8 Steps to C&R Excellence by Luis Lacourt

white paper

Breaking Through Barriers— 8 Steps to C&R Excellence

June 2012

»» Summary More than ever, today’s lenders are challenged to predict which customers may fall behind in payments due to job losses, additional credit burdens, medical costs or other factors. Identifying methods to keep payers from falling behind—or introducing the right treatment if payments are delayed—is critical to driving profitability and retaining good customers. Whether you’ve just started down the collections path or have a mature infrastructure in place, you need to be able to understand where current practices limit your ability to execute. This paper examines eight practices that can help your organization make C&R a competitive advantage.

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Breaking Through Barriers—8 Steps to C&R Excellence

The collections and recovery (C&R) industry is at a crossroads. No longer is collecting cash enough— to remain profitable, banks need to optimize risk and capital management, identify and retain good customers, and address regulatory requirements—while, in many cases, streamlining operations to meet tough budget constraints. A reset economy now forces banking units to quickly identify and move past barriers to optimal C&R performance. Working with clients across all global regions, of all shapes and sizes, FICO has identified several innovative practices these organizations use to transform C&R capabilities. The latest insights in analytics, data, strategy and operations can help banks identify where existing practices are holding them back, and take C&R to the next level. We’ve identified eight key areas where organizations can act—now—to impact C&R performance and profitability:

• Reduce the incidence of operational negation in your organization. • Plan and execute a precision-based strategy. • Apply effort where it can secure the greatest reward. • Optimize your channels to transform C&R results. • Make your headcount count. • Take a fresh look at repayment solutions. • Improve agents’ negotiation skills. • Align management information with operational goals. No matter how unique your business challenges or how atypical your operations, in this white paper you’ll discover how vastly dissimilar banks typically demonstrate very similar behaviors, and how each can benefit from these eight steps.

1. Reduce the Incidence of Operational Negation in Your Organization

Without systems that enforce consistency and connected decisions, businesses often make one set of decisions that negates the value created in another set of decisions made elsewhere. This is called operational negation. An example would be when the marketing department attracts high risk customers, or the customer management department recommends collection strategies for an account that are ignored by the collections business unit. Some organizations are actually aware of, and continue to maintain, operational negation. For example, policies may mandate whether to retain or exit a customer, without considering the customer’s long history (and multiple accounts) with the bank. Unless the organization consistently manages the customer across all touchpoints, one negative human interaction could cost your bank a 30-year customer (and the customer’s family). They have to put their money somewhere, why not bank with the competition? Typically, however, banks do not have full visibility of the situation, and the resulting inefficiencies, losses and costs. Banking leaders and innovators routinely seek confirmation that negation activity has not started or continues. In a transformed economy, with regulations, changed customer behaviors, shrinking growth opportunities, and other challenges, negation is more obvious than ever. Still, it requires consensus from stakeholders across all business units to agree to look at these policies—which typically aren’t confined to the C&R function—and take action.

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Breaking Through Barriers—8 Steps to C&R Excellence

Rooting out negation is critical to implementing any of the other best practices discussed herein. Here are some common examples of negation “in action”: People: There is a lack of ownership and accountability, and a focus on productivity rather than loss reduction. Also, skill sets may be broad but few specialists exist, making it difficult to identify and enhance specific areas that may be underperforming. Technology: There is too much reliance on power dialers—an average 9% right-party contact rate to (dialer) download is common, but what is happening to the 91% of accounts not contacted? Process: There is a big pool approach that combines all buckets of delinquency—with no or limited operational segmentation. Data-driven, risk-segmented strategies are lost when they hit the collections operation. Performance Management: There is a focus on collecting cash but not necessarily improving delinquency. Key questions are not being asked, such as: Where is the cash coming from—early or late stage? How is it trending? How many accounts are impacted? Is cash increasing at the same rate as delinquency; and what is the cost to collect? Are there ample repayment solutions to drive better performance for the organization as a whole, and retain good customers? Knowledge Management: The effectiveness of the most experienced collectors is diminished by “buddying” with new hires. External Factors: There is a potential shortfall in collector resource if external factors are not considered and fed into a capacity-planning process. To help identify and move beyond negation, you need a clear perspective of how your organizational strategies and C&R processes and tools can be improved and realigned. Sometimes this knowledge can come from within; frequently, however, banks are reaching to external sources for clear, unbiased perspectives to gain an upper hand on negation. In either case, it is important to ensure you have full stakeholder buy-in, specific actions and targeted results, and willingness and flexibility to change “even when it hurts.” Without a clear view of where negation exists, adopting any best practice will be a challenge.

