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Farming it out.

Farming it Out

Outsourcing - having a third party perform certain mortgage banking functions - is riding a wave of popularity today. While some firms using these services say they are realizing many benefits, others have decided to keep their operations in-house.

The pace of change in our industry is often blinding. With change comes new terms and ideas, often in fashion for just a few months. Yet certain things, once adopted by the industry, never go away. One idea currently in vogue, yet likely to last, is "outsourcing." Though the term may be new to some, mortgage bankers have been leaders in outsourcing and further development of this concept holds many rewards. Outsourcing, in one form or another, has a permanent future with our industry.

This article takes a look at the advantages of outsourcing. Some of the nation's leading mortgage bankers discuss why they would or would not get involved in this symbiotic data processing relationship. Finally, we will take a look at the future of outsourcing and examine how it can fit into most organizations.

What is outsourcing? Outsourcing is simply the use of someone else's capacity, whether it is for hardware, software, personnel or expertise, to perform a task. The goal is obvious: to perform an activity at less cost and with a higher degree of accuracy than could be done in-house. The most prevalent example of outsourcing in the mortgage banking industry is a service bureau operation. By examining the role of service bureaus in our industry, it will become clear why outsourcing is such a big deal.

To find out what advantages service bureaus say they offer to customers, the Mortgage Bankers Association of America (MBA) asked three service bureaus and their clients what they thought the advantages were. Each service bureau we spoke with, Computer Power, Inc. (CPI), Lomas Information Systems and Data Link Systems, Inc., believed that the quality of their products and services was truly top-notch. Because the primary business these organizations do is provide outsourcing, these companies have spent years perfecting their automation and systems and believe in constant improvement as a permanent goal. Each service bureau also believes that this type of arrangement provides the lowest data-processing cost per loan, with the maximum servicing capability.

Staffing benefits

Thomas Harwell, vice president of Data Link Systems, provided several advantages that he believes the service bureau arrangement provides for companies. Harwell says that allowing Data Link's experts to deal directly with the regulatory and secondary marketing agencies is advantageous for users of outsourcing. Doing so frees up valuable staff time spent researching and determining implementation procedures connected with regulatory changes.

Harwell provided three, key, personnel-related issues that a service bureau adequately handles. According to Harwell, a systems department, as well as any other division of a mortgage banking firm, needs protection from turnover. This is more than just a matter of technical expertise; it is difficult and time-consuming to teach new programming or systems staff about your corporate culture and about the industry itself in a short amount of time. Harwell points out that outsourcing allows his firm to, in essence, maintain a larger staff that is on call and ready to fill in if necessary. Harwell also said that this type of personnel utilization is transparent to the user.

A second human-resource issue cited by Harwell concerns the importance of having knowledgeable, communicative staff members on-board that are able to readily understand new guidelines, offer expertise with questions and respond to burgeoning opportunities. Harwell points out that data-processing staff and mortgage bankers must be able to speak the same language. Service bureaus can provide technical experts that can bridge these gaps.

Harwell says a third staffing issue outsourcing can assist with is having access to programming expertise when necessary without incurring the cost of maintaining a large data-processing staff. When Data Link has several projects coming together at the same time, says Harwell, they bring in temporary staff that are already trained in Data Link's practices and hardware and then set them to work so that no one project needs to be put on hold while another is completed.

Outsourcing means

added value

John Whitehouse, senior vice president of Computer Power, Inc. (CPI), views outsourcing arrangements as an "added-value" approach to systems. CPI, "offers the full functionality of the very best servicing system for starters. What distinguishes the service bureau approach is what other advantages you obtain," says Whitehouse.

For example, according to Whitehouse, CPI offers its users timely and accurate solutions to problems caused by regulatory and industry changes. Keeping up with the pace of change is hard enough on front-line mortgage banking staff, and the support received from an outsourcing company with a team assigned to monitor and react to sudden changes in the industry cannot be underestimated.

Whitehouse points to the early introduction of advanced technologies as an example of how expertise obtained through outsourcing can be used to implement these high-tech systems on a cost-effective basis. There are wonderful, new technologies available in the marketplace today. Yet they all carry a steep price tag. Companies that wish to remain on the cutting edge and enjoy technological superiority can end up on the bleeding edge if they do not have enough volume to support the innovations. A service bureau can likely offer its small, medium and large customers advanced technology at an earlier point than would normally be reasonable from a cost standpoint.

