A 21st century outsourcing model.

Author:Sternin, Jan

Servicers continue to be challenged by market conditions, requiring them to employ diverse strategies to maintain operational excellence while managing economic variables. [paragraph] As a part of that process, servicing companies routinely examine all aspects of their infrastructure and operations and, for years, have incorporated varied aspects of outsourcing and offshoring into their platform schematic. [paragraph] Outsourcing refers to the assignment of a specific task or function to a third party. Offshoring refers to the repositioning of tasks or functions to a foreign venue.

Offshoring is accomplished either through the creation of a foreign-based subsidiary or through a contractual relationship with an offshore vendor. In both cases, the goal is to obtain operational efficiencies or, in other words, to convert fixed expenses to variable ones while maintaining the highest levels of quality and service.

It has long been standard and accepted practice in the commercial real estate servicing industry to use subject-matter-specific vendors to provide collateral-centric services, such as property inspections, real estate tax processing and Uniform Commercial Code (UCC) support.

Over time, servicers have actively explored numerous options to complement discrete core functions that historically have been internally executed.

Challenging the traditional servicing model necessitates long-term vision. Varying the manner in which core functions are handled requires not only an operational change--but also a cultural commitment to change. This is especially challenging in an industry where success and ratings are determined by the stability and execution of established policies and procedures.

Servicing managers are increasingly challenged and empowered to find opportunistic alternatives that preserve that stability while providing operational benefits. Market factors, including the low interest-rate environment as well as mortgage servicing rights economics, demand stronger expense controls. That fact, coupled with a rebounding commercial real estate industry, mandate that options be adaptable and scalable to handle the diverse product mix on the horizon. Achieving that level of flexibility requires a deliberate and time-intensive commitment, further necessitating the evaluation of servicing options.

Some background

Historically, the outreach to third-party vendors supporting core functionality was achieved through "white-label" or private-label relationships. Under these arrangements, the third-party provider was anonymous, with the contracting party responsible for all external communications.

The natural reaction of prospective clients was a resistance to the thought of having tasks and functions managed by other parties. Clients were often protective about their proprietary policies and procedures as well. Although these private-label relationships continue, the industry has accepted the value of third-party subject-matter-specific outsourcing and offshoring relationships.

Highlighting the growth and acceptance of platforms that blend outsourcing and offshoring, Horsham, Pennsylvania-based Morningstar Credit Ratings published a June 2013 commentary on the use of subsidiary offshore operations to support traditional commercial mortgage-backed securities (CMBS) servicing platforms.

The commentary, Passage to India: The Progressive Offshoring of CMBS Servicing Functions, concluded that each platform should be assessed individually when evaluating operational performance as part of the overall servicer ratings. The article further...

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