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. While 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 neither a dealer, a service organization, nor 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, Bank One, Manhein Auto Auctions, Mazda USA, and
Volvo Canada. APCO markets its products under the trade name Easycare.

While APCO had only $8 million in sales in 1989, its fifth year, by the year 2000, its sales had
grown to $165 million, and were expected to grow 9 to 10 percent in 2001. In year 2000 APCO
had about 1,200 dealer-customers in the United States. About two 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 has
experienced a dramatic upsurge in sales, increasing more than 20 times in just 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 many options, this
is extremely complex. Currently APCO minimizes the number of contracts it must support by
creating a large number of generic contracts which, 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 this
specific customer's contract and which do not, depending upon 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 was 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 also resulting in many improper contract
applications. For instance, between half and three-quarters of the applications being received by
APCO under the current system are rejected due to required information that 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 is also time consuming,
error-prone and expensive. Such expensive and time-consuming processes seriously interfere
with APCO's ability to hold on to 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, making it even more difficult 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, "We'd 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
explained, "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 are individuals who purchased their
vehicles from that dealer, and so 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 re-entered manually into the next system. Contracts and paper reports are physically
handed to the APCO underwriters.

While 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 on primarily old 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 [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 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 will 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
lowering its (and dealers') costs. Kohrman's goal is that the customers of the dealers will leave
the dealers' premises not only with the automobile it has just purchased but also with a warranty
and/or service contract signed and in hand.

As a member of Brian Kohrman's staff, you have been asked to draw up APCO's RFP for
Kohrman and for APCO's management. Ultimately it is to be issued to potential software and
hardware companies for their consideration. The RFP will only cover the first phase of the
project, the contract-management phase. Kohrman expects that a number of companies will
submit a proposal, which would result in APCO selecting one or two to carry out the first phase
of the project. However, the RFP must also include a description of all phases of the overall
project so the companies applying for the work will fully understand APCO's business goals.

Questions
1. State the goals of the total project. List and explain the various problems the company is
facing so that the companies submitting proposals will understand the overall project (all
phases) it will have to address. Briefly name and describe in the appropriate order each
phase the company will have to execute to complete the whole project.
2. Do the same thing as requested in question one in more detail for the first phase of the
project, the contract-management phase, which has been the primary topic of this case
study.
3. Develop an overview of the systems you would recommend for APCO, and explain how
each of these systems would address the problems listed in your goals. Include in your
proposal any major noncomputer-based steps that will need to be taken.
4. Address the financing of the project.