have successfully
adopted this new philosophical framework for evaluating their business
processes, policies and procedures they will be in a better position to
articulate what exactly they need from a process or technology standpoint.  Then the mortgage banker can then start asking
their respective technology providers and personnel to assist them
accordingly.”

When discussing existing operations and investments, “As it
stands today, a majority of mortgage bankers have already gone out and
purchased a new LOS at some point in the last three or four years.  Still other tech savvy mortgage bankers have
successfully patched together a fairly efficient set of processes that deliver
compliance.  Considering this and how
mortgage bankers will continue to operate on razor thin margins for the
foreseeable future, they will not be able to afford an initiative of uprooting
their existing technology and starting from scratch in order to meet changing
regulatory requirements.  Furthermore, mortgage
bankers are keenly aware that while each vendor offers various bells and
whistles, after all the hard work, time, money, and effort the mortgage banker
still holds the bag.  Loosely translated
this means that the mortgage banker still assumes 100% responsibility for their
‘loan decision’ on each and every loan regardless if the technology provider is
compliant, or not.  As a result, it’s no
wonder mortgage bankers are carefully evaluating risks versus costs when making
decisions surrounding technology investments.”

Mr. Kemph emphasizes, moving into the definition of and deployment
for business and consumer mandates, that “There will be growing demands within
the industry for LOS providers to offer more cost effective access for clients
to self manage their own LOS environments and platforms.  This will require technology providers to
become more organized and efficient in managing professional services, while
delivering technology in an agile architectural envelope which is both client
and vendor integration friendly.  Otherwise,
outsourced professional services, consulting firms, and 3rd party
vendor software services will see THE increased demand, as they help
organizations deliver maximum productivity and revenue using compliance as the
wrapper.  It’s my opinion that either by sheer
luck or a true strategic approach, firms and partnerships similar to Optimal
Blue, Secondary Interactive and Motivity Solutions, are fine examples of
organizations that may be ahead of the curve in this regard.“

So what should be done to guarantee investment returns?  Mr. Kemph concludes, “While technology
providers have historically played an important and significant role in helping
mortgage bankers to operate more efficiently, for the next two years they are
going to need to align themselves with vendor partners.  They must seek out best-in-class customer
service and low cost and high efficiency firms, who also provide easy access to
framework architectures at a reduced cost surrounding platform management.  Five years ago, the CEO of a leading mortgage
technology service provider privately stated, ‘It’s ok for our clients to put
pressure on us and dictate what they need – the pressure to reinvent ourselves
is a good thing for the industry.’”

As Mr. Kemph touched on above, the demand for technology to
business process integration will become a cornerstone and key competency of
any future banking strategy—that is they must be proactively linked to promote
the best fit at the least cost.


Transforming Business Process Management (BPM)

In transforming organizations using BPM, Pedro Fong,
Managing Principal, Innovative Relevance® directs his expertise against the
extensive adjustments and development of business processes needed to
efficiently orchetrates technology investments, data reuse, and operational
integrations.

For Mr. Fong, the remedies of prescriptive solutions are not
a panacea due to the complexity of legacy environments.  “Constant change seems to be the ‘new normal’
in our post mortgage meltdown economy. 
Yet, exactly what does that mean for BPM folks?  This new equilibrium can refer to a variety
of new business processes that have to be either reengineered or created from
scratch for a business to profitably operate. 
If you are lucky your business partners should have standard business
processes that were documented and instantiated within the organization well
before your arrival—or not.  Either way
businesses are going to need BPM expertise that can step up and help
organizations navigate through the different methods and techniques available
today to achieve their business needs. 
Unfortunately the answer of whether to BPM or not is ‘it depends’.  Moreover, BPM is not going to be a ‘silver
bullet’, but it can be a way for an organization to capture its thought
leadership and map out a strategy.  This
is an approach that can be communicated out on what the new normal means to the
organization and how it’s going to impact its operations and profitability.”

By selecting the right instrument for the task at hand, “Everyone
understands that simply deciding that you are going to ‘do’ BPM and purchasing
a tool, does not mean that your BPM approach will help you achieve your
business goals.  BPM at its core is
really a way for IT and the business partners to communicate through the use of
a ‘process tool’ or common language that will help their organizations become
better aligned to achieve their goals. 
Once aligned, IT and the business can focus on the people, process, and
technology changes required.  The
implementation of any new business process (will be read by the organization as
‘change’) whether it’s a small tweak, a process redesign, or the creation
processes to support a new business; they all have to be approached
methodically.”

