The Total Economic Impact Of Kale Consultants REVERA (Platform) -Based Outsourcing Solution

Transcription

1 Prepared for Kale Consultants November 2009 The Total Economic Impact Of Kale Consultants REVERA (Platform) -Based Outsourcing Solution Project Director: Amit Diddee, Senior Client Solutions Strategist

2 TABLE OF CONTENTS Executive Summary... 3 Purpose... 3 Methodology... 3 Approach... 4 Key Findings... 4 Disclosures... 5 Kale Consultants REVERA Solution: Overview... 6 Analysis... 8 Interview Highlights... 8 TEI Framework... 9 Costs... 9 Benefits Risk Flexibility TEI Framework: Summary Study Conclusions Appendix A: Total Economic Impact Overview Appendix B: Glossary Appendix C: About The Project Manager , Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to

3 Executive Summary In April 2009, Kale Consultants commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by deploying REVERA, Kale Consultants passenger revenue accounting solution. Passenger revenue accounting is a critical and complex business process that all airlines dedicate significant resources to; proper passenger revenue accounting can improve business insight of ticket sales and accuracy in interline billing and can potentially avoid the risk of significant revenue and cash loss. REVERA is an automated passenger revenue accounting system that helps audit and verify airline ticket revenue and therefore provides transparency to revenue flow, trends, and analysis, as well as statistical data that is imperative to other departments like accounting, finance, and marketing. This study illustrates the financial impact of adopting an outsourced REVERA solution within a private airline operator based in the United Kingdom. This organization ( Customer Organization ), which has asked to remain anonymous, outsourced all of its passenger revenue accounting processes, including credit card billing for the direct sales, to Kale Consultants. In conducting in-depth interviews with the customer, Forrester found that this organization achieved significant financial benefits as a result of its investment in REVERA. Forrester quantifies the benefits of the customer s REVERA implementation principally in terms of: 1) elimination of support costs of legacy system; 2) reduced revenue accounting payroll costs; 3) improved cash flow; 4) reduction in unmatched sales; 5) cost avoidance of third-party credit card billing, and 6) improved payment card industry (PCI) compliance. Purpose The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of an outsourced passenger revenue accounting solution at an airline organization. Forrester s aim is to clearly show all calculations and assumptions used in the analysis. Readers should use this study to better understand and communicate a business case for investing in an outsourced version of REVERA, Kale Consultants passenger revenue accounting solution. Methodology Kale Consultants selected Forrester for this project because of its industry expertise in business applications, IT services, and Forrester s Total Economic Impact (TEI) methodology. TEI not only measures costs and cost reduction (areas that are typically accounted for within IT) but also weighs the enabling value of a technology in increasing the effectiveness of overall business processes. For this study, Forrester employed four fundamental elements of TEI in modeling the passenger revenue accounting solution: 1. Costs and cost reduction. 2. Benefits to the entire organization. 3. Flexibility. 4. Risk. Given the increasing sophistication that enterprises have regarding cost analyses related to IT investments, Forrester s TEI methodology serves an extremely useful purpose by providing a - 3 -

4 complete picture of the total economic impact of purchase decisions. Please see Appendix A for additional information on the TEI methodology. Approach Forrester used a five-step approach for this study: 1. Forrester gathered data from existing Forrester research relative to airline revenue accounting solutions and the airline market in general. 2. Forrester interviewed Kale Consultants marketing and sales personnel to fully understand the potential (or intended) value proposition of Kale Consultants passenger revenue accounting solutions. 3. Forrester conducted a series of in-depth interviews with one organization that is currently using REVERA, Kale Consultants passenger revenue accounting solution. 4. Forrester constructed a financial model representative of the interviews. This model can be found in the TEI Framework section below. 5. Forrester populated the framework using data from the interviews as applied to the Customer Organization. Key Findings The customer profiled in this study is an airline company headquartered in Western Europe that has an annual revenue of more than 1 billion. It s a member of a large airline alliance and has three operating divisions that fly more than 7.5 million passengers per year. The total number of passengers flown in 2007 and 2008 was 10.5 million and 9.5 million, respectively. The airline has outsourced the passenger revenue accounting processes for its mainline and regional operations, accounting for an average of 5.2 million passengers flown over the last three years. It has significant interline and code-sharing operations, which currently account for 30% to 50% of overall passenger revenue in mainline and regional operations. Forrester s study of this organization s experiences with REVERA yielded a number of key findings: ROI. Based on the interviews with an existing Kale Consultants customer, Forrester constructed a TEI framework for this Customer Organization and the associated ROI analysis illustrating the financial impact areas. As seen in Table 1, the five-year riskadjusted ROI for the reference company is 77%, with a breakeven point (payback period) within eight months after deployment. Benefits. The primary benefits experienced by this customer were: 1) elimination of support costs of legacy system; 2) reduced revenue accounting payroll costs; 3) improved cash flow; 4) reduction in unmatched sales; 5) cost avoidance of third-party credit card billing; and 6) improved PCI compliance. Additionally, the Customer Organization also benefited by way of increased control over passenger revenue data and increased ability to provide actionable MIS to commercial and other stakeholders. Costs. The initial upfront costs of implementing the REVERA solution totaled to just over $1.9 million. Ongoing annual operational costs and system and process maintenance - 4 -

