Lending in the High Tech Age

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Feature Balancing Risk and ROI B PO firms are primarily leveraged for two key reasons: cost savings and capacity management. The mortgage industry has undergone major changes as a result of the housing crisis. The resulting squeezed margins as lenders invest in technology, quality measures, and employee training for compliance have forced them to seek new alternatives for cost savings. "As we have seen over the last decade, mortgage volumes can swing as much as 30 percent in less than a year's time," said Michael Baker, director of business development at Sutherland Global Services. "That volatility presents execution risk and added costs as lenders struggle to staff or are faced with excess capacity. This challenge makes a strong case for outsourcing operational fulfillment to a BPO provider." Accenture Credit Services sees four BPO models emerging for balancing risk and ROI: shifting inherent fixed cost to variable cost, leveraging (versus loading) scalable capacity, shifting cost structures, and outsourcing specialization. In shifting fixed costs to variable, "the aim is to eliminate all non-core activities to partners with greater scale, lower unit costs, and who have sufficient diversity of clients to balance staffing," Santos said. This model allows the "specialist" provider to maintain regulatory, licensing, and qualitycontrol expertise in house, and it eliminates underutilized fixed costs in leaner times, as well as the need to ramp up specialty skills in high-demand periods. "By storing capacity with a BPO provider," Santos added, "firms are gaining the 'gunpowder' needed to react when market conditions create the opportunity for rapid spikes in origination volume. Many firms would rather store right-shore flex capacity at suboptimal unit rates during down cycles so 22 | The M Report "It is important for companies to identify an outsourcing partner who invests significant efforts to get as close as possible to the customer's business culture. " — Ramachandran Ariyur, SLK Global that the response cycle time to upticks in the market can be minimized and the timing to ramp up trained, quality personnel to close loans is reduced." In the model of shifting cost structures, lenders retain internal governance over high-risk, highly regulated mortgage roles and functions, which require the top talent to manage compliance. "This implies outsourcing more commoditized functions to specialty firms at reduced cost and higher productivity, so that internal spend can focus on more highly specialized talent that is more challenging to recruit and retain," Santos said. In outsourcing specialization, lenders and servicers save the time and energy from both building and maintaining internally compliant processes, and instead source them through specialty BPO providers that have greater experience, technological capability, and other assets. Sure, mortgage companies pay premiums to third-party firms for this outsourcing, but in return they receive indemnification from defects and non-conformance. "BPO partnerships can help on two levels: bring the innovation, change, and process enhancements needed to upgrade or retrofit to existing infrastructure and serve as another level of compliance and oversight to enhance the significant resources being deployed by the institution," Haralampoudis said. Examples of BPO services deployed to enhance banks' oversight and scalability are processing data at an aggregate versus loan level, loan tracking over time (and in real time), flexible reporting with robust analytic capabilities, customizing and producing ad-hoc reports for multiple regulators, and providing data across a variety of accounting, risk, and capital perspectives. Balancing risk and return on investment (ROI) is not the only challenge. Mortgage companies want to maintain control and ensure that their business partners will maintain the same highquality standards. "It is important for companies to identify an outsourcing partner who invests significant efforts to get as close as possible to the customer's business culture," Ariyur said. "This has been identified as one of the major reasons for several engagement failures, and it is necessary that conscious attempts are made by the BPO vendor to mitigate this risk. Companies need to identify BPO partners that show immense initiative, implemented and controlled by senior management, to drive the customer culture into the operating teams that work for the customer." BPO Best Practices to Mitigate Risk A ccenture's Santos maintains that it is important to create reporting and monitoring requirements far more robust than what could be measured and reported internally. "Make in-line quality control, quality milestones, checkpoints, measurement, regression analysis, and trend reporting part of the service deliverable," he said. "By outsourcing, firms can dramatically increase their sampling rates and inspection criteria and require corrective action responsiveness that exceeds what they could achieve internally." Per Santos' example, a mortgage company could increase quality sampling from 5 percent internally to 20 percent with a

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