The outsourcing issue: two years ago, Mortgage Banking wrote about a new trend to outsource...

IT'S SPRING IN MUMBAI, INDIA (FORMERLY Bombay), and already the weather is turning hot, indicating a long, steamy summer ahead. No one seems to notice, as everyone scrambles to make a living in this bustling city of 15 million people--all squeezed onto a long peninsula with offset islands that

Mumbai, like New York in the United States, is the country's financial center. When U.S. commercial banks, investment banks and, increasingly, mortgage banks decide to outsource to India, they usually look to Mumbai first and then to a lesser extent Chennai (formerly Madras) and Pune.

Not only is there a financial infrastructure in Mumbai, but the local universities graduate about 150,000 English-speaking students every year, says Abishek Kapoor, manager of corporate real estate services for Los Angeles-based CB Richard Ellis in Mumbai.

Kapoor works the business parks and call-center sector, and life these days doesn't slow down in the heat. When Mortgage Banking visited with Kapoor earlier this year, he said, "We have U.S. financial companies seeking about a half-million square feet of space right now. That's about 5,000 jobs."

In regard to outsourcing, the biggest news in town during the spring was the arrival of Calabasas, California-based Countrywide Financial Corporation. Anyone who was putting together outsourcing deals in Mumbai, from the processes to the real estate, was talking with the executives from. Countrywide, who were discussing a deal that would give them what was reported to be a call-center operation in Mumbai.

That information was difficult to confirm, however. Countrywide declined to discuss its plans in India.

This seems to be the grand dilemma. Just as the next wave of mortgage banking companies begins to open offshore operations, particularly in India, the political climate in the United States in regard to outsourcing has turned sensitive. Indeed, the Democratic Party under the John Kerry banner has tied together the loss of U.S. jobs with global outsourcing, and is putting the issue before the voters in the presidential campaign.

For the mortgage banking industry, however, even the most reluctant companies are discovering they have no choice but to find a low-cost solution to back-office processes and other routine services if they are to stay competitive.

"The pricing of our products was sliding downward, and we had no control of it due to the market," recalls Donald O'Neill, president and chief executive of Stewart Mortgage Information Co., Houston. "We saw a lot of price compression in postclosing |mortgage| document preparation and flood determinations. Market dynamics forced us to look at how we could reduce our costs," he says.

The answer was India, and in 2002 Stewart Mortgage outsourced its mortgage reconveyance work, and the flood determination business followed. Today, the company has a presence in Mumbai and Bangalore.

A short history

The first wave of mortgage companies to outsource happened in 2001 and 2002, when firms such as Stewart Mortgage; Ocwen Financial Corporation, West Palm Beach, Florida; GreenPoint Mortgage Funding Inc., Novato, California; and Bay View Financial Trading Group, Miami, began opening operations in India. It's difficult to establish how these outsource functions have done over the intervening years because Ocwen, GreenPoint and Bay View were not available for comment on the subject.

According to a September 2002 (when executives who outsourced were considered visionaries) Mortgage Banking article on the subject, Bay View employed a staff in Kolkata (formerly Calcutta) that did loan setup and outbound call work, GreenPoint was doing mortgage back-office functions and Ocwen told the magazine it had a strong interest in providing servicing support to U.S. mortgage banks interested in outsourcing.

Apparently, Ocwen's vision came to fruition, because Stewart Mortgage's outsourcing firm is Ocwen. "It had an employment base in two locations in India [Mumbai and Bangalore], so we hired Ocwen as our outsource provider," says O'Neill.

Beginning in mid- to late 2003, a new round of companies with mortgage operations sought a means of cutting operating costs, and the most efficient way was to put some of that business in India. Some of these latter firms include: ELOAN Inc., Pleasanton, California; IndyMac Bancorp Inc., Pasadena, California; Washington Mutual Inc. (WaMu), Seattle; and Countrywide Financial.