If organizations reuse the same tactics and principles of
operation, they will fail.  So what
should be done?  “The ‘new normal’ is
challenging the FSI in ways that cannot be addressed with the same old
approaches and tools that banks have used in the past.  The banks that choose to dust off their old
approaches to meet these new challenges will at best continue to struggle or
worse fall by the wayside.  The new
normal requires FSI organizations to look at everything and rethink how they
will meet the challenges (e.g., new regulations, risk management, increase
profitability, consumer perception, and ever changing technologies) that are
being thrown at them at a high rate of speed and still run the bank as a for-profit-business.  Changes will continue to be lobbed at FSI for
the foreseeable future and banks will not have the luxury of implementing them
at the same slow and steady pace that they have been operating in the past—as
new regulations now number in the dozens per week.”

By internalizing nimble, compartmentalized building block business
processes, “Only the process savvy, agile organizations will be able to keep
pace with changes as they sweep across their FMBO’s (i.e., front, middle and
back office).  These organizations will
not only know their business but they will know how all the processes are
wired, what processes are shared across business units, the data that is being
passed through each point in the process, how that data is used, how fresh or
accurate the data is—where else should they be leveraging that data to support
other business processes?  Banks will
need expertise to identify how to interconnect their current vertical stove
pipe business units to create a more efficient and profitable
organization.  Understanding how to
maximize existing business processes is going to be a key starting point for
all of the banks.  Nonetheless,
understanding how to successfully implement those new business processes will
determine which ones will be the leaders and which will just be running with
the pack—or not at all.”

* * * * * * * *

The need for solid directions cannot be underestimated for
this coming year.  With a projected
recession for the second half of 2012 spurred by EU crisis after crisis, and underpinned
by the realization of why a $1 trillion IMF fund is needed to deal with lending
demands, it is clear that business as usual or a return to normal is a
mirage.  The deployment of new structured
products (e.g., US covered bonds, non-GSE MBS’s) and robust secondary markets
(for liquidity, risks and pricing transparency) are also a critical aspect that
many domestic corporations have yet to appreciate, let alone create plans for
implementation.

Moreover with foreclosures now projected to be greater than
1.5 million in addition to the hidden REO stealth inventories for 2012, the
downward pricing on housing even without the prospect of rising energy
pressures (e.g., gasoline > $5 gallon) will not allow the market to find a
new equilibrium.  With consumers once
again diving into savings to support the recovery, the market’s ability to
reach origination and refinancing volumes equal to just two short years ago may
take another five or seven years to reach.

The need to get back to business has never been greater.  Very little of the past is a guide for the
future as the forecasts continue to be wrong. 
To deal with the vast uncertainty of consumers, markets, and
politicians, technology and data must be the cornerstones for critical
transformational actions.  Taking care of
business has to start with LOS excellence, BPM, and the downstream needs that
are tightly-coupled with every new, non-government backed structured
product.  The realization of lead,
follow, or get out-of-the-way has never had great resonance.

 

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Private Securitization Markets Are Too Important for Politics

July 18th, 2011

By Mark P. Dangelo

Since the 1780’s, covered bonds have been a favorite for
investors seeking dual resource within a highly rated, senior-asset class.  In 2011, institutional and insurance firms
(i.e., sophisticated investors) are projected to double their purchase of EU covered bonds (CB’s) to over $60
billion – some denominated in dollar and others in Euros.  What’s more, new CB issues offered to
investors in the first-half of 2011 were oversubscribed by a factor of three to
four.

In March 2011, the Garrett-Maloney
legislation (H.R. 940) was
introduced in a bi-partisan effort to break-through a three year political
battle regarding the establishment of legal protections and guidelines for a
U.S. CB market.  As reported, U.S.
Representative Barney Frank sought to
amend H.R. 940 at the behest of a specific U.S. regulator, but it passed out of
committee by a vote of 44-7 in late June. 
Needless to say, the amendment actions from the co-author of Dodd-Frank (DF) generated strong reactions and rebuttals from those
understanding the importance of the CB legislation to the future financial
supply chain.