2. Plan and Execute a Precision-Based Strategy

You can expect between 5% and 30% uplift in collection effectiveness resulting from data-driven strategy and decision rules.

While operations business units frequently measure tried and true productivity and resulting KPIs, they rarely calculate the variance to strategy adherence. This is a clear example of negation at work. If the variance is constant, operations may not realize that the results achieved are not in line with those expected from the strategy design. The following diagram illustrates a planned analytics-derived strategy. Differing risk segments, often further enhanced by balance at risk, are expected to receive different treatment with respect to the tone and timing of system-determined collections events.

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Breaking Through Barriers—8 Steps to C&R Excellence

The risk groups are also worked to differing levels of intensity, given the expected higher losses from the high risk group if contact is not achieved and customer intent and ability are undetermined.

ANALYTICS HELP PRESCRIBE THE RIGHT CUSTOMER TREATMENTS Risk/ Intensity

Medium risk

Low risk

High risk Penetration (effort)

Penetration (effort)

200%

350% Firm tone

Soft tone

Medium tone

Penetration (effort)

75% Action type and timing

Action type and timing Action type and timing

However, in many cases, factors ranging from resource and technology constraints through lack of awareness of best practice, actual execution starts to resemble the strategy below:

CONSTRAINTS FREQUENTLY NEGATE OPTIMAL PERFORMANCE Medium risk

Penetration (effort)

150%

High risk

Penetration (effort)

150%

Medium tone

Low risk

Medium tone

Risk/ Intensity

Penetration (effort)

150%

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Breaking Through Barriers—8 Steps to C&R Excellence

Operations should track relational and specific measures that will answer strategy adherence questions such as:

One lender achieved 37% improvement in RightParty contact due to right effort at right time from data-driven strategy and operational execution. 3. Apply Effort Where It Can Secure the Greatest Reward

• Does every message type to customers differ by risk group? • Does each sequential message align with the strategy-planned progressive tone? • What are the trended contacts per account at a given strategy point? • Is the effort applied in line with strategic goals? Consider differentiated penetration, contact effectiveness and negotiation result.

• Does the operation send “tactical” SMS, for example, outside of strategy?

• Is the timing of execution optimal, e.g., percentage of operational time deployed at best time to contact?

Too often, operational execution is planned around operating hours and staff attendance instead of aligning each resource with strategy demands driven by optimal effectiveness. In this situation, where capacity drives strategy, a business will often underperform as the strategy design is adversely impacted based on suboptimal execution practices. For example, high risk accounts not receiving the correct level of intensity required due to insufficient resources. For many organizations, resource levels are not coordinated to meet the penetration target during periods of optimal efficiency. There is also a need to understand the relationship between effort and result. Activity-focused metrics that don’t align with tangible results can cause “operational blind spots.”

In changing the best time to call and effort by risk group, one client realized 300 additional promises per day, saving €1.5 million in provisions. 4. Optimize Channels to Transform C&R Results

Full transparency is delivered through the gathering and understanding of the metrics necessary to understand the relationship between five sequential steps: activity, action, response, result and impact. Without full transparency, organizations are not able to relate penetration to contact effectiveness. It is possible to have 100% penetration and not talk to a customer. Also, depending on how penetration is defined, 100% penetration can be reported but not all accounts have been worked. Penetration targets are often deployed only in relation to predictive dialer activity. However, consideration should be given to whether each and every activity type should have varying levels of penetration. You also need to know where it is appropriate to have concurrent activity of different but aligned actions to drive higher penetration and related results.

