The Total Economic Impact⢠of iovation ReputationManagerâ¢
Prepared for iovation
The Total Economic Impact™ of iovation ReputationManager™
Single Company Analysis – Financial Services Project Directors: Jon Erickson and Michelle Salazar
The Total Economic Impact of iovation ReputationManager
TABLE OF CONTENTS Executive Summary ............................................................................................................................... 4 Purpose .............................................................................................................................................. 4 Methodology....................................................................................................................................... 4 Approach ............................................................................................................................................ 4 Key Findings ...................................................................................................................................... 5 Disclosures......................................................................................................................................... 6 iovation ReputationManager: Overview................................................................................................. 7 Analysis .............................................................................................................................................. 7 Interview Highlights............................................................................................................................ 7 TEI Framework .................................................................................................................................. 8 Initial Costs......................................................................................................................................... 9 Ongoing Costs .................................................................................................................................11 Benefits ............................................................................................................................................14 Risk...................................................................................................................................................16 Flexibility...........................................................................................................................................17 TEI Framework: Summary...............................................................................................................18 Study Conclusions................................................................................................................................19 Appendix A: Total Economic Impact Overview ...................................................................................20 Benefits ............................................................................................................................................20 Costs ................................................................................................................................................20 Risk...................................................................................................................................................20 Flexibility...........................................................................................................................................20 Appendix B: Glossary...........................................................................................................................21
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The Total Economic Impact of iovation ReputationManager
© 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.
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The Total Economic Impact of iovation ReputationManager
Executive Summary Online fraud and abuse management service provider iovation, inc. commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by deploying iovation’s ReputationManager. ReputationManager is a realtime fraud management solution and a forensic fraud analysis tool to identify and reduce the impact of online fraud such as chargebacks, stolen credit cards and identity theft, as well as abusive activity such as chat abuse, predatory behavior, and other forms of online harassment. This study illustrates the financial impact of using ReputationManager as part of a financial services organization’s online credit card application process. In conducting in-depth interviews with an existing iovation customer, Forrester found cases where ReputationManager was able to identify and reduce the impact of fraud, specifically when an individual was using a stolen identity to apply for financial credit. This led to a reduction in loss exposure as well as improvement to the overall efficiency of the organization’s fraud detection process.
Purpose The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of ReputationManager on their organizations. 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 ReputationManager.
Methodology iovation selected Forrester for this project because of its industry expertise in fraud detection and analysis 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 ReputationManager: 1. Costs and cost reduction. 2. Benefits to the entire organization. 3. Risk. 4. Flexibility. 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 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:
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The Total Economic Impact of iovation ReputationManager
1. Forrester gathered data from existing Forrester research relative to ReputationManager and the fraud detection market in general. 2. Forrester interviewed iovation marketing and sales personnel to fully understand the potential (or intended) value proposition of iovation solutions. 3. Forrester conducted a series of in-depth interviews with an organization had been using ReputationManager for more than a year. 4. Forrester constructed a financial model representative of the interviews. This model can be found in the TEI Framework section below.
Key Findings Forrester’s study yielded three key findings: •
ROI. Based on the interviews with an existing iovation customer, Forrester constructed a TEI framework for a representative organization, and the associated ROI analysis illustrating the financial impact areas. As seen in Table 1, the ROI for the organization is 321% with a breakeven point (payback period) of 6 months after deployment.
•
Benefits. Benefits cited by the interviewed organization included a reduction in the exposure of potential losses due to fraudulent applications as well as an improvement in the efficiency of the fraud detection process.
•
Costs. Costs included both initial and ongoing costs associated with ReputationManager. Initial costs included the cost of updating customer sites, the cost of vendor selection and technology evaluation, project management and integration costs, and internal legal costs. Ongoing costs included project management and tracking, internal telecom costs, ongoing fraud monitoring and support as well as iovation services costs
Table 1 illustrates the risk-adjusted cash flow for the representative 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: Composite Company ROI, Risk-Adjusted Ref.
Total benefits
Initial
Year 1
Year 2
Total
NPV
J1
Total costs
$135,880
$840,000
$601,000
$1,576,880
$1,396,211
L1
Total benefits
$0
$3,235,746
$3,559,320
$6,795,066
$5,883,174
P1
Total
($135,880)
$2,395,746
$2,958,320
$5,218,186
$4,486,964
P2
Return on investment
321%
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The Total Economic Impact of iovation ReputationManager
P3
Payback period
6 months
Source: Forrester Research, Inc.
Key factors that ultimately determined the final ROI included the number of device reputation inquiries processed, the level of fraudulent applications, the number of resources devoted to detecting and investigating possible fraud cases, and the growth of application demand.
Disclosures The reader should be aware of the following: •
The study is commissioned by iovation and delivered by the Forrester Consulting group.
•
iovation 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 names for the interviews were provided by iovation.
•
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 iovation/ReputationManager.
•
This study is not meant to be used as a competitive product analysis.
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The Total Economic Impact of iovation ReputationManager
iovation ReputationManager: Overview According to iovation. iovation’s patented device-based technology and reputation management platform identifies physical Internet-enabled devices connecting to a network and shares the reputations of tens of millions of devices across multiple networks to protect online businesses from all forms of online fraud and abuse. iovation’s real-time ReputationManagerTM device-based fraud management service exposes hidden relationships between fraudulent devices and their accounts to help online businesses reduce fraud, improve operational efficiencies, and increase revenue through more precise risk management. By creating a robust web of associations between suspicious devices and accounts across the Internet, iovation’s customers are better equipped to stop fraudsters and online abusers from hiding behind multiple identities to perpetrate fraud and abuse. The service does not impact the user experience, require software downloads, or collect any personally identifiable information (PII). ReputationManagerTM is built on iovation’s shared Device Reputation AuthorityTM fraud management platform. This device reputation repository manages the reputations of more than 40 million devices worldwide and anticipates handling up to 1 billion reputation inquiries in 2008 from customers representing a number of verticals including financial services, online retail, Internet gaming and online social networking. Today, iovation performs more than 2 million fraud checks per day, allowing its customers to control online fraud and abuse while benefiting from sharing device reputation intelligence..
Analysis As stated in the Executive Summary, Forrester took a multistep approach to evaluate the impact that implementing ReputationManager can have on an organization: •
Interviews with iovation marketing and sales personnel.
•
In-depth interviews of an organization currently using ReputationManager.
•
Construction of a common financial framework for the implementation of ReputationManager.
•
Construction of a composite organization based on characteristics of the interviewed organizations.
