A word we are now very familiar with, ‘outsourcing’ is a classic example of US-imported management-speak. It may not look particularly elegant but it does what it says.
That outsourcing has become prevalent across all parts of the UK commercial scene is not in doubt. It has always existed to one degree or another, albeit under a different name. But where businesses once took corporate pride in providing their customers – and employees – with an in-house ‘wing-to-wing’ service, current thinking has made this something of an old-fashioned, even quaint approach. Now, the drive appears to be to outsource as many functions and processes as possible.
Outsourcing can take many forms, from the provision of IT services to catering facilities. In the financial services sector its most widely publicised, and sometimes controversial form is in the shape of call centres – particularly where these are based outside the UK. That they offer significant cost benefits is not in question. But this positive aspect must be offset against the potential for negative consumer and media opinion and the possible resultant loss of goodwill and custom. Indeed, at least one major clearing bank now devotes a considerable part of its advertising budget to raising awareness that its call centres are UK-based, and that more of its services are being brought back in-house via branches.
Clear reasoning
What this tells us is that any business considering going down the outsourcing path needs to be very clear as to the reasons, the potential benefits and the risks. Management must also have a very clear understanding upfront of the basis on which any outsourced arrangement will work, both at a relationship and service level. It is also important to recognise that outsourcing will be perceived in different ways by distinct groups of internal and external stakeholders.
Within the mortgage sector, there are a number of functions and services a company may deem suitable for outsourcing. These include training, software development, internal audit, PR and media buying. For those lenders that rely upon intermediaries for distribution, we already effectively outsource our new business origination processes via our broker and packager partners. This may be extended further through bespoke branded lending relationships that give intermediaries even closer control over marketing, point-of-sale and underwriting components.
A major function that may successfully be outsourced to a suitable third-party is a lender’s ‘back office’ or account management facility. This is likely to comprise key post-completion customer services such as mortgage account administration, payment processing, collections and litigation management and data reporting. With the exception of the latter, each of these has the potential to impact significantly a lender’s ongoing relationship with its customers and, particularly in the specialist arena, its intermediary partners. The rationale for outsourcing, and the way in which it operates, must therefore be understood from the start, as must the fundamental requirement to have strong management information reporting and a Service Level Agreement (SLA) in place to monitor the performance of the outsource provider.
Measurable advantages
There are several measurable advantages, for example, to a lender outsourcing its back-office functions. First, it helps reduce the business’ overall cost base through shared efficiencies and economies of scale. This is achieved by reducing operating overheads and by making more efficient use of fixed costs, such as releasing expensive office space. Further savings are achievable by other lenders using the same outsource provider, so keeping management fees and charges low.
Second, a wise choice of third-party provider will give access to a proven centre of excellence for this type of activity. This allows the lender to draw upon the experience, knowledge and expertise of its partner. Third, this leaves the lender free to focus on its core commercial competencies of product design and building market distribution.
Fourth, it allows the lender to channel its investment in training and development programmes to employees in new business-focused functions. And fifth, it offers the lender flexibility to respond to changing workflows and pressures. After all, it tends to be easier to scale up or down with an external provider than it is to adjust internal employee headcounts.
Together these benefits can add real value in both financial and operating terms. The flexibility delivered also offers great advantages, particularly to smaller lenders competing in an aggressive market by allowing them to focus resource and expertise on core new business objectives and activities.
Loss of control
A very real risk associated with outsourcing any function, but especially a lender’s account management facility, is the sense of loss of control or abrogation of responsibility. This can be felt equally by customers and employees, and management teams are well advised to treat it seriously when considering outsourcing. There is also a danger that employees could be unsettled by thoughts of outsourcing ‘creep’, whereby no job or function is thought safe in what is often perceived as a ruthless pursuit of cost-cutting and improved business efficiency. Management can address these concerns by taking certain prudent steps.
Fundamental to any successful outsourcing arrangement, whether for a back-office facility or any other process, is a well-drafted and robust SLA. This will help ensure that both parties clearly understand the operational and commercial basis of the relationship, and will provide qualitative and quantitative benchmarks against which its performance is measured and tracked. This can be further enhanced through the use of sophisticated tracking technology to provide real-time data on the performance of customer accounts.
Data and the flow of data are, of course, essential in any such arrangement. It is the fuel that powers the outsourcing engine. The lender must therefore ensure customer account information is complete and accurate. Simple but avoidable errors in data can seriously hamper the performance of the arrangement, and can cause unnecessary friction between the parties. Equally, the outsource provider must ensure it provides the outsourcer with management information reporting of the highest quality.
The relationship can be made more effective and further bolstered by the outsourcer deploying employees with specialist skills onsite at the provider’s offices. These do not have to be permanent appointments, and even short-term tactical deployments can significantly help improve efficiency and shared understanding.
Commitment
Critically, both parties to the arrangement must show and demonstrate absolute commitment to legal and regulatory requirements and obligations. However, this should not be taken for granted. It must be systemised by embedding a rigorous audit programme in the operating rhythm of the arrangement. This will validate compliance with the prevailing rules and regulations, and will provide stakeholders with greater confidence.
An effective and ongoing communication process is also essential. Regular dialogue between the management teams of the respective partners will help keep problems manageable and to a minimum. It also provides an opportunity for sharing ideas and ways to improve the arrangement. Ongoing communication between the outsourcer and its own employees and customers is also vital. This will help manage the expectations of these key groups while ensuring they understand the rationale behind the decision to outsource the customer management process. In many instances, the customer will see their lender and the outsource provider as one and the same.
Finally, it is essential to choose the right partner. The wrong decision here could ultimately prove costly in both a reputational and financial manner. Money Partners, for example, has chosen Homeloans Management Limited (HML) to manage its post-completion processes. HML is a recognised market leader in its field with a significant client base. Its expertise and understanding of what makes a successful relationship has proved invaluable in helping us achieve our business objectives.
Key messages
In summary, there are a number of key messages to understand when considering outsourcing as an option. These certainly apply to back-office outsourcing, but apply equally to other processes:
- Outsourcing does not mean an abdication of responsibility.
- Both parties to the arrangement must strive for continual process improvements.
- Their commitment to customer service, compliance and regulation must be unequivocal.
- They should look to provide increased benefit by sharing economies of scale.
- A credible audit review programme and the exchange of management information are key.
- Regularly review outsourcing options and alternatives to ensure the business – and its employees and customers – are being best served.
- Communicate with stakeholders both inside and outside the business.
Peter Brennan is operations director at Money Partners