5 averaged $3.8 million per year. This also takes into account the Customer Organization s annual travel costs to the service provider s offshore location to review the process and manage the business relationship. Table 1 illustrates the main financial metrics for the Customer Organization, based on data and characteristics obtained during the interview process. Forrester risk-adjusts these values to take into account the potential uncertainty that exists in estimating the costs and benefits of a technology investment. The risk-adjusted value is meant to provide a conservative estimation, incorporating any potential risk factors that may later impact the original cost and benefit estimates. For a more in-depth explanation of risk and risk adjustments used in this study, please see the Risk section. Table 1: Customer Organization ROI Summary financial results Original estimate Risk-adjusted ROI 98% 77% Payback period (months) 6 8 Total costs (PV) $16,202,625 $16,837,011 Total benefits (PV) $32,066,746 $29,718,217 Total (NPV) $15,864,121 $12,881,205 Disclosures The reader should be aware of the following: This study was commissioned by Kale Consultants and delivered by the Forrester Consulting group. Kale Consultants reviewed and provided feedback to Forrester, but Forrester maintained editorial control over the study and its findings and did not accept changes to the study that contradicted Forrester s findings or obscured the meaning of the study. The customer interviewed by Forrester Consulting for this study was provided by Kale Consultants. Forrester makes no assumptions as to the potential return on investment that other organizations will receive. Forrester strongly advises that readers should use their own estimates within the framework provided in the report to determine the appropriateness of an investment in Kale Consultants passenger revenue accounting solutions. This study is not meant to be used as a competitive product analysis

6 Kale Consultants REVERA Solution: Overview According to Kale Consultants Limited, its passenger revenue accounting (PRA) solutions address business pains of stakeholders in finance through revenue accounting and proration solutions and for commercial through decision support and actionable business intelligence. REVERA the Kale Consultants solution for PRA is a component-based system that replaces the patchwork of legacy systems typically used by midsized to large airlines. REVERA covers the entire ticket life cycle from sale to complete utilization. Some of the main functions of PRA are stock control, sales processing, proration, refund and exchange/reissue usage, uplift accounting and outward and inward interline billing, revenue recognition, tax reconciliation, etc. Some of the key features of REVERA are: Scalable, three-tier, Web-enabled architecture. Industry-standard proration engine APEX, which can prorate large volumes of tickets with proviso and Special Prorate Agreements (SPAs). Flexible and user configurable workflow management. Flexible rule-based accounting engine. Embedded decision support tools. Extensive audit trail and data protection capability. Ongoing development and support for industry initiatives. REVERA is available in multiple delivery options: license deployed on customer s site, hosted pay for use, as well as the platform used for end-to-end outsourced services. Kale s Managed Process Services (MPS) facility currently employs more than 1,100 airline revenue accounting experts and processes more than 65 million PRA transactions per annum. Kale also provides the Neutral Fare Proration service on behalf of IATA, powered by APEX and processes more than 50 million proration transactions. It also provides revenue audit and recovery services to the industry and helped airlines recover more than $60 million in More than 80 airlines, including 15 of the top 20, are its customers. As a managed process service, Kale takes end-to-end responsibility for the entire business process. It takes the required input data from the customer and commits to the outputs as the agreed service-level agreements (SLAs) that define the timeliness, accuracy, and completeness of the processing by Kale. Kale is responsible for application platform, data center, servers and technical infrastructure, trained and qualified resources and the business process and quality controls. In effect, Kale takes care of the entire transaction processing and provides the processed data back to the customer along with actionable MIS and decision dupport tools. All of these products, infrastructure, and service components are bundled into a unit transaction price to the customer. Kale follows documented and audited quality management practices such as ISO9002 and ISO27001 for Information Data Security and is also PCI compliant. From an accounting control

7 standpoint, its processes are SAS70 ready. It operates from three locations in India to provide a robust disaster recovery and business continuity plan. The value proposition behind managed process services according to Kale is the following: Industry best practices, quality and service levels. Actionable MIS to support marketing, sales, and commercial decisions. Substantial tangible cost savings and economic benefits. No management bandwidth on managing hardware, software, people, training, productivity, etc. Can be better focused on analysis to support airline strategy. Year-on-year service improvement and compliance with industry standards. Variable cost structure tied to business