Interview Highlights A series of discussions involving a representative from a financial services organization based in the United States were conducted for this study. The in-depth interviews uncovered several key points that drove the initial analysis: •
The interviewed organization is in the financial services industry and is the issuer of private label credit cards and bank cards. Roughly six years ago, the organization had developed a new Internet sales channel to meet growing consumer demand for applying over the Internet. The organization initially set up Web pages for 32 of its retail clients, providing private label credit cards directly to consumers.
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The Total Economic Impact of iovation ReputationManager
•
The organization noticed that it was receiving much higher fraud rates over the Internet compared to other customer channels and developed fraud strategies to identify and reduce the impact of fraudulent applications. These included such things as out-of-wallet question and answering tools used to identify the level of intrusion during the application process. In conjunction, the organization was implementing additional fraud management tools and techniques to further identify and reduce the incidence of fraud.
•
However, the organization was looking for a way of creating a high level of effectiveness while at the same time reducing the intrusive nature of fraud identification during the application process. For the organization, the iovation solution provided them with a way of reducing the number of false positives while at the same time improving the ability to identify potentially fraudulent applications.
•
It was noted during interviews with the customer organization that employees were “excited” to find that upon viewing one report during the iovation pilot phase, they saw previously undetected fraud applications coming from one device. Pre-iovation, their fraud systems had not detected these applications as interconnected or fraudulent.
•
The customer organization also noted that a “very key feature” of iovation was very low false positives. iovation’s low false positive rate enabled the organization to integrate iovation earlier in its customer acquisition process, providing a more automated fraud detection solution.
TEI Framework Introduction From the information provided in the in-depth interviews, Forrester has constructed a TEI framework for those organizations considering implementation of ReputationManager. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that impact the investment decision.
Composite Organization Based on the interviews with an existing customer provided by iovation, Forrester constructed a TEI framework, a composite company, and an associated ROI analysis that illustrates the areas impacted financially. The composite organization that Forrester synthesized from these results represents a US-based financial services organization.
Framework Assumptions Table 2 lists the discount rate used in the present value (PV) and net present value (NPV) calculations and time horizon used for the financial modeling. Table 2: General Assumptions Ref.
General assumptions
Value
Discount rate
10%
Length of analysis
Two years
Source: Forrester Research, Inc.
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The Total Economic Impact of iovation ReputationManager
Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their finance department to determine the most appropriate discount rate to use within their own organizations.
Initial Costs Client Site Development Initial costs included cost of performing minor updates to each of their client Web sites. This included the cost of placing development code on the Web site as well as the cost to review and test to make sure the code was working accurately. The organization noted it initially partnered with 32 retail clients in the issuing of private label credit cards. Since it had migrated to iovation, the number of clients had grown to 37. To construct the cost of development, Forrester assumes it took the organization 24 hours to develop, install, and test for the first client and 16 hours per subsequent client. Assuming a fully burdened development cost of $130 per hour, the total cost of initial development equates to $78,000 ((24*130)+(16*130*36)). Table 3 illustrates the equation used. Table 3: Client Site Development Cost Ref.
Metric
Calculation
Value
B1
Number of clients
37
B2
Time to set up initial client (hours)
24
B3
Time to set up subsequent clients (hours)
16
B4
Cost per hour
$130
B5
Total cost
(B2*B4)+(B3*B4*(B1-1))
$78,000
Source: Forrester Research, Inc.
Vendor Selection and Testing Another initial cost was the investment in vendor selection and testing of the iovation solution. The organization noted that it devoted 0.5 FTE for a period of four months to examining and testing the different marketplace options for online fraud detection. Assuming the fully burdened cost of the resource is $80 per hour and there are roughly 168 hours per month, the total cost allocated for vendor selection and management equates to $26,880 (4*168*80*0.5). Table 4 illustrates the equation used. Table 4: Vendor Selection And Testing Cost Ref. C1
Metric
Calculation
Length of time (months)
Value 4
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The Total Economic Impact of iovation ReputationManager
C2
Hours per month
168
C3
Cost per hour
$80
C4
FTE allocation
0.5
C5
Total cost
C1*C2*C3*C4
$26,880
Source: Forrester Research, Inc.
Upfront Project Management Project management costs were another initial cost incurred by the organization. These costs included the cost to manage and oversee the integration with existing systems. While it acknowledged that the process of integrating the iovation solution was relatively easy, the organization needed to ensure the solution integrated seamlessly into its online systems. Over the four months of integration, the organization assumed it devoted roughly $4,000 per month in project management costs equating to a total of $16,000 (4*4000). Table 5 illustrates the equation used. Table 5: Upfront Project Management Cost Ref.
Metric
Calculation
Value
D1
Number of months
4
D2
Cost per month
$4,000
D3
Total cost
D2*D1
$16,000
Source: Forrester Research, Inc.
Internal Legal Fees The final initial cost mentioned by the interviewed organization was the cost of internal legal fees associated with the implementation. These fees included reviewing the overall contract between the organization and iovation as well as completing a non-disclosure agreement between the two organizations. The organization noted that it devoted roughly 125 hours to review and approve the legal aspects of the contract. Assuming it costs the organization $120 per hour, the total cost of internal legal fees equates to $15,000 (125*120). Table 6 illustrates the equation used. Table 6: Internal Legal Fees Cost Ref.
Metric
Calculation
Value
E1
Number of hours
125
E2
Cost per hour
$120
E3
Total cost
E2*E1
Source: Forrester Research, Inc. - 10 -
$15,000
The Total Economic Impact of iovation ReputationManager
Ongoing Costs In addition to initial costs mentioned by the organization, there were several recurring costs included as part of the investment. These included the ongoing cost of project management and tracking of results, internal telecom costs, fraud monitoring and support for investing in full automation of the iovation solution, as well as iovation licensing costs.
Project Management And Tracking Project management and tracking is an ongoing cost considered as part of the overall investment. This includes the cost of managing the relationship with iovation and developing a long-term strategy of the use of ReputationManager as the number of clients increase. As part of this effort, the organization noted it devoted a senior employee for roughly 5 hours per week as well as a data analyst for 10 hours per week. Assuming the fully burdened cost of the strategy professional is $80 per hour and the cost of the data analyst is $40 per hour, the total annual cost of project management and tracking equates to $40,000 per year. Table 7 illustrates the equation used. Table 7: Project Management And Tracking Cost Ref.
