Knowledge process outsourcingZia BhuttaKPO, technology, outsourcing
A new source of value in the mortgage
Companies in the mortgage industry have been outsourcing
technology application development projects for many years. The
largest mortgage banks frequently outsource the bulk of their
technology application development with the exception of mission
critical applications and applications where intellectual property
is involved. Small to medium sized lenders often do not have the
scale to make outsourcing cost effective, nor do they always have
the capabilities to develop systems internally to automate their
important business processes. Their limited information technology
resources are usually devoted to maintenance and installation of
information technology infrastructure.
According to industry research, the cost per loan spent on
technology rose from $99 in 2004 to $119 in 2005. Although the
dynamics of the market have changed recently as the market has
cooled, most companies will continue to invest in technology
through outsourcing and offshoring relationships to stay
Many of these technology investments are ongoing efforts that
require the lender/broker to partner with an outsourcing firm for
ongoing maintenance and support.
Business process outsourcing
With the adoption of the offshore outsourcing of technology
application development, offshoring business process outsourcing
(BPO) work has also grown over the past few years, most rapidly in
India, the Philippines and China. The U.S. mortgage banking BPO
market in India, for example, is expected to grow to approximately
$1 billion over the next five years, from the existing $150
million. Lenders use BPO service providers to perform many of their
business functions more cost effectively.
According to a recent report by Tower Group, about 15 of the
top 20 U.S. mortgage lenders have either established their own
offshore operations (captive) or have partnered with other service
providers to set up offshore operations.
For example, many companies outsource the post close audit and
quality control operations of their loan portfolio to an outsourced
service provider. Because the mortgage industry is generally
cyclical and many lenders do not have the flexibility to ramp up
and down during these cycles, outsourcing provides them flexibility
and meets their staffing needs.
There is one subtle difference between outsourcing business
processes onshore vs. offshore. Typically, a company would
outsource onshore because of the speed and flexibility required.
Costs are not a major concern because most outsourcers charge on a
per transaction/file basis. Although the same is true for offshore
companies, there is also a cost benefit of offshoring work to low
wage countries. It is because of this cost benefit that the scope
of BPO is much wider offshore, since companies can utilize this
model to offload many of their routine automated processes, such as
call centers, data entry, lead generation and loan data entry.
Research analysts at Stamford, Conn. based Gartner predict a
substantial rise in the mortgage BPO outsourcing trend as U.S.
human capital constitutes a major chunk of overall mortgage
processing and servicing costs, eating into a significant portion
of the revenues of mortgage banks. Firms that have successfully
shifted their business processes to India claim to have saved 30 50
BPO evolves into knowledge process
As BPO vendors and their services have matured, niche vendors have
started to offer higher end services that offer greater value than
the more automated, routine BPO tasks. The outsourcing of higher
end business processes is known as knowledge process outsourcing
Increasingly, front end processes where timing and execution are
critical are now being outsourced as well. There is a gradual
learning curve associated with these services, and business
processes can differ from one lender to another.
The benefits of KPO
Whereas BPO utilizes lower end generalists for routine automated
tasks, KPO demands high end specialists. KPO services are knowledge
intensive processes and provide cost, time and productivity
benefits that lenders can pass to their customers. All types and
sizes of lenders benefit from access to a resource base of subject
matter experts in mortgage operations at a highly competitive
global rate, as well as transition specialists who ensure seamless
and secure migration of process operations. However, whereas BPOs
cater to the large company, large volume market, KPOs are ideal for
the vast majority of lenders. KPO infrastructure is flexible and
scalable, with ramp up capability to enable lenders to better
manage peaks and troughs in loan volume.
Additional benefits of KPO include:
-24/7 productivity, increasing time to market for both mortgage
products and services;
-Expedited loan processing;
-Lowered operational costs and improved process efficiencies;
-Access to transition specialists who ensure seamless and secure
migration of process operations.
Types of KPO
Services that can be successfully provided by an offshore KPO
provider include loan boarding, conditions processing, title review
services, rate locking, compliance services, verification services,
document mapping services, quality control and post close audit
services, among others. The combination of lower cost labor with
both technology expertise and domain expertise creates even greater
value, cost savings and efficiency.
Inefficient processes in the industry were readily identified
through domain and process understanding. For example, manual
assembly of rate sheets for loan officers can be inefficient and
error prone. The KPO provider with domain expertise can see the
added value of replacing this manual process with a more efficient
and accurate process, such as a Web based pricing system that
imports daily rate sheets and enables loans to be priced
efficiently and without errors. The mortgage company derives higher
value through this domain and technology expertise, and the former
BPO provider slowly evolves into a KPO provider for the
Key elements for successful KPO
A successful KPO relationship requires strong communication between
the mortgage lender and offshore service provider. Additionally,
key elements of a successful partnership include:
-Minimal process disruption;
-Process mapping offshore;
-Comprehensive knowledge transfer;
-Information and data security;
-Identification of performance parameters (volume, speed,
-Migration to digital technology if necessary;
-Establish report with U.S. closing agents; and
-Business process management review.
Challenges and opportunities
KPO will experience growing pains and challenges as knowledge and
skill intensive front end processes are transferred offshore.
Technology will need to work seamlessly with operational workflow,
and both will need to be aligned to strategic business goals.
Currently, there are only a handful of companies in the United
States who have experimented with KPO successfully, but the number
As the trend grows, BPO and KPO providers will adopt newer
methodologies, business approaches and quality intensive delivery
standards to meet service expectations. The opportunity is there
for many lenders who may not have had the scale to establish their
own operations previously to partner with providers who have these
Mortgage companies will continue to reap the rewards of offshore
outsourcing, not only by outsourcing the more routine, automated
and low value functions, but increasingly by outsourcing some of
the more complex value oriented processes, such as supplementation
of secondary marketing staff, title reviews, quality control audits
and underwriting functions as well.
Frequently asked questions about KPO
How can KPO help you compete?
Outsourcing allows companies to be flexible and react to market
conditions quickly. KPO raises the bar in terms of the complexity
of services that can be offered by an outsourcing provider. With
todays current network and technology infrastructure, companies can
outsource some of their more complex operational functions.
What are the types of services that KPO can help
Services are now evolving where some service providers are offering
full/end to end loan processing services on a cost per transaction
basis. However, this model does not fit all lenders. Service
providers now offer services where they take over certain desks
(e.g., loan boarding, conditions, title reviews, rate locks and
Does KPO threaten my staff's jobs?
No, not usually. Companies generally outsource to handle crunch
periods and stay flexible. The internal staff is often redeployed
on more value oriented tasks.
Zia Bhutta is the chief operating officer and co founder of
Piscataway, N.J. based Synechron
Inc., a global information technology solutions and services
provider. He may be reached at (732) 562 0088 or e-mail [email protected]