CFNA CREDIT CORPORATION: CALL CENTER OUTSOURCING

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1 UVA-OM-1072 Cynthia Kelejen was feeling intensely pressured. As an associate in CFNA Credit Corporation s still nascent Supply Chain Management group, she had been chartered to develop a strategy for outsourcing call center operations including the possibility of offshoring some operations to India. CFNA had only recently started outsourcing customer relations calls to domestic suppliers, so a shift to India was a dramatic step. Many of the call center managers had worried about degradation in quality when outsourcing, but positive initial results for domestic pilots coupled with 30 percent savings versus internal cost had convinced most that outsourcing was a viable alternative. The savings potential in India was even higher but so was the concern over quality. Kelejen realized that she needed to develop a deep understanding of the economics and performance drivers of call centers in order to build the right business case. CFNA Corporation Overview The genesis of CFNA dated back to the early 1980s when the New York-based, Jewell Bank decided to spin off its credit card division. The company developed affiliate card programs targeting high-end consumer groups. By combining information from the affiliate organization with its own extensive records, CFNA mined information to develop highly customized credit cards. After conducting thousands of tests over several years, in 1989 CFNA introduced the innovative balance transfer credit card with differential interest rates. Breaking with the traditional one-size-fits-all model dominating the credit card industry at that time, CFNA surged into a position of market leadership. Leveraging its leadership position, CFNA expanded into promising related markets such as auto finance and patient financing while simultaneously extending geographically into other English-speaking nations including Canada, the United Kingdom, and Australia. This case was prepared by Assistant Professor Timothy M. Laseter drawing upon the experiences of a real company. All financial data, though directionally correct, has been disguised. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2003 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an to [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of the Darden School Foundation. Rev. 2/05.

2 -2- UVA-OM-1072 By 2003, CFNA supported a global customer base of nearly 50 million and managed loans totaling $80 billion. The company continued to apply its innovative data-mining business strategy to tailor products to the individual needs within each affinity group. CFNA Corp formed the Supply Chain Management Group in late 2000 under Senior Vice President Jean Dassault to provide a center of expertise for managing its growing purchases with outside suppliers. By 2003, the group consisted of over 200 associates who helped manage over $2.8 billion in annual spending. The members of the Supply Chain Management Group pointed with pride to the way they had influenced the company s strategy to continue the pursuit of revenue growth while leveraging outsourcing to control the growth in headcount. The most recent year s results demonstrated a reduction in total employment and an improvement in profit margins. (See Exhibit 1.) Call Center Industry Overview Despite the growing use of the Internet for online ordering and problem solving, in mid- 2003, the telephone continued to be the primary means for companies to connect directly with the consumer. For example, in 1999 over 1.55 million agents worked in call centers within the United States. That level of employment equated to 1.4 percent of total private sector employment and was growing at 8 percent per year. Estimates for employment in Europe were somewhat lower but still a significant percentage of employment. Lower telecommunications cost and an increasing need for multilingual call centers in the European Union were factors driving consolidation among call center operators. Although many companies operated their own call centers, a significant outsourcing industry was also available. A few large players operated over 20,000 seats the call center terminology for the workstation used by a call center Customer Service Representative (CSR) but most independent call center operators remained relatively small niche players. Those companies willing to outsource call center operations viewed the service as a commodity, which increased downward pricing pressure. Profit margins rarely exceeded 8 to 10 percent, and many domestic call center companies operated at margins below 4 percent. In the early 1990s, call center participants in the United States and Europe began to develop operations in countries like Canada and Ireland to lower labor costs. Initially, Canada cost 20 percent less and Ireland 50 percent less than a U.S.-based operation. Exchange rate fluctuations and increase in European wage rates eroded much of these advantages over time, however. In the late 1990s, companies began to invest in India as a more significant source of labor advantage. One of the leaders in this thrust, GE Capital, opened an India operation in 1997 to support back-office processes. Initially the operation simply focused on data entry and transaction processing but over time took responsibility for handling live calls with GE customers. Other companies followed suit, and an India-based call center industry began to blossom.