Metric
Calculation
Value
F1
Strategy FTE (hours per week)
5
F2
Data analyst FTE (hours per week)
10
F3
Strategy professional (cost per hour)
$80
F4
Data analyst (cost per hour)
$40
F5
Weeks per year
50
F6
Total cost
(F1*F5*F3)+(F2*F4*F5)
$40,000
Source: Forrester Research, Inc.
Internal Telecom Costs The organization noted the investment in iovation also impacted its existing telecom infrastructure. While ReputationManager is based on a software as a service (SaaS) model, and does not require customers to install a dedicated communications line, the organization determined that it would prefer a dedicated communication line to ensure the solution had adequate and secure connections to deliver high levels of availability and reliability. The organization noted that it allocated roughly $10,000 per year in telecom costs to the use of the iovation solution. Table 8: Telecom Cost Ref.
Metric
G1
Internal telecom costs
G2
Total cost
Calculation
Value $10,000
G1
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$10,000
The Total Economic Impact of iovation ReputationManager
Source: Forrester Research, Inc.
Ongoing Support and Analysis Ongoing day-to-day analysis of possible fraud cases identified by the iovation solution is another cost incurred by the organization. This includes the data analysts’ time reviewing bad devices, assigning evidence in the iovation database, closing accounts that are potentially fraudulent, and producing reports and analytics for portfolio risk managers. The organization noted that during the first year of deployment, it was using iovation in a more manual process, manually identifying then shutting down approved applications from fraudulent devices. However, after the initial trial period of the service, the organization increased the automation of fraud detection, and as a result it reduced the ongoing resources required for ongoing analysis. The organization noted it will automate part of the detection process in the second year of analysis. Currently, submitting evidence against an account or device is automated, but the blocking of accounts is handled manually. In the future, the iovation device will be used earlier in the acquisition systems process — before an application is approved. To calculate the ongoing cost of support and analysis, we assume the organization will incur the cost of 2 FTE for data analysis in the first year, which will then be reduced to 1 FTE as the organization increases the level of automation. The cost to increase the level of automation was assumed to be roughly $250,000, which included the integration and development cost of fully integrating the iovation reporting into the organization’s back end systems. In addition, we assume that an additional fraud manager would be responsible for ongoing technical support of the product equating to roughly 5 hours per week. Table 9 illustrates the equations used. Table 9: Ongoing Support And Analysis Cost Ref.
Metric
Calculation
Value
H1
Total automation cost
$250,000
H2
No. of fraud managers: Year 1
2
H3
No. of fraud managers: Years 2+
1
H4
Yearly salary
$35,000
H5
Fraud manager: hours per week
5
H6
Fraud manager: Cost per hour
40
H7
Weeks per year
50
H8
Total cost: fraud monitoring and support
H9
Total cost
H8+H1
Source: Forrester Research, Inc.
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Year 1
Year 2 $250,000
$80,000
$45,000
$80,000
$295,000
The Total Economic Impact of iovation ReputationManager
iovation Subscription The final recurring costs for the organization were the actual costs billed directly to iovation for the use of the product. The organization noted that it is charged roughly $0.06 for every device reputation inquiry. Based on average volume, the average monthly cost equates to $35,000 per month or $420,000 per year. The organization also assumes a 10% increase in the second year, leading to a yearly cost in Year 2 of $462,000. Table 10 illustrates the equations used. Table 10: Subscription Cost Ref.
Metric
Calculation
Value
I1
Estimated monthly cost
$35,000
I2
Yearly cost increase
10%
I3
Number of months
12
I4
Total annual cost – Year 1
I1*I3
$420,000
I5
Total annual cost – Year 2
I4*(1+I2)
$462,000
Source: Forrester Research, Inc.
Total Costs Table 11 illustrates the upfront and ongoing costs associated with the investment in ReputationManager. Table 11: Total Cost — Non-Risk-Adjusted Ref.
Metric
Initial cost
Year 1
Year 2
Total
PV
B5
Cost of updating customer sites
$78,000
$0
$0
$78,000
$78,000
C5
Vendor selection and technology evaluation
$26,880
$0
$0
$26,880
$26,880
D3
Project management and integration
$16,000
$0
$0
$16,000
$16,000
E3
Internal legal costs
$15,000
$0
$0
$15,000
$15,000
F6
Project management and tracking
$0
$40,000
$40,000
$80,000
$69,421
G2
Internal telecom costs
$0
$10,000
$10,000
$20,000
$17,355
H9
Fraud monitoring and support
$0
$80,000
$295,000
$375,000
$316,529
I4
iovation licensing costs
$0
$420,000
$462,000
$882,000
$763,636
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The Total Economic Impact of iovation ReputationManager
J1
Total cost
$135,880
$550,000
$807,000
$1,492,880
$1,302,822
Source: Forrester Research, Inc.
Benefits The organization noted two key benefits as a result of its investment in ReputationManager solution through reduced fraud losses and lowered operational costs. First, iovation allowed the organization to identify potential threats early in the application process by identifying common patterns in fraudulent application, thus reducing the potential exposure and loss. Second, by reducing the number of fraudulent applications early in the application process, the organization was able to reduce the cost of identifying and investigating fraudulent accounts.
Reducing Fraud Exposure The first benefit cited by the organization was the ability to identify and detect fraudulent applications early in the approval process while at the same time ensuring non-fraudulent applications would not be blocked. ReputationManager allowed the organization to identify patterns within fraudulent applications and to deny the application prior to the approval process. To calculate this benefit, the organization estimates that over the course of a year, ReputationManager prints 3,811,850 applications, growing at about 10% per year. Of those applications printed, ReputationManager identified 43,825 of applications as fraudulent. Of those applications that were identified as fraudulent, the organization estimated that roughly 20%, or 8,765, of those applications would have been approved without the investment in iovation. Assuming the average credit exposure from a fraudulent application is $400, we can calculate the total yearly savings from reduced fraud exposure. Table 12 illustrates the calculation used. Table 12: Reducing Fraud Exposure Ref.
Metric
Calculation
Value
K1
Total number of applications processed
3,811,850
K2
Annual growth
0.1
K3
Number of applications identified from bad devices
43,825
K4
Percent that would have been approved without iovation
20%
K5
Average exposure from fraudulent application
$400
K6
Total
K3*K4*K5
Source: Forrester Research, Inc.
