Outsource With Us: Mount Street’s Relationship-First Approach to Outsourcing

Outsourcing involves the delegation of specific processes or functions by a business (Customer) to a third-party service provider (Supplier). Mount Street, an independent loan service provider, has considerable experience in outsourcing and in the Supplier role, having acted as an outsourced loan servicer for over a decade.Our experience has determined that the key to a successful outsourcing is a relationship-focused outsourcing agreement.

What do we mean by that?
A properly transformative outsourcing agreement should be centred on a mutual and longterm commitment between a Customer and a Supplier and must create a framework that
allows the relationship to grow and adapt over years.

It therefore requires a balancing of incentives and a sharing of risk/reward between the parties for it to be successful in the long term. This is often difficult to negotiate, as there are conflicting interests on the side of the Supplier and the Customer.

Example A:

• Customer wants a complete end-to-end solution delivered.
• Supplier wants a clear delineation of services and recognised dependencies.

Example B:

• Customer wants clear remedies for breach and clear termination rights.
• Supplier needs some flexibility in delivery and wants opportunities to rectify errors which may occur before termination options are exercised.

Example C:

• Customer wants open ended commitments for continuous improvement and development projects for the long-term.
• Supplier needs to forecast pricing and resource in advance without the ability to properly cost out the commitments and in advance of having a true understanding of the achievability of the proposed objectives.

A proper outsourcing contract will balance these competing interests through a variety of mechanisms built into the contract:

Example A

As part of the contract negotiation, the Supplier and Customer will work out detailed service level agreements (SLAs) which detail the services to be performed by the Supplier, and the
requirements and inputs needed by the Customer to achieve the SLAs (Service Dependencies). This may also involve the creation of process flows and technical mapping documents to make it clear where the responsibilities lie and to illustrate how the service delivery will functionally work. These SLAs and supporting documents are a critical operational piece of the outsourcing agreement.
Certain outsourcings may also have a transitional framework pre-agreed, where the parties agree on milestones to implement the envisaged service delivery and can attempt a parallel test run of certain functions while the Customer winds down and off legacy systems and processes. This can help the parties have confidence that come “Go-Live” of the full contract, the service provision will be able to carry on without issue.

Example B

Sitting alongside the SLAs you will often find Key Performance Indicators (KPIs). Proper KPIs agreed between the parties should provide a healthy metric of how well the services are
being delivered and effectively highlight any trouble areas in the relationship. A failure in KPIs may result in service credits being issued or may simply be used as the mechanism which triggers an escalation to a service delivery forum so that the problems can be rectified.
Often, the outsourcing agreement will contain provisions and commitments around remedy plans and steps to take in the event of service failures. To keep the balance, the agreement
also recognizes a concept of relief events – that is, a Supplier cannot be held responsible for non-delivery of services where the failure is due to a missing Service Dependency. This balance keeps both parties mutually incentivised to deliver under the agreement.

Example C

This conflict can be mitigated and supported by a variety of provisions in the outsourcing agreement. A charges framework should cover not only the fixed service costs, but may also
include agreement on ad-hoc additional pricing such as day rates, or, potentially a pre-agreed bucket of included person-hours or a specifically agreed budget for development
projects. Committees may be established to manage sub-projects within the wider outsourcing.

Continuous improvement commitments can provide reassurance to the Customer that it will benefit from improvements to the service delivery of Supplier and certain technological advances made by Supplier applicable to its clients generally, without additional cost repercussions.

Supporting all the examples above, the contract will also have built in mechanisms to bring the parties together and to address change and conflicts. Each agreement typically has a
change control process to detail how service changes and pricing may need to be adjusted over time and who bears responsibility for which costs. Most importantly, the agreement will also have a governance structure built into it, including features such as:

• Regular forums for service delivery discussions.
• Escalation points for service issues.
• Dispute resolution provisions.
• Steering committees.

The central focus of governance is to make sure the relationship is maintained, even when issues arise, and to keep the parties coming back to the table regularly to work through them.

A long-term outsourcing agreement is a substantial document designed to legislate for a wide array of outcomes between the Customer and Supplier over years. The parties need to
be realistic about the possibility of relationship breakdown and termination, and so, a well-drafted outsourcing agreement will also provide not only for termination rights, but also exit mechanics around any termination of the contract, with clear descriptions of how the services will be transferred back to the Customer or to another service provider, and how the exit mechanics may change based on the reason for termination. This avoids the parties having to negotiate exit plans at a time when the relationship may already be strained and gives the Customer assurances that the service delivery will be smoothly transferred, no matter the circumstances.

Mount Street has significant experience in the outsourcing space and is a committed outsourcing partner to many financial institutions, investment managers and regulated entities. If you are considering outsourcing the whole or any part of your loan servicing, agency, asset management or surveillance functions, we encourage you to reach out to us to discuss how we can partner with you to support your business.