Fair Isaac Aims to Score With Its New Collections Unit

  Fair Isaac Corp., probably best known for its FICO credit rating scoring system, lately has been targeting the collections industry. Now, the company says, the pieces are in place to provide an array of analytics, software and services to companies that handle credit accounts from inception through collections.
  "We own soup to nuts now," says Dale Williams, a Fair Isaac vice president who is in charge of the company's collections and recovery unit.
  Fair Isaac provides account products to financial-services companies, automotive finance providers, government agencies and other customers. The Minneapolis-based company claims that its technology manages 65% of the world's credit cards. Its main products include Capstone, which helps originate accounts; Triad, which helps manage accounts; and Falcon, which is software used to detect fraud.
  Through several company purchases, Fair Isaac has added expertise and products to target the collections market. By buying Narex Inc., a Colorado-based collections-software company, in the summer of 2003 for $10 million in cash, Fair Isaac added expertise in analyzing delinquent accounts.
  The April 2004 acquisition of London Bridge Software Holdings plc, a United Kingdom-based software provider, for $299 million furnished Fair Isaac with a platform to deliver services and a network to link its customers with their vendors.
  Now that Fair Isaac has integrated the companies into a single division, called Collections and Recovery Solutions, or CRS for short, it is putting together a large sales team to promote the business. And the company has put together selling strategies that include potential cross-selling initiatives.
  Williams, a former London Bridge executive, now heads the unit. Expectations run high for CRS, whose target customers include card issuers.
  Although Williams declined to divulge specific numbers, he says the group has one of the company's highest targets for year-on-year growth, giving it a key role in the anticipated expansion of Fair Isaac's companywide revenue to $1.5 billion for 2008. That is an ambitious goal, given that Fair Isaac in 2004 generated $706.2 million in revenue, up 12% from $629.3 million in fiscal 2003.
  Industry observers say Fair Isaac has a good chance to succeed in meeting its revenue targets in the collections and recovery space, though the company faces stiff competition. Competitors in the collections space include the three major credit bureaus-Experian, Trans Union LLC, and Equifax Inc.-as well as American Management Systems, which recently became part of the Montreal-based CGI Group Inc., says Sophie Louvel, a research analyst at Financial Insights, a Framingham, Mass.-based research and consulting firm that specializes in financial services.
  Fair Isaac is meeting those competitors with a battery of products. Debt Manager, its flagship collections and recovery workflow platform, generates about 64% of the CRS division's revenue, Williams says. Debt Manager came to Fair Isaac with the purchase of London Bridge.
  Debt Manager creates work queues for collections organizations, prioritizes the work and keeps track of the action taken on each account. To help make decisions, Debt Manager imports strategies, scores and goals from other applications.
  At a typical Fair Isaac client, several hundred Debt Manager users will have the job of contacting customers. The application supports the employees by displaying customer information, including the amount in arrears and any previous action that may have been taken on the account.
  Automated Prompts
  London Bridge introduced Debt Manager in 1999 for lenders worldwide. One feature is a prompt to take specific actions, such as making a phone call or sending a follow-up letter.
  Recovery Management System, or RMS, another workflow platform from London Bridge, was created specifically for the United States. U.S. collections organizations are subject to more complex regulation than are companies in many other markets, according to Williams, and RMS helps fill that niche.
  Williams sees no problem of overlap for RMS and Debt Manager, both of which are sold to American clients. RMS comes already structured, while Debt Manager is configured to fit each company's needs. Which one works for a particular American operation depends on the corporate culture, Williams says.
  Fair Isaac's CRS unit offers choices in analytics, too. Using expertise that came from Narex, the company studies clients' data and goals requirements to create dynamic custom collections models. The models are called dynamic because they monitor their own results and make changes to improve performance.
  In effect, the models learn by observing and then refresh themselves, Williams says. Static models deteriorate over time, he adds. The CRS unit hosts the data in facilities in the United States and the United Kingdom.
  The CRS group hosts data in those regions as well for another analytics offering, PlacementsPlus, which also originated with Narex. Clients create the rules for placing their delinquent accounts with collections agencies, and PlacementsPlus has the infrastructure, engine and mechanism to make the choices.
