Internal Build vs. Buy Services?Calculating the Economic Decisions of Outsourcing

Maris RolmanisCGI - Global Business Engineeringmaris.rolmanis@cgi.com

April, 2006

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Agenda

Process Considerations Information is Key Segmentation

Outsourcing – Maximizing the Value Why: Motivations What: Candidates for Outsourcing How: Economic Framework

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The Dream…….

Turning revenue into profit

Reality is….. Not all customers pay on time or are even

willing to pay

Sounds simple:ensure the customers pay for the services and products used

• on time• complete• without additional effort/stress

Saturation

Revenue

Profit

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Today’s Focus - Revenue into Profit

Product Development

Usage Management

Collections

Acquisition/Provision

Loss Recognition

MarketingRecoveries

Integrated Risk

Management

Managing credit risk allows companies to maximize their customer profitabilityManaging credit risk allows companies to maximize their customer profitability

• Propensity Scoring• Churn Management• Retention• Winback• Cross-sell/Up-sell• Customer Segmentation• Customer Valuation• Pricing Strategies

• Prescreen• Credit Scoring• Product Selection• Approvals/Declines• Risk-based Pricing• Offer Analysis• Workflow Routing• Up-sell/Cross-sell

• Portfolio Scoring• Care Differentiation• Fee Waivers• Product Upgrades• Pay/No Pay• Authorizations• Up-sell/Cross-Sell• Usage Monitoring• Customer Satisfaction• Limit Adjustments

• Risk-based Collections• Behavior Scoring• Collection Actions• Fraud Management• Agency Placement• Repossession Assessment

Credit Risk Management Life-cycle

Risk-basedCollections

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Collections Management – Information is Key Prudent Best Practices

1. Gather all customer contacts & history

3. Score customer using risk behavior model(s)

4. Introduction of champion/challenger strategies

5. Extension of scoring models to Value Management

Score customer against risk behavior model(s) using customer input data

Score customer against risk behavior model(s) using customer input data

Combine different enterprise scoring models and systems to generate common view on the customer – allowing maximizing on his value

Combine different enterprise scoring models and systems to generate common view on the customer – allowing maximizing on his value

Add additional – behavioral & predictive customer data describing his motivation and his psychometrics

Add additional – behavioral & predictive customer data describing his motivation and his psychometrics

Segment customers into logical grouping (subjective/best practice) and according treatment

Segment customers into logical grouping (subjective/best practice) and according treatment

5. Introduction of Psychometric Profiles

2. Segment & assign customer to risk groups

Frequent (automated) assessment & continuous improvement cycle

Frequent (automated) assessment & continuous improvement cycle

- Ensure all customer contacts are tracked- Ensure all required history data can be obtained in (data model) and by the system (operations)- Ensure the availability of the analysis and reporting data

- Ensure all customer contacts are tracked- Ensure all required history data can be obtained in (data model) and by the system (operations)- Ensure the availability of the analysis and reporting data

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Managing the Debt CollectionCustomer Segmentation

Customer group 1:Willing to pay – payin time

Customer group 3:Could pay – but doesNot want to (at leastimmediately)

Customer group 2:Willing to pay – buttemporarily out ofmoney

Customer group 4:Does not want to or cannot pay

Educate

Negotiate Stop

Leverage

Embed into other selection criteria

Lengthof relation

Lengthof relation

Averageused amount

Averageused amount Average

paymentbehaviour

Averagepaymentbehaviour

Personalcriteria

Personalcriteria

Contractvalue

Contractvalue

Openpromises

OpenpromisesFormer

actions

Formeractions

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Why move on to scoring? What are the key benefits?