Whitehouse also discusses the value that is added through networking, electronic data interchange (EDI) and third-party data exchange. All three of the service bureaus we talked to offer several of the data standards developed by MBA. These data-exchange standards offer higher levels of efficiency and usefulness to those who adopt them. While there is a significant cost associated with standardization, the advantage is that the service bureaus have already made the investment. According to Whitehouse, CPI also offers access to other services and providers through their on-line system. By allowing mortgage bankers to exchange data with other third parties, mortgage bankers often find additional trading partners and new lines of business.

When asked to elaborate on how a service bureau delivers the added value, Whitehouse responded, "These added values are possible because of economies of scale, the large number of highly skilled personnel that can be dedicated to a specific industry sector, the economic motivation of the service bureau to provide a high level of service and the ability of the service bureau to concentrate and focus the views and needs of many, in one direction, for the benefit of all."

Being prepared

At Lomas Information Systems, Floyd McGlothlin, senior vice president, paints a picture of the worst case when asked why mortgage lenders should look into using a service bureau. In the event of flood, hurricane, earthquake or other crisis, he says, what does the mortgage banker do? Most all firms have disaster recovery plans. Yet, these plans must be curtailed by funds available and require the dedication of the data-processing department as well as an off-site contractor.

On the other hand, he says, entire disaster recovery mechanisms - from stored data to actual computer facilities - are maintained by the service bureau. A disaster recovery plan is a necessity for any computer system, he explains, and service bureaus will provide such a plan on a scale otherwise not accessible to companies with smaller volumes. McGlothlin points out that by participating in such a disaster recovery plan, not only is the mortgage banker's data secure, but, in the event of an emergency, Lomas can even provide either a full facility or backup equipment for its users to continue their work uninterrupted, as if nothing has happened.

Another advantage of outsourcing is the ability for clients to participate in user groups sponsored by all the service bureaus. McGlothlin says there is value in listening to many different opinions and views through user groups. By learning the "wish list" of their constituency through candid group sessions, service bureaus can anticipate needs and satisfy desires of their clients in a reasonable time frame. McGlothlin believes that this enhances the efficiency of each of the system users, even if they specifically did not request a change or enhancement.

With service bureaus providing a lot more tools to users, mortgage bankers can have more control of their destiny. It is the best of both worlds, because while mortgage banking companies achieve optimum responsiveness from the service bureau through the use of their hardware, they still maintain flexibility in how they do business. Flexibility can be obtained through custom-designed reports, special screens for prompting and input, as well as remote connections to other systems owned by the client.

Outsourcing other services

There are very few mortgage banking functions that have not had some attempt to be performed through outsourcing. Some of these, such as flood insurance determination and tax service and appraisal, lend themselves readily to being performed outside of the organization. Others are newcomers, and still need time to prove themselves. Among these are services such as remote loan closing document-preparation services, contract processing, underwriting and/or quality control as well as many services that lenders and service bureaus think could possibly be performed more efficiently outside the organization.

Is outsourcing right for you?

So, does this seem like enough reasons to sign up today? Of course, there is always the other side. We asked several mortgage bankers why their firm had decided to do all their own automation, and inquired about what benefits they found by not outsourcing certain types of task.

Andrew Jezioro, vice president of information systems at Dominion Bankshares Mortgage Corporation, McLean, Virginia, is one who believes that everything needs to be done in-house, on a holistic basis, with all functions and departments working in conjunction with the master system. Jezioro, also the chairperson of MBA's Mortgage Data Standards Task Force, believes that the way for a company to control its own destiny is to design, implement and support its own system.

Jezioro recalls the advice of Angelo Mozilo, president and CEO of Pasadena-based Countrywide Funding Corporation, as he spoke at an MBA Technology Conference: Think of technology as a strategic advantage. Jezioro says following this philosophy is only possible with an in-house system, because you "can tailor it to meet your goals, rather than the goals of an organization serving many different people. Although Lomas' McGlothlin pointed out the ability of service bureaus to adapt to the needs of the user, Jezioro draws a line. "Mortgage bankers need to think about more than customized reporting, customized screens and specially designed routines. The system must be planned in concordance with the corporate plan and provide functionality where and when needed. It is not just a matter of cost."

Harwell of Data Link spoke about the issues that involved programmers and mortgage bankers being able to converse. Vera Owens, senior vice president of Troy & Nichols, Inc., Monroe, Louisiana, tells of another formula for successful communications without the use of the service bureau.

"Our programming staff is small, and has five to six years experience with the code. All of them had reached a level equivalent to vice president of operations prior to coming to the information systems department." Owens says that this has given them control and fluency with the needs of the many employees they must satisfy. Owens also adds that, "the experience of our programming staff has allowed for a far quicker relationship with published information." She thinks this has allowed the company to react to change, both inside and outside the organization, quickly and efficiently.

