Servicing Management

OUTSOURCING

Outsourcing As A Management Tool

Outsourcing has become a key management tool to be employed for such goals as reducing and controlling operating costs.

BY SCOTT BRINKLEY

Many companies in the mortgage industry are under increasingly strong pressure from shareholders and investors to reduce costs, increase customer bases, and improve quality and customer service - and at the same time, to increase profits. The management teams responsible for meeting what at times must seem like impossible expectations invest considerable time and energy searching for the proverbial "magic bullet" solution for achieving these objectives.

However, as all seasoned managers know, the existence of a "magic bullet" is not only questionable, but attempts to find it usually leads to unwarranted frustration. Nevertheless, there are solutions, and one significant source of relief is being delivered by a growing management tool: outsourcing.

In 1996, corporations spent an estimated $100 billion on outsourcing. The Outsourcing Research Council estimates that in the year 2001, that amount will exceed $300 billion. Based upon these figures, it is clear that corporations are more than ever utilizing the concept of outsourcing to assist in the achievement of management goals.

While outsourcing has permeated almost every industry in today's economy, we will focus on the impact it has had - and is capable of having - on the mortgage servicing industry. We will also take a look at the decisions management teams must consider regarding the feasibility of outsourcing as a solution to their problems.

The real estate crashes and savings & loan debacle caused by the excesses of the 1980s created unprecedented pressures on mortgage servicing operations. Delinquency rates jumped, borrowers willingly sent in keys to their homes, and real estate-owned (REO) volumes spiked.

The typical servicing operation was, at best, not prepared for the increases in default volume generated by these economic conditions. Traditionally, a variety of servicing sectors were outsourced, including:

legal services for foreclosures and bankruptcies,
borrower contact,
property inspection and maintenance services,
marketing and management of REO properties, and
certain acquisition services.

These areas were destined to be supplemented by additional outsourcing solutions.

Today, functions ranging from tax and insurance management to foreclosure and claims processing are outsourced on a regular basis. Some companies are even beginning to outsource internal auditing and quality control responsibilities (Never thought that would happen, did you?).

But before we continue, it is important to remember that companies do not outsource because they want to. They outsource to achieve a specific objective. Outsourcing is nothing more than a management tool.

Following are five core advantages and goals associated with outsourcing that we need to focus on before proceeding:

Reduce and control operating costs.
Realign internal resources to focus on core business objectives.
When necessary, shift considerable risk to the outsource partner.
Realize improved quality of service to the client (or investor, if applicable).
Offload functions that are difficult to manage.

Critical steps

A frequently asked question is: "What is the process that companies go through to determine whether or not outsourcing is the right solution for them?" We have found several steps to be critical to success, as described below.

First, compare the internal costs associated with the function to the cost of utilizing the outsource company. It is important to have a thorough understanding of the cost factors associated with managing the functions internally to complete this analysis. These factors include labor, computer hardware, space, management time, telecommunication expenses, and errors with financial implications.

Second, compare available internal resources to that of the outsource company in order to reach a comfort level and identify advantages and disadvantages. At times, the cost comparison will prove to be advantageous, but the resources that the outsource company is proposing to assign may be inferior to a company's own internal staffing. This is a critical factor and is best resolved by requesting resumes from the management team responsible for your account.

Third, it is important to reach a comfort level with the capability of the outsource company to provide the services more cost effectively than if it were handled in-house. This step is often overlooked and could prove in the long run to be destructive to the relationship if not addressed. If the outsourcing company is unable to clearly identify the factors for providing the service more cost effectively, then there is the strong possibility that they cannot. Therefore, they will experience the same issues that prompted you to look for a solution in the first place.

Once it has been decided that outsourcing is a feasible alternative, and you are ready to realize the advantages listed above, we move to the next step: defining the structure and implementing the outsourcing relationship.

It is critical to clearly define the scope and responsibilities of one's outsource partner from the start. Ambiguities here will definitely lead to problems down the road. This issue is typically addressed with the creation of a formal contract or business rules document.

Clearly state the functions and procedures that your outsource partner will be responsible for, from start to finish. Make sure that those who are currently responsible for the functions are part of the process of reviewing the document to ensure that there will not be any "responsibility gaps."

Monitoring

Next, the parties need to define and agree upon the performance standards necessary to achieve the client's objectives. Both parties must be able to monitor the progress of the new relationship and provide answers to such questions as:

Are the expectations of the client being realized?
Are service levels where they need to be?
Are quality and customer service being maintained?

All of these questions, and more, establish a need for indicators of progress. Most performance standards will need to identify timeframes and quality assurance levels required to achieve the client's goals. Structure the standards so that the priority of the service standard correlates to its potential impact on the bottom line.

Once the scope and performance standards have been defined, the next step is to define communication and problem resolution protocol. The key to any productive relationship is communication.

We have found it beneficial to hold weekly conference calls between the management team of the client and that of the outsource partner. Issues that might not have been anticipated during the pre-conversion discussions can be addressed here, and solutions can be implemented before things get out of control.

Finally, determine a conversion schedule that works for both the outsource partner and the client. It is fairly typical and unwise for both the servicer and the outsource partner to rush into the conversion process. The servicer is typically eager to rid themselves of the headaches, and the outsource partner looks forward to the revenue from the new business.

A smooth conversion is the key to proper implementation, and both parties should take the necessary steps to avoid underestimating the potential pitfalls that inevitably loom around the corner.

Servicing managers face new challenges on a daily basis, including rapid industry consolidation and how to handle the tight labor market. The upside is that today's management teams have more tools at their disposal than ever before. Outsourcing, being the solution of choice, leads the pack in providing the options for improving our bottom line and quality of service to our clients, investors and shareholders.

Scott Brinkley is chief executive officer of Baker, Brinkley & Pierce, The Default Solutions Group, based in San Antonio. The company specializes in default outsource solutions and mortgage insurance claims outsourcing. He may be reached at (210) 281-1000, ext. 118.

This article was previously published in the December 2000 Issue of Servicing Management.