Case Study: Can APCO Insure Its Future with a New System?

APCO, short for the Automobile Protection Corp., is a little-known company whose field is automotive service insurance and whose goal is to market and administer contracts that cover both automobile warranties and service contracts. Headquartered in Atlanta, Georgia, the company was launched in 1984 and was acquired by Ford in 1999 for $165 million. Its contracts are actually insurance policies that cover the costs of repairing vehicles—contracts that dealers offer when customers purchase a vehicle. Although some dealers insure for repairs themselves, usually these contracts are actually offered by insurance companies in the name of the dealers, and they are usually sold through the dealers.
APCO is not a dealer, a service organization, or an insurer but instead arranges for warranting and servicing insurance with various insurance companies. It then markets these policies as service contracts or warranties through the automobile dealers. Once these contracts are sold to the vehicle purchasers, APCO administers them through the dealers. It also handles private-label service contracts for partners who finance and sell their own contracts and then engage APCO to administer them. Its private-label partners include such well-known companies as Allstate, American Honda Finance, Banc One, Manhein Auto Auctions, Mazda USA, and Volvo Canada.
Although APCO had only $8 million in sales in 1989, its fifth year, by the year 2000, its sales had grown to $165 million, and sales were expected to grow 9 to 10 percent in 2001. In the year 2000 APCO had about 1,200 dealer–customers in the United States. About 2 percent of all extended automobile service contracts sold in the United States are sold through dealers. This leaves a huge potential market for APCO to expand into as well as into markets in Canada and Europe. APCO's main competitors are vehicle manufacturers, many of which also offer factory-backed warranties although at a higher price.
APCO now has a major problem, one that many companies would love to have—a massive expansion of customers that has already occurred and is likely to continue. APCO experienced a dramatic upsurge in sales, increasing more than 20 times in only 11 years. The result is that both dealer–customer applications for its policies and the submission of repair claims have become almost unmanageable as well as extremely costly. A significant element of that problem is that APCO issues and administers hundreds of different policies to thousands of policyholders, each of which is complex. Different dealers offer different types and amounts of service in those contracts, and all customers must select the level and type of service they will pay for when they purchase the contracts. APCO faces many of the same problems with the thousands of private-label contracts it administers.
APCO's work is highly document intensive and time consuming. All of this time and manual work is inefficient and makes the process very costly. The first step in the process is for the company to design and create many different documents, one for each type of contract the dealers require. Given the hundreds of different dealer contracts and all their possible options, this is extremely complex. Currently, APCO minimizes the number of contracts it must support by creating a large number of generic contracts that, when issued to the auto purchaser, must be adjusted both to each specific dealer and to each customer. These adjustments are done in the contract's declaration section, where the dealer records which other contract sections apply to a specific customer's contract and which do not, depending on what the dealer wants to offer and what specific coverage the customer has agreed to pay for. Once the dealer has filled out the declaration section, it must be approved by APCO, and only after that can it be issued to the auto purchaser.
With the current system, this whole process is very slow and costly. After a dealer fills out the declaration section, it is mailed to APCO where the data are manually entered into APCO's computers. Next the computer processes the application, after which it is forwarded to the underwriters where it is manually entered into the underwriters' computers. It is then approved or rejected and mailed back to the dealer. Finally, assuming the document has been approved, the customer must return to sign it. The whole process usually takes between five and ten days to be completed.
Being heavily manual and requiring the data to be entered several times, the process is also quite error prone, requiring many corrections and resulting in many improper contract applications. For instance, between one-half and three-quarters of the applications received by APCO under the current system are rejected because required information is missing. This adds to the expense and the wasted time. In addition, the errors and the slowness of approval seriously damage APCO's relations with its customers—the dealers—as well as the dealers' relations with their customers—the automobile purchasers. The same problems exist when private-label (partner) vehicle customers decide to sign an APCO contract.
Claims processing uses systems similar to the contract systems, and they are also time consuming, error-prone, and expensive. Such expensive and time-consuming processes seriously interfere with APCO's ability to retain current customers and to acquire new customers. In fact, the cost and time for contract creation and approval, along with claims administration, have caused the company almost to lose control over both processes. Unless a way is found to better manage it all, expanding further into the United States and into foreign markets will only greatly increase the problems, creating even more difficulties for APCO's and the dealers' customers. That is the problem APCO faces, and something must be done.