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Year 1
$3,506,000
Year 2
$3,856,600
The Total Economic Impact of iovation ReputationManager
Improved Process Efficiency In addition to the top line savings resulting from reduced fraud exposure, the organization also noted the efficiency savings of not having to identify, investigate, and ultimately close fraudulent accounts. The organization noted that if those applications identified by ReputationManager would become confirmed fraud, they would have had to investigate them and write them off. The resolution process through the Identity Threat Victim Assistance Center involves contacting the victim, obtaining an affidavit of fraud, investigating the case, closing all the accounts, and issuing new cards. This has a significant time impact on the organization. To calculate this benefit, the organization conservatively estimates that it takes one hour to identify, investigate, and ultimately close fraudulent accounts. Assuming the blended hourly cost of $35 and the total number of identified fraudulent applications (8,765), we can calculate the total benefit from improved process efficiency. Table 13 illustrates the calculation used. Table 13: Improved Process Efficiency Ref.
Metric
Calculation
Value
L1
Number of applications identified by iovation
8,765
L2
Annual growth
10%
L3
Estimated time requirement to investigate/resolve (minutes)
60
L4
Hourly salary
$35
L5
Total
L1*L2+1*L3*L4/*60
Year 1
Year 2
$306,775
$337,453
Source: Forrester Research, Inc.
Total Benefits Table 14 illustrates the total two-year benefits as a result of the migration to iovation ReputationManager. The total present value benefits equate to roughly $6.9 million. Table 14: Total Benefits — Non-Risk-Adjusted Ref.
Metric
Year 1
Year 2
Total
PV
K6
Reducing potential fraud exposure
$3,506,000
$3,856,600
$7,362,600
$6,374,545
L5
Improved process efficiency
$306,775
$337,453
$644,228
$557,773
M1
Total
$3,812,775
$4,194,053
$8,006,828
$6,932,318
Source: Forrester Research, Inc.
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The Total Economic Impact of iovation ReputationManager
Risk Forrester defines two types of investment risk associated with this analysis: implementation and impact risk. Implementation risk is the risk that a proposed technology investment may deviate from the original resource requirements needed to implement and integrate the investment, resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the technology investment, resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. Quantitatively capturing investment risk by directly adjusting the financial estimates results in more meaningful and accurate estimates and a more accurate projection of the return on an investment. The following implementation risk is identified as part of this analysis: •
Acquisition costs could be higher than originally anticipated for the ReputationManager solution.
The following impact risks are identified as part of the analysis: •
The amount of exposure savings may be lower than originally anticipated due to a reduction in credit applications as well as smaller potential credit applications.
•
The process efficiency savings may be lower than originally anticipated due to a reduction in credit applications.
•
The level of actual benefits received may be lower than originally anticipated due to inadequate testing and planning for the implementation of the solution.
Steps For Measuring Investment Risk Risk factors are used in TEI to widen the possible outcomes of the costs and benefits (and resulting savings) associated with a project. 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 estimate. The expected value — the mean of the distribution — is used as the risk-adjusted cost or benefit number. The risk-adjusted costs and benefits are then summed to yield a complete risk-adjusted summary and ROI. In this study, Forrester discovered that engaging with iovation was a relatively low-risk endeavor, as expressed by the interviewed organizations, and applied a risk factor of 110% to selected costs and 76% to the benefits to arrive at a risk-adjusted number. Table 15 provides a risk-adjusted breakdown of the costs received. Table 16 provides a risk adjusted breakdown of the benefits received. Table 15: Total Costs — Risk Adjusted
Costs
Step 1: Original estimate
High
Low
Risk adjustment % value
Cost of updating customer sites
$78,000
$78,000
$78,000
100%
$78,000
Vendor selection and technology evaluation
$26,880
$26,880
$26,880
100%
$26,880
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Step 2:
The Total Economic Impact of iovation ReputationManager
Project management and integration
$16,000
$16,000
$16,000
100%
$16,000
Internal legal costs
$15,000
$15,000
$15,000
100%
$15,000
Project management and tracking
$80,000
$80,000
$80,000
100%
$80,000
Internal telecom costs
$20,000
$20,000
$20,000
100%
$20,000
Fraud monitoring and support
$375,000
$375,000
$375,000
100%
$375,000
iovation licensing costs
$882,000
$1,134,000
$882,000
110%
$966,000
Source: Forrester Research, Inc.
Table 16: Total Benefits — Risk-Adjusted
Benefit
Step 1: Original estimate
Step 2: High
Low
Risk adjustment % value
Reducing potential fraud exposure
$7,362,600
$7,362,600
$4,141,463
84%
$6,186,629
Improved process efficiency
$557,773
$557,773
$464,811
94%
$526,785
Source: Forrester Research, Inc.
Flexibility Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business benefit for some future additional investment. Flexibility would also be quantified when evaluated as part of a specific project (described in more detail in Appendix A). The interviewed organization noted that the use of iovation can potentially enable future benefits in other areas of the organization to identify fraudulent activity. These included: •
Identifying good customers and using the information from the iovation device print to market to these good customers and offer them more services. The organization noted that this ability to identify good customers as a byproduct of the iovation device print can also possibly be used to replace out-of-wallet questions with user-transparent verification through iovation.
•
Using iovation within other areas of the organization such as with monitoring specific eservices as well as using the solution at the individual transaction level to identify and monitor potentially at-risk transactions.
•
Partnering with existing clients that are also using the iovation solution in sharing device reputation information.
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The Total Economic Impact of iovation ReputationManager
While Forrester believes that organizations purchasing iovation can take advantage of these flexibility options, quantification (using the financial industry standard Black-Scholes or the binomial option pricing models) of the additional value associated with these options for this customer would require scenario development and forward-looking analysis that is not available at this time. The value of flexibility is unique to each organization, and the willingness to measure its value varies from company to company (see Appendix A for additional information regarding the flexibility calculation).
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 investment, net present value, and payback period. Table 17 shows the consolidation of the numbers for the composite organization. Table 17: Return On Investment — Risk-Adjusted Ref.
Metric
Initial
Year 1
Year 2
Total
NPV
H1
Total costs
$135,880
$840,000
$601,000
$1,576,880
$1,396,211
L1
Total benefits
$0
$3,235,746
$3,559,320
$6,795,066
$5,883,174
P1
Total
($135,880)
$2,395,746
$2,958,320
$5,218,186
$4,486,964
P2
Return on investment
321%
P3
Payback period
6 months
Source: Forrester Research, Inc.
It is important to note that values used throughout the TEI Framework are based on in-depth interviews with an existing iovation customer and the resulting representative organization built by Forrester. 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 ReputationManager.
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The Total Economic Impact of iovation ReputationManager
Study Conclusions Forrester’s in-depth interviews with an iovation customer yielded several important observations: •
Based on information collected in interviews with a current ReputationManager customer, Forrester found that organizations can realize benefits in the form of reduction in the exposure of potential losses due to fraudulent applications as well as to an improvement in the efficiency of the fraud detection process.