IndyMac, too, declined comment about its India operations, but in August 2003 an India development publication reported the bank struck a threeyear deal with a Indian company called EXL-Services to recruit as many as 1,500 people.

As to Countrywide, while at home it was downplaying the subject of outsourcing, overseas it was big news.

"Countrywide came to India just before Christmas last year," notes James Knowles, associate director of corporate solutions for Chicagobased Jones Lang LaSalle in Mumbai. "They came to perform due diligence on outsourcing and were talking with several consultants, legal advisers, human resource advisers and real estate advisers."

Countrywide was looking to outsource various business lines and set up a business process outsourcing (BPO) unit, says Nikhil Bhatia, head of the Jones Lang LaSalle agency in Mumbai. The company was looking to start with a pilot program that would need about 10,000 square feet of space, "But they soon felt it was the right place to be. They have already taken up close to 45,000 square feet, with an option to expand to another 45,000 square feet. All this has happened in less than three months," says Bhatia.

Countrywide's experience was similar to other firms coming to India for the first time. "A lot of American and European firms are very cautious when they come into this market," Knowles says. "They come in with the idea of taking 10,000 square feet and maybe hiring 100 people. Countrywide came in with the same idea, and within a very short space of time said, 'OK, India is starting to look a lot easier than we actually thought.'"

While tech companies that come to India look at Bangalore, Delhi or Hyderabad, financial companies prefer Mumbai because it is the financial capital of India, says Manish Kashyap, head of transaction services for CB Richard Ellis in Mumbai.

"Fidelity has a large presence in Delhi, but JP Morgan Chase and HSBC have traditionally been in Mumbai, and recently Goldman Sachs has come to Mumbai. Every week new companies from the United States and Europe are in touch with us," Kashyap says.

One company recently making contact with India for the first time was Washington Mutual. At the end of 2003, WaMu announced it would begin outsourcing information technology (IT) work to India.

"We took a thoughtful and methodical approach to global outsourcing, and at this point we have one project that was launched early in 2004," explains Libby Hutchinson, WaMu's first vice president-corporate public relations. "It is very much in the development stages. We are nowhere near the level of some of our competitors in terms of outsourcing."

What WaMu is outsourcing to India is "an internal help desk for our employees," says Hutchinson. "This was done by an outside vendor before, and in the bidding process an Indian company was the low-cost provider. There were a number of vendors who provided bids to us, and after doing what we considered to be a very thorough due diligence and risk mitigation, we elected to have this be our first project outsourced to India."

WaMu is not reducing any jobs, Hutchinson says, recognizing that the loss of jobs to a foreign market has become a sensitive topic--especially in an improving economy that is very slowly producing new employment opportunities in the United States.

But what are companies like mortgage firms supposed to do? They need to reduce costs, and one of the most efficient ways is to employ low-wage help overseas for mundane tasks. E-LOAN's chairman and chief executive officer, Christian Larsen, clearly saw his industry was faced with a serious dilemma, and the solution many were choosing was the wrong one. Mortgage firms were making the decision to outsource, but trying to keep the news away from customers.

"Companies are getting into trouble when they are hiding the fact that they are outsourcing," says Larsen. "And then when the news [comes] out, it's played out like a struggle between big corporate powers and labor."

To address this issue, E-LOAN devised a novel solution. Home-equity customers designated to E-LOAN's Indian program can decide whether they want to participate in the Indian-outsourced process before completing an application. Homeequity customers who opt to participate in the program close their loans two days faster than if the entire process were done domestically.

The pilot program, which was launched in early February, has the capacity to process 25 percent of E-LOAN's home-equity applications. Testing showed 86 percent of the customers designated for the program choose to take advantage of the faster processing. E-LOAN's outpost in India can be found in Chennai.

"There's no question the cost structure for certain jobs is substantially lower in India, and it is efficient," explains Larsen. "Many of our competitors are there, but all have plans to go to India--so you really have to participate if you want to play on a level field. It is impossible not do so if you want to be competitive."