At the time the customer buys the automobile, APCO would "ultimately like the customer to leave the dealership with the [APCO] contract in hand," explained Brian Kohrman, APCO's MIS director. With a proper system, "We'd be able to do approval and denial almost immediately," he said, "and ultimately fire the contract right back to the dealership and have them print [it] out and have it signed, right there." Dan Walsh, APCO's vice president and creative director, believes that, with the right package, APCO "can start providing customers with coverage information that's more specific to whatever they purchased. It becomes more personalized and gives the customer more accurate information."
Automobile dealers maintain that the buying experience must become friendlier because today's shoppers are too startled and even frightened when they first see the vehicle sticker price. As a result dealers are searching for ways to reduce the tensions and fears throughout the entire sales process, including warrantees and servicing. Moreover, servicing is extremely important to dealers for another reason—it is very profitable. Dealers usually make more profit from servicing than from vehicle sales. Almost all service customers have purchased their vehicles from that dealer, and dealers must find ways to sign them up as service customers and then to hold on to them. Auto industry service retention rates are currently at or below 30 percent when the vehicle is under warranty and fall even further after the warranty expires. Making the whole service contract process friendlier and quicker is one way to help gain more service customers because it should result in the sale of more of these contracts.
APCO's existing information systems store most of their data in old-fashioned flat files rather than in more modern relational database management systems. As a result, in several steps each contract document, along with its data and other key pieces of information, must be transmitted to the next application where it has to be reformatted for that application. For several steps the data must be reentered manually into the next system. Contracts and paper reports are physically handed to the APCO underwriters.
Although the creation of each contract document requires the approval of the compliance department, in reality contract design and creation should be the responsibility of compliance. APCO's systems run on IBM RS/6000 workstations using the UNIX operating system, Windows NT for the network operating system, and Microsoft SQL Server as the database management software. APCO's client workstations use the Microsoft Windows operating system along with Office desktop productivity tools and the Internet Explorer Web browser. Although APCO does use some modern software packages, such as an Adobe PageMaker package to create the contract forms, its systems are based primarily on homegrown pieces of software. The company wants to automate its entire application process to speed up everything for both APCO and its customers and to eliminate much of the reliance on paper documents. For instance if a new, more modern system were running, according to Kohrman, compliance will need to "extract the information as easily as possible, without a lot of IT overhead," an improvement that can be achieved if APCO begins to use a relational DBMS.
APCO has moved to solve this problem by issuing a Request for Proposal (RFP) for the first of a series of changes that its systems require. Its goal is to create for APCO and its customers a Web-based system for the creation and approval of contracts and for the administration of vehicle servicing. The system must simplify and speed up the business processes in order to support the planned growth of the company, increase customer service, and reduce costs.
The first step is to create a comprehensive electronic document-management (or content-management) system. The company wants the final content-management system to be highly automated so it can handle the whole process from the creation of all documents to the handling of an automobile purchaser's application for the insurance to final approval. The new system must decrease the amount of content APCO must handle by replacing its method of storing a separate document for each program and level of coverage. The new system should enable specific contracts to be assembled from many stored components, some of which will be unique to that particular document. However, most, if not all, of the components of the documents will be shared with many other contracts. The system will have to collect all the required components according to the rules for that particular program and state requirements.
APCO is wondering how the Web could be used to speed up the whole process and provide a new channel for enrolling and servicing customers and whether Internet technology could help it lower its (and dealers') costs. Kohrman's goal is to have the customers of the dealers leave the dealers' premises not only with the automobile they have just purchased but also with a warranty and/or service contract signed and in hand.
Source: Copeland, Ron. "Wanted: E-Document Strategy", Information Week, March 19, 2001; Hooper, Kristin. "Building a Content-Management System, Soup to Nuts", Information Week, March 19, 2001. Wallace, Bob. "Software Will Let Customers Book That Oil Change Online", Computerworld, February 8, 1999.

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