In House vs. Outsourced QC

In-House vs. Outsourced QC

The categories below are designed to provide you with an overview of the differences between in-house and outsource quality control. For categories where outsourcing is superior, the cumulative assessment column to the right will be written in red letters. Categories where in-house analysis is likely to be superior are in blue, and assessments where the outcome could emerge either way are explained in black. As you can see, outsourcing is only guaranteed to be superior in terms of fixed costs. Doing your own QC, in-house, can provide you with as good or better results in every other area, provided you make the right investments in technology and training.

Cogent recommends that lenders speak with other lenders who have experience with outsourcing of QC reviews. We also recommend researching best practices, both for in-house and outsourced reviews. You may be surprised what you discover.

Issue	In-House	Outsource	Assessment
Costs (Fixed)	Higher fixed costs with an in-house QC department.	Fixed cost for in-house administration and second reviews only.	Outsourcing saves you money in fixed costs.
Costs (Variable)	Some variable cost (for overflow) during times of unusually high volume, otherwise, fixed costs cover everything.	Pricing is typically done on a per-loan basis. Because of larger sample sizes and limited opportunities to improve efficiency, outsource costs may increase substantially when volumes increase.	With low origination volumes, outsourcing may cost you less money per loan, depending on the price you get and the number of loans reviewed. With high origination volumes, in-house is likely to be less expensive. In-house departments can also improve productivity and efficiency, resulting in lower cost per loan over time.
Incentive structure	An in-house staff has, or should have, incentives to accurately report defects and to improve both efficiency and quality over time.	Outsource firms are usually paid on a per-loan basis, so they may not have much incentive to reduce sample sizes and error rates.	In-house QC is superior. Incentives are generally in line with the company’s objectives of reducing cost-per-loan and improving quality over time.
Meeting Regulatory Requirements	Meets standard regulatory requirements.	Meets standard regulatory requirements.	Both approaches fulfill minimum requirements.
Process Over Time	In-house QC processes improve over time as auditors become experienced and as reporting of defects, feedback and corrective actions become more efficient.	The same outsource auditors may not work on your QC over time, which makes it difficult to improve practices and efficiency, not to mention quality.	In-house analysis is likely to become more refined and accurate over time, whereas there is no such guarantee for outsourcing. Some lenders re-review the results of outsourced audits, because they do not trust the results.
Perception of Regulators, Investors and Rating Agencies	An in-house QC system is the mark of a lender that is serious about improving loan quality. It demonstrates a willingness to invest in good business practices.	Outsourcing may be the sign of a lender more concerned with reducing fixed costs than with long term quality improvement.	In-house analysis is generally perceived as more effective, and can result in more favorable treatment.
Reporting	A good in-house system will create meaningful, statistically valid reports. In addition to standard reports, it will allow you to create custom reports of both detailed and summary results.	Most outsource firms produce voluminous detailed reports of individual findings, but sophisticated reports and custom reports will either be unavailable or will cost extra.	Creating meaningful reports requires familiarity with a particular lender's processes and an ability to flexibly deploy a sophisticated array of tools for analysis. While outsourcing firms may be able to produce satisfactory exception-level reports, you will have less control over the format, and less ability to modify reports to suit your needs as they change.
Sampling	A good in-house system allows you to draw statistical, stratified, and targeted samples. It ensures that your random reviews are minimized and your discretionary reviews are intelligently targeted, based on actual historical risk.	Outsourcing firms typically over-sample for random reviews, resulting in higher costs and slower turnaround. Targeted samples may not reflect the lender’s actual current risk profile, since defect rates are not used to calculate sample sizes	Sampling strategy is a key component of quality control and is best done by those who are closest to and most familiar with the unique historical and ongoing risks of the processes being analyzed.
Flexibility	Sampling strategies, risk focus, and review scopes, and reporting packages can be tailored to your practices and needs, and quickly altered, as necessary, to meet changing business requirements.	Flexibility in sampling, reporting and reviews is limited and not as timely. Reviews are designed to meet general industry standards, rather than a particular lender's current business risks.	In-house analysis provides the possibility of a far more flexible review process as it places control of the process in the hands of QC managers rather than outsource consultants.