•
Several factors drove the impact on ROI. These factors included the number of device prints processed, the level of fraudulent applications, the number of resources devoted to detecting and investigating possible fraud cases, and the growth of application demand.
The financial analysis provided in this study illustrates the potential way an organization can evaluate the value proposition of iovation ReputationManager. Based on information collected in the in-depth customer interviews, Forrester calculated a two-year risk-adjusted ROI of 321% for the representative organization with a payback period of less than 12 months. All final estimates are risk-adjusted to incorporate potential uncertainty in the calculation of costs and benefits. Based on these findings, companies looking to implement ReputationManager can see gains around the benefits of fraud identification and discovery. Using the TEI framework, many companies may find the potential for a compelling business case to make such an investment.
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The Total Economic Impact of iovation ReputationManager
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.
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The Total Economic Impact of iovation ReputationManager
Appendix B: Glossary Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, companies often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their organization to determine the most appropriate discount rate to use in their own environment. Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs. Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows. Payback period: The breakeven point for an investment; the point in time at which net benefits (benefits minus costs) equal initial investment or cost. Return on investment (ROI): A measure of a project’s expected return in percentage terms. ROI is calculated by dividing net benefits (benefits minus costs) by costs.
iovation/Industry Terminology Device: Any Internet enabled machine such as Windows PCs, Macintosh Computers, Linux Machines, Virtual Machines or Mobile Devices such as a BlackBerry or iPhone. Device printing: The process of assigning a unique identifier to a device to recognize or rerecognize a device in case it returns. iovation has a spectrum of device printing capabilities that include downloadable software and a wide range of transparent identifiers that do not impact the user’s experience and run purely on the Web browser. Application fraud: A scam in which a criminal applies for a card with another person’s personal financial information. By using stolen or false documents, including utility bills, banks statements, and passports or driving licenses, the thief can usually pass the credit card application. This scam is a particularly damaging form of identity theft. There are two types of application fraud, true and synthetic. True application fraud uses real data from identity fraud. Synthetic application fraud uses fabricated information. Device reputation inquiry: A subscriber queries the ReputationManagerTM to determine whether a device-account pair should be “Allowed” or “Denied” from conducting a transaction with that subscriber. Reputation sharing: iovation’s subscribers share the unique device reputations that are managed in its Device Reputation AuthorityTM (DRA) database. Fraud managers can use this device intelligence to determine what actions they will take against a particular device based on evidence placed by its peers. Sharing of device reputation is optional, but if a customer wants to benefit from the data of other customers, they are required to share.
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The Total Economic Impact of iovation ReputationManager
A Note On Cash Flow Tables The following is a note on the cash flow tables used in this study (see the example table below). The initial investment column contains costs incurred at “time 0” or at the beginning of Year 1. Those costs are not discounted. All other cash flows in Years 1 through 2 are discounted using the discount rate shown in Table 2 at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year. Example Table Ref.
Category
Calculation
Initial cost
Source: Forrester Research, Inc.
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Year 1
Year 2
Total
The Total Economic Impact of iovation ReputationManager
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The Total Economic Impact™ of iovation ReputationManager™
Single Company Analysis – Financial Services Project Directors: Jon Erickson and Michelle Salazar
The Total Economic Impact of iovation ReputationManager
TABLE OF CONTENTS Executive Summary ............................................................................................................................... 4 Purpose .............................................................................................................................................. 4 Methodology....................................................................................................................................... 4 Approach ............................................................................................................................................ 4 Key Findings ...................................................................................................................................... 5 Disclosures......................................................................................................................................... 6 iovation ReputationManager: Overview................................................................................................. 7 Analysis .............................................................................................................................................. 7 Interview Highlights............................................................................................................................ 7 TEI Framework .................................................................................................................................. 8 Initial Costs......................................................................................................................................... 9 Ongoing Costs .................................................................................................................................11 Benefits ............................................................................................................................................14 Risk...................................................................................................................................................16 Flexibility...........................................................................................................................................17 TEI Framework: Summary...............................................................................................................18 Study Conclusions................................................................................................................................19 Appendix A: Total Economic Impact Overview ...................................................................................20 Benefits ............................................................................................................................................20 Costs ................................................................................................................................................20 Risk...................................................................................................................................................20 Flexibility...........................................................................................................................................20 Appendix B: Glossary...........................................................................................................................21
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The Total Economic Impact of iovation ReputationManager
© 2008, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.
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The Total Economic Impact of iovation ReputationManager
Executive Summary Online fraud and abuse management service provider iovation, inc. commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by deploying iovation’s ReputationManager. ReputationManager is a realtime fraud management solution and a forensic fraud analysis tool to identify and reduce the impact of online fraud such as chargebacks, stolen credit cards and identity theft, as well as abusive activity such as chat abuse, predatory behavior, and other forms of online harassment. This study illustrates the financial impact of using ReputationManager as part of a financial services organization’s online credit card application process. In conducting in-depth interviews with an existing iovation customer, Forrester found cases where ReputationManager was able to identify and reduce the impact of fraud, specifically when an individual was using a stolen identity to apply for financial credit. This led to a reduction in loss exposure as well as improvement to the overall efficiency of the organization’s fraud detection process.
Purpose The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of ReputationManager on their organizations. 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 ReputationManager.
Methodology iovation selected Forrester for this project because of its industry expertise in fraud detection and analysis 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 ReputationManager: 1. Costs and cost reduction. 2. Benefits to the entire organization. 3. Risk. 4. Flexibility. 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 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:
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The Total Economic Impact of iovation ReputationManager
1. Forrester gathered data from existing Forrester research relative to ReputationManager and the fraud detection market in general. 2. Forrester interviewed iovation marketing and sales personnel to fully understand the potential (or intended) value proposition of iovation solutions. 3. Forrester conducted a series of in-depth interviews with an organization had been using ReputationManager for more than a year. 4. Forrester constructed a financial model representative of the interviews. This model can be found in the TEI Framework section below.
Key Findings Forrester’s study yielded three key findings: •
ROI. Based on the interviews with an existing iovation customer, Forrester constructed a TEI framework for a representative organization, and the associated ROI analysis illustrating the financial impact areas. As seen in Table 1, the ROI for the organization is 321% with a breakeven point (payback period) of 6 months after deployment.
•
Benefits. Benefits cited by the interviewed organization included a reduction in the exposure of potential losses due to fraudulent applications as well as an improvement in the efficiency of the fraud detection process.