More formalized approach allowing more ‚objectivity‘ in decisioning (~ improved quality/reduction of credit risk)

Enables almost individual treatment („mass customization“) Introduces easy extendable, changeable & maintainable

frame for adding new criteria Leverages ‚collections view‘ to enterprise-wide credit risk Allows integration of „predictive“ models Dynamic customer evaluation – each situation encounters

the most recent events (not as static as within a treatment strategy)

Information is Key…Scoring

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Customer Scoring Volume Demands automation

Pas

t C

usto

mer

Dat

a

Analysis & Modelling- Understand your customers- create scoring model and scorecard- develop decision trees

in

div

. S

CO

RE

CA

RD

S

Eva

luat

ion

mod

el

Recalculate basedon events

Adjust if required

Analyse the past Predict the future

Dec

isio

n t

rees

usi

ng

D

ecis

ion

An

alyt

ics

Analysing model e.g.- Discriminent analysis (uni/multivar.)- Regression analysis (Logit/Probit)- Neuronal Networks

EmbedintoApply

- Data availibiltity & Data history- Capacities & Resources- Know-how- Tools (e.g. Data Mining)

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Which customers are likely to stay, to go? How can I reduce attrition / increase loyalty among the right customers? Is there a best “next product” to offer my customer? What should be the timing and channel for that offer? How can I interest customers in new types of services, such as

integrated production planning or a new product customization service? How aggressively should I be approaching customers?

Customer Issues

What is the future value that I can expect from my customer portfolio, and what are the sources of this value? How am I doing compared to my competitors? Am I winning/losing the right kinds of customers?

Am I getting sufficient value from the customers I seek? How specifically can I increase the value and reduce the risk of my

customer portfolio? How can I learn and adapt quickly as conditions change?

Tac

tica

lS

trat

egic

al

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Integrated Customer Value Management Environment

Profitability

AttritionVulnerability

Customer Decision Strategy Processes

Customer ManagementDecision Strategies

Customer-Level Decision Engine

Data Warehouse

z

Proactive Marketing

Responsive Marketing

Originations/ Provisioning

Servicing

Retention Management

CollectionsActions/Tactics

Feedback and Learning

Customer Contact

Internet

Direct Marketing

Call Center ATM

Shop Operations

Customer Knowledge Through Models and Data

Segment Objectives

Risk Profile

ChannelPreferences

• which customers• what products

• what product(s)

• what fee• what rate• what credit limit

• pay/no pay• limit adjustment

• what action, when • outsource?

• waive fee(s) • upgrade

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General Outsourcing Characteristics

An outsourcing contract is an agreement for services associated with service levels (measure of performance against agreed criteria).

For credit & collections, services that can be outsourced extend from whole business process, call center operations, to portfolio analytics, to IT systems and maintenance.

An outsourcing contract is generally a long-term agreement (3+ years) so understand the future strategy, and ability to adapt.

An outsourcing contract may require servicing from different locations, internal and external, possibly other countries (both near-shore and offshore).

“Buyers” expect significant cost savings, continuous improvement and/or business value. A “Seller’s” ability to do so is based on its concentration of infrastructure and expertise, its standardization, its efficiency and its creativity and innovation to adapt with changing markets .

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WHY: The Driving Motivators for Outsourcing

Financial Pressure Reduce costs Reduce headcounts Drive revenue

Competitive Advantage Speed to market Innovation Efficiency Effectiveness Drive revenue Flexibility

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A Matter of PerspectiveOutsourcing Considerations in the Credit & Collections Space

BuyersBuyers OutsourcersOutsourcers

Staffing Staffing capabilities?capabilities?

Difficulty in attracting and retaining quality trained staff in highly competitive market

Multiple opportunities for staff; knowledge retention; access to broad breadth of analytical, technological & process skills

Supply/demand Supply/demand alignment?alignment?

Slow to grow and/or downsize; staff allocated to low value initiatives

Ability to re-allocate staff to other clients; completely scaleable both ways; same capability, but with different billing model

Core Core competency?competency?

Compete for attention and funding with higher-value alternatives

Heavy investment in leverageable infrastructure: efficiency, effectiveness, reliability

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WHAT: Candidates for Outsourcing in Credit & Collections Management

Credit Life

Cycle

Credit Life

CycleCreditCredit RecoveryRecoveryCollectionsCollectionsUsageUsage

Value Continuum

Value Continuum

HigherHigher

LowerLower

Credit Data Storage

Credit Scoring

Credit Model Development Behavior Model Development

Application Processing

Account Retention

CRM and Marketing Cross-Sell

Delinquency Model Development

Outbound calling

Bankruptcy Processing

Recoveries

Post Write-Off Litigation

Debt Sale

Skip Tracing

Fraud ID Detection

Fraud Monitoring

Letter processing

System Maintenance & Support

Analysis Champion/Challenger Strategy Design Execution

System Development

In-bound calls

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HOW: The Economic Framework

1. Identify the Impact Points = Key performance measures (KPM’s)

2. Quantify each Impact Point = Value of Improvement

3. Determine the Baseline

4. Define & Test Alternatives Approaches

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Identifying the Impact Points for Collections