Globally, the implementation of legislation to establish a far-reaching
U.S. CB’s marketplace have been positively portrayed or actively supported by a
number of institutions and industry associations.  A few names of note include: SIFMA (Securities Industry and
Financial Markets Association), ASF,
MBA, BoAML, Barclays, RBC, OCC, NRSRO’s, Goldman Sachs, and even PIMCO.

It is worth noting; a robust U.S. CB program solution set was
reported as part of the original DF to stimulate private securitizations, but allegedly
at the request of the FDIC and supported
by legislators it was pulled from the final vote. 

What has been the result of languishing CB legislation and
regulatory, political manipulation? 
Another year has gone by with the government guaranteeing over 95% of
the housing finance market, and the Federal
Reserve continuing to maintain a large balance sheet of over $2 trillion. 

Frequently noted, there were only two private
securitizations in all of 2010.  The
potential implications of this void are that trillions in private money waiting
for quality, secure instruments were invested in foreign markets.  With $3.5 trillion of non-U.S. CB’s already in existence, it would appear there is ample
justification to create a robust U.S. market – to keep private money within the
domestic landscape.

Moreover, factoring in the worries surrounding sovereign
debt and the pending downgrades of government bonds, which will eventually happen
if the U.S. debt ceiling is raised without an austerity plan, the amount of
triple-AAA securities available continues to fall globally since late 2009.  If the U.S. debt is downgraded one or two
notches, then the impact to banks asset ratios will fall, sparking a flash-crash
to find replacements and shore up regulatory demands (e.g., BASEL). 
Where will the “secure” money rush to and what will be the fallout
across the financial services supply chain funding? 

U.S. covered bonds are not a panacea for the lack of private
securitizations — and the removal of big-government from the housing and asset-backed
(ABS) markets.  However, they do represent a piece of the
solution for private securitization, leveraging a 225 year old instrument
(i.e., using something familiar to create something new and beneficial).  Like any fresh solution and especially with a
modernized financial instrument, there are concerns and myths that have
surrounded the usage of CB’s within the United States. 

Let’s review a few of the often sited challenges (C) and their responses (R).

(C): Since U.S. CB’s are only useful for residential mortgage
securitization, why are they important when the housing market is still
shrinking?

(R): Under current House legislation, U.S. CB’s would cover nine
asset classes – residential mortgage, home equity, commercial mortgage, public
sector, automobile, student loan, credit or charge card, small business, and
other (as defined by the U.S. Secretary
of Treasury) – resulting in a wide range of quality assets appealing to the
varied needs of investors and institutions. 

(C): So what can U.S. CB’s do for a beleaguered housing market and
financing?

(R): With limits and restrictions on the amount of CB’s that can be
issued against balance sheet assets (yes, CB’s are on-balance-sheet
instruments), the total amount of issues would be gradual.  The impact would likely be noticed six months
after legislation is signed into law. 
For example, if an additional $250 billion of U.S. CB’s were issued in
2012, it would represent a significant potential to securitize assets (and make
loans available).  This could be very
beneficial and timely with the reduction in conforming loan limits expected to
take place in October 2011 across 250 housing markets.  For those working in origination and customer
contact, U.S. CB’s offer new financing capabilities / options directly linked
into the servicing, secondary, and investor worlds.  CB’s are not MBS’s.

(C): CB’s only benefit larger institutions effectively shutting out
small banking issuers.

(R): H.R. 940 took this challenge head-on by allowing eligible
issuers to pool assets.  This provision
would allow any depository institution, bank holding company, nonbank financial
company, or issuer sponsored by eligible institutions, to issue U.S. CB’s on a
pooled basis.  With a wide-range of
eligible assets, smaller organizations can pool assets within classes to create
“jumbo” issues – that is greater than $1 billion within a cover pool.

(C): U.S. CB’s would lessen the importance of the GSE’s and FHL banks.

(R): In their current form, U.S. CB’s would provide alternatives
for investors, issuers, and for government decisions on the systemic structure
of finances.  It would be another option
and tool for use with the final disposition of the GSE’s, and the removal of
taxpayer liabilities and losses on guarantees. 
CB’s have a potential to positively impact costs to consumers, and the increasingly
burdensome, evolving government regulations (e.g., QRM) on what constitutes loan acceptance.