At the same time, Larsen adds, some companies are not always disclosing. "So we thought, 'Let's disclose it and let the consumers make their own decisions," he says.

Manifold benefits

E-LOAN can shave two days off the mortgage process by outsourcing to India, because it allows the company to process 24 hours a day, says Larsen.

"Basically, people go home at night in the United States, but that work can be continued seamlessly by our folks in India. When they are done, the work is seamlessly picked up by our people in the States the next morning," says Larsen. Outsourcing to India, he affirms, is not only about cost containment.

Stewart's O'Neil would agree. As he explains, his company's Houston office peaked in employment at about 400 people last year, and it runs basically 7 a.m. to 7 p.m. To stretch the day during very busy times, the company used to pay overtime or add contract labor. But by sending work to India, O'Neil figures Stewart Mortgage added two additional shifts that were not on a traditional U.S. workday. "When we would come in to work in the morning in Houston, a lot of work had been done on our off-hours, on the other side of the globe."

The first reason why companies seek to outsource globally is cost containment, and India is one of the first considerations because it boasts a low-cost pool of English-speaking, college-educated talent. Jones Lang LaSalle reports manpower costs are estimated to be one-tenth that of the United States for the same job.

Boston-based Colliers International also looked at cost advantages of India, breaking it down this way:

* Labor: In the United States, the average monthly wage at a call center is $2,700 to $2,800. In India, the same monthly costs are $400 to $700.

* Operations: In the United States, the average yearly cost of a 300-person BPO facility is $13.3 million. In India, costs for a similar facility are $4.38 million.

* Property: In the United States, the average real estate cost (net annual rent) for a 100-person operator facility is $447,000. In India, the same costs are $98,000.

But it is not just about the money, says Anna DeSimone, president and founder of Bankers Advisory Inc., an Arlington, Massachusetts-based company that specializes in staff training programs for mortgage banks. "It's about reliability, performance, absenteeism and labor. What plagues mortgage banks in the United States is turnover and poor work performance. Every time a mortgage banker has to hire someone, it costs one-third of a salary. So, HR [human resources] is one of the strongest considerations as to why outsourcing has flourished."

Forrester Research Inc., Cambridge, Massachusetts, predicts that over the next 15 years, 3.3 million U.S. service jobs and $136 million in wages will move offshore to countries such as India, China and the Philippines. These jobs will fall into four general categories; software development, customer service/call center, product development and back-office accounting--the latter being of particular interest to a number of financial firms, says John McCarthy, a group director at Forrester. He cites the World Bank and AIG as two companies that have established accounting and claims processing centers in India.

American Way magazine, in an article entitled "America's Back Office," claims no industry has moved into BPO outsourcing as far or as fast as finance. "What started as a trickle of banks sending jobs overseas has swelled into a torrent," the magazine reported. "Bankers in the U.S. snapped to attention when they realized they could cut costs by 45 percent by sending operations abroad."

A 2003 survey of the world's 100 largest banks by Deloitte & Touche LLC, New York, concluded that financial institutions were shifting about 15 percent of their operating budget abroad. Deloitte estimates $356 billion of cost for the global financial services industry will be relocated offshore in the period 2004 to 2008. This will translate into a bottom-line savings of $138 billion for the world's top 100 financial services companies in 2008, according to Deloitte.

Another survey, this one by Chicago-based A.T. Kearney Inc., reports that India tops the offshore location attractiveness index by a wide margin, ranked first not only for cost advantages, but also for the depth and breadth of offshoring experience and people skills.

"India has extended a significant lead through its continuing cost advantages and its increasing market maturity, says Stefan Spohr, an A.T. Kearney vice president and co-author of its offshore study. "It has attracted the lion's share of off-shore migration activity to date, without any impact on cost levels."

It's not only the need for cheaper labor sources that motivates companies to go offshore, Forrester's McCarthy says. Other attractions include low-cost bandwidth, which means firms can ship huge volumes of scanned documents overseas for processing without breaking the bank; standardized business applications; and Internet-based collaborative tools, which make it easier to stay in daily contact with services outsourcers.