3 -3- UVA-OM-1072 Regardless of the location, most call centers looked pretty similar. A typical operation consisted of a large open room divided into workstation cubicles. CSRs or agents wore telephone headsets and sat in front of computer screens in the cubicles. When the type of service required access to a company s mainframe systems as is the case for customer relations workstations would typically be dedicated to a single company for security reasons. In other cases, such as telemarketing, the workstations might be shared between multiple customers over the course of the day or week. Supporting the physical facilities full of Customer Service Representatives was a massive investment in networking technology. Network infrastructure equipment, such as dialers and routers, handled a fixed number of workstations and would be procured in multiples to match the number of workstations in operation. Phone calls were processed through T1 trunk lines that could support a fixed number of concurrent users. The most favorable contract rates were available for long-term commitments of a fixed level of capacity. Call center operators mixed fixed lines with variable capacity agreements to meet the expected demand at the lowest cost possible. Offshore call centers faced additional costs for International Private Leased Circuit (IPLC) between their country and the country where the call terminated. These had to be leased in fixed increments and added substantially to the cost for these operators. CFNA Call Center Services CFNA segmented call center services into four categories: Customer Relations, Telemarketing, Collections, and Recoveries. Each of the four services had different performance characteristics and was handled by different departments within CFNA s supply chain management organization. Though there were some large companies that offered multiple services, suppliers tended to focus by service type. This was especially true with offshore suppliers. Customer relations Customer relations call centers handled mostly inbound calls from customers with questions on an account or about a product. These calls could range in complexity from simple questions about the balance on a credit card account to more complex calls regarding a disputed charge or credit report discrepancy. Most calls occurred in the late morning and early afternoon (see Exhibit 2). Staffing the call center to match the calling pattern was one of the main challenges for customer relations call centers. There were minimum quality expectations, but performance above the threshold often went unnoticed by customers. Bad customer experiences, however, significantly impacted account attrition and was to be avoided above all else. CFNA outsourced a significant portion of customer relations calls for supporting the United States and Canada: in total it employed about 1,300 full-time equivalent (FTEs) 1 Customer Service 1 Note: FTE = one full-time equivalent or 40 work hours per week. This may be split across multiple part-time Customer Service Representatives.

4 -4- UVA-OM-1072 Representatives (CSRs) across its supply base. European and Australian operations had not yet outsourced any call center operations. Telemarketing Telemarketing operations processed outbound calls aimed at selling a product or service to a consumer. Operators typically read from a pre-defined script and accordingly telemarketing calls ranked among the least complex of all call center activities. Call center productivity measures focused on two dimensions: number of calls per hour and sales rate. Through the use of automatic dialing technology, operators could achieve around 35 calls per hour. Sales rates, however, were quite low, ranging from about one half of a percent to less than 2 percent. The time of day significantly affected the success rate. (See Exhibit 3.) CFNA employed about 1000 full-time equivalent CSRs for telemarketing, with almost all of this outsourced. Seventyfive percent of the calls targeted U.S. customers versus 15 percent for the United Kingdom and 5 percent for Australia and Canada respectively. Collections Collections calls addressed delinquent accounts and could be either inbound or outbound. The complexity of the call generally depended upon the amount of time that had passed since a payment was made. Although outbound calls were often scripted, inbound calls required welltrained CSRs to be effective. The number of calls per hour tended to be a bit lower than those in customer relations, but measuring the quality in the form of reduced delinquencies proved much easier. Similar to telemarketing, collections calls tended to be more successful late in the day. CFNA employed about 450 FTE CSRs via its five U.S.-outsourced call centers and 150 FTEs at its one European call center. Recoveries Recovery operations concerned debt that had already been written off as bad debt. Although some companies like CFNA engaged call center suppliers to make recovery calls, most institutions sold the charged-off debt to a recovery specialist. A few large recovery specialists operated massive call centers, and they retained the full value of any payments they received. There were also many small call center operators who didn t buy the debt but would work for a fee based on a percentage of the recoveries. Under either scenario, success was clearly measurable in the form of cash payments received. This form of call center demanded the highest skilled CSRs of any of the other types, but like collections and telemarketing, success tended to be higher later in the day. CFNA used small-scale outside players for recoveries and across the eight current suppliers they employed about 700 full-time equivalent CSRs (about 500 in North America and 125 in Europe and 75 in Australia).