(C): The Federal Reserve does not recognize CB’s as collateral at the “Discount
Window”.

(R): Since 2008, the Fed has provided distinct margin requirements specifically
for these assets.  If the U.S. CB market grows,
it is anticipated that the Fed would continue its acceptance and potential
expansion of these U.S. assets – and the favorable rates these
over-collateralized instruments have historically received.

(C): CB’s are not a quality asset since they do not have government
guarantees.

(R): CB’s are considered a dual recourse asset class – they have
the backing of an over-collateralized asset pool and the soundness of the
issuing institution.  They typically
carry a rating from several NRSRO’s
and they are on-balance sheet, senior secured debt (usually lessening the risk concerns
for institutional and insurance investors).  These asset classes are not tranched like
traditional MBS’s and asset classes cannot be mixed (e.g., auto with home with
commercial).  Any non-performing asset in
the cover pool is required to be replaced.

(C): When will U.S. CB’s as defined by current legislation become law?

(R): This is the most frustrating aspect of the last three
years.  Since July 2008, when Secretary
Paulson announced the U.S. Covered Bond program and best practices (and backed
by public commitments from BoA, CitiGroup, Wells Fargo & Co., and JPMorgan),
there have been no issuance of U.S.
covered bonds.  The House is now able to
move forward, but no corresponding bill has been introduced into the Senate
(although news reporting states that Senator
Schumer plans to do this).  Best estimates
place a U.S. Covered Bond Law sometime in Q4 2011.  The greatest unknown and threat is the White
House’s current appointment to become the FDIC Chairman.

(C): Secondary markets are not important for U.S. CB’s.

(R): There are three critical taxonomies for CB’s: 1) issuers and
investors, 2) trading and settlement, and 3) FMBO (front, middle and back office).  Each of these segments promotes not only the CB
issuance, but the need for on-going market liquidity, transparency, and data
dependencies.  Hence, there is a critical
need for an open and robust secondary market. 
Across the three categories are 10 major processes: 1) risk management
and investment principles, 2) discovery and research, 3) controls and strategy,
4) technology, 5) compliance, 6) asset / cover pool management, 7) financial
management and issue integrity, 8) reporting and servicing, 9) pricing,
transparency, and liquidity, and 10) clearing and settlement.

(C): The lack of definition and development of processes will limit the
deployment of U.S. CB’s

(R): To ensure that every institution has an equal opportunity to
participate in the U.S. CB markets, the use of pilots and consortiums will
become prevalent in the next 6 to 12 months. 
Within the areas of technology, compliance, and FMBO, knowledge
workforces and operations must be shared to deal with the demand for best-practices
(see U.S. Treasury publications), while lessening capital outlays and organic,
organizational challenges.  Equally,
secondary market exchanges will be adapted to allow for active trading of
issues and to properly assess the on-going risks, performance, and liquidity
(including the use of fixed-income workstations for discovery and analytics).

A U.S. Covered Bond Law holds great promise when considering
the needs to reform housing finance, improve asset quality, and reduce the
opacity that dominated private financing “innovations” since 1998.  While the Financial Depression of 2008 forced
a retrenching of private securitization and steered banking institution
priorities away from these on-balance-sheet assets, U.S. CB’s hold a key to the
future for weaning domestic markets away from government life-support and
draconian regulations.  It is one of
several solutions that will be required to restore private securitizations.

If the housing and finance markets are to recover and
eventually grow, private money and investment once again must be welcomed with
confidence and proper risk-attribution.  Evidence
of this comes in the form of social media discussions on the topic, LinkedIn groups (see #U.S. Covered Bonds), and countless
tweets on the subject.  Of course, there
is three years of Congressional testimony, numerous whitepapers, countless
websites, and daily and weekly articles in places like the Financial Times.

The principles and frameworks encompassing CB’s proven for
hundreds of years – and updated for our domestic markets, regulators, and
behaviors — offers one of the needed options institutions, homeowners, and
investors have been seeking. 

The politics surrounding the U.S. CB’s must end in 2011 –
three years in “development” is enough.  The
final question is, “When will Congress and the White House finally act?”  When will the U.S. get its new legislation
addressing an asset class used for centuries by other countries?