8 Analysis As stated in the Executive Summary, Forrester took a multistep approach to evaluate the impact that implementing the passenger revenue accounting solution can have on an organization: Interviews with Kale Consultants marketing and sales personnel. In-depth interviews with one organization that is currently using REVERA, Kale Consultants passenger revenue accounting solution. Construction of a financial framework for the implementation of an outsourced deployment of REVERA. Interview Highlights The customer interviews uncovered a number of insights, including: Prior to outsourcing its passenger revenue accounting operations to Kale Consultants, the revenue accounting department of the Customer Organization relied on a legacy application that was no longer supported by its vendor. The airline was forced to rely on an external consultant to maintain the solution and make necessary changes to the application as required by regulatory bodies and tax authorities. As the pace of change requests accelerated, so grew the risk of noncompliance. In 2005, the firm made the decision to get rid of the legacy system and to replace it with a more flexible, future-proof, and costeffective solution. Apart from the lack of flexibility, a primary driver for investing in an alternative solution was the steadily increasing costs of maintaining the legacy application and its labor-intensive processes. As other business applications migrated to newer systems, the revenue accounting department had to bear a growing share of the costs related to the mainframe environment. The Customer Organization also found it increasingly difficult to recruit employees with the right skill set to enhance the application. This in turn resulted in the revenue accounting department not being able to take advantage of e-tickets fully to increase automation and productivity. Another factor behind the investment in the new solution was the need for more accurate and timely management information at the transaction level. This need was amplified when the airline joined a partner alliance program. In the second half of 2005, the Customer Organization selected Kale Consultants passenger revenue accounting solution among solutions from other vendors because of its accounting rigor, strong proration engine ( APEX) backed by the International Air Transport Association (IATA), and neutrality as an airline-independent solution. Having selected the Kale software, the Customer Organization then investigated Kale s outsourcing capability and ultimately decided to outsource the full revenue accounting function. The whole implementation process, i.e., from contract signature to full production, took about eight months

9 Despite some occasional minor communication problems between the Customer Organization and the provider s offshore staff, the partnership is seen as a complete success. The Customer Organization is very satisfied with the service provided by Kale Consultants. Kale is increasingly viewed as a strategic partner in further improving the Customer Organization s passenger revenue accounting processes. TEI Framework Introduction From the information provided in the in-depth interviews, Forrester has constructed a TEI framework for those organizations considering implementation of a passenger revenue accounting solution. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that influence the investment decision. Framework Assumptions Table 2 lists the discount rate used in the PV and NPV calculations and the time horizon used for the financial modeling. Table 2: General Assumptions Ref. General assumptions Value X1 Discount rate 10% X2 Length of analysis Five years X3 Exchange rate [GBP( ) to USD ($)] $1.65 Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their company s finance department to determine the most appropriate discount rate to use within their own organizations. Costs This section summarizes the costs that the Customer Organization incurred to implement and maintain the new passenger revenue accounting solution. These costs include initial upfront costs such as those related to implementation, IT infrastructure and staff redeployment, and regular ongoing costs such as outsourcing service fees and internal management costs. Outsourced Revenue Accounting Service Fees The Customer Organization pays a variable fee on a per-transaction basis for the outsourced service. This fee includes all of the ongoing costs related to using REVERA to perform passenger revenue accounting including costs associated with hardware, software, data centers, network, and other infrastructure, maintenance, etc. The fee also includes the costs for skilled resources for processing such as qualified accountants, proration and interline experts, quality control, and supervisory management

10 The unit fee is negotiated based on the scope of service, level of automation (electronic tickets versus paper tickets), SLA (service-level agreement), business complexity (e.g., number of BSPs and interline transactions) and the customer-specific requirements and data analysis services. The unit fee is multiplied by the actual number of transactions processed for the month and is thus essentially variable in nature. The pricing structure has a floor and slabs so that higher volumes qualify for discounts. The average annual service cost of outsourcing the passenger revenue accounting process for the given scope to Kale was $2,976,552. External And Internal Implementation Costs At the start of the project, the customer engaged Kale Consultants implementation team for system design, process mapping, project management, and operational consulting services, as well as Kale s expertise in revenue accounting vis-à-vis the airline industry. Additionally, an internal team at the Customer Organization consisting of three full-time equivalent employees in accounting and project management were involved on a full-time basis for the entire implementation duration of eight months. This team needed to travel between the Customer Organization s location and Kale s MPS Center in Mumbai India multiple times during implementation. In total, the Customer Organization estimated the total internal and external costs of implementing REVERA to be $1,389,058, inclusive of travel costs. IT Infrastructure Upgrade Costs During implementation, the Customer Organization upgraded its existing reporting portals, software interfaces, and other IT infrastructure. Servers for a data warehouse along with BI tool was procured and deployed at the Customer Organization s data center. The Customer Organization estimated that the initial upfront time investment toward this amounted to $165,364, and subsequent annual upgrade costs amounted to 20% of the initial upfront costs. Staff Redeployment Costs As a result of the outsourcing, the Customer had to make 115 jobs redundant. While many of the staff were offered alternative positions and redeployed elsewhere, for those who were not, the Customer provided for severance and redeployment costs to take care of statutory obligations and union agreements. The Customer Organization estimated these annual costs as being $353,466. Table 3: Staff Redeployment Costs Ref. Metric Calculation Initial Year 1 Year 2 Year 3 Year 4 Year 5 Total A1 Number of workers made redundant 115 A2 % staff reduction not reallocated 50% A3 Yearly rate per worker $49,609 A4 Avg number of years

