Value Chain Analysis Gemini ConsultingSeptember 1993.

Value Chain Analysis

Gemini Consulting September 1993

A00309 vcaSep93v3.0 - 2 -© 1993 Gemini Consulting. Reproduction with Express Permission Only.

Purpose

• Introduce value chain concept

• Breakdown XXXX Leasing value chain into its component parts

• Summarize XXXX Leasing’s current value chain strategy

• Examine implications of strategic shifts

Value Chain Analysis


Value Chain Analysis Provides a Useful Tool for Understanding the Key Activities of a Business

• Confirm our understanding of the core business processes of XXXX Leasing

• Illustrate how these core processes cut across XXXX Leasing’s organizational structure

• Develop an understanding of revenue and cost drivers:- Cash inflows

- Cash outflows

- Risks

• Determine how strategic change in one area of the value chain will affect other areas

VALUE CHAIN ANALYSIS

Breaking Down theValue Chain


XXXX Leasing’s Value Chain Focuses on the Provision of Capital Equipment Leases

UnderwriteLease

ServiceLease

FundLease

SourceLease

BREAKING DOWN THE VALUE CHAIN

This kind of value chain strategy can be referred to as a product-focused strategy.

This kind of value chain strategy can be referred to as a product-focused strategy.

Until applicationis sent to

XXXX

Everything done aftera lease is booked

Until leaseis booked


Sourcing Includes Everything XXXX Does to Get the End User to Send in an Application

UnderwriteLease

ServiceLease

FundLease

SourceLease

Market OriginateTarget

• Identify end user

• Identify vendors:

-OEMs

-Wholesalers

• Market to end user:

-Telemarketing

-Direct mail

• Market to vendors:

-Telemarketing

-Direct mail

• Market to brokers

• Originate application



XXXX Goes through Various Channels to Source Its End User


UnderwriteLease

ServiceLease

FundLease

SourceLease


1. XXXX Direct Customer Marketing identifies potential end user:

-Direct mail (list experimentation)-Telemarketing-Affinity groups

XXXX to Small Optician (End User)

XXXX to Broker

1. XXXX Broker Group identifies potential brokers:

-Advertising-Trade shows-Referrals-Calling program-Limited direct mail

2. Direct Customer Marketing contacts end user:

-Calls direct mail respondents-Calls existing lessees-Calls trade show attendees/participants-Cold calls

3. End user signs up/fills out application

4. End user sends application to XXXX

2. Broker Group makes contact with broker:

-Responds to any contact

3. Broker establishes relationship with Broker Group

4. Broker seeks out end user:-Directly-Indirectly via unaffiliated dealers and sometimes (though very infrequently) OEM and large chain stores


6. Broker sends application to XXXX


XXXX Goes through Various Channels to Source Its End User (cont.)


UnderwriteLease

ServiceLease

FundLease

SourceLease


1. XXXX Vendor Services identifies potential ‘mom & pop’ dealer:

-Direct mail-Associations-Trade show lists-Cold calling

XXXX to ‘Mom & Pop’ Dealer

XXXX to OEM/National Account (Sonitrol)

1. XXXX National Accounts identifies potential participants:

-Trade shows-Associations

2. Vendor Services makes contact with dealer:

-Responds to any inquiry

3. Vendor Services makes agreement with dealer official:

-Exclusive or non-exclusive-Negotiates rates, commission

4. Dealer offers XXXX Leasing program to end user


6. Dealer sends application to XXXX

2. National Accounts calls corporate offices to set up appointment

3. Salesperson pays visit to corporate offices

4. OEM signs exclusive agreement with salesperson:

-Private label-Gives XXXX dealer list

5. National Accounts gives list to Vendor Services

6. Vendor Services representative sign up dealers:-Calls dealers

7. Dealer offers XXXX Leasing program (private label) to end user


9. Dealer sends application to XXXX


XXXX Goes through Various Channels to Source Its End User (cont.)


