According to the MBA (Mortgage Bankers Association), per-loan costs have increased nonstop over the past two years. In the group’s most recent mortgage banker performance report, production expenses stood at $8,025 per loan, an increase of 38% from the first quarter of 2013. The cost increases largely have come from new compliance requirements and a rigid cost structure unable to scale with the market. Meanwhile, competitive pressure on lenders has surged: Overall mortgage origination volume is 54% lower than last year, according to the MBA.
Operational flexibility has become critical for lenders hoping to thrive during these trying times. Except for the largest lenders, however, few are equipped to independently make the necessary ongoing investments in technology, process improvement, and infrastructure to identify and execute transformational programs that can reduce costs and restore profitability.
The problem stems from a poor understanding of the end-to-end lending process and inadequate operating models. In effect, lenders have gravitated toward solutions that optimize and overly “build” only part of the value chain while depriving themselves of the flexibility they need during market shifts. Ebbs and flows in the market traditionally have been met with endless cycles of hiring, training, and layoffs as needs change.
Smaller lenders have been particularly affected. Without a large staff to ensure comprehensive, up-to-date interpretation and implementation of the morass of regulations, this group is faced with some tough decisions. This is leading to historic levels of M&A activity, which in turn increases volatility.
The next generation of operating models
One trend that is emerging from this perfect storm is a new kind of operating model delivered through BPO. Over the past decade, lenders have increasingly outsourced parts of their operations as a means of reducing costs and improving overall efficiency. Whether outsourcing one or several parts of their business, lenders have gained access to specific business expertise while leveraging onshore or offshore labor resources. Yet as of late, lenders have found that BPO providers are susceptible to the same market pressures and risks as lenders and have not been spared from rising costs. This has increased prices and strained many BPO/lender relationships. As a result, now is the time to rethink business process outsourcing.
The next generation of BPO involves a more holistic approach to the problem. Business Process as a Service (BPaaS) was created to provide any type of horizontal or vertical business process delivered through a cloud computing environment. It is somewhat similar to Software as a Service (SaaS) solutions that have grown in popularity over the past several years. Instead of just delivering software, however, BPaaS delivers a technology-enabled process or activity in the mortgage chain.
Through BPaaS solutions, lenders can pick and choose processes that match their business policies or those of their partners. For example, BPaaS solutions can include managing email, invoices, or compensation. The solutions themselves are totally configurable depending on the exact process that is needed.
BPaaS vs. BPO
BPaaS evolves BPO into a more advanced end-to-end operating model. It differs from traditional BPO in that BPaaS providers provide lenders with technology platforms that multiply the value of process reengineering and often employ “gain share” or “value share” concepts instead of traditional “per FTE” pricing. These concepts align incentives and ensure that both parties are invested in the relationship’s success.
By harnessing technology and analytics so they strictly match up with a lender’s strategic business goals, BPaaS models enable the transformation to a truly intelligent and agile lending operation. The benefits of a collaborative BPaaS model are proven, and the results are significant.
How BPaaS works
The BPaaS strategy focuses on reaching clearly identified business outcomes through delivering optimized operations that leverage best practices, best-in-class technology, and cost-effective labor.
Built-in best practices. While every lender would like to be unique, the reality is that investors view every 30-year fixed loan essentially the same. When lenders are recognized for their business processes, it’s usually for something negative, such as when errors or omissions occur. A BPaaS strategy ensures that current best practices are incorporated into every business process, resulting in consistent, predictable accuracy and excellence.
Cutting-edge technology “for life.” It is difficult for lenders to keep up with changes in technology, and it is especially difficult to scale IT personnel costs relative to volume. A BPaaS strategy lifts this burden from lenders since the BPaaS provider assumes responsibility for updating the underlying technology and optimizing it specifically to cost-effectively engage the staff segment of the advanced operation. The lender benefits from having the best technology without the IT staff overhead to update and maintain it.
Optimized throughput and cost via global resources. While onshore outsourcing can offer cost savings, the nation’s largest lenders have embraced offshoring for select business processes. This group has benefited the most through programs that started as purely “cost arbitrage” but evolved to focus on quality, growth, and compliance. Because processes can be ordered a la carte, and with the provider’s costs spread out over multiple lenders, BPaaS models offer smaller lenders the same advantages at affordable costs. The playing field becomes truly level.
By unlocking the top-line benefits of flexible business operations based on a BPaaS model, lenders can successfully address the challenges presented by rising costs, thinning margins, and increasing regulations. Our advice is to pay attention to the year ahead. We will see many more lenders finding substantial benefits through business process outsourcing as a service, and BPaaS will become a familiar term to everyone who is interested in controlling costs and maximizing profits.
This paper was authored by Matt Woods, President, Mortgage Services, Genpact