A new TowerGroup study challenges claims that US firms which outsource mortgage processing to centres in India will reduce costs by 25-50%, and instead predicts that lenders offshoring loan origination processes will be able to cut costs per loan by just six per cent by 2008.
The TowerGroup research shows that mortgage firms will not perform true end-to-end loan processing in India. In the loan origination process, firms will offshore data entry, document and data verification, and quality control. In the loan servicing process, customer support and collections are more likely to be offshored.
TowerGroup says the hype regarding 25-50% offshore cost savings may be true for individual sub-processes, but the creation of new facilities, additional overhead costs and offshoring of only a percentage of loan processing will limit total average savings to far less.
Craig Focardi, senior analyst in the consumer lending and bank cards practice at Towergroup, says the offshoring and outsourcing business models in India are still maturing, but will help the US mortgage industry lower total origination costs per loan six per cent by 2008 and will ultimately reduce total direct loan origination and loan servicing costs to four per cent by 2010.
"No matter what offshoring model they use, return on investment and cost savings estimates must include a careful assessment of start-up investments, new marginal costs necessitated by the offshoring initiative, and overhead," says Focardi.
Focardi warns that offshoring overseas is a strategic business decision, not a tactical operating cost decision, because it requires large, long-term capital and management resources.