Home owners and consumers are suffering considerable financial pain at the moment. For many individuals, this is their first experience of recession and the impact across the country is immense.
Unemployment passed two million in January and is expected to reach more than three million in Q3 2010, according to the British Chambers of Commerce. The last time the UK saw this many individuals unemployed was in the recession of the early 1990s.
The contraction in gross domestic product is also ratcheting up – the BCC estimates that it will fall by more than 3% this year.
Meanwhile, repossessions are rising as a consequence of the growing number of consumers unable to pay their mortgages, with the Council of Mortgage Lenders predicting that repossessions will reach 75,000 in 2009.
So what is the most effective way forward for mortgage lenders in these uncertain times?
First, they should be encouraging as many of their customers as possible to continue paying their mortgages and avoid creating situations in which they fall into arrears or find themselves at risk of repossession.
At the same time lenders must cut their costs. But while they are doing this they must also ensure that the quality of their customer service remains high to help borrowers maintain their payments as well as maximise revenue from those who have already crossed the line into arrears.
Lenders that have already outsourced areas of their business such as origination, underwriting, completions and servicing should also consider expert third party support when it comes to arrears management.
Specialist outsourcing companies that have in-depth experience of the mortgage market can provide support across many areas.
Benefits can be gained from outsourcing at the pre-arrears stage right through to helping borrowers with four months’ worth of arrears and beyond.
Outsourcers can contribute most to customer services that have to be conducted at volume and can be broken down into discrete processes.
In arrears management these elements include contact with borrowers via telephone or email, negotiations with them, the production and mailing of automated letters and sourcing borrowers’ ability to pay based on information including the value of their property and their credit rating.
Analysts point to outsourcing as a valuable strategy in helping companies manage through the recession, and it is clear that the industry is set to grow substantially despite the downturn.
For example, on a global basis consultancy Nelson Hall expects the value of the business process outsourcing market to grow 43% to £308bn by 2012, with an expectation that the UK market will jump by a similar proportion – 45% – to £33bn in the same period.
So what should lenders be looking for when considering outsourcing their arrears management or any other part of the mortgage process to a third party?
Five operational factors are paramount – leverage of technology, a focus on customer relationship management, efficient back office processing capability, use of continuous process improvement methodology and a mixture of on- shore and offshore delivery capability to cut costs.
Lenders should also be looking for outsourcing providers that are prepared to link their remuneration to defined targets and objectives. Such targets might include the recovery of a certain volume of debt in a given time, a reduction in the time taken to serve customers or the elimination of repeat calls.
On the IT side, analytics technology can allow outsourcers to micro-analyse borrowers’ accounts and categorise them according to financial status. This can influence outsourcing firms’ contact programmes with borrowers, which typically consist of letters followed by phone calls.
Using such analytics, outsourcers can also generate information that allows them to contact borrowers who have not yet fallen into arrears but are at risk of doing so.
When it comes to communicating on the phone with borrowers heading for difficulties or already in arrears, customer agents must not only be empathetic but also have an attitude that leads to a positive financial outcome for both customer and lender.
There will be significant advisory element to many of these conversations whether borrowers call in themselves or are responding to calls from agents. Often, advice constitutes guidance on payment plans and where to source additional financial help.
One customer segment that can show considerable return to lenders is those who are one month in arrears. This is because the outstanding amount is likely to be relatively small and can be settled over a short period of time.
But because this is a particularly high volume area many lenders struggle to provide enough resource to handle it, making it an obvious area to consider outsourcing.
Alternatively, if lenders prefer to keep arrears management inhouse they may consider diverting their skilled staff to focus on arrears while outsourcing more of their general mortgage servicing and administration.
On the cost reduction front, outsourcing can deliver double-digit cost savings compared with doing work inhouse. Indeed, lenders can cut costs further and generate even more value by outsourcing elements of the mortgage process such as pre-completion application processing, post-completion account administration and broader phone-based customer relations.
Conversations about arrears can be long and complicated, and therefore expensive for lenders. Outsourcers can bring efficiency to these calls by using their experience of debt collecting in other business areas to communicate effectively with borrowers and achieve a satisfactory outcome more quickly.
Delivering top class customer service may be hampered by legacy technology infrastructures and resolution counsellors having to juggle multiple business applications to resolve issues.
But process improvement using tools such as lean management can offer substantial business benefits without introducing new CRM applications. When applied properly, the lean management technique removes cost from a process by making it more efficient, and this underlying improvement often results in a better customer experience.
It also frees up capacity within the operation to handle additional business transactions.
By adopting what is known as a right-shoring strategy – i.e. using a blend of onshore and offshore locations for different stages of the mortgage life cycle – lenders can shave off more costs and generate extra gains.
There are many viable locations for offshore outsourcing including areas of Eastern Europe, Latin America, southern Africa, South-East Asia and the Far East. But India remains the most important hub for offshore outsourcing and is still predicted to grow.
Adopting a right-shoring strategy requires considerable investment in due diligence including the assessment of countries’ risk profiles and service providers’ corporate governance standards, management experience, financial profiles, risk management procedures, data protection standards and records of client delivery.
But right-shoring also offers mortgage companies the opportunity to develop outsourcing strategies that are bespoke and thus responsive to their needs.
Some companies make extensive use of low-cost overseas locations for back office processing work including data analysis, customer segmentation and email communications while keeping the sensitive area of phone-based contact with customers onshore.
Savings through outsourcing to long-haul destinations can be substantial. For example, like-for-like operating costs in India are around 40% lower than those in the UK.
And additional value comes from tapping into the 24-hour working window that becomes available through adding countries such as India as operational locations.
Some organisations have successfully incorporated offshore resource into their right-shoring strategies when they need to tap into a larger customer agent base for intense periods such as during marketing promotions for new products and services.
Another right-shoring strategy could involve testing and refining back office processes onshore before moving them offshore.
A good example of the value that can be derived from offshore outsourcing is our work out of India for a leading UK mortgage provider.
By leveraging our human resources, our process improvement methodologies and the time zone difference we significantly improved the quality of the firm’s customer experience by doubling the operating time of the customer service function to 16 hours, reducing the turnaround time for some processes from 10 days to two and embedding scalability into the function.
This was underpinned by a transformation of the lender’s customer management workflow system and elimi- nating paper and print-based tasks.
In terms of costs, we delivered a 40% reduction in the firm’s mortgage origination and administration overheads. Outsourcing is a proven strategy when it comes to building revenue, cutting costs, enhancing customer service quality and embedding operational agility.
There are many elements of mortgage customer management that can be outsourced onshore, offshore or through the right-shoring model but getting it right requires careful consideration of the processes that are to be outsourced and extensive scrutiny of providers’ capabilities and experience.
Analysts point to an acceleration in the trend towards outsourcing and I expect that as the recessionary pressure builds it will become of increasing strategic value to lenders in a range of areas, but perhaps most importantly in arrears LSmanagement.