Collections contact channels have come a long way in a short time and integration of those channels is seen as the new norm. Increasingly, medium to large collections operations, along with more traditional letter contact methods, have deployed or are deploying:

• Dialer: Predictive, Preview and Manual. • IVR: Inbound and outbound auto-messaging with self-serve. • SMS, with leading organizations deploying mobile payment and self-serve. • Web: Email, internet portal self-serve, collections online chat.

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Breaking Through Barriers—8 Steps to C&R Excellence

If these channels are not managed interactively, it is common to see:

For one lender, payments made within two days increased from 24% to 74% with implementation of self-serve/online payments.

• Customer complaints. • Mixed messages to customers. • Overwork of low risk and underwork of high risk customers as different risk types fall under pooled execution approach.

• Single channel contact to save cents when thousands of dollars are held in provision. Common myths that need to be validated before being accepted include:

• Our customer will not self-serve. • Our customers will not respond through “X” channel. • We have to speak to every customer. • We save a lot of money by cutting down on use of “Y” channel. Symptoms of channel non-performance »» Contact attempted at “less than best” contact times. »» Inbound calls not managed by risk type. »» Compromise on outbound penetration for inbound abandon rate. »» Blend across all inbound and outbound resource as appose to “ring fenced” to target/SLA requirement. »» Same timing, message content and script despite risk. »» Overuse of voicemail messages. »» Minimal self-serve functionality.

Channel management, targeting and integration can create C&R competitive and regulatory advantage. Securing effective communication is the primary success criteria and the action on which all other actions and treatment are determined. This is especially so when considering that many markets have restrictions on how often a contact attempt can be made, as well as various organizations having their own guidelines on not using more than one contact channel per day in order to avoid customer complaints. When layered with multiple customer products, this becomes an even more complex problem.

Market leaders are now deploying contact channel optimization which considers the best time, and the best channel, to make contact. Reporting and controls are built in to identify regulatory or policy contact breaches and real-time processing automatically “kills” other channel activity if contact is made elsewhere, e.g., a dialer or SMS event will be “killed” if an inbound call is received from a customer before the other event takes place. This helps drive the effectiveness of channels, and helps ensure that no one channel gets inappropriately sacrificed for the achievement of performance on another without very clear understanding of the profit/loss impact of the decision.

»» Non-differential SLAs, for staff and channel, by risk and age of delinquency.

5. Make Your Headcount Count

In the world of operational negation, capacity planning does not exist outside of capacity being dictated by budgetary factors rather than what is actually required to deliver the strategy. In midsized to smaller operations (i.e., fewer than 100 collections resources), it is rare to see the coexistence of sophisticated capacity and resource allocation planning. Although collections operations of this size limit options for how capacity planning is conducted, you can still account for seasonal to intraday granularity, specific industry or other factors.

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Breaking Through Barriers—8 Steps to C&R Excellence

By optimizing resource use, one lender achieved a 100% increase in delinquency volume managed without increasing resources.

Whatever the size of your C&R function, the capacity plan should reflect what risk segment will require a given “human” action at a given point in time. The resource allocation plan should be of sufficient detail to identify what skill sets will be required throughout a given day to undertake work related to a specific SLA and level of effort. Any good outbound capacity plan model will start with a monthly delinquency forecast for each product, overlaid with how many accounts the strategy determines will be required to be presented for collector activity, segmented by bucket of delinquency and risk of account with intensity efforts added which then results in a resource requirement. This will result in a “productive FTE” requirement which then needs to be increased based on shrinkage. The basis of any capacity plan should be to achieve or better the loss forecast. However, in many cases, it is based predominantly on historical dialer volumes and effort. If not optimized, call blending can create significant operational negation, and this can be further compounded in organizations that feel call blending eliminates the need for robust resource planning. Risk-to-skill routing requires a high technology competency and sophisticated resource allocation, but can more than recompense the investment over time.

