Outsourcing -- Intelligent selection

Outsourcing has long been a driver in the mortgage industry, with distribution costs having been driven down by banks and non-bank lenders through engaging commission-based brokers.

But lenders are now increasingly looking for alternatives to in-house management for a number of other functions. Back-end processes, such as settlement, arrears management, recoveries and customer contact centres, are now being outsourced.

Unisys has undertaken the end-to-end servicing and processing of RAMS Home Loans' residential mortgage loans since 2002. During this period RAMS has achieved in excess of a 25 per cent reduction in costs as a direct result of its outsourcing partnership with Unisys, says Rafe Kruger, general manager of Unisys Business Process Outsourcing Asia-Pacific.

Kruger says outsourcing not only helps lenders cut costs, it can also improve the overall customer experience the lender is able to offer by reducing loan processing times and providing scale to manage peak loan periods. It can also deliver transparency to support governance and compliance requirements.

"A collaborative outsourcing relationship can deliver significant cost savings while improving the customer experience and staff productivity," Kruger says.

Together we stand

The critical word here is collaboration — it's the building block on which all good outsourcing relationships are built. Finding the right partner is therefore essential to the success of any outsourced initiative.

While outsourcing no doubt has its benefits, it doesn't always go to plan — with typical problems being poor communication, unrealistic expectations or a flawed outsourcing structure.

It can even come down to a simple turf war between the outsourcing firm and internal staff. Avoiding such issues requires planning, according to Sam Makhoul, a partner with mortgage production and settlement firm Mortgage Settlements Australia.

"It is best to set up a committee at a senior level to lay the ground work before advising the internal staff that may be affected. Otherwise the client may experience staff resignations," says Makhoul.

"Staff must be informed at the appropriate time, and must be involved in a positive way," he adds.

According to Makhoul, redeployment is one technique that can help facilitate a smooth transition from the in-house management of functions to outsourcing — and keep staff engaged.

"Staff are usually re-employed by the outsourcing partner or re-deployed in other departments of the client, which is a huge advantage in today's full employment market."

Choosing an outsourcing partner with a compatible corporate culture is critical however — and is often overlooked. While the mismatch may not be apparent when the relationship is initially established, without proper due diligence beforehand, relations can head south once the initial honeymoon period is over.

For Makhoul, the solution is simple.

"Senior managers must get out and have a solution-focused culture that filters down on both sides," he says.

Makhoul identifies the main problem with outsourcing relationships, particularly in the early days, as gaining buy-in by the team responsible for managing the outsourced services of the services provider.

"Client relations may become difficult in the early period if you have the wrong people driving the outsourcing process. You must have people that are dynamic and enthusiastic about the benefits of the product. You obviously cannot have people who are resistant to change and who have a 'we are used to doing this way' mentality."

Unrealistic expectations

Indeed, some of the primary reasons that the expectations and the reality of outsourced relationships don't always come together are because the organisation is dissatisfied by the level of collaboration and communication it has with the outsourcing provider. Cost is also an issue.

According to research house Forrester Research, at least 30 percent of buyers in the outsourcing market feel this way about their outsourcing relationship. A further 37 per cent are dissatisfied by the provider's cost, and 37 per cent are dissatisfied by the provider's ability to manage change.

"Choosing [a provider] on price alone and not always on company size or experience is a key mistake buyers make when choosing an outsource partner," says Dean Anderson, a product manager with The System Works, which provides facilities management services to the Australian mutuals sector.

Anderson says that while client expectations are typically realistic when they make the decision to outsource, it's common for some clients to underestimate, or not to fully understand, the content or scope of their existing systems. This means they often fail to communicate their complete requirements for a project, which can lead to a breakdown in the relationship early on. To avoid this, Anderson says, communication is key.

"Regular meetings are a must so that the client has a firm understanding of any issues which have been identified,"says Anderson.

Outsourcing IT, mortgage settlements and other functions is not a new phenomenon for the mortgage industry. The ability to eliminate the cost of managing these components of the mortgage process — i.e. take it off the balance sheet — and transfer the risk management component to another party continue to be the main drivers.

Still, the outsourcing process is a dynamic one. Organisations cannot afford to rest on their laurels; they need to constantly re-evaluate the relationship.

"Around mid 2006 we decided to make some improvements and wanted to change our core banking systems — but our existing provider was unable to meet our needs," says Colin Moyle, manager of corporate services at credit union Big Sky Credit Union.

"The decision was between taking our systems back in-house or seeking another provider. While there are certainly pros with an in-house system, it made more sense to continue to outsource this aspect of the business to IT specialists with the appropriate skills and knowledge, rather than trying to recruit and develop our own support team to manage the system," he says.

The decision to outsource, says Moyle, was made at the board level. The process to assess the most suitable candidates fell solely on Moyle's shoulders, however. He put the job out to tender and received submissions from three providers.

"In terms of evaluation as to where we outsourced the business, a number of factors were considered including technical, financial, and the philosophy of the companies. From the initial tender to financial evaluation the whole process took about two months," he says.

Although the tangible impact on the company's bottom line was difficult to assess, Moyle says the business saw marked improvements in its efficiencies as well as its core banking systems.

"Though there were some early minor teething problems, they were quickly ironed out within the first couple of months. All in all the whole process only took around three months to implement."

----------------------------------------------------------------

Relationship on the rocks?

Lenders can use two key metrics to measure whether an outsourced relationship is working: the adherence to service level agreements (SLAs) —which are agreed to upfront — and financial savings.

A softer measure, says Rafe Kruger, general manager of Unisys Business Process Outsourcing Asia-Pacific, is whether it helps a lender build stronger relationships with its clients.

But outsourcing relationships can turn sour, for a range of reasons.

According to Kruger, bad outsourcing relationships occur when the expectations of the two parties are not aligned and service levels are not met.

"To rectify such a relationship the parties must speak to each other, form common objectives, mutually agree SLAs and then work together to make the improvements to meet the joint objectives," he says.

----------------------------------------------------------------

Smooth settlements

Mortgage Settlements is an often overlooked part of the overall mortgage lending process according to George Zakher, manager for wholesale products and pricing at Firstfolio.

"The emphasis for many lenders seems to be on sales followed by loan approval," he says. "The job is not done, however, until the loan actually settles".

So how can good back-end outsourced settlements help a lender? For Zakher, an efficient settlement process can:
* improve referral opportunities
* improve cash flow
* give originators who introduce business to wholesalers greater satisfaction.