11 employed A5 Number of weeks offered severance for each year employed 2 Ato Staff redeployment costs A1*A2*(A3/48) *A4*A5 $353,466 $ - $ - $ - $ - $ - $353,466 Internal Operational Costs The Customer Organization has retained a core team to manage the outsourced service as well as carry out various tasks that need to be done in-house by the airline. The airline core team comprises three managers and nine staff in functions of accounting, sales control, interline and management reporting. This core team includes eight FTEs that were added after implementation to coordinate with Kale and perform quality checks and control functions to ensure accuracy and completeness of revenue accounting and processing. The remaining four FTEs on the team carry out functions that the airline needs to do in any case such as balance sheet control and management reporting. The annual cost of eight FTEs involved with managing the revenue accounting function are estimated by Customer Organization as being $529,165, not including a 5% annual merit increase in salary typically earmarked for such employees. The Customer Organization stated that the core team travels to the offshore offices and R&D centers of Kale Consultants to review the passenger revenue accounting processes and discuss ways to enhance and improve them. The Customer Organization estimates the total annual travel cost for the core team to be approximately $16,536. Table 4: Internal Operational Costs Ref. Metric Calculation Initial Year 1 Year 2 Year 3 Year 4 Year 5 Total A1 A2 A3 Ato Number of workers added Fully loaded annual salary with 5% annual salary increase ( ) $66,146 $69,453 $72,926 $76,572 $80,400 Related travel costs $16,536 $16,536 $16,536 $16,536 $6,536 Internal operational costs A1*A2+A3 $545,701 $572,159 $599,941 $629,111 $659,740 $ 3,006,

12 Data Procurement Costs The Customer needs to subscribe to various data required for the revenue accounting function. The total annual costs are estimated at $165,364. Total Costs Table 5 summarizes the costs spent by the Customer Organization in outsourcing its passenger revenue accounting process over a five-year period. Table 5: Total Costs Costs Initial Year 1 Year 2 Year 3 Year 4 Year 5 Total NPV Outsourced revenue accounting service fees $ - $2,976,552 $2,976,552 $2,976,552 $2,976,552 $2,976,552 $14,882,760 $11,283,474 External and internal implementation costs $1,389,058 $ - $ - $ - $ - $ - $1,389,058 $1,389,058 IT infrastructure upgrade costs $165,364 $33,073 $33,073 $33,073 $33,073 $33,073 $330,728 $290,736 Staff redeployment costs $353,466 $ - $ - $ - $ - $ - $353,466 $353,466 Internal operational costs $ - $545,701 $572,159 $599,941 $629,111 $659,740 $3,006,652 $2,259,033 Data procurement costs $ - $165,364 $165,364 $165,364 $165,364 $165,364 $826,820 $626,860 Total $1,907,887 $3,720,690 $3,747,148 $3,774,929 $3,804,100 $3,834,728 $20,789,483 $16,202,625 Benefits Reduced costs, improved cash flows, lower risk, improved MIS and... future-proofing... were the key things that drove our business case. And we've seen all of those. General manager of finance, Airline

13 This section summarizes the quantifiable benefits that the Customer Organization experienced adopting Kale Consultants outsourced passenger revenue accounting solution. The various benefits are explained in the subsections below. Elimination Of Support Costs Of Legacy PRA System The Customer Organization stated that investing in REVERA allowed it to quickly phase out an inefficient legacy system used to account for passenger revenue and just as quickly entirely eliminate associated support and maintenance costs. This system required the Customer Organization to hire and contract an external resource to support and maintain the application and manually hard-code the revenue accounting and proration and tax mandates published by the International Air Transport Association (IATA) on a monthly basis. The total cost for maintaining the legacy mainframe system, LAN/desktop support, service desk management, and related application support totaled nearly $1 million annually, as outlined in the table below. Table 6: Elimination Of Support Costs Of Legacy PRA System Ref. Metric Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Total A1 A2 A3 A4 A5 Application support expenses including contract payroll $138,906 Annual mainframe/ server/lan support cost savings A2+A3+A4 $770,596 Mainframe management costs $385,298 Midrange server $115,755 LAN and desktop management and service desk $269,543 Ato Elimination of support costs of legacy system (A1*A2*A3) + A4 $909,502 $909,502 $909,502 $909,502 $909,502 $4,547,510 Revenue Accounting Payroll Savings Investing in REVERA resulted in substantial labor cost savings as a result of automating the existing labor-intensive passenger revenue accounting processes. Prior to the investment, the