6. Take a Fresh Look at Repayment Solutions

One vendor reported a 12% reduction in chargeoff due to revising its repayment solution policy.

The range of repayment solutions in many organizations is inadequate to cater to the breadth of customer situations and affordability. Financial institutions have a multitude of credit products to meet customer requirements; but once the customer enters collections, a “solution for every need” is often absent. Solutions need to be appropriate to cover the large number of situations that will roll up into the categories of:

• Disorganized. • Short-term cash flow constraint. • Medium-term liquidity constraint. • Permanent financial change. Repayment solutions should be available to cater to:

• Short-term immediate payment. • Arrangement to pay arrears either in fixed or variable installments and time frames. • Re-aging those customers who can meet forward contractual obligations, but are unable to repay accumulated arrears.

• Restructure customers who should be retained but will need revised credit terms to complete the repayment.

• Understand when to deploy a commercial decision to mitigate loss and base it on more than a fixed percent settlement threshold. Most organizations do not capture and use the reason for delinquency in their solution selection rules. Many do not have a decision logic tool at the agent desk level that enables a hierarchy of solution options presented to agents based on business rules. Also, many either do not have or have too limited an ability to effectively measure the customer’s disposable income. Lack of demographic “trigger figures” will often lead to inconsistent agent determination of what solution has the best success potential.

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Breaking Through Barriers—8 Steps to C&R Excellence

A strong repayment tool kit, supported with flexible but well-defined selection decision logic, is the primary driver of collections effectiveness after successful contact. It is essential that each stage of delinquency has a different set of treatments so that conversations can take a different approach as the account ages, rather than investing in the contact but having nothing different with which to negotiate. Repayment solutions can be strategized as proactive offerings across different channels. Collections and recovery staff should know who to retain or exit, and have solution selection policies and tools that enable them to retain good customers while mitigating the loss, if any, to be incurred on an “exit customer.” Management should understand how solution selection affects portfolio quality, NPV, provision and capital adequacy, cash flow, and ultimately profitability across the short, medium and longer term. This management information should be used to refine treatment options so that the treatments with the best success can be identified and promoted while other treatments, that perhaps just delay the inevitable, are removed.

7. Improve Agents’ Negotiation Skills

By investing in an enhanced agent toolkit, one lender achieved a 66% reduction in solution default rates.

Even if everything else is intact, poor agent negotiation skills can negate your edge. Culprits include a low-cost workforce or failure to train and develop staff in C&R-specific skill sets. Strategic investments in human capital during challenging economic climates have helped numerous organizations gain an edge in collections. The combination of flexible strategic repayment options, savvy technology investments and expert collector negotiation skills can help organizations transform collections capabilities. To be effective, organizations must ensure collectors have a clear understanding of various call models in relation to customer profiles and segments. Linking agent success to reductions in delinquency, roll rates and provisions is the bottom line for many leaders around the globe. Many organizations ask questions like:

• What are the best metrics to measure collector success? • How should targets link back to forecasted losses? • What type of incentive plans link to strategies? Collector incentive plans are most effective when they reward behaviors that directly correlate to delinquency targets. It is critical that targets focus on improving the P&L performance. Many organizations reward collectors on cash collected and productivity-related measures. Leading organizations align the targets and rewards to impact on provisions. This often highlights a differential impact to the P&L where cash collected measures show an equal performance or, in the worst cases, reward the least effective of two collectors. Leading organizations will be measuring provisions saved per hour at the collector level, rather than relying on cash collected, which may or may not lead to a provision save.