5 -5- UVA-OM-1072 Decision Time Despite the pressure, Cynthia Kelejen felt well-prepared for the challenge of developing the call center strategy. She had decided to begin her detailed assessment with a focus on customer relations calls. After having identified a dozen potential suppliers offering such a service including four current call center suppliers she had launched a fairly massive Request for Quote process drawing upon her learning from a recent cost-modeling training class she had attended. As she reviewed the results (Exhibit 4), she was pleased to see that the current suppliers had quoted the lowest prices among the U.S. supply base but was disappointed to see that the current European supplier had a higher price than its European competitors. Kelejen also noticed that all three of the India-based suppliers were lower than the lowest United States or European suppliers. In fact, Ellington in Delhi offered a 19 percent savings versus the price offered by Brighton in Indianapolis. Kelejen thought to herself that a 19 percent savings would be nice. To put it in terms that the steering committee would appreciate, a 35-cent savings on each of 29 million calls per year would be worth over $10 million annually to CFNA Corporation. She reflected on her cost-modeling training, however, and decided that making decisions based upon price quotes was not particularly strategic. So, she turned next to the cost data that she had also requested from the 12 suppliers (Exhibit 5). Looking at the percentage breakdowns, she noticed that most of the suppliers had quite similar cost structures, except for the three suppliers in India. Those suppliers had much larger sales and marketing budgets and much lower labor costs. Their telecommunications cost also seemed to be much higher. Kelejen again thought back to her training course and remembered that the key to cost modeling was to understand the cost drivers and not just the cost elements provided in a financial statement. She still wasn t clear about this concept, but she thought the set of key metrics (Exhibit 6) provided by the suppliers would be helpful somehow. Kelejen was surprised to see the wide variation in the key metrics. For example, George had five times as many workstations as Albertson. But George did not have the most Customer Service Representatives (CSRs): Brighton, Calvert, Danielson, and Innovate all had more. Thinking back to the training class, she assumed this had something to do with different rates of utilization, an issue that would need to be addressed before she compared the costs across suppliers. There was also a wide range in the number of calls handled each year by the different suppliers as well as the calls per hour. Ellington handled only eight per hour compared to the ten per hour at Frederick, which equated to a higher productivity rate of 25 percent. That would seem to be an important cost driver. But again, she wondered: was the difference really an issue of productivity? It might be a sign of poor quality. Maybe Frederick s CSR s kept people on hold longer to increase their own efficiency. Or maybe they didn t answer the customers

6 -6- UVA-OM-1072 questions as thoroughly. Then again, maybe it had nothing to do with the suppliers but was simply a function of the customers. Kelejen glanced at her watch and saw that it was well past 6 p.m. She was getting tired and ready to head for home. It was clear she couldn t sort this out tonight. As she began packing up her brief case, she made sure that her calculator and laptop were both plugged in to be charged overnight. She was sure she would be crunching a lot of numbers the next day.

7 -7- UVA-OM-1072 Exhibit 1 CFNA Growth Trends Income Statement Year Revenue ($ mil.) Net Income ($ mil.) Net Profit Margin Employees ,376 1, % 21, , % 24, , % 21, , % 16, , % 11, , % 6, , % 6, , % 3, % 2, % 2,735 Source: Hoover s Online.

8 -8- UVA-OM-1072 Exhibit 2 Daily Call Curve for Customer Relations Calls for all U.S. Time Zones (But logged according to Eastern Time) 4.50% 4.00% 3.50% P C T o f D aily V olume 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 5:30 6:30 7:30 8:30 9:3010:3011:3012:3013:3014:3015:3016:3017:3018:3019:3020:3021:3022:3023:30 0:30 1:30 2:30 3:30 4:30

9 -9- UVA-OM-1072 Exhibit 3 Telemarketing Call Productivity and Sales Rate by Time of Day (EST for all time zones) % % % Calls Per hour % 1.0% 0.8% 0.6% Sales Rate :00 AM 9:00 AM 10:00 AM 11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM 5:00 PM 6:00 PM Time Calls per hour Sales Rate 7:00 PM 8:00 PM 9:00 PM 10:00 PM 11:00 PM 12:00 PM 1:00 AM 0.4% 0.2% 0.0% Note: Legal outbound calling hours are from 9 a.m. 9 p.m., Mon. Sat., local time.