14 reference company employed about 127 people taking care of processes like sales processing, reconciliation, interairline billing, audit, reporting, credit card billing, and chargebacks. With the hosted services approach from Kale Consultants, the Customer Organization was able to reduce this team by 91%. The efficiency in terms of the labor cost no longer required amounts to 115 clerical FTEs earning a fully loaded compensation of approximately $50,000 per year, or a total of $5.7 million per year. This does not include the 5% annual increase in payroll costs estimated by the Customer Organization had it continued with the legacy system and its associated resources. Table 7: Reduced Revenue Accounting Payroll Costs Ref. Metric Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Total A1 A2 Ato Number of workers (saved) Fully loaded annual salary with 5% annual salary increase ( ) $49,609 $52,090 $54,694 $57,429 $60,300 Revenue accounting payroll savings A1*A2 $5,705,058 $5,990,311 $6,289,826 $6,604,318 $6,934,534 $31,524,047 Improved Cash Flows During 2008 the industry moved from a monthly billing cycle between carriers to a weekly cycle. This change would have been very difficult and costly with the legacy system, but working with Kale and the REVERA system meant that the Customer Organization was able to implement weekly billing in line with industry deadlines. With annual interline billing worth nearly $500 million, the Customer Organization has estimated that cash flow has improved by approximately $14,882,760. Assuming a cost of capital of 6% per annum, the benefit from the improved cash flow is $892,996 per annum

15 Reduction In Unmatched Sales The legacy PRA system was poor at matching flown coupons with the original sale, a problem that was accentuated by manual data entry errors. The Customer Organization routinely had approximately $1.65 million in unmatched sales. With REVERA, the unreported sales values have routinely been less than $800,000 at any time due to the automation in data entry, improved coupon matching, and better exception reporting. As a result of REVERA, the Customer Organization is now able to track and recognize and raise ADM to the tune of $ 90,000. The Customer Organization is also more confident about the accuracy and control over the sales process. Table 8: Reduction In Unmatched Sales Ref. Metric Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Total A1 A2 Annual value of unmatched sales $1,653,640 Percent improvement due to REVERA 5.44% Ato Reduction in unmatched sales A1*A2 $90,000 $90,000 $90,000 $90,000 $90,000 $450,000 Savings From Third-Party Credit Card Billing Prior to the investment, the Customer Organization was paying a third party to bill and process credit card transactions for direct sales. With REVERA, Kale Consultants were able to conduct credit card billing for direct sales. Additionally, credit card billing cycles improved by one day. The related cost savings realized and benefits due to improved cash flows are to the tune of $244,739 per annum, assuming a cost of capital of 6%. Improved PCI Compliance By migrating to Kale s outsourced solution, the Customer Organization estimates that it would have been much more expensive and complex to become compliant to the PCI standards with the legacy passenger revenue accounting system, and the fines for noncompliance would have reached $82,682 per annum. Total Benefits The financial benefits described in this section are summarized in Table 9 below

16 Table 9: Total Benefits Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Total NPV Elimination of support costs of legacy system $909,502 $909,502 $909,502 $909,502 $909,502 $4,547,510 $3,447,728 Revenue accounting payroll savings $5,705,058 $5,990,311 $6,289,826 $6,604,318 $6,934,534 $31,524,047 $23,679,364 Improved cash flow $892,966 $892,966 $892,966 $892,966 $892,966 $4,464,828 $3,385,042 Reduction in unmatched sales $90,000 $90,000 $90,000 $90,000 $90,000 $450,000 $341,171 Savings from third-party credit card billing $244,739 $244,739 $244,739 $244,739 $244,739 $1,223,694 $927,752 Improved PCI compliance $82,682 $82,682 $82,682 $82,682 $82,682 $413,410 $313,430 Total $7,924,947 $8,210,199 $8,509,715 $8,824,206 $9,154,422 $42,623,488 $32,094,487 Additional Value-Enriching Benefits The Customer Organization noted several areas of benefit that were not accurately measured or delivered entirely as a result of REVERA. However, these benefits, outlined below, did add value for the Customer Organization s business. Readers of this study are advised to evaluate these potential benefits (some of which were not quantified by the customer interviewed in this study) associated with the improved decision-making as a result of more accurate and timely revenue data. Increased Revenue Recognition The Customer Organization noted that the revenue from nearly 3% of the flight coupons was routinely not recognized by its accounting department because the tickets were not flown for a variety of reasons. The Customer Organization used to follow a conservative policy of recognizing most of the revenue after 12 months because there was no coupon-level data of outdated tickets available. With REVERA, the company is able to track usage at the coupon level and recognize revenue as soon as it becomes outdated. This resulted in a substantial financial benefit accrual after 12 months of initial deployment due to early and accurate revenue recognition. Because results generated by Kale are significantly more accurate and precise, the Customer Organization

