Is outsourcing bad for business?

by MPA13 Oct 2014
By David Lykken
Special to MPA

Recently, a story arose in the media that shed somewhat of a negative light on the idea of outsourcing in the mortgage industry. Flagstar reached a settlement of $37.5 million for improper handling of its foreclosures. The CBFP found that its full-time staff of 25 and its outscourced partner in India were inadequate to handle the 13,000 foreclosures it was processing.
Many have grabbed this story and latched onto the detail about the firm partnering with a company in India. Flagstar engaged in unscrupulous behavior and it also outsourced much of its operations to India. Does that mean that outsourcing itself is to blame for the failures? I don't think so.
Suppose a study found that a high number of drownings occur during a particular time every year in a certain area. In seeking to find an explanation, the researchers also uncover the fact that there is also a high degree of ice cream sales during that time and in that region. Could we then conclude that consumption of ice cream is causing people do drown?
That would be silly, wouldn't it? When we dig deeper, we'll find that the time period is summer and the area in question contains a beach or a public pool. My point is this: just because two things occur together, that doesn't mean one is to blame for the other. Correlation doesn't equal causation.
Outsourcing can be good for business and it can be bad for business. It all depends on what you outsource, who you choose as a partner, the level of communication you have between one another, and dozens of other variables. Outsourcing may not be for everyone, but we can't rule it out just because it is loosely associated with one negative story in the press.
Outsourcing: The Importance of Choosing the Right Partner
The recent news about Flagstar paying a $37.5 million settlement for its failures in properly processing foreclosures has really got me thinking lately about outsourcing as a business practice. As you probably know, many have pointed to the fact that Flagstar partnered with an Indian firm as the root cause of its misgivings. Is this true? Is outsourcing the enemy?
I don't want to speak too specifically about Flagstar's situation but, within any situation in which a company outsources, the main problem will most likely occur in who the organization chooses as a partner. Why zero in on the fact a firm is from India, or any other country for that matter? Perhaps it's just that the firm is poorly managed. Unfortunately, we have plenty of those in the U.S. as well. Perhaps it's an issue of miscommunication between the client and the vendor, and expectations for each party were not clearly drawn.
There can be a number of reasons why outsourcing fails, but companies who choose to outsource with a great partner can achieve great benefits. The partner can bring technologies to the relationship that the firm doesn't have. The partner can bring cost savings to the firm. The partner can bring synergy to the firm and compliment that talents and expertise of its people.
The main point isn't where the vendor is located, but rather who the vendor is. You want to choose a partner that can align with your strategic objectives and grow with you as you grow. Whether it's right down the street or halfway around the world, the right partner can give you the edge you need to succeed and the wrong partner can send you over the edge to your doom. Choose wisely.
The One Thing You Should Never Outsource
In thinking about outsourcing over the past few weeks, I got the opportunity to interview Rajan Nair, President of Indecomm Global Services--a vendor in India that helps mortgage companies process loans in various ways. The conversation was exciting and enlightening in view of the recent failures of Flagstar and the fact the company had been outsourcing to a firm in India.
Rajan told me, among other things, that the most important thing in outsourcing is choosing the right partner. Whether foreign or domestic, the right partner can be an extraordinary driver for success. We talked a great deal about the benefits of outsourcing, but I think one of the most interesting insights was what he shared with me about what he thought shouldn't be outsourced.
When asked about the one thing that should never be outsourced, the president of a large and growing vendor in India had this to say: loan origination. Rajan advised keeping loan origination within the organization, because it is the initial touchpoint with the consumer.
Like any business, the mortgage industry is about relationships. Keeping that initial point of contact within the organization is essential. The behind-the-scenes processing of the applications can be outsourced effectively. But, when it comes to interacting directly with the consumer, it's usually best to keep it in-house.

David Lykken is 40-year industry veteran who consults on virtually all aspects of mortgage banking. David hosts a successful weekly radio program called “Lykken On Lending” ( that is heard each Monday at noon (Central Standard Time) by thousands of mortgage professionals.


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