P&L Measures Bad Debt

Gross Bad Debt, Gross Recoveries, Net Bad Debt Fraud

Expenses OpEx: Salaries (collectors, analysts, IT staff), Credit Reports, Skip

Tracing CapEx: Processing systems/infrastructure, upgrades

Revenue

Non-P&L Measures Churn/Attrition Collection strategy attitude = follow-on business value Cash Flow (DSO)

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General Outsourcing Claims4 Distinct Impact Points

Bad DebtBad Debt DOWNDOWN

Ops ExpenseOps Expense DOWNDOWN

Churn/AttritionChurn/Attrition DOWNDOWN

RevenueRevenue UPUP

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Quantifying each Impact Point

Credit Credit Life Life

CycleCycle

Credit Credit Life Life

CycleCycle

UsageUsageUsageUsageCollectionsCollectionsCollectionsCollections

CreditCreditCreditCredit

Marketing

Write-OffWrite-Off

RecoveriesRecoveries

Product Development

Bad DebtBad Debt # of accounts account balances

Work more high-risk/high-balance accounts more aggressively, resulting in more payments

Work more high-risk/high-balance accounts more aggressively, resulting in more payments

Can’t control creditworthiness of through-the-

door sales

Can’t control creditworthiness of through-the-

door sales

Can’t control pre-delinquency

balance build-up

Can’t control pre-delinquency

balance build-up

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Quantifying each Impact Point

Pay lower ratesPay lower rates

FTE ExpenseFTE Expense hourly rate productivity automation

Collector Workforce

Collector Workforce SalariesSalaries

Manual tasksManual tasks

ProductivityProductivity

Automate tasksAutomate tasks

Work higher % of paid hoursWork higher % of paid hours

Work fasterWork faster

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???Additional Economic Modeling

RevenueRevenue # of accounts usage/ARPU

More efficient/effective collection efforts

= Fewer accounts rolling through delinquency

= Delinquent accounts cured sooner

= Accounts back in buying cycle more often

= MORE INCREMENTAL REVENUE?

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???Additional Economic Modeling

ChurnChurn voluntary involuntary

Better account segmentation

= Risk-differentiated calling campaigns

= Lower-risk customers don’t get heavy-handed treatment

= LOWER VOLUNTARY CHURN?

More efficient/effective collection efforts

= Fewer accounts rolling through delinquency

= Delinquent accounts cured sooner

= Fewer accounts reach disconnect point

= LOWER INVOLUNTARY CHURN?

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Points to Consider

Make sure the BAU forecast is realistic Remember what’s in scope of control…and what’s

outside of control Focus on the business drivers Test different scenarios Define HOW the improvements are going to be made

SegmentationSegmentation

More dials/RPCsMore dials/RPCs

Better trainingBetter training

More paymentsMore payments

Faster paymentsFaster payments

Fewer forward rollsFewer forward rolls

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Pricing Models

Input-based models Units sent for processing FTEs Cost Plus Time & Materials Build-Operate-Transfer (BOT)

Output-based models Units processed Fixed or Milestone Priced

Shared risk-reward Contingency Revenue Change Savings

Win-Win:How do the Buyer and Seller make money?

Win-Win:How do the Buyer and Seller make money?

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Summary: A Top 10 List

1. It’s about the ECONOMICS: Just about everything can be quantified (even “qualitative” factors).

2. Define your reasons for outsourcing.

3. Know your P&L.

4. Verify (and challenge) all assumptions.

5. Know what’s controllable vs. what’s not.

6. Focus on the actual business drivers.

7. Compare against out-year forecasts, not today’s BAU.

8. Test different scenarios.

9. Understand the linkages between process components.

10. Know how both sides make money.

Internal vs. External?Calculating the Economic Decisions of Outsourcing

Take decisions based on facts &

Own the full process