10 -10- UVA-OM-1072 Exhibit 4 Supplier Price Quotes Supplier Price Quote Location Albertson $ 1.62 Bombay Brighton* $ 1.80 Indianapolis Calvert $ 2.29 Dublin Danielson* $ 1.97 Stanford Ellington $ 1.45 Delhi Fredrick* $ 2.54 London George* $ 2.09 Boise Huston $ 2.20 St. Paul Innovate $ 2.39 Manchester Jackson $ 2.25 St. Louis Keebler $ 2.58 Cleveland Lambert $ 1.64 Bangalore *Current suppliers

11 -11- UVA-OM-1072 Exhibit 5 Call Center Supplier Cost Data Albertson Brighton Calvert Danielson Ellington Fredrick George Huston Innovate Jackson Keebler Lambert Fixed Costs Sales & Marketing $ 550 $ 1,000 $ 400 $ 550 $ 600 $ 500 $ 400 $ 500 $ 600 $ 600 $ 500 $ 500 Administration $ 429 $ 1,817 $ 1,412 $ 1,383 $ 347 $ 1,436 $ 1,162 $ 1,167 $ 1,498 $ 1,192 $ 1,169 $ 405 Facility Costs $ 445 $ 2,420 $ 2,574 $ 1,904 $ 686 $ 1,548 $ 2,393 $ 2,202 $ 2,084 $ 1,557 $ 1,255 $ 884 Technology Costs $ 1,250 $ 4,725 $ 4,620 $ 2,460 $ 1,770 $ 2,100 $ 3,975 $ 4,045 $ 3,058 $ 2,473 $ 1,968 $ 2,450 Total Fixed Costs $ 3,172 $ 2,674 $ 9,962 $ 9,006 $ 6,297 $ 3,403 $ 5,584 $ 7,930 $ 7,914 $ 7,240 $ 5,822 $ 4,892 Variable Costs Team Leader Labor $ 148 $ 3,635 $ 2,798 $ 2,312 $ 144 $ 1,505 $ 2,112 $ 2,055 $ 3,029 $ 2,385 $ 1,081 $ 206 CSR Labor $ 964 $34,007 $26,106 $ 23,821 $ 1,205 $ 13,000 $19,686 $16,027 $30,618 $18,014 $ 9,324 $ 1,514 Telecommunications $ 749 $ 288 $ 222 $ 144 $ 1,268 $ 152 $ 264 $ 213 $ 216 $ 144 $ 144 $ 1,950 Total Variable Costs $ 1,819 $ 1,861 $37,930 $29,126 $ 26,277 $ 2,617 $ 14,657 $22,062 $18,295 $33,863 $20,543 $10,549 Total Costs $ 4,991 $ 4,535 $47,892 $38,132 $ 32,574 $ 6,020 $ 20,241 $29,992 $26,209 $41,103 $26,365 $15,441 Albertson Brighton Calvert Danielson Ellington Fredrick George Huston Innovate Jackson Keebler Lambert Fixed Costs Sales & Marketing 12% 2% 1% 2% 10% 2% 1% 2% 1% 2% 3% 6% Administration 9% 4% 4% 4% 6% 7% 4% 4% 4% 5% 8% 5% Facility Costs 10% 5% 7% 6% 11% 8% 8% 8% 5% 6% 8% 11% Technology Costs 28% 10% 12% 8% 29% 10% 13% 15% 7% 9% 13% 31% Total Fixed Costs 59% 59% 21% 24% 19% 57% 28% 26% 30% 18% 22% 32% Variable Costs Team Leader Labor 3% 8% 7% 7% 2% 7% 7% 8% 7% 9% 7% 3% CSR Labor 21% 71% 68% 73% 20% 64% 66% 61% 74% 68% 60% 19% Telecommunications 17% 1% 1% 0% 21% 1% 1% 1% 1% 1% 1% 25% Total Variable Costs 41% 41% 79% 76% 81% 43% 72% 74% 70% 82% 78% 68% Total Costs 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

12 -12- UVA-OM-1072 Exhibit 6 Key Metrics Supplier Workstations CSRs Calls (Millions) Calls per Hour Albertson Brighton 650 1, Calvert 600 1, Danielson 400 1, Ellington Fredrick George Huston Innovate 450 1, Jackson Keebler Lambert