•
Costs. Costs included both initial and ongoing costs associated with ReputationManager. Initial costs included the cost of updating customer sites, the cost of vendor selection and technology evaluation, project management and integration costs, and internal legal costs. Ongoing costs included project management and tracking, internal telecom costs, ongoing fraud monitoring and support as well as iovation services costs
Table 1 illustrates the risk-adjusted cash flow for the representative 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: Composite Company ROI, Risk-Adjusted Ref.
Total benefits
Initial
Year 1
Year 2
Total
NPV
J1
Total costs
$135,880
$840,000
$601,000
$1,576,880
$1,396,211
L1
Total benefits
$0
$3,235,746
$3,559,320
$6,795,066
$5,883,174
P1
Total
($135,880)
$2,395,746
$2,958,320
$5,218,186
$4,486,964
P2
Return on investment
321%
-5-
The Total Economic Impact of iovation ReputationManager
P3
Payback period
6 months
Source: Forrester Research, Inc.
Key factors that ultimately determined the final ROI included the number of device reputation inquiries processed, the level of fraudulent applications, the number of resources devoted to detecting and investigating possible fraud cases, and the growth of application demand.
Disclosures The reader should be aware of the following: •
The study is commissioned by iovation and delivered by the Forrester Consulting group.
•
iovation 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 names for the interviews were provided by iovation.
•
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 iovation/ReputationManager.
•
This study is not meant to be used as a competitive product analysis.
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The Total Economic Impact of iovation ReputationManager
iovation ReputationManager: Overview According to iovation. iovation’s patented device-based technology and reputation management platform identifies physical Internet-enabled devices connecting to a network and shares the reputations of tens of millions of devices across multiple networks to protect online businesses from all forms of online fraud and abuse. iovation’s real-time ReputationManagerTM device-based fraud management service exposes hidden relationships between fraudulent devices and their accounts to help online businesses reduce fraud, improve operational efficiencies, and increase revenue through more precise risk management. By creating a robust web of associations between suspicious devices and accounts across the Internet, iovation’s customers are better equipped to stop fraudsters and online abusers from hiding behind multiple identities to perpetrate fraud and abuse. The service does not impact the user experience, require software downloads, or collect any personally identifiable information (PII). ReputationManagerTM is built on iovation’s shared Device Reputation AuthorityTM fraud management platform. This device reputation repository manages the reputations of more than 40 million devices worldwide and anticipates handling up to 1 billion reputation inquiries in 2008 from customers representing a number of verticals including financial services, online retail, Internet gaming and online social networking. Today, iovation performs more than 2 million fraud checks per day, allowing its customers to control online fraud and abuse while benefiting from sharing device reputation intelligence..
Analysis As stated in the Executive Summary, Forrester took a multistep approach to evaluate the impact that implementing ReputationManager can have on an organization: •
Interviews with iovation marketing and sales personnel.
•
In-depth interviews of an organization currently using ReputationManager.
•
Construction of a common financial framework for the implementation of ReputationManager.
•
Construction of a composite organization based on characteristics of the interviewed organizations.
Interview Highlights A series of discussions involving a representative from a financial services organization based in the United States were conducted for this study. The in-depth interviews uncovered several key points that drove the initial analysis: •
The interviewed organization is in the financial services industry and is the issuer of private label credit cards and bank cards. Roughly six years ago, the organization had developed a new Internet sales channel to meet growing consumer demand for applying over the Internet. The organization initially set up Web pages for 32 of its retail clients, providing private label credit cards directly to consumers.
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The Total Economic Impact of iovation ReputationManager
•
The organization noticed that it was receiving much higher fraud rates over the Internet compared to other customer channels and developed fraud strategies to identify and reduce the impact of fraudulent applications. These included such things as out-of-wallet question and answering tools used to identify the level of intrusion during the application process. In conjunction, the organization was implementing additional fraud management tools and techniques to further identify and reduce the incidence of fraud.
•
However, the organization was looking for a way of creating a high level of effectiveness while at the same time reducing the intrusive nature of fraud identification during the application process. For the organization, the iovation solution provided them with a way of reducing the number of false positives while at the same time improving the ability to identify potentially fraudulent applications.
•
It was noted during interviews with the customer organization that employees were “excited” to find that upon viewing one report during the iovation pilot phase, they saw previously undetected fraud applications coming from one device. Pre-iovation, their fraud systems had not detected these applications as interconnected or fraudulent.
•
The customer organization also noted that a “very key feature” of iovation was very low false positives. iovation’s low false positive rate enabled the organization to integrate iovation earlier in its customer acquisition process, providing a more automated fraud detection solution.
TEI Framework Introduction From the information provided in the in-depth interviews, Forrester has constructed a TEI framework for those organizations considering implementation of ReputationManager. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that impact the investment decision.
Composite Organization Based on the interviews with an existing customer provided by iovation, Forrester constructed a TEI framework, a composite company, and an associated ROI analysis that illustrates the areas impacted financially. The composite organization that Forrester synthesized from these results represents a US-based financial services organization.
Framework Assumptions Table 2 lists the discount rate used in the present value (PV) and net present value (NPV) calculations and time horizon used for the financial modeling. Table 2: General Assumptions Ref.
General assumptions
Value
Discount rate
10%
Length of analysis
Two years
Source: Forrester Research, Inc.
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The Total Economic Impact of iovation ReputationManager
Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their finance department to determine the most appropriate discount rate to use within their own organizations.
Initial Costs Client Site Development Initial costs included cost of performing minor updates to each of their client Web sites. This included the cost of placing development code on the Web site as well as the cost to review and test to make sure the code was working accurately. The organization noted it initially partnered with 32 retail clients in the issuing of private label credit cards. Since it had migrated to iovation, the number of clients had grown to 37. To construct the cost of development, Forrester assumes it took the organization 24 hours to develop, install, and test for the first client and 16 hours per subsequent client. Assuming a fully burdened development cost of $130 per hour, the total cost of initial development equates to $78,000 ((24*130)+(16*130*36)). Table 3 illustrates the equation used. Table 3: Client Site Development Cost Ref.
Metric
Calculation
Value
B1
Number of clients
37
B2
Time to set up initial client (hours)
24
B3
Time to set up subsequent clients (hours)
16
B4
Cost per hour
$130
B5
Total cost
(B2*B4)+(B3*B4*(B1-1))
$78,000
Source: Forrester Research, Inc.
