Is it time to consider business process offshoring?

Mortgage Banking, August, 2007 by Brenda B. White

While most of the subjects in Deal Talk focus on the state of the industry as it relates to mergers and acquisitions and capital-raising activities, the topic of business process offshoring is an important one for management teams to evaluate--particularly in the current market environment. It is also a significant topic to discuss in the context of creating and building value for a company.

This column is based primarily on a Deloitte Consulting LLP study entitled Business Process Offshoring in the Mortgage Industry: A Tale of Two Opportunities, which discusses business process offshoring in the mortgage industry.

Business process offshoring continues to gain adoption in financial services; its long-term effect on the mortgage banking business will likely be substantial. While considered a late-entry to business process offshoring versus other financial services industry participants, the mortgage banking industry is rapidly accepting this strategy, which is destined to have a sizable long-term impact on how lenders do business both externally and internally. According to analysis done by Deloitte Consulting, approximately half of the nation's top 40 lenders are offshoring.

An effective business process offshoring strategy becomes a critical element in enhancing profitability, given the current competitive landscape. Those that do not implement some sort of business process offshoring may be poorly positioned in tight, volatile markets as pressures on margins continue. An effective offshoring strategy could mean the difference between profit or loss, achieving or not achieving specific objectives and, perhaps most important, independence or acquisition. Further, greater profitability resulting from a well-implemented offshoring strategy may enhance the value of a company in a sale or an initial public offering (IPO).

The U.S. residential mortgage market represents an incredible opportunity for the effective utilization of business process offshoring. The Outlook for the Real Estate Finance Industry report, prepared by the Council to Shape Change--an independent group of mortgage industry leaders, of which this author was a member--concluded that the mortgage market's correction would result in real estate financial processes being broken down into smaller components that can be isolated, optimized, automated and outsourced. Opportunities for offshoring would be a key driver pushing firms to "componentize" processes and identify the best ways to gain efficiencies.

Mumbai, India-based WNS Global Services, a mortgage domain-focused business process offshoring service provider, and Mumbai-based Avendus Advisors, an investment bank specializing in information technology (IT) and outsourcing markets, have estimated the offshore-addressable business process offshoring market size for the U.S. residential mortgage ecosystem is in the range of $6 billion to $7.4 billion.

Needham, Massachusetts-based TowerGroup's research led the company to believe India is the best place to outsource because of the volume of professionals who have business, computer programming and engineering degrees and who understand the mortgage process. The existing mortgage processing business process offshoring market in India is approximately $150 million and employs about 7,500 people, according to WNS Global Services' research.

Of the figure of $6 billion to $7.4 billion, the company believes that India's portion will account for $1.1 billion over the next five years. Many of the industry's leading firms have successfully incorporated offshore partnerships in India into their business process strategies.

According to WNS Global Services, business process offshoring service providers that want to attract mortgage lender clients and garner a portion of these projected revenues will need to develop some key industry capabilities, such as in-depth vertical domain knowledge, technology-enabled process delivery capabilities, a strong balance sheet, and scalable operations and infrastructure to grow with the lenders' origination volume needs.

Cost savings have been the primary drivers in business process offshoring. The mortgage industry is labor-intensive. TowerGroup estimates that half of the $44 billion in direct industry costs in 2005 were labor-related. TowerGroup's July 2006 report by analyst Craig Focardi, Strategic Cost Transformation in Mortgage Lending Through Offshoring Business Processes, points out that the offshorable market for mortgage lending processes will grow from $9 billion in 2005 to $13.1 billion in 2010, with more than 80 percent of these costs occurring in loan origination processes.

Because of the nature of mortgage banking, including automation and massive volumes of activity, the servicing function has been the business segment that has yielded the greatest benefits. Many industry experts agree that the processing of mortgage originations is poised to benefit significantly from offshoring as it becomes more process-oriented and further divided into smaller components.