17 was able to recognize a substantial amount of revenue on its balance sheets worth $16,536,400 per year. Timely Inward Billing And Accuracy The IATA process gives up to six months during which an airline can review the interline billing and reject any invoices. With the legacy PRA solution, the inward billing process was routinely delayed, thus negatively affecting cash flows. With Kale providing the service and having the staffing flexibility to meet peak demands, the review of interline billing is much more timely, resulting in improved cash flows. The Customer Organization also feels much more confident about the accuracy of the interline billing process (both outward and inward). This confidence stems in large part from the Customer Organization s confidence in Kale s industry-standard proration engine and the associated high degree of process automation, as well as the quality of the process and skills with Kale. Although the Customer Organization was unable to precisely quantify this benefit, the interviewee expressed the significance of this benefit as a result of a 25% reduction in interline billing inaccuracies, which is normally 1% to 2% for nearly $500 million per annum. Access To Valuable Revenue Analytics And Actionable MIS The Commercial department at the Customer Organization requires revenue information to track sales performance and make tactical decisions to improve revenues. The legacy PRA process used to produce revenue reports (after accounting processing) nearly two months delayed. Since revenue was often needed in a much more timely fashion, the department would develop its own revenue estimates and make decisions largely independent of the data from revenue accounting. With the Kale service, the revenue reports are ready by the sixth working day after the month and made available to the sales network by the 15th of the month. Further, revenue estimates are produced by the 10th of the month and then updated as the month progresses. The information provided by the revenue accounting department is accurate and granular and takes account of discounts and commissions. The Commercial department is now able to function on the basis of factual and accurate data, rather than inaccurate estimates. Improved Analysis Of Code-Share And Interline Agreements A big area where the PRA department is able to add value is in the analysis of interline traffic flows and net yields and value from various code-share/special prorate agreements. The interline business of the customer as a share of total passenger revenue has noticeably increased because of the Customer Organization s ability to leverage alliance and code-share agreements facilitated by the implementation of REVERA. Enhanced Network Analysis The PRA department is able to add value to the analysis of the network so that better decisions can be made about which routes to add or reduce capacity on. As an example, the Customer Organization, because of data made available by REVERA, is now able to analyze feeder traffic reports, which provide information on traffic capacity of each feeder routes to mainline routes. At a time when the airline needs to reallocate capacity dynamically, this analysis is of great value since it is based on actual net-net revenue data. Additional Benefits The revenue accounting (RA) process at the Customer Organization has gained greater prominence and importance

18 The revenue accounting function at the Customer Organization has been seamlessly integrated with the core finance and accounting process, thereby bringing a faster balance sheet reconciliation on an ongoing basis. In many ways, it stands demystified and better understood by all stakeholders. The focus of the revenue accounting manager is shifting from managing transaction processes to control and value added analysis. The stakeholders are beginning to see the value of the information that RA can provide and expect more from the function. Because of the management bandwidth now available as a result of services provided by Kale, the revenue accounting department is now able to execute on new areas of business quickly and deliver savings. An example of this is credit card fraud management, where the Customer Organization has set up a new process along with Kale to look at this area. The savings can potentially be estimated to be more than $800,000. Risk Risk is the third component within the TEI model; it is used as a filter to capture the uncertainty surrounding different cost and benefit estimates. If a risk-adjusted ROI still demonstrates a compelling business case, it raises confidence that the investment is likely to succeed because the risks that threaten the project have been taken into consideration and quantified. The risk-adjusted numbers should be taken as realistic expectations, since they represent the expected values considering risk. In general, risks affect costs by raising the original estimates and they affect benefits by reducing the original estimates. For the purpose of this analysis, Forrester risk-adjusts cost and benefit estimates to better reflect the level of uncertainty that exists for each estimate. The TEI model uses a triangular distribution method to calculate risk-adjusted values. To construct the distribution, it is necessary to first estimate the low, most likely, and high values that could occur within the current environment. The risk-adjusted value is the mean of the distribution of those points. For example, in the case of the benefit calculation for improved Reduction in Unmatched Sales, the $82,682 annual benefit value used in this analysis can be considered the most likely value prior to risk adjustment. However, this value might be overestimated based on the complexity of the changing environment. This variability represents a risk that must be captured as part of this study. Forrester here uses here a risk factor of 100% on the high end and 80% on the low end. This has the effect of decreasing the benefit estimate. Forrester then creates a triangular distribution to reflect the range of expected benefit, with 90% as the mean. Forrester applies this mean to the most likely estimate, $82,682, to arrive at a risk-adjusted value of $74,414. This method typically has the effect of increasing the cost estimates to take into account the fact that original cost estimates are more likely to be revised upward than downward, while it has the opposite effect on benefits risk adjustments for benefits reduce the original benefit estimates resulting in a conservative filter for financial assumptions. The end result is that the risk-adjusted ROI is lower than the original ROI estimate. The following tables show the values used to adjust for uncertainty in cost and benefit estimates. Different cost and benefit estimates have different levels of risk adjustments. Readers are urged to apply their own risk ranges based on their own degrees of confidence in the cost and benefit estimates