Vendor Selection and Testing Another initial cost was the investment in vendor selection and testing of the iovation solution. The organization noted that it devoted 0.5 FTE for a period of four months to examining and testing the different marketplace options for online fraud detection. Assuming the fully burdened cost of the resource is $80 per hour and there are roughly 168 hours per month, the total cost allocated for vendor selection and management equates to $26,880 (4*168*80*0.5). Table 4 illustrates the equation used. Table 4: Vendor Selection And Testing Cost Ref. C1
Metric
Calculation
Length of time (months)
Value 4
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The Total Economic Impact of iovation ReputationManager
C2
Hours per month
168
C3
Cost per hour
$80
C4
FTE allocation
0.5
C5
Total cost
C1*C2*C3*C4
$26,880
Source: Forrester Research, Inc.
Upfront Project Management Project management costs were another initial cost incurred by the organization. These costs included the cost to manage and oversee the integration with existing systems. While it acknowledged that the process of integrating the iovation solution was relatively easy, the organization needed to ensure the solution integrated seamlessly into its online systems. Over the four months of integration, the organization assumed it devoted roughly $4,000 per month in project management costs equating to a total of $16,000 (4*4000). Table 5 illustrates the equation used. Table 5: Upfront Project Management Cost Ref.
Metric
Calculation
Value
D1
Number of months
4
D2
Cost per month
$4,000
D3
Total cost
D2*D1
$16,000
Source: Forrester Research, Inc.
Internal Legal Fees The final initial cost mentioned by the interviewed organization was the cost of internal legal fees associated with the implementation. These fees included reviewing the overall contract between the organization and iovation as well as completing a non-disclosure agreement between the two organizations. The organization noted that it devoted roughly 125 hours to review and approve the legal aspects of the contract. Assuming it costs the organization $120 per hour, the total cost of internal legal fees equates to $15,000 (125*120). Table 6 illustrates the equation used. Table 6: Internal Legal Fees Cost Ref.
Metric
Calculation
Value
E1
Number of hours
125
E2
Cost per hour
$120
E3
Total cost
E2*E1
Source: Forrester Research, Inc. - 10 -
$15,000
The Total Economic Impact of iovation ReputationManager
Ongoing Costs In addition to initial costs mentioned by the organization, there were several recurring costs included as part of the investment. These included the ongoing cost of project management and tracking of results, internal telecom costs, fraud monitoring and support for investing in full automation of the iovation solution, as well as iovation licensing costs.
Project Management And Tracking Project management and tracking is an ongoing cost considered as part of the overall investment. This includes the cost of managing the relationship with iovation and developing a long-term strategy of the use of ReputationManager as the number of clients increase. As part of this effort, the organization noted it devoted a senior employee for roughly 5 hours per week as well as a data analyst for 10 hours per week. Assuming the fully burdened cost of the strategy professional is $80 per hour and the cost of the data analyst is $40 per hour, the total annual cost of project management and tracking equates to $40,000 per year. Table 7 illustrates the equation used. Table 7: Project Management And Tracking Cost Ref.
Metric
Calculation
Value
F1
Strategy FTE (hours per week)
5
F2
Data analyst FTE (hours per week)
10
F3
Strategy professional (cost per hour)
$80
F4
Data analyst (cost per hour)
$40
F5
Weeks per year
50
F6
Total cost
(F1*F5*F3)+(F2*F4*F5)
$40,000
Source: Forrester Research, Inc.
Internal Telecom Costs The organization noted the investment in iovation also impacted its existing telecom infrastructure. While ReputationManager is based on a software as a service (SaaS) model, and does not require customers to install a dedicated communications line, the organization determined that it would prefer a dedicated communication line to ensure the solution had adequate and secure connections to deliver high levels of availability and reliability. The organization noted that it allocated roughly $10,000 per year in telecom costs to the use of the iovation solution. Table 8: Telecom Cost Ref.
Metric
G1
Internal telecom costs
G2
Total cost
Calculation
Value $10,000
G1
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$10,000
The Total Economic Impact of iovation ReputationManager
Source: Forrester Research, Inc.
Ongoing Support and Analysis Ongoing day-to-day analysis of possible fraud cases identified by the iovation solution is another cost incurred by the organization. This includes the data analysts’ time reviewing bad devices, assigning evidence in the iovation database, closing accounts that are potentially fraudulent, and producing reports and analytics for portfolio risk managers. The organization noted that during the first year of deployment, it was using iovation in a more manual process, manually identifying then shutting down approved applications from fraudulent devices. However, after the initial trial period of the service, the organization increased the automation of fraud detection, and as a result it reduced the ongoing resources required for ongoing analysis. The organization noted it will automate part of the detection process in the second year of analysis. Currently, submitting evidence against an account or device is automated, but the blocking of accounts is handled manually. In the future, the iovation device will be used earlier in the acquisition systems process — before an application is approved. To calculate the ongoing cost of support and analysis, we assume the organization will incur the cost of 2 FTE for data analysis in the first year, which will then be reduced to 1 FTE as the organization increases the level of automation. The cost to increase the level of automation was assumed to be roughly $250,000, which included the integration and development cost of fully integrating the iovation reporting into the organization’s back end systems. In addition, we assume that an additional fraud manager would be responsible for ongoing technical support of the product equating to roughly 5 hours per week. Table 9 illustrates the equations used. Table 9: Ongoing Support And Analysis Cost Ref.
Metric
Calculation
Value
H1
Total automation cost
$250,000
H2
No. of fraud managers: Year 1
2
H3
No. of fraud managers: Years 2+
1
H4
Yearly salary
$35,000
H5
Fraud manager: hours per week
5
H6
Fraud manager: Cost per hour
40
H7
Weeks per year
50
H8
Total cost: fraud monitoring and support
H9
Total cost
H8+H1
Source: Forrester Research, Inc.
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Year 1
Year 2 $250,000
$80,000
$45,000
$80,000
$295,000
The Total Economic Impact of iovation ReputationManager
iovation Subscription The final recurring costs for the organization were the actual costs billed directly to iovation for the use of the product. The organization noted that it is charged roughly $0.06 for every device reputation inquiry. Based on average volume, the average monthly cost equates to $35,000 per month or $420,000 per year. The organization also assumes a 10% increase in the second year, leading to a yearly cost in Year 2 of $462,000. Table 10 illustrates the equations used. Table 10: Subscription Cost Ref.
Metric
Calculation
Value
I1
Estimated monthly cost
$35,000
I2
Yearly cost increase
10%
I3
Number of months
12
I4
Total annual cost – Year 1
I1*I3
$420,000
I5
Total annual cost – Year 2
I4*(1+I2)
$462,000
Source: Forrester Research, Inc.
