Mortgage servicers should consider the strategic advantages of outsourcing some servicing tasks to other countries. Currently, some pioneers have relocated servicing operations to India--and are pleased with the outcome.
In the current market, mortgage companies that find a way to deliver on three critical fronts are the only ones likely to survive. Sound a little extreme and dogmatic? Just wait until you read a little further to make up your mind.
What's on my list of the three crucial competitive arenas to master? It's this:
* Diversification into new markets (e.g., B&C lending, globalization);
* Efficient and flexible origination process (e.g., streamline refis, Fannie Mae/Freddie Mac origination software (automated underwriting systems); and
* Increased focus on cost reduction (e.g., mergers and acquisitions to achieve economies of scale, exit of cost-inefficient players).
What if mortgage banks could achieve two of the three targets at once, with one business decision? Recent moves by some companies to transfer parts of their back-office operations to foreign countries may present such an opportunity.
Transferring nonessential back-office operations to countries such as India can reduce operating costs on a mortgage bank's existing servicing portfolio while simultaneously providing a foothold in an important emerging market. This article highlights the experience of some companies that have already moved some back-office operations to India and analyzes the issues involved with such a transfer.
I focus on India because in my view it makes the most sense as a destination for operations transfer, especially if you weigh all aspects involved in choosing a foreign base of operations. Michael Lea, president of countrywide International consulting, calabasas, california, a subsidiary of Countrywide credit Industries Inc., who advises various countries on developing their domestic mortgage markets, agrees India provides one of the highest-cost advantages and the highest value as a potential market for mortgage products.
Besides India, the Philippines, Ireland, Poland, china and some caribbean countries can be potential destinations for outsourcing. Figure summarizes the pros and cons of each of these counties based on the information this author was able to gather. Countries are rated on a scale of 1 to 5 (5 being most favorable) on seven considerations related to process outsourcing.
A similar study evaluating the pros and cons of any market can be conducted incorporating your company's preferences. Robert Pruett, vice president of international operations for Ocwen Financial Corporation, West Palm Beach, Florida, believes cost arbitrage and the availability of qualified staff are the most important variables in differentiating various countries.
According to Sadu Thinakal, president of Fiserv Mortgage Servicing Systems, South Bend, Indiana, the process of outsourcing servicing began in the late 1990S and is likely to continue to gain momentum. Three of Fiserv's clients are already outsourcing parts of their servicing operations to countries that include India and Ireland.
There is no doubt that transferring operations to countries where labor costs are 50 percent to 75 percent lower than in the United States will produce cost savings. These countries will continue to gain importance as potential new markets for the financial services industry.
Common arguments made against a move into foreign markets are the sociopolitical risks inherent in them. Those concerns are often coupled with the reluctance of management to reorganize existing operations. These, of course, are valid arguments that each company will have to carefully analyze before making any strategic decision.
What some first movers have to say
Many U.S. financial services companies that have transferred their back-office operations to India actually started with information technology (IT) or development work during the latter part of the 1990s. From 1998 to 2001, when finding talented and experienced programmers for the right price in the United States became almost impossible, India provided an abundant pool of talented IT resources. Steps taken by the Indian government--such as providing tax breaks, subsidies and infrastructure support--also facilitated process outsourcing.
Since then, many of these IT support units have diversified into areas such as business process outsourcing (BPO) or IT-enabled services. This phenomenon has gained greater momentum in other areas of financial services, such as credit cards and insurance, than in mortgage banking. Fiserv's Thinakal attributes this difference to the higher level of complexity and nonstandardization involved with servicing mortgages.
GE Capital Corporation, Stamford, Connecticut, which moved its development and back-office operation to India as early as 1997, now employs 2,000 people. Although GE exited the residential mortgage servicing business, citing margin and business focus concerns, it continues to develop expertise in servicing a variety of U.S. loans, including credit cards, mortgages and insurance, from India. GE markets these services to mortgage, insurance and accounting industries as "productivity enhancers."
According to an Oct. 9, 2000, article in Economic Times, GE believes companies spend as much as 60 percent of their time doing things that have to get done but that have very little to do with the success of a business. GE's productivity solutions reduce resources and time devoted to back-office processes.
Larkspur, California-based GreenPoint Mortgage Funding Inc. recently announced a $30 million deal with Progeon Limited, Bangalore, India. Progeon will provide process redesign consulting and operations support to GreenPoint as a result of this deal. GreenPoint expects to save $5 million per year as a result of this relationship.
In a press release announcing the deal, S.A. Ibrahim, president and chief executive officer of GreenPoint Mortgage, was quoted as saying, "By contracting certain activities to Progeon, we will be able to increase our capacity and growth potential on a more cost-effective basis." Progeon is a 2-month-old unit, which was set up by Infosys Technologies Ltd. with $5 million of its own cash and $20 million from Citigroup.
HSBC Holdings PLC, London, has set up multiple centers around the globe to service and administer a variety of products offered by the group's companies in several countries. According to a recent press release, the group has three service locations in India and two in China. HSBC Mortgage Company, Depew, New York, is expected to receive significant operations support from these centers.
Ocwen, one of the pioneers of this outsourcing trend in the mortgage industry, expressed its satisfaction with its Indian operation in its 2001 annual report in the following terms: "As of year-end, 39 software developers were employed at our Bangalore, India, facility. The quality of their work and the related cost savings have been noteworthy. We will continue to grow our...