19 Costs Risk-Adjustment Factors Outsourced Revenue Accounting Service Fees The variability and risk associated with the service fees hinge on the percentage of tickets that are electronic. Forrester s interviewee mentioned that the service cost per flown passenger transaction was higher for paper tickets than for electronic tickets. The interviewee reported that the electronic tickets make up 82% of all flown passenger tickets. However, Forrester s industry analysis and research suggests that this percentage may be as low as 65%, especially in regions where credit card transactions are not widely used. External And Internal Implementation Costs Forrester assumes external implementation charges by Kale have been determined by contract, so no risk adjustment is applied. However, variability does exist with internal implementation costs, which are driven by the uncertainty in the length of time needed to fully implement the solution. Organizations with a highly complex data architecture and infrastructure or unsophisticated legacy environments should expect implementation to last closer to nine months, whereas those organizations with less complex systems and more mature legacy systems should experience implementation to last eight months. IT Infrastructure Upgrade Costs The Customer Organization estimated that the costs to upgrade hardware and other IT infrastructure necessary to take the full potential of Kale s solution to amount to $165,364. However, Forrester estimates that the actual cost of IT upgrades needed can vary depending on the complexity of the needs of the customer, maturity of the underlying technical architecture, and quality and quantity of data being fed into the system. Therefore, Forrester risk-adjusts this cost higher to account for this. Staff Redeployment Costs The risk in estimating staff redeployment costs stems from the number of weeks each worker made obsolete is paid severance. Since severance pay is typically based on the number of years an employee has dedicated to the organization in full-time employment, the variability in the tenure of employees made obsolete can vary the total staff redeployment costs. In this analysis, the Customer Organization assumed each worker had an average tenure of three years. However, Forrester estimates that a certain percentage of workers may have been employed at the Customer Organization for substantially longer periods of time. To account for this, Forrester risk-adjusted costs for this category upward by 67%. Internal Operational Costs The Customer Organization stated that the core team travels to the offshore offices and R&D centers of Kale Consultants to review the passenger revenue accounting processes and discuss ways to enhance and improve them. Since the number of trips made to offshore offices may be more frequent and longer in duration for complex or feature-rich projects, the actual travel costs may be higher than those estimated by the Customer Organization. Data Procurement Costs Data procurement costs are highly dependent of scope of implementation and functional requirements. For projects with more advanced needs, an organization should expect their data costs to be higher than those expressed by the Customer Organization

20 Total Costs Taking into account the risk associated with each cost category, Forrester has assigned the following risk adjustments to the original cost estimates. Table 10: Cost Risk-Adjustments Costs Riskadjustment Outsourced revenue accounting service fees 101% External and internal implementation costs 102% IT infrastructure upgrade costs 119% Staff redeployment costs 167% Internal operational costs 101% Data procurement costs 125% Benefits Risk-Adjustment Factors Elimination Of Support Costs Of Legacy PRA System The risk adjustment of this benefit is based entirely on how quickly the Organization was able to phase out the use and maintenance of the legacy applications. Forrester believes that the Customer Organization may have continued to maintain the legacy applications for some time after the deployment of REVERA as a fail-safe measure to ensure continuity of operations and minimal disruption due to the implementation of new technology. During this time, the Customer Organization may have paid some fractional cost to maintain and support the legacy PRA system. Revenue Accounting Payroll Savings No risk-adjustment was applied to this benefit because virtually no uncertainty exists in estimating the number of hourly employees that can be saved performing work that can be automated. Improved Cash Flows This benefit was risk-adjusted to take into account that variability in the amount of annual cash flow that resulted from improved interline billing and a variable cost of capital between 4% and 6%. Reduction In Unmatched Sales This benefit was risk-adjusted down by to account for uncertainty in the improvement in unmatched sales. Savings From Third-Party Credit Card Billing In regions outside of North America, credit card usage for flight ticket purchases can vary from 65% to 85%. To account for this variability, Forrester applied a risk-adjustment to the savings associated with third-party credit card billing

21 Improved PCI Compliance The fines for noncompliance estimated by the Customer Organization are dependent on their estimate of the decrease in the potential of being caught noncompliant by governing bodies. Because this estimate is highly dependent on the audit plans of the governing body, which often are driven by random checks or reports of noncompliance, Forrester risk-adjusts these savings downward. Total Benefits Taking into account the risk associated with each benefit category, Forrester has assigned the following risk adjustments to the original benefit estimates. Table 11: Benefit Risk-Adjustments Benefits Risk-adjustment Elimination of support costs of legacy system 80% Reduced revenue accounting payroll costs 100% Improved cash flow 60% Reduction in unmatched sales 90% Cost avoidance of third-party credit card billing 75% Improved PCI compliance 87% Flexibility Flexibility, as defined in Forrester s TEI methodology, is an investment in additional capacity or agility today that can be turned into future business benefits at some additional cost in the future. This provides an organization with the right or the ability to engage in future initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to adopt an outsourced PRA solution and later discover additional value that can be realized by further building on the existing platform and services. Forrester believes that there are several such real options available to the organization profiled here, which can differ from one organization to another. The flexibility component of TEI can capture that value using the industry-standard Black-Scholes option pricing model; however this value was not computed. While data for calculating the monetary value of specific flexibility options was not available at the time of publication, the Customer Organization generally recognizes the additional flexibility that the organization gained by switching to the outsourced passenger revenue accounting solution. TEI Framework: Summary Considering the financial framework constructed above, the results of the costs, benefits, risk, and flexibility sections using the representative numbers can be used to determine a return on

