A Mature Market for Offshore Mortgage Processing?

In the years since the first brave mortgage banks initially ventured offshore, business process outsourcing (BPO), and particularly offshore BPO, has generated a significant amount of attention within the mortgage industry. As greater numbers of mortgage banks sought partnerships with offshore BPO

BPO providers-increased expertise and reliability

The number of mortgage BPO providers has increased over the past two years, and, at the same time, some industry providers have begun to consolidate in order to offer more comprehensive services and to capture larger market shares in the United States. In a July 2006 report, Needham, Massachusetts-based TowerGroup, a financial services research and consulting firm, estimated the 2005 direct cost base of the U.S. mortgage industry was $44 billion-and half of this cost was attributable to labor expense.

Given these numbers, it is not surprising that providers based in lower-cost areas have grown to fill the demand for labor that is highly skilled, available and cost-efficient. An April 2006 TowerGroup report showed that as many as 18 India-based BPO providers were then serving U.S. mortgage banks. The number has surely increased since then, and as the number of offshore BPO providers has grown, the best of these firms also have matured into more knowledgeable and reliable service providers.

The mortgage BPO industry has significantly enhanced its knowledge base to deliver processes of more breadth and depth from outside the United States. The employees of both captive and third-party offshore mortgage operations have cultivated more specialized knowledge and are now equipped to handle complex mortgage processes. Much of this knowledge has been acquired through rigorous employee training and career-development initiatives. These programs focus on teaching employees skill sets specific to a vertical industry such as underwriting or loan-pool pricing, rather than training them across a horizontal process such as customer service or basic data entry. Additionally, offshore BPO operations leverage online and multimedia training programs such as those offered by the Mortgage Bankers Association (MBA) through its CampusMBA to provide yet another level of industry training and expertise.

As the number and complexity of processes delivered offshore increase, so has the need to maintain the highest levels of compliance, risk management and security in offshore operations. Whereas the early days of offshore processing were characterized by single-location providers with limited business continuity and compliance capabilities, today's top-tier providers have multi-city, multi-facility operations that offer business continuity, compliance, and security infrastructures and processes that are as mature as those in the United States. These enhanced capabilities allow providers to maintain service levels in the event of a natural disaster (such as the July 2005 monsoons in Mumbai, India) or other catastrophic events, by migrating processes to alternate locations.

Optimized program governance and project management also have become key differentiators and enablers of operational excellence for third-party providers, allowing them to maintain the highest levels of compliance, risk management and security for their U.S.-based financial services customers. The firms that focus on providing a high-touch onshore program-management presence often are the most successful in maintaining high levels of customer satisfaction, and mitigating risk factors and concerns before they arise.

Data-center security, customer information security and physical security standards in offshore BPO locations often meet or exceed the standards at locations in the United States, according to TowerGroup reports filed just after an April 2006 research trip to India-based BPO facilities, and according to several other cybersecurity experts' assessments. Compliance, security and business continuity are now traits inherent of offshore BPO providers that are in the business of supplying "always on" business processes for demanding customers in the financial services industry.

BPO buyers: strategic global sourcing is the new paradigm

As providers of mortgage BPO services become more mature in their service-delivery capabilities and industry knowledge, buyers also have learned some important lessons and strategies when it comes to offshore sourcing. Many of these buyers initially moved toward global sourcing to reduce comparatively high fixed labor costs, but they have also realized several other important benefits as a result of offshoring.

Early adopters of mortgage BPO often chose to launch their BPO strategy by moving too many processes offshore at once, or by selecting processes that were ill-suited for offshoring because of their relative risk or complexity. Given these missteps, some early offshore endeavors failed in producing the level of cost savings or quality improvements that are now common in offshore programs. In the past two or three years, however, BPO buyers-with the help of BPO providers-have continually increased their knowledge of offshore strategy and governance, and these offshore partnerships have begun to yield significant benefits. Thus, where early adopters may have stumbled in offshoring the wrong processes, they and the next generation of adopters are now more knowledgeable about processes best-suited to fit within an offshore operating model.

Furthermore, the decisions driving what processes to offshore and in what manner to offshore them (e.g., captive vs. third-party; single vendor vs. multiple vendor; geographical choice) are now being treated as boardroom-level strategic decisions that can improve efficiencies, enhance quality, reduce time to market for products and services, and facilitate customer service-rather than simply reduce cost. In short, buyers have learned that, while improving cost efficiencies is important, it should not be the sole strategic driver for offshoring. On the contrary: Effective BPO programs operate as a strategic extension of the buyer's business, allowing the buyer to source work to the best-suited global team based on skill set, work quality, shift timing and costs.

Facilitating these strategic decisions to offshore are the investments that mortgage banks have made in technology, specifically related to enterprise loan origination systems (LOSes), document imaging, service-oriented architectures (SOAs) such as Web services, workflow management and security. Many lenders are now well-poised from a technology perspective to reap the full benefits of offshoring because of their recent technology investments.

Finally, for buyers sourcing mortgage processing work in diverse geographies, the practice is now seen as a competitive advantage, as opposed to a novel and risky undertaking. This is probably best demonstrated by TowerGroup's finding in April 2006 that 15 of the top 20 U.S. mortgage banks currently source components of their back-office functions from an offshore location, either captively or through a third-party partner.

Offshore sourcing-a strategic imperative

Offshore sourcing will continue to be an important factor in the U.S. mortgage industry today and in the future, as an increasing number of mortgage banks leverage global sourcing capabilities to maximize their in-house resources, reduce costs, maintain and enhance their competitiveness, and confront the volatile nature of the mortgage market.

Inevitably, offshore sourcing will continue to mature along with the mortgage industry, and global sourcing is likely to become a necessary component of any mortgage bank's corporate strategy. Indeed, following several years of innovation and process improvements by both providers and buyers of mortgage BPO services, processes delivered today by offshore providers would have seemed impossible to move just a few years ago. Furthermore, as conditions in the U.S. residential mortgage market continue to be volatile and origination volumes continue to fall from the all-time highs of the past few years, there is a significant-and growing-opportunity for mortgage banks to source their business processes captively, from skilled third-party providers or by leveraging a combination of both.

Offshore sourcing is likely to remain a strategic imperative, allowing mortgage banks to find the proper mix of risk, cost, quality and agility necessary to compete in a rapidly changing marketplace.