 

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Outsourcing – The Right Way

June 21st, 2011

By Mark P. Dangelo

Since 2008, non-manufacturing outsourcing, both offshore and
onshore, has undergone remarkable changes – forced M&A’s, fraud, declining
margins, vanishing customer bases, and market consolidations.  The economic downturn caught outsourced firms
off-guard and unprepared for political and domestic purchasing shifts coupled
with a lack of skilled, locally based, non-sales resources. 

Additionally, competitive upstarts using cloud technologies
are sprouting up biting into traditional outsourcing profits often booked during
years 2 through 4 of contract terms.  Factor
in a domestic unemployment rate estimated to linger at 8% to 9% until at least 2013,
indirectly creating protectionist sentiments, and the operating and usage
models for outsourcing are generating unique opportunities for buyers and
providers of services.

As traditional offshore firms struggle to regain direction,
it has been the domestically based and globally integrated outsourced providers
that have risen to leadership status during the financial and consumer crisis. 


A Changing Industry

The Great Financial Depression of 2008-2010 has changed the
outlook and the realities of how corporations select and engage with
outsourcing service providers both in the information technology (IT) and
business process (BP) space. 

With the U.S. economy languishing and housing officially in
a double-dip decline, the engagement parameters, governance, and corporate
drivers also continue to be transformed, moving from siloed offerings into
integrated capabilities selected in clusters or individually. 

Once driven by labor arbitrage fueled by educated remote
workforces, the outsourcing industry ran up meteoric growth of 25% to 35%
annually from humble beginnings in the early 1990’s to reach an industry top
line revenue rate exceeding $50 billion. 
In 2011, market growth has been reduced to just 5% to 15% CAGR.  

Historically, outsourcing was viewed as a path to
cost-efficiency and scale of operation, and it flourished under an order taking
model for nearly 15 years giving rise to numerous billion dollar
multi-nationals entrusted with front and back office processes.  However, outsourcing as an industry has now
matured and reached a conventional familiarity with buyers.  It is no longer a panacea for CFO’s and COO’s
to fix operational inefficiencies. 

With financial services becoming increasingly homogeneous
and utility defined, outsourcing buyers are seeking out true partners who can flexibly
assist with differentiation, customer retention, individualized service, and of
course, all with an acceptable ROI and risk. 

It is this change of positioning (e.g., historically, measure
everything, adversarial vendor relationships, and distrust of the outsourcer)
coupled with market and economic realities which are opening up new contractual
dealings beyond SLA’s and dashboard reporting.

The old “lift-and-shift”
model has yielded to consumer needs of variability and knowledge
expertise.  The result is a bespoke
approach of metrics, compliance, and governance underpinned by robust industry
expertise. 


Questioning a Right-Sourced Outsourcing Provider

As panicked financial outsourcing consumers sought out
right-sized solutions to alleviate their operational burdens and risks, domestic
outsourcers rapidly adjusted their delivery models as the crisis’s unfolded.  After all, they had local experts who
understood the domestic cultures and changing national sentiments.

To achieve an outsourcer provider perspective for this
article, I reached out Keane, an NTT Data company, to provide their
insights and lessons learned.  Ken Miller, Director at Keane in the Securities and Capital Markets group,
provides the answers to a few of the critical questions regarding on-going
market changes (see Mr. Miller’s responses in italics). 

1.    What
new approaches or methods for outsourcing have been introduced since 2008?

KM: The outsourcing horizon is changing dramatically.  Labor arbitrage is now a commodity and
sourcing decisions are increasingly based on specific value added rather than
pure cost savings.  At Keane, we have
seen this manifest itself in the success of our Halifax based operation, where
clients have turned to a near shore alternative that brings many of the
benefits of traditional outsourcing, while eliminating the inconveniences of
time zone differences.  The outsourcing
business in general is in a natural state of evolution, and firms in financial
markets are looking to find “right sourcing” rather than “outsourcing”
solutions.  This will involve a mix of
traditional outsourcing including India,
China, Eastern Europe, South
America as well as innovative
sourcing, including sharing of processes on a business to business basis,
even between traditional competitors. 
This mixture is becoming the norm, and I expect this to be a dominant
theme in times to come. Value, rather than cost savings, is the deciding
factor.