The excess capacity boon

Like all other forms of automation, outsourcing produces some amount of excess capacity. Excess capacity allows mortgage banking staff to do more and is the single greatest advantage to technology because it enhances volume, or the amount of the products offered.

Mark Muratore, managing director of F&M Docset, a loan closing document preparation firm, recently wrote a letter to MBA saying that he believed an advantage of outsourcing is the ability to have excess capacity on demand. He says that this "offers several advantages to a firm: they pay only for what is used; growing or peak demands do not require an investment in more space or equipment; and work does not bottleneck while new capacity is brought on-line." In a contractual relationship, where capacity is delivered when needed and companies pay only for what they use, it is easy to see the true benefits of outsourcing.

Those engaged actively in outsourcing should consider the reputation and experience level of the service provider. They also need to examine what level of insurance (such as errors and omission) specifically covers any problems that might occur as a result of a mistake or act of negligence by one of these firms. Checking out references, especially those with similar volumes and needs, is also highly recommended.

With all these advantages, where lie the concerns? Why are organizations in all industries not working in shells, while all repetitive tasks, whether complicated or simple, are performed at specialists offices? There are many answers. The largest organizations can likely afford to give themselves the same high level of service at less cost. For others, it is more an issue of control - over the process, or over the company's future. Dependency on a service bureau, whether on an as-needed or permanent basis, can be a scary thought. For instance, though outsourcing companies that provide flood insurance services offer professionalism in determination for a fee, it is the mortgage banker who, in the end, is liable for errors in determination. One outsourcing company, TransAmerica Flood Hazard Certification, Paramus, New Jersey, offers a full guarantee of its work to reduce the anxiety that mortgage bankers may feel when they parcel out vital tasks.

Charles Fletcher, vice president of the National Loan ServiceCenter, a mortgage banking firm located in Washington, D.C., describes a unique situation that his company designed to fit its needs. For many years, Fletcher's firm used someone else's mainframe computer, on a time-share basis, to do its processing. The software was adapted and designed in-house and the company maintained on-location facilities for testing and development purposes. National Loan ServiceCenter chose to buy exactly what it needed: someone else's computing capacity, while maintaining full control of programming, priorities and reporting.

The pluses and minuses listed by Fletcher sum up the difficult elements of this technology decision. To use superior capacity provided by others, Fletcher says that they gave up some control and quite a bit of convenience. He says they had to physically transfer reports and tapes and data; share a platform with other users who might have disparate needs; as well as undergo the discomfort of having their business being done outside the watchful eye of those who designed the system and procedures. Fletcher also told us of questions of issues that pertained to his company's involvement with outsourcing. For National Loan ServiceCenter, he says, the question of scheduling was always an issue, and the firm needed to maintain flexibility. In addition, because outside factors influence the performance of a third party, he believed that these factors opened the company up to potential situations that are hard to predict.

Fletcher advises mortgage bankers to take steps to protect and enrich themselves in a service bureau environment. First, he recommends that all levels of service be clearly defined. "Determine what types of equipment, software and personnel are available before you sign up," states Fletcher. National Loan ServiceCenter requested a seat on the board of their service bureau. According to Fletcher, this allowed him and his firm to have a great deal of say in priorities as well as levels of service delivered. While this may be impractical for outsourcing arrangements other than National Loan ServiceCenter's, it is advisable to join the user groups and encourage staff to be very vocal during the meetings. Finally, Fletcher recommends evaluating alternatives to outsourcing, at least annually. "Analysis of [the] level of service and cost was a key to our decision making," states Fletcher.

It is difficult to advise whether or not the increasing use of outsourcing is a positive trend for the industry. It is a question worth examining as an increasing number of organizations distribute their processing and become more specialized. The psychological blocks to allowing others to help you carry out your business have changed in the past decade, primarily due to the use of outsourcing by industries such as manufacturing and banking. According to a recent article in American Banker, these arrangements are riding an all-time-high wave of popularity.

When the National Loan ServiceCenter was in the early stages of its growth, it needed other's capacity so it could concentrate on increasing its core business. The result is that it developed so much business that it found it to be more economical to bring a mainframe in-house. The time may come when those using outsourcing will bring the functions back in-house, and those on their own will look to contract out for services. Matching a system to the corporate culture, the company's goals and its current position in the market are what most closely determine the result of the decision. As with all technology decisions, it is not just a matter of cost.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:outsourcing of data processing in mortgage banking
Author:Hershkowitz, Brian
Publication:Mortgage Banking
Date:Oct 1, 1991
Previous Article:The new RESPA police.
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