Business Process Outsourcing: Is It Right for You?

Business process outsourcing (BPO) holds great promise for the mortgage servicing sector. Whether working with onshore or offshore companies, a wide variety of third-party service providers are leveraging economies of scale and narrowly scoped domain expertise to bring more value at a lower cost than

Is BPO right for your organization? It's a question executives across the industry have been thinking about and trying to answer for their companies. In a survey of senior executives from 50 mortgage and servicing companies conducted by Martopia in August 2006, 46 percent of respondents said their company was considering outsourcing, while 54 percent reported they were not. Of those considering outsourcing, more than one-third said they were looking at both onshore and offshore alternatives.

Looking inward

The first step in determining whether BPO is a good option for any firm is a thorough analysis of the company's corporate goals and objectives, especially as they are expected to evolve on a go-forward basis. This is the key to determining the organization's core competencies and to identifying noncore functions that might be outsourced to a third party. Processes and competencies that do not have significant strategic value to a firm are prime candidates for outsourcing.

However, today's highly networked business environment has enabled powerful outsourcing options that were not viable even a few years ago. For example, the ability to seamlessly transfer large amounts of data and services has changed our view of what constitutes a core competency versus those functions now better defined as commodities. Running data centers or collecting payments, for instance-once considered core competencies-are now considered by many organizations as secondary to the primary (and strategic) competencies of customer service, retention and cross-selling.

Servicers must identify the internal capabilities that truly represent core competencies, but beyond that they must decide which competencies equate to strategic advantage. A functional operation such as default management can be performing at a very high level and be very efficient-but unless the company's primary focus is default management, that capability is not necessarily a strategic advantage. When faced with competitive pressures or aggressive financial performance expectations, some companies are choosing to partner with reputable BPO providers that can deliver high-quality services for a lower total cost of operations.

This is a significant shift for companies that have traditionally preferred to keep everything under one roof for purposes of centralized management and control. Still, the dynamics of the marketplace and the availability of enabling technology have made it necessary for most companies to at least reconsider that position.

Cost reduction

Telecommunication costs have dropped significantly, while bandwidth has grown exponentially. At the same time, technology has become much more flexible and accessible, enabling a wider range of opportunities to improve processes and conduct business globally 24 hours a day.

Businesses can now seamlessly connect their functional operations whether they are performed in-house, offsite or by third-party BPO providers across the globe-via high-speed Internet. Companies no longer have to operate from a central location or even from a single country to accomplish the effective and efficient delivery of many of their products and services.

The savings derived from outsourcing non-core, non-strategic functions can be significant, and can help give companies staying power-especially in a down mortgage market, when margins are slim. However, cost savings alone is not the only consideration, and due diligence around service quality, uptime guarantees, security and other relevant factors is essential. Still, all things being equal, the financial analysis will often favor outsourcing. According to Mumbai, India-based Avendus Advisors, an investment banking firm specializing in information technology (IT) and business process outsourcing markets, companies are reporting cost savings of 30 percent to 50 percent or more from outsourcing.

The element of risk

A common concern expressed by executives is that BPO could expose their companies to increased risk with regard to matters of security and data integrity. However, most major players in outsourcing today-particularly those who operate in the American financial services sector-understand these concerns and place the utmost importance on security and regulatory compliance.

In fact, for certain servicing-related tasks, outsourcing can actually reduce a company's exposure to some forms of risk. This is largely because BPO providers are focused on very specific processes or tasks that are supported by specialized technology and highly customized training. That combination enables a level of expertise and operational consistency that is hard for any servicer to duplicate while managing very diverse functions across the enterprise.

This is particularly advantageous in areas such as tax administration, where financial risk is directly associated with missed payments or underfunded escrow accounts. Some BPO vendors in the tax field will provide financial guarantees to their clients. If a property is lost to a tax sale or penalties are levied because the vendor fails to perform contracted services, the BPO provider agrees to be fiscally responsible, therefore minimizing the servicer's financial risk.

Is outsourcing right for you?

BPO may not be for all companies, and a hard look at business goals, operating philosophy, corporate culture and financial objectives must be part of any self-analysis. Servicers must also determine what are and are not core competencies with strategic significance, and which competencies are better purchased as commodities from reputable BPO vendors.

Ensuring that BPO providers can meet all regulatory and security requirements is critically important. That said, servicers shouldn't assume that outsourcing equates to substandard protection of data or service continuity. In fact, by shifting oversight and responsibility of certain well-documented and replicable processes to a provider specializing in those areas, companies can actually reduce their risk exposure.

While there may be very sound reasons against outsourcing certain functions for your organization, it makes all the sense in the world to examine your operations, run the numbers and determine for yourself whether BPO has a role to play in your organization. Regardless of your conclusion, you must continue to re-evaluate your position as your company, the market, technology and the availability of reputable BPO providers evolve.