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Internal Build vs. Buy Services?Calculating the Economic Decisions of Outsourcing
Maris RolmanisCGI - Global Business [email protected]
April, 2006
2
Agenda
Process Considerations Information is Key Segmentation
Outsourcing – Maximizing the Value Why: Motivations What: Candidates for Outsourcing How: Economic Framework
3
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
4
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
5
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
6
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
7
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)
9
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
10
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
11
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 .
12
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
13
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
14
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
15
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
16
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)
17
General Outsourcing Claims4 Distinct Impact Points
Bad DebtBad Debt DOWNDOWN
Ops ExpenseOps Expense DOWNDOWN
Churn/AttritionChurn/Attrition DOWNDOWN
RevenueRevenue UPUP
18
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
19
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
20
???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?
21
???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?
22
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
23
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?
24
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.