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National Mortgage Professional
Mar 28, 2007

Knowledge process outsourcingZia BhuttaKPO, technology, outsourcing A new source of value in the mortgage industry 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 competitive. 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 percent. BPO evolves into knowledge process outsourcing 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 (KPO). 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; and -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 company. 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; -Operations replication; -Information and data security; -Identification of performance parameters (volume, speed, etc.); -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 is growing. 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 capabilities. 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 with? 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 pricing, etc.). 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 ziab@synechron.com.
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