2.    What
are the lessons learned moving into the remainder of 2011 that every
organization engaged in an outsourced relationship should be internalizing?

KM: First, make sure you can articulate a cultural alignment between the traditions
and values of your firm and the outsourcing provider; your outsourcer is an
extension of your firm.  Second, identify
and institutionalize key success factors; not just service levels but the real
items which determine success as measured by the outside world.  Third, do not make an outsourcing decision
based on cost savings. Cost reduction is only a part of operational efficiency,
and focus on this is a recipe for reduced client service.  Finally, do not focus entirely on utility
services; if you look introspectively, you may find that there are better
sourcing alternatives for processes you might regard as core competencies.

 

3.    Has
outsourcing become increasingly about technology ubiquity?  What are the key points organizations need to
consider when evaluating or renegotiating outsourcing relationships?

KM: The key to this question is to understand the interplay between
people, process, and technology.  Outsourcing
is not about technology ubiquity and we are increasingly seeing Business
Process Outsourcing become the norm.  Typically,
outsourcing firms will offer guaranteed cost savings over a period.  They are able to achieve this by adopting
methodologies such as Lean and Six Sigma that allow them to adapt and evolve
people, process, and technology deployment to drive operational efficiency.  The key is to recognize that these three sides
of the triangle are inextricably linked.  When negotiating an outsourcing agreement, an
organization needs to comfort itself that the potential provider is taking
adequate heed of this.  Otherwise,
desired benefits will not be achieved.

4.    With
financial volumes being consolidated, due to client M&A efforts, what
happens to the outsourcing relationship in these situations? 

KM: Often time an incumbent outsourcing agreement can be a significant
benefit in an M&A scenario.  Similarly,
outsourcing, especially BPO can be an effective transitional methodology and
can greatly assist migration efforts by depoliticizing integration activities.  This can be particularly effective when a
captive organization previously existed; there are many instances of such
captives being sold off to major providers to assist in cost optimization.  In addition, a pre-existing outsourcing
arrangement can often be a ready source of further cost savings by extending
scope, bearing in mind the need to focus on value.  In such scenarios’, innovative leverage of
outsourcing arrangements (e.g., taking advantage of follow the sun scenarios
can greatly facilitate integration).  I
have recent experience of a client being able to eliminate costly over night
reconciliation by shifting the activities to a different time zone.  It is in such scenarios that the true value of
outsourcing, particularly BPO, can be unlocked.

5.    Information
is progressively more mobile, how can outsourcing help mitigate the security,
privacy, and regulatory concerns many enterprises are facing? 

KM: Outsourcing is now an accepted way of dealing with cross enterprise
regulatory concerns.  AML and compliance is
core outsourcing competencies these days, and often times these issues are more
easily dealt with by alternative sourcing rather than cross divisional internal
utilities.  Also, regulatory bodies are
beginning to embracing this.  Regarding
mobile devices, these are not going away, but should be regarded as portal
technologies.  No different than the 3270
technology of yore.  Key considerations
of security, privacy and the like need to be addressed at the data source, and
this is not going to change in the near future.

6.    With
global disruptions prevalent in the headlines, disrupting service supply
chains, what contingencies should be made or included in contractual
relationships moving forward?

KM: Easy answer.  Do not adopt a
sole sourcing approach.  Diversify your
risk.  The best example of this in recent
times is Apple.  The Japanese crisis disrupted most hi tech
supply chains, but not Apple.  The iPad 2
rolled out on time.  Apple had its
sourcing options in the right place at the right time.  Contractual negotiations in this arena should
never be exclusive and should always allow for multiple sourcing.

In conclusion, the future of outsourcing will remain an
organizational decision to find the right balance of cost, value, and risk to
meet the changing needs and behaviors of consumers.  The “right” model takes into consideration
domestic needs, core competencies, and local workforce leverage. 

While there will be offshore outsourcing organizations that
continue to prosper, their lure of cost efficiencies driven by arbitrage are no
longer THE compelling business
case.  Perhaps this is why most are now
rushing to have 25% to 40% of their enterprises labor forces onshore as they
fight to comprehend the local cultural shifts?

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