8. Align Management Information with Operational Goals: The Final C&R Barrier

Substandard management data—and knowing how to use that data—limits an organization’s ability to assess collector, portfolio and strategy performance. Managers find themselves spending a large amount of time trying to develop reports that will provide insight, e.g., an early view into portfolio weaknesses and trends. Companies are realizing the value in linking data sources and investing in sophisticated reporting packages to precisely track, analyze and change strategies. When you align advanced management information system (MIS) capabilities with focused operational goals and strategies, you can optimally determine when to:

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Breaking Through Barriers—8 Steps to C&R Excellence

• Allocate internally vs. externally. • Send letters vs. text message or email. • Choose the most effective repayment solution for a given circumstance. • Choose the most effective recovery option—sell, soak (hold), keep or place. • Prevent delinquency. • Keep or exit a customer (know who and when). Six months after implementing advanced MIS, cards were 5% ahead of plan and loans 4%.

»» Conclusion—

Transitioning from Operational Negation to Collections Excellence

MIS improvements, including automation, allow managers to make clear and precise decisions to improve efficiency and overall effectiveness. Most organizations have a base level of “actual” and “absolute” MIS. However, few have developed sophisticated relational measures that enable them to understand the relative performance of various activities, and the results that derive from a combination of these. Advanced MIS allows targeted champion/challenger campaigns that typically secure competitive advantage in collections performance. These organizations continue to push the frontier of efficiency and effectiveness across the performance of the debt portfolio, operational execution, staff effectiveness and cost of collections.

Many financial institutions have invested significantly in analytics and technology, but have failed to leverage the investment or gain the competitive advantage and business benefits initially expected due to operational negation. Only organizations that can target success barriers in their organizations, and act on them, can build the foundation for increasing market share through C&R and realizing positive ROI on their investments.

IDENTIFYING AND OVERCOMING BARRIERS DRIVES MEASURABLE RESULTS

European Bank

Asian Bank

US Bank

Managed 100% increase in accounts through economic downturn

9% improvement in bad debt

35% improvement in staff attrition

ROI of 1200%

50% improvement in staff attrition

Increased productivity resulting in a 25% improvement in contact rates

7% bad debt saving

Greater buy-in and accountability

Improved employee morale and engagement

Operating costs reduced by nearly $500K per annum

Vastly improved problemsolving environment

Reduced training and new hire cost

Promises taken increased 37%

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Breaking Through Barriers—8 Steps to C&R Excellence

FICO C&R business consultants can help you identify best practices in your market, given your business size, thereby ensuring any operational barriers to achieving operational excellence are identified, worked around, eliminated, or the cost of a constraint is fully understood by the business. In the following cases, we recently helped clients move toward a better aligned, better performing C&R operation. Our consultants have an average of 20 years industry experience in C&R operations and have held leadership roles for many well known organizations. They have unparalleled global insight, having worked with clients of all sizes, serving all banking products in every geography. If you’re experiencing low performing C&R, or would simply like to learn more about how we can help you on your journey to enhance capabilities and results, we would be excited to talk to you. Visit www.fico.com/insights for more white papers, including:

• Better Collections Performance in a Time of Crisis • Reduce Exposure with Pre-Delinquent Treatments • How Mobile Communications Can Improve Collections

»» About FICO

FICO (NYSE:FICO) transforms business by making every decision count. FICO’s Decision Management solutions combine trusted advice, world-class analytics and innovative applications to give organizations the power to automate, improve and connect decisions across their business. Clients in 80 countries work with FICO to increase customer loyalty and profitability, cut fraud losses, manage credit risk, meet regulatory and competitive demands, and rapidly build market share. FICO also helps millions of individuals manage their credit health through the www.myFICO.com website. Learn more about FICO at www.fico.com.

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FICO and “Make every decision count” are trademarks or registered trademarks of Fair Isaac Corporation in the United States and in other countries. Other product and company names herein may be trademarks of their respective owners. © 2012 Fair Isaac Corporation. All rights reserved. 2871WP 06/12 PDF