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

1. Internal Build vs. Buy Services?Calculating the Economic Decisions of Outsourcing Maris RolmanisCGI - Global Business Engineeringmaris.rolmanis@cgi.comApril, 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 Revenue Profit Saturation

4. Product Development Recoveries Marketing Integrated Risk Management Acquisition/Provision Loss Recognition Usage Management Collections Today’s Focus - Revenue into Profit Managing credit risk allows companies to maximize their customer profitability Credit Risk Management Life-cycle • Propensity Scoring • Churn Management • Retention • Winback • Cross-sell/Up-sell • Customer Segmentation • Customer Valuation • Pricing Strategies • 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

5. 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

6. Managing the Debt CollectionCustomer Segmentation Embed into other selection criteria Leverage Educate 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

7. Information is Key…Scoring • 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)

8. 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 Apply Embed into - Data availibiltity & Data history - Capacities & Resources - Know-how - Tools (e.g. Data Mining) Adjust if required Recalculate based on events Predict the future Analyse the past

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? 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? Customer Issues Tactical Strategical

10. which customers • what products • what product(s) • what fee • what rate • what credit limit • pay/no pay • limit adjustment • waive fee(s) • upgrade • what action, when • outsource? 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

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. Core competency? • Compete for attention and funding with higher-value alternatives • Heavy investment in leverageable infrastructure: efficiency, effectiveness, reliability Staffing 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 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 A Matter of PerspectiveOutsourcing Considerations in the Credit & Collections Space Buyers Outsourcers

14. Value Continuum Higher Credit Life Cycle Credit Usage Collections Recovery Lower 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

15. HOW: The Economic Framework • Identify the Impact Points = Key performance measures (KPM’s) • Quantify each Impact Point = Value of Improvement • Determine the Baseline • 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. DOWN Bad Debt DOWN Ops Expense UP Revenue DOWN Churn/Attrition General Outsourcing Claims4 Distinct Impact Points

18. Bad Debt • # of accounts • account balances Product Development Credit Life Cycle Marketing Recoveries Credit Write-Off Usage Collections Quantifying each Impact Point Can’t control creditworthiness of through-the-door sales Can’t control pre-delinquency balance build-up Work more high-risk/high-balance accounts more aggressively, resulting in more payments

19. hourly rate • productivity • automation Collector Workforce FTE Expense Work higher % of paid hours Work faster Quantifying each Impact Point Salaries Pay lower rates Productivity Manual tasks Automate tasks

20. # of accounts • usage/ARPU Revenue 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?

21. voluntary • involuntary Churn Additional Economic Modeling ? ? ? 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. Segmentation More payments More dials/RPCs Faster payments Better training Fewer forward rolls 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

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?

24. Summary: A Top 10 List • It’s about the ECONOMICS: Just about everything can be quantified (even “qualitative” factors). • Define your reasons for outsourcing. • Know your P&L. • Verify (and challenge) all assumptions. • Know what’s controllable vs. what’s not. • Focus on the actual business drivers. • Compare against out-year forecasts, not today’s BAU. • Test different scenarios. • Understand the linkages between process components. • Know how both sides make money.

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