Going global: Two examples

Economies today are increasingly global, so despite the claims that jobs are being lost to offshore locations, the fact of the matter is more jobs are being outsourced to the United States from overseas. The U.S. Commerce Department earlier this year reported exportation of private services rose to $131.01 billion in 2003, a jump of $8.42 billion over the prior year. Despite that increase, the country still posted a surplus of $63.64 billion in private services trade with the rest of the world.

A recent Wall Street Journal story noted that 86 percent of 180 companies surveyed said they expect to send more technology jobs overseas in the next 12 months. That compares with 32 percent two years ago. Executives cited in the survey also believe the growth of outsourcing will slow as potential political backlash in the United States grows. According to the survey, 85 percent of the executives were concerned about political pressure against outsourcing.

That kind of concern is apparent in the mortgage banking industry, where many companies that are outsourcing are doing so quietly. Even offshore banks operating in the United States seem to be extra sensitive about this issue in this election year.

HSBC Holdings Plc, London, is one the top two global financial institutions along with Citigroup. It has offices in 79 countries, and here in the United States boasts a major subsidiary HSBC USA Inc., the parent of HSBC Bank USA and HSBC Mortgage Corporation, which has grown into one of the top 30 mortgage originators. Last year, HSBC Mortgage originated $30.85 billion in mortgages, according to Inside Mortgage Finance.

Two years ago, when Mortgage Banking did its first story on global outsourcing, it noted that HSBC Holdings had three service locations in India and its New York-based U.S. operation was "expected to receive significant operations support from these centers."

HSBC USA was not available to comment further on its India-based operation.

Forrester's McCarthy says that at the close of 2003, HSBC had 4,000 staff in India call centers and in two other countries. HSBC handles 15,000 calls and associated back-office paperwork every week from small-business customers out of Hyderabad, McCarthy noted in a 2002 survey.

"Bank of America has about 100,000 square feet in Hyderabad," says CB Richard Ellis' Kapoor. "GE Capital has a huge business in India and has more than 1 million square feet in Hyderabad."

The lack of project management experience hinders some businesses overseas, adds McCarthy, but "the strong performance from firms like GE that are heavily invested in outsourcing sets them apart," he says.

GE's financial operations and Citibank both have been building up offshore operations in India for nearly two decades, reports Deloitte.

General Electric Co., the Fairfield, Connecticut-based industrial giant, doesn't segregate its businesses as to what is outsourced, since it has been an international company almost since its founding more than 100 years ago. "We have always tapped the world in terms of intellectual capital, employment capital and markets to sell into," says Peter Stack, a spokesperson for the company.

Still, it wasn't until 1997 that GE began to create backoffice and service functions for different parts of its vast businesses in places around the globe, including India, says Stack. While GE may have grown to 20,000 employees in India, its employment in the United States has remained consistent over a 10-year period, according to Stack.

Although GE Capital has stopped being an operating entity for the company (divided into four businesses--GE Commercial Finance, GE Consumer Finance, GE Insurance and GE Equipment Services), there is a unit called GE Capital International Services (GECIS). Based in Gurgaon and Hyderabad, India, GECIS operates as a remote processing operation, servicing international customers in a broad range of IT-enabled services, including call centers, accounting services, transaction processing and eLearning.

GE is not shy about its internationalism, and maintains that without international outreach it couldn't be the highly regarded company it is today.

"Tapping overseas markets has been hugely important for us to remain globally competitive," says Stack. "This is not a world that allows you to be competitive without being global."

Steve Bergsman is a freelance writer based in Mesa, Arizona. He is the author of Maverick Real Estate Investing: The Art of Buying and Selling Properties Like Trump, Zell, Simon and the World's Greatest Land Owners ([c]2004). He can be reached at smbcomm@hotmail.com.