Why 'letting go' is the new control

Lending Strategy September 2010

According to Gartner, the demand for outsourcing is increasing by about 8% a year. There are various drivers for this, especially as lenders remain under pressure to review cost cutting strategies and improve operating efficiency. Love it or loathe it, outsourcing can play a key role in a lender’s business plan and generally works best when it is employed to release it to focus on core competencies.

The first task is to identify those process areas of value either where the lender can benefit from the experience of an outsourcer, or where value or control can be maintained by the lender, such as sales and underwriting. It could even provide an operating model for the emerging new wave of lending. The three key challenges facing lenders this year will remain cost reduction, growth and regulatory change all of which can be mitigated by outsourcing certain functions to an experienced third party.

Cost reduction
A reputable outsourcer can provide tried and trusted processes, progressive technology and specialist staff, thus removing the need for additional inward investment by the lender.

Outsourcers can also offer a lender better bargaining power on cost negotiation with other third party suppliers such as valuers, with whom they should already have an existing relationship with. This can be particularly beneficial to new market entrants who might encounter difficulty in brokering deals with credit agencies for example.

Enabling new lending
For start ups, outsourcing helps keep the cost of market entry low by removing overheads such as staff and premises costs along with investment in key servicing infrastructure. As the lending operation grows over time, some or all elements of these functions could be brought back in-house and the reliance on third party support scaled back if required. This approach also frees up new entrants to concentrate on the front end of their operation growing the business.

For existing market players it provides the ability to maintain or increase operating efficiency through greater process automation. At the very least, outsourcers will perform back office tasks for a lender, so removing the need to increase head count. And in some instances, the provider has more sophisticated systems and processes that can be harnessed to service the portfolio and remove the need for additional investment by the lender in upgrading its in-house technology.

In a marketplace, where regulatory change is evolving at a rate of knots, it is increasingly important for organisations to select a partner with rigid processes that are highly visible to the lender.

For example, the use of electronic document management and business processing management (BPM) technologies will help lenders and outsourcers alike enforce compliance and ensure a clear audit trail giving lenders increased confidence that their portfolio is being managed in a fully compliant manner with all of the associated benefits including meeting regulatory obligations, adhering to Treating Customers Fairly principles and brand protection.

The perfect partnership
As your chosen third party will be a partner in your business, a lender must be confident that the chosen provider will protect the brand’s values and maintain service levels that customers expect.

Reviewing a potential outsourcer’s servicer ranking before appointment will also help ensure that a lender has selected the right third party for the job. Reputable outsourcers will have an assigned independent servicer ranking with a ratings agency such as Standard & Poor’s, Fitch or Moody’s. A reputable outsourcer will provide flexible and predictable pricing with a proven track record and the agility to quickly adapt to market change.

Outsourcing many of the routine business processes to a servicer with a lower cost base is good business sense as it offers the potential to substantially reduce costs a lender might prefer to retain risk control in-house but outsource customer account management.

Processes such as arrears management or complaints management, are another area that are often outsourced to a qualified third party.
Business process outsourcing also offers lenders the flexibility to mix and match their outsourcing to their business requirements whether it’s the full end -to-end lending operation or just part of the processes such as arrears management.

Tailored and efficient lending software is also critical for ensuring a successful outsourcing partnership, (see cube left). Though vitally important in helping to deliver an efficient service, IT should be regarded as an enabler. It equips experienced people to perform to their utmost potential. By combining an outsourcer’s proven technology with its highly qualified personnel, lenders get the best possible opportunity to deliver results.