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

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Internal Build vs. Buy Services?Calculating the
Economic Decisions of Outsourcing
Maris RolmanisCGI - Global Business
Engineeringmaris.rolmanis_at_cgi.comApril, 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

Revenue
Profit
Saturation
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Todays Focus - Revenue into Profit
Managing 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

Credit Risk Management Life-cycle

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

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

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

Risk-based Collections
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Collections Management Information is Key
Prudent Best Practices
- 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
1. Gather all customer contacts history
2. Segment assign customer to risk groups
Segment customers into logical grouping
(subjective/best practice) and according treatment
3. Score customer using risk behavior model(s)
Score customer against risk behavior model(s)
using customer input data
Frequent (automated) assessment continuous
improvement cycle
4. Introduction of champion/challenger strategies
Combine different enterprise scoring models and
systems to generate common view on the customer
allowing maximizing on his value
5. Extension of scoring models to Value
Management
5. Introduction of Psychometric Profiles
Add additional behavioral predictive customer
data describing his motivation and his
psychometrics
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Managing the Debt CollectionCustomer Segmentation
Embed into other selection criteria
Educate
Leverage
Customer group 3 Could pay but does Not want
to (at least immediately)
Customer group 1 Willing to pay pay in time
Customer group 2 Willing to pay
but temporarily out of money
Customer group 4 Does not want to or cannot pay
Open promises
Former actions
Negotiate
Stop
Contract value
Length of relation
Personal criteria
Average used amount
Average payment behaviour
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Information is KeyScoring

• 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)

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Customer Scoring Volume Demands automation
Analysing model e.g. - Discriminent analysis
(uni/multivar.) - Regression analysis
(Logit/Probit) - Neuronal Networks
Past Customer Data
indiv. SCORECARDS
Evaluation model
Decision trees using Decision Analytics
Analysis Modelling - Understand your
customers - create scoring model and scorecard -
develop decision trees
Embed into
Apply
- Data availibiltity Data history - Capacities
Resources - Know-how - Tools (e.g. Data Mining)
Recalculate based on events
Adjust if required
Predict the future
Analyse the past
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Customer Issues

• 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?

Tactical

• 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?

Strategical
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Integrated Customer Value Management Environment
Customer Knowledge Through Models and Data
Proactive Marketing
Customer Contact
Profitability
Risk Profile
AttritionVulnerability
ChannelPreferences
Direct Marketing
Internet
Responsive Marketing
Customer Decision Strategy Processes
Originations/ Provisioning
Segment Objectives
Call Center
ATM
z
Customer ManagementDecision Strategies
Servicing
Retention Management
Shop
Operations
Customer-Level Decision Engine
Actions/Tactics
Collections
Data Warehouse
Feedback and Learning
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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
  Sellers 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
Buyers
Outsourcers
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WHAT Candidates for Outsourcing in Credit
Collections Management
Analysis
Champion/Challenger Strategy Design
Execution
Outbound calling
CRM and Marketing Cross-Sell
Recoveries
In-bound calls
Account Retention
Post Write-Off Litigation
Credit Model Development
Behavior Model Development
Delinquency Model Development
Credit Scoring
Debt Sale
Fraud Monitoring
System Development
Credit Data Storage
Bankruptcy Processing
Fraud ID Detection
System Maintenance Support
Application Processing
Skip Tracing
Letter processing
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HOW The Economic Framework

1. Identify the Impact Points Key performance
   measures (KPMs)
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

• PL 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-PL Measures
• Churn/Attrition
• Collection strategy attitude follow-on business
  value
• Cash Flow (DSO)

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General Outsourcing Claims4 Distinct Impact
Points
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Quantifying each Impact Point
Cant control creditworthiness of
through-the-door sales
Cant control pre-delinquency balance build-up
Work more high-risk/high-balance accounts more
aggressively, resulting in more payments
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Quantifying each Impact Point
Salaries
Pay lower rates
Productivity
Manual tasks
Automate tasks
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Additional Economic Modeling
?
?
?

• 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
?
?
?
Better account segmentation
Risk-differentiated calling campaigns
Lower-risk customers dont 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 whats in scope of controland whats
  outside of control
• Focus on the business drivers
• Test different scenarios
• Define HOW the improvements are going to be made

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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?
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Summary A Top 10 List

1. Its about the ECONOMICS Just about everything
   can be quantified (even qualitative factors).
2. Define your reasons for outsourcing.
3. Know your PL.
4. Verify (and challenge) all assumptions.
5. Know whats controllable vs. whats not.
6. Focus on the actual business drivers.
7. Compare against out-year forecasts, not todays
   BAU.
8. Test different scenarios.
9. Understand the linkages between process
   components.
10. Know how both sides make money.

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Internal vs. External?Calculating the Economic
Decisions of Outsourcing
Take decisions based on facts Own the full
process