UnderwriteLease

ServiceLease

FundLease

SourceLease


1. XXXX National Accounts identifies potential chain stores:

-Referral from sales-Trade shows-Trade magazines, journals, etc.

XXXX to Computerware (Large Chain)

2. National Accounts sets up appointment

3. Salesperson pays visit

4. Salesperson sets up either exclusive or non-exclusive agreement:

-Private label

5. National Accounts obtains store list and gives to Vendor Services

6. Vendor Services representatives signs up chain stores:

-Telemarketing

7. Chain stores offer XXXX Leasing program to end user:

-Direct mail-In store sales


9. Chain store sends application to XXXX


Underwriting Refers to How XXXX Books a Lease

• Receive application

• Review credit records

• Investigate if necessary

• Approve/reject application

• Give to origination to notify:

-Broker

-Vendor

-End user

• Receive documentation

• Re-work documentation

• Approve documentation

• Send advance check to vendor

UnderwriteLease

ServiceLease

FundLease

SourceLease

Approve/Reject

Application

Approve/Reject

Documentation

ReviewApplication



XXXX’s Underwriting Process Is Highly Standardized for Most Leases


UnderwriteLease

ServiceLease

FundLease

SourceLease

Approve/Reject

Application

Approve/Reject

Documentation

ReviewApplication

Pull up credit information:• Dun and Bradstreet• Three consumer bureaus

Receive fax from:• Broker• Vendor• End user

Credit Analyst Reviews Application

CreditInvestigation

CreditAnalyst

MoreInformation Decision

50% 50%

Notification of Rejection:• Broker• Vendor• End user

Receive Documentation:• Signed lease• Advance check (=security

deposit)• Other documentation

Notification of Approval:• Broker• Vendor• End user

Book Lease

Send Advance Checkto Vendor

Reject

33%

67%

AdditionalInformation

Documentation Group Makes Decision

80%

20%

1%

End User


Servicing Is What XXXX Does for the Customer after a Lease Has Been Booked

• Send invoice

• Track payment

• Service

• Notify delinquents

• Start collection proceedings

• Call delinquents

• Start collection proceedings

• Re-possess

• Re-market

UnderwriteLease

ServiceLease

FundLease

SourceLease

Collect ManageDefaultsBill



Servicing Is Also Highly Standardized for XXXX’s End Users

Collect ManageDefaultsBill


UnderwriteLease

ServiceLease

FundLease

SourceLease

Assign Booked Lease toBilling Cycle:

• Four cycles per month

Colonial NationalReceives Payment

At 14 and 28 Days Delinquent:• Send dunning letter

Yes

Legal DecidesMerit of Suit

After 120 Days or Bankruptcy,

Classify as a Default

WorkCase

No

InternalCollection

Repossess/Re-sell

CourtCase

Send Bill:• 90–95% receive one bill per

month

Receipt of PaymentsUpdated Daily

> $2,500 < $2,500

Service Account:• Inquiries/referrals

If 31–60 Days Delinquent:• Divide into alphabetical groups• Call by Jr. collectors

Take Off List WhenPayment Received

If 61–90 Days Delinquent:• Divide into alpha. groups/> $5,000• Call by Sr. collectors

If 91–120 Days Delinquent:• Hand over to workout group


Funding Is How XXXX Funds the Lease

• Securitize:

-Execute and manage

-Fund credit enhancements

• Maintain owned assets:

-Fund non-securitizable assets

UnderwriteLease

ServiceLease

FundLease

SourceLease

EstablishInterim

Funding

SecuritizeProvideInitialCredit


MaintainOwned Assets

• Establish credit availability

• Manage liquidity risks

• Establish interim credit lines

• Manage interest rate exposure


All of XXXX’s Leases Are Funded through a Similar Process

EstablishInterim

Funding

SecuritizeProvideInitialCredit


UnderwriteLease

ServiceLease

FundLease

SourceLease

Package Leases forCustodian:

• 75 leases/batch $500k

MaintainOwned Assets

Fund Initial Payment toVendor:

• Cash flows from:- Non-securitized leases- Service fees- Excess funds from credit

enhancements*- Investment income

• Credit facilities fromXXXX parent:

- $15mm on a workingcapital basis

- $35mm tactical opportunities (e.g., portfolio purchase)

Establish Interim Funding:• Commercial banks:

- Short term warehousinglines

- Secured lines- Floating rate- Short money market rate

• Investment banks:- Bridge financing

specifically negotiated

Notify Custodian to TransferCustody to Funding Source

Amass Leases forSecuritization:

• $30mm minimum

Securitize:• Private placements• Public market (not yet done)

Fund Credit Enhancement:• Cash and leases held as

collateral by investors

Fund Non-SecuritizableLeases:

• Severe delinquencies• Too small• Too few payments• Seasonal leases• Step payments

Use Batches of Leases as Collateral

* Most securitizations require a credit enhancement to be held in cash and leases equal to a fixed percent of bonds outstanding. As the bonds are paid down, cash and leases are released from this requirement proportionately.

Se

cu

riti

zeM

ain

tain

Current Value Chain Strategy


XXXX Has Successfully Pursued a Strategy Focused on Capital Equipment Leases

1. Organization structured around key business activities

2. Active management of key revenue drivers

3. Active management of key activity cost drivers

4. Minimization of overhead costs

5. Ability to manage risks in capital equipment lease market

6. Widespread management understanding of profit drivers

CURRENT VALUE CHAIN STRATEGY

UnderwriteLease

ServiceLease

FundLease

SourceLease


1. Organization Structured Around Key Business Activities

UnderwriteLease

ServiceLease

FundLease

SourceLease

Units withDirect

Involvement

Units withSupport

Involvement

• Senior management• Financial control• Systems


• Sales• Marketing• Brokers• Portfolio

• Credit & Operations

• Recoveries• Workouts• Customer

Service• Collections• Resell

• Treasury• Portfolio

Management


2. Active Management of Key Revenue Drivers

UnderwriteLease

ServiceLease

FundLease

SourceLease

RevenueStrategy

RevenuesNet Interest Income: $4,331.7M

Fee Income: $9,160.3M


• Increase profitable volumes:

-New channels-New products-New markets

• Increase profitable hit rates:

-Approvals-Booked/approved ratio

• Improve collections:

-Bill-Collect-Resell

• Manage portfolio:

-Treasury management

a. Includes accounting adjustments.

a


3. Active Management of Key Activity Cost Drivers

UnderwriteLease

ServiceLease

FundLease

SourceLease

ActivityStrategy

ActivityCosts

Cost breakdown:

($3,779M)

34.4%

Cost breakdown:

($729M)

6.6%

Cost breakdown:

($812M)

7.4%

Cost breakdown:

($253M)

2.3%

• Find low-costdistribution:

-Telemarketing-Brokers-Affinity groups-End user direct

• Streamline key processes:

-Approval time-Credit scoring-Investigation

• Streamline key processes:

-Billing-Collections

• Reduce funding costs:

-Securitization-Risk management



• Suburban location• Few executives in overhead positions• System costs centered around business activities

4. Minimization of Overhead Costs

UnderwriteLease

ServiceLease

FundLease

SourceLease

SupportStrategy

BusinessSustaining

($5,407M)

49.2%



5. Ability to Manage Risks in Capital Equipment Lease Market

UnderwriteLease

ServiceLease

FundLease

SourceLease

RiskManagement

Strategy

RiskExposures

• Market segmentation:

-No tanning beds-Technology

• Credit scoring:-Modeling-Asset quality-Statistics-Judgment

• Management of delinquencies:

-Calling-Collecting-Reselling

• Liquidity risk management:

• Interest risk management


• Market risk exposure

• Economic risk exposure

• Credit risk exposure

• Delinquency risk exposure

• Liquidity exposures

• Interest rate exposures


6. Widespread Management Understanding of the Interaction of Profit Drivers

UnderwriteLease

ServiceLease

FundLease

SourceLease


IncreaseProfitableVolume

IncreaseHit Rates

ImproveCollections

ManagePortfolio

Interest/FeeRevenue

DecreaseOrigination

Costs

StreamlineProcesses

StreamlineProcesses

StreamlineProcesses

OperatingCosts

ManageFunding

Costs/Risks

FundingCosts

ManageMarketRisks

ManageCreditRisk

ManageCollections

DefaultCosts

MINUS

MINUS

MINUS

PROFIT

RevenueDrivers

CostDrivers

Implications of Strategic Shifts


Changes in XXXX Leasing’s Strategy Will Affect Its Value Chain

Examples of potential strategies that you suggested:

1. Exhaust growth opportunities in the technology sector of the small-ticket capital equipment leasing market:

- Improve delivery capabilities through better understanding of third-party channels and end-users

2. Sell other kinds of leases to small business market:

- High risk, operating, industrial equipment, etc.

3. Develop a relationship strategy targeted at specific kinds of end users, vendors, and brokers:

- Cross-sell products and services within current target market: insurance, financing, cash management, 401(K), etc.

4. Move into middle market leasing

5. Move into consumer leasing

IMPLICATIONS OF STRATEGIC SHIFTS

UnderwriteLease

ServiceLease

FundLease

SourceLease


1. Exhaust Growth Opportunities in the Technology Sector of the Small-Ticket Capital Equipment Leasing Market

• Improve understanding of needs:

-End users

-Vendors

-Brokers

• Focus on taking cost out of industry value chain

• Improve credit scoring

• Build economies of scale



UnderwriteLease

ServiceLease

FundLease

SourceLease

How much growth would this strategy offer?How much growth would this strategy offer?


Implications:

“Market Penetration Strategy”


2. Sell Other Kinds of Leases to Small Business Market

• Develop new relationships:

-End users

-Vendors

-Brokers

• Develop residual value analysis capabilities

• Develop risk/return analysis capabilities

• Developre-posessing capabilities


UnderwriteLease

ServiceLease

FundLease

SourceLease

Could XXXX Leasing handle other small-ticket leases as efficiently as it does capital equipment leases?

Could XXXX Leasing handle other small-ticket leases as efficiently as it does capital equipment leases?

• Develop funding capabilities for higher risk leases

“Product-Line Extension Strategy”

Implications:


3. Develop a Relationship Strategy Targeted at Specific Kinds of End Users, Vendors, and Brokers

• Multiple sales skills:

-Insurance-Services-Financing

• Understanding of customer needs

• Average exposure may increase

• Ability to handle multiple services/products

• Ability to service multiple products


UnderwriteLease

ServiceLease

FundLease

SourceLease

How would these changes affect XXXX Leasing’s economics?How would these changes affect XXXX Leasing’s economics?

• Ability to fund multiple products

Set-UpRelationship

ServiceRelationship

FundRelationship

SourceRelationship

“Product-Focus Strategy”

Implications:

“Share-of-Wallet Strategy”


4. Move into Middle Market Leasing

• Develop personal/hands-on sales skills

• Develop risk/return analysis capabilities

• Develop high differentiation servicing capabilities


UnderwriteLease

ServiceLease

FundLease

SourceLease

Could middle market leasing and small-ticket leasing be handled efficiently through the same value chain?

Could middle market leasing and small-ticket leasing be handled efficiently through the same value chain?

• Handle funding of larger lease size

“Up-Market Strategy”

Implications:


5. Move into Consumer Leasing

• Develop channels to reach consumers:

-Vendors

-Direct

• Develop credit modeling capabilities

• Develop consumer service capabilities


UnderwriteLease

ServiceLease

FundLease

SourceLease

Could small business leasing and consumer leasing be handled efficiently through the same value chain?

Could small business leasing and consumer leasing be handled efficiently through the same value chain?

• Develop securitization process for consumer loans

“Down-Market Strategy”

Implications:

Value Chain Analysis Gemini ConsultingSeptember 1993.

Documents

Transcript of Value Chain Analysis Gemini ConsultingSeptember 1993.