22 investment, net present value, and payback period. Table 14 shows the consolidation of the numbers for the reference Organization. Tables 12 and 13 below show the risk-adjusted values, applying the risk-adjustment method indicated in the Risks section above and the values from Tables 4 and 9. It is important to note that values used throughout the TEI Framework are based on in-depth interviews with one existing Kale Consultants customer. Forrester makes no assumptions as to the potential return that other organizations will receive within their own environment. Forrester strongly advises that readers use their own estimates within the framework provided in this study to determine the expected financial impact of implementing REVERA. Table 12: Total Risk-Adjusted Costs Costs Initial Year 1 Year 2 Year 3 Year 4 Year 5 Total NPV Outsourced revenue accounting service fees $ - $3,015,247 $3,015,247 $3,015,247 $3,015,247 $3,015,247 $15,076,236 $ 11,430,159 External and internal implementation costs $1,409,728 $ - $ - $ - $ - $ - $1,409,728 $1,409,728 IT infrastructure upgrade costs $190,169 $38,034 $38,034 $38,034 $38,034 $38,034 $380,337 $334,346 Staff redeployment costs $589,109 $ - $ - $ - $ - $ - $589,109 $589,109 Internal operational costs $ - $553,205 $580,027 $608,190 $637,761 $668,811 $3,047,993 $2,290,094 Data procurement costs $ - $206,705 $206,705 $206,705 $206,705 $206,705 $1,033,525 $783,575 Total $2,189,006 $3,813,190 $3,840,012 $3,868,176 $3,868,176 $3,928,797 $13,710,384 $16,837,

23 The three-year risk-adjusted benefits are summarized in the following table. Table 13: Total Risk-Adjusted Benefits Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Total NPV Elimination of support costs of legacy system $727,602 $727,602 $727,602 $727,602 $727,602 $3,638,008 $2,758,183 Revenue accounting payroll savings $5,705,058 $5,990,311 $6,289,826 $6,604,318 $6,934,534 $31,524,047 $23,679,364 Improved cash flow $535,779 $535,779 $535,779 $535,779 $535,779 $2,678,897 $2,031,025 Reduction in unmatched sales $74,414 $74,414 $74,414 $74,414 $74,414 $372,069 $282,087 Savings from thirdparty credit card billing $183,554 $183,554 $183,554 $183,554 $183,554 $917,770 $695,814 Improved PCI compliance $71,685 $71,685 $71,685 $71,685 $71,685 $358,426 $271,744 Total $7,298,092 $7,583,345 $7,882,861 $8,197,352 $8,527,568 $39,489,217 $29,718,

24 Study Conclusions This study is meant to provide the reader with a framework to examine the costs and benefits of implementing Kale Consultants passenger revenue accounting solution. Based on our in-depth discussions with an existing Kale Consultants customer, Forrester found that this organization expects a five-year risk-adjusted ROI of 77%. The net present value for this investment is $12.9 million (risk-adjusted) over five years. The benefits that have been quantified in this study are: Elimination of support costs of legacy system. Reduced revenue accounting payroll costs. Improved cash flow. Reduction in unmatched sales. Cost avoidance of third-party credit card billing. Improved PCI compliance.. Based on these findings, companies looking to implement a hosted REVERA solution can see cost savings, revenue generating, and cash flow management benefits. Using the TEI framework, many companies may find the potential for a compelling business case to make such an investment. Table 14: Customer Organization ROI Summary financial results Original estimate Risk-adjusted ROI 98% 77% Payback period (months) 6 8 Total costs (PV) $16,202,625 $16,837,011 Total benefits (PV) $32,066,746 $29,718,217 Total (NPV) $15,864,121 $12,881,

25 Appendix A: Total Economic Impact Overview Total Economic Impact is a methodology developed by Forrester Research that enhances a company s technology decision-making processes and assists vendors in communicating the value proposition of their products and services to clients. The TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to both senior management and other key business stakeholders. The TEI methodology consists of four components to evaluate investment value: benefits, costs, risks, and flexibility. For the purpose of this analysis, the impact of flexibility was not quantified. Benefits Benefits represent the value delivered to the user organization IT and/or business units by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line. Costs Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs in the forms of fully burdened labor, subcontractors, or materials. Costs consider all the investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created. Risk Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two ways: the likelihood that the cost and benefit estimates will meet the original projections and the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as triangular distribution to the values entered. At a minimum, three values are calculated to estimate the underlying range around each cost and benefit. Flexibility Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated. The collaboration can only be used with additional investment in training at some future point in time. However, having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI captures that value