  Another product, Placement Optimizer, contains an additional layer of analytics that studies the performance of a group of agencies and picks the best for a particular account.
  UniScore, a Fair Isaac generic recovery score for charged-off debt designed by Narex, uses a large number of characteristics to rank accounts by how much the debtor appears likely to pay back. That differs from most scores, Williams says, which use fewer characteristics to project the likelihood a creditor will receive a payment.
  "You can prioritize the accounts with reference to those who will pay back the most, as opposed to just simply those who will make a payment," says Williams. He notes some debtors may owe more than others, but the top priority should be the consumer that will pay the most.
  BridgeLink is another Fair Isaac product that comes from London Bridge. The Web-based service connects collections organizations with their vendors, including collection agencies, lawyers and data providers.
  BridgeLink builds on the supply-chain management concept to reduce costs, provide a secure medium for exchanging information and increase data integrity by eliminating re-keying, says Williams.
  Bruce Simpson, an analyst at the Chicago-based investment house William Blair & Co., characterized BridgeLink as a business model similar to the networking schemes that proliferated in a number of industries during the dot-com boom. "It's kind of a big, interconnected platform for people involved in that industry," he says.
  Louvel says BridgeLink makes communications more efficient for financial institutions by providing lists of vendors, including 350 collections agencies.
  For the workflow platforms, Fair Isaac charges a licensing fee derived from the number of users and the number of accounts. For the Placement Plus and Placement Optimizer custom models, Fair Isaac works out a return-on-investment model upfront, based on the complexity of the application.
  "Our expectation is that our margin will be higher on a highly sophisticated model that returns more to the client than on a less sophisticated model," Williams says.
  Despite the growth in collections and recovery options offered at Fair Isaac with the creation of the CRS group, Williams emphasizes that the company offered analytics in that field before the recent acquisitions. Before the company bought London Bridge and Narex, he says, the Fair Isaac Triad product for account management identified debtors likely to go into collections and determined the initial strategy for handling those accounts.
  At that point, Triad handed off responsibility to a product such as Debt Manager, essentially embedding Fair Isaac analytics in a competitor's platform. Part of the rationale for buying London Bridge was to end that practice, says Williams.
  Now, the acquisitions have made Fair Isaac a serious player in collections and recovery. However, no company can lead every segment of the industry-at least not yet, says Louvel.
  Among some other companies making headway in the market is Austin Logistics. The Austin, Texas-based company has formed strong relationships with call centers, which can improve collections, Louvel says. Another small company, Intelligent Results, incorporates transaction histories with notes made by employees in call centers and collections agencies to create comprehensive models, she says.
  Yet prospects for growth appear solid for Fair Isaac in the collections and recovery business. The London Bridge acquisition gives Fair Isaac a boost abroad, says Simpson. "They've tried to use that acquisition of a foreign-based company to jump-start their own international efforts and to create an international management infrastructure," he says.
  Meanwhile, demand is growing in Asia and the Pacific regions as those markets "feel the pressure of over-inflated consumerism," Williams says. Rising interest rates and the possibility of declining home values in some regions of North America also could increase collections activity, Louvel says.
  The acquisitions also fit the pattern of combining analytics platforms, a strategy Thomas Grudnowski, Fair Isaac chief executive, outlined in a June investor conference. The next task, now that the products have been put together, is to sell them, Grudnowski said. The company's 200-member sales team could double, he added.
  Marketing Task
  Williams admits that the company faces a formidable marketing task. Marketing will focus on the efficiency of the end-to-end system the company now offers.
  Efforts are under way to sell Debt Manager to Triad users, which number more than 200 worldwide, Williams says. European customers already using Debt Manager may consider other Fair Isaac products now that the systems are being integrated.
  The CRS group also could receive an indirect marketing boost from Fair Isaac's acquisition of Chicago-based Braun Consulting Inc. for $30 million in cash last September. Braun has expertise in customer relationship management, but its leaders usually interact with high-level executives. That could open up more sales opportunities, says Williams.
  Fair Isaac has grown from its FICO score and risk-management days to a full-service, inception-to-collections vendor. The acquisitions appear to be integrated, the products are respected, and the client list is there. As Grudnowski said, the challenge now is to sell them.
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