CIO CORNER

Variability in Outsourcing: Changing the Model for the Current Market

By MIT CIO | May 12, 2008

Variability in Outsourcing: Changing the Model for the Current Market

 

By Bill Adamowski, President of KPO for ISGN

 

The fallout from the subprime crisis is continuing to shake the mortgage industry and the credit crunch has extended into the conventional mortgage market. According to a February 2008 article in the New York Times, the mortgage meltdown is now an industry-wide problem with a ripple effect that’s brought losses across the financial industry.  Lenders are feeling the transitional pains of recognizing that this isn’t the growth-friendly mortgage industry of yesteryear.

 

In addition to a significant decline in mortgage loan volume, today’s lenders are faced with more stringent regulations, increased competition and declining margins, not to mention a deluge of defaults and foreclosures as well.  As they struggle to face these new challenges, many have begun to re-evaluate their infrastructures, asking themselves whether it still makes sense to employ large in-house staffs to complete each task at each stage of the mortgage cycle, and whether their core competencies are suffering as a result.

 

Whether weathering the storm or planning for growth, lenders are discovering that moving forward with the infrastructure that worked so well just a few years ago, may no longer be the way to move forward in today’s market.  In the past year alone, roughly 200 major lenders have downsized, restructured or gone out of business, with an additional 50 facing similar fate during the previous year.  Of the top 100 lenders in 2006, at least 14 lenders have shut down completely, while another 14 have closed at least one business channel.  There are no signs indicating that the industry is positioned for an upswing in the near future.  According to an ABCnews.com article in April 2008, the number of homes facing foreclosure has increased by 112 percent, more than doubling since first quarter last year—and each foreclosure is estimated to cost lenders over $50,000 a piece.

 

In order to give themselves the best chance of not only weathering the current storm, but also positioning themselves for growth once the market begins to recover, businesses will need to protect their core competencies by ensuring that all tasks and functions are handled in the most efficient, cost-effective manner possible. 

 

Variable Outsourcing: Protecting Core Competencies

 

As lenders adjust to the industry’s new constraints, many have found it challenging to position themselves for growth, particularly if they’re encountering increased labor demands for task-intensive areas such as servicing and default management, while also operating under reduced budgets.  While they understand that they need to maintain optimal output, they are often unlikely to seek outside assistance, particularly when it comes to offshore outsourcing. Like organizations in a variety of industries, lenders recognize the necessity for less expensive, more efficient labor, but fear relinquishing control of the process.  Often, if they outsource at all, they do so only in limited quantities in an effort to protect the functions handled within core business units.

 

The answer isn’t merely offshore outsourcing, but variable offshore outsourcing, a solution that keeps control in the hands of the company, rather than those of the outsourcing provider.  A key aspect of that control lies in the company’s visibility into the labor performed by outsourced personnel. Another aspect is the flexibility businesses have to keep their core business units not only intact, but more importantly, focused on crucial revenue-generating functions during the company’s realignment. One of the key benefits to the offshore aspect of outsourcing is having labor completed by offshore talent in differing time zones.  This night-to-day disparity enables companies to leverage the concurrent difference in time zones to achieve a “clean slate” at the start of each business day and operate a continuous 24 hour work shift, which is particularly beneficial for certain time-sensitive, deadline-driven departments and industries. Because the variable outsourcing model is inherently customized, it can be utilized not only within the mortgage industry, but also for organizations in other arenas, and in various stages of growth.

 

A good variable offshore outsourcing model combines in-house visibility with around-the-clock offshore productivity.  These models utilize an in-house team leader that manages the outsourced offshore team from within the lender’s own U.S. location.  The team leader, who begins the process by becoming thoroughly acquainted with the inner workings and protocol of the client company, also oversees, delegates and trains the offshore staff while maintaining constant close connection with the client company.  The company simply submits tasks and functions to the outsourced team via secure Internet channels, and the outsourced team—managed by the in-house team leader—handles those tasks and functions, often before the next U.S. business day.   After a short period of time, a second team leader is brought in and trained by the first team leader, who then goes to the offshore location to manage the team abroad.  The end result for the company is the consistency that stems from single-source, on-site leadership, in-house visibility and hands-on knowledge of how offshore outsourced teams are handling the day-to-day changes that occur within the organization and/or business unit.  By using a variable in-house/offshore model, companies can get the speed of after-hours labor, with the assurance of an in-house point of contact. 

 

Variable offshore outsourcing also offers companies the ability to optimize output from core business units.  Customarily, the function of a core unit is comprised of a variety of tasks and functions, both core and non-core. In fact, up to 70 percent of a core business unit’s activities are comprised of non-core tasks that can be easily and successfully delegated to outsourced offshore teams.  A variable offshore outsourcing model enables companies to separate core functions from non-core tasks, and assign those non-core tasks to an outsourced team.  This variability enables companies to free personnel within their core business units to concentrate on activities that yield the highest payoff.

 

The ideal variable outsourcing model also extends variability into project duration and manpower.  Rather than operating as a static unit, the outsourced staff should offer the fluidity that enables companies to adjust not only the number of resources needed, but also the duration of the project.  As projects are completed, companies should have the flexibility of reducing their reliance on the outsourced staff.  If they need fewer resources one month, and more resources the next, the true variable outsource provider will be able to easily adjust and accommodate their needs. In order to be of maximum effectiveness and efficiency, variable outsourcing models should enable companies to adjust their timelines and requirements according to the constantly changing dictates of the economy, industry and milestones of the project. 

 

Rather than to avoid outsourcing altogether, companies in a variety of industries can utilize variable offshore outsourcing, allowing non-core tasks to be handed by the outsourced team, while core functions remain in-house.  By maintaining complete control of all labor processes, companies can more easily carve their own unique paths, orchestrating the type of growth and recovery they would like to achieve, both during the difficult transitional periods as well as when the market begins to recover.

 

A Modern Solution for Today’s Mortgage Market

 

In today’s economy, lenders need cost-effective, high-efficiency solutions.  The outsourcing solutions of yesterday offered only static models that severely limited the number of activities that could be delegated to outsourced teams.  Lenders’ goals and challenges can change literally from month to month.  In order to hit these moving targets, they need flexible outsourcing solutions that offer variability, both in segmentation of tasks and in project duration. By selecting a variable model, lenders can protect and optimize their core competencies, exploiting their internal resources for the goals and objectives they see fit. 

 

 

References:

“Mortgage Crisis Spreads Past Subprime Loans,” NYTimes.com, February 12, 2008

“Homes Facing Foreclosure More Than Doubled in 1Q From 2007,” ABCnews.com, April 29, 2008

 

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Topics: Economics: IT Staffing & Discretionary Budgets | 1 Comment »

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