Total Costs Table 11 illustrates the upfront and ongoing costs associated with the investment in ReputationManager. Table 11: Total Cost — Non-Risk-Adjusted Ref.
Metric
Initial cost
Year 1
Year 2
Total
PV
B5
Cost of updating customer sites
$78,000
$0
$0
$78,000
$78,000
C5
Vendor selection and technology evaluation
$26,880
$0
$0
$26,880
$26,880
D3
Project management and integration
$16,000
$0
$0
$16,000
$16,000
E3
Internal legal costs
$15,000
$0
$0
$15,000
$15,000
F6
Project management and tracking
$0
$40,000
$40,000
$80,000
$69,421
G2
Internal telecom costs
$0
$10,000
$10,000
$20,000
$17,355
H9
Fraud monitoring and support
$0
$80,000
$295,000
$375,000
$316,529
I4
iovation licensing costs
$0
$420,000
$462,000
$882,000
$763,636
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The Total Economic Impact of iovation ReputationManager
J1
Total cost
$135,880
$550,000
$807,000
$1,492,880
$1,302,822
Source: Forrester Research, Inc.
Benefits The organization noted two key benefits as a result of its investment in ReputationManager solution through reduced fraud losses and lowered operational costs. First, iovation allowed the organization to identify potential threats early in the application process by identifying common patterns in fraudulent application, thus reducing the potential exposure and loss. Second, by reducing the number of fraudulent applications early in the application process, the organization was able to reduce the cost of identifying and investigating fraudulent accounts.
Reducing Fraud Exposure The first benefit cited by the organization was the ability to identify and detect fraudulent applications early in the approval process while at the same time ensuring non-fraudulent applications would not be blocked. ReputationManager allowed the organization to identify patterns within fraudulent applications and to deny the application prior to the approval process. To calculate this benefit, the organization estimates that over the course of a year, ReputationManager prints 3,811,850 applications, growing at about 10% per year. Of those applications printed, ReputationManager identified 43,825 of applications as fraudulent. Of those applications that were identified as fraudulent, the organization estimated that roughly 20%, or 8,765, of those applications would have been approved without the investment in iovation. Assuming the average credit exposure from a fraudulent application is $400, we can calculate the total yearly savings from reduced fraud exposure. Table 12 illustrates the calculation used. Table 12: Reducing Fraud Exposure Ref.
Metric
Calculation
Value
K1
Total number of applications processed
3,811,850
K2
Annual growth
0.1
K3
Number of applications identified from bad devices
43,825
K4
Percent that would have been approved without iovation
20%
K5
Average exposure from fraudulent application
$400
K6
Total
K3*K4*K5
Source: Forrester Research, Inc.
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Year 1
$3,506,000
Year 2
$3,856,600
The Total Economic Impact of iovation ReputationManager
Improved Process Efficiency In addition to the top line savings resulting from reduced fraud exposure, the organization also noted the efficiency savings of not having to identify, investigate, and ultimately close fraudulent accounts. The organization noted that if those applications identified by ReputationManager would become confirmed fraud, they would have had to investigate them and write them off. The resolution process through the Identity Threat Victim Assistance Center involves contacting the victim, obtaining an affidavit of fraud, investigating the case, closing all the accounts, and issuing new cards. This has a significant time impact on the organization. To calculate this benefit, the organization conservatively estimates that it takes one hour to identify, investigate, and ultimately close fraudulent accounts. Assuming the blended hourly cost of $35 and the total number of identified fraudulent applications (8,765), we can calculate the total benefit from improved process efficiency. Table 13 illustrates the calculation used. Table 13: Improved Process Efficiency Ref.
Metric
Calculation
Value
L1
Number of applications identified by iovation
8,765
L2
Annual growth
10%
L3
Estimated time requirement to investigate/resolve (minutes)
60
L4
Hourly salary
$35
L5
Total
L1*L2+1*L3*L4/*60
Year 1
Year 2
$306,775
$337,453
Source: Forrester Research, Inc.
Total Benefits Table 14 illustrates the total two-year benefits as a result of the migration to iovation ReputationManager. The total present value benefits equate to roughly $6.9 million. Table 14: Total Benefits — Non-Risk-Adjusted Ref.
Metric
Year 1
Year 2
Total
PV
K6
Reducing potential fraud exposure
$3,506,000
$3,856,600
$7,362,600
$6,374,545
L5
Improved process efficiency
$306,775
$337,453
$644,228
$557,773
M1
Total
$3,812,775
$4,194,053
$8,006,828
$6,932,318
Source: Forrester Research, Inc.
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The Total Economic Impact of iovation ReputationManager
Risk Forrester defines two types of investment risk associated with this analysis: implementation and impact risk. Implementation risk is the risk that a proposed technology investment may deviate from the original resource requirements needed to implement and integrate the investment, resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the technology investment, resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. Quantitatively capturing investment risk by directly adjusting the financial estimates results in more meaningful and accurate estimates and a more accurate projection of the return on an investment. The following implementation risk is identified as part of this analysis: •
Acquisition costs could be higher than originally anticipated for the ReputationManager solution.
The following impact risks are identified as part of the analysis: •
The amount of exposure savings may be lower than originally anticipated due to a reduction in credit applications as well as smaller potential credit applications.
•
The process efficiency savings may be lower than originally anticipated due to a reduction in credit applications.
•
The level of actual benefits received may be lower than originally anticipated due to inadequate testing and planning for the implementation of the solution.
Steps For Measuring Investment Risk Risk factors are used in TEI to widen the possible outcomes of the costs and benefits (and resulting savings) associated with a project. 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 estimate. The expected value — the mean of the distribution — is used as the risk-adjusted cost or benefit number. The risk-adjusted costs and benefits are then summed to yield a complete risk-adjusted summary and ROI. In this study, Forrester discovered that engaging with iovation was a relatively low-risk endeavor, as expressed by the interviewed organizations, and applied a risk factor of 110% to selected costs and 76% to the benefits to arrive at a risk-adjusted number. Table 15 provides a risk-adjusted breakdown of the costs received. Table 16 provides a risk adjusted breakdown of the benefits received. Table 15: Total Costs — Risk Adjusted
Costs
Step 1: Original estimate
High
Low
Risk adjustment % value
Cost of updating customer sites
$78,000
$78,000
$78,000
100%
$78,000
Vendor selection and technology evaluation
$26,880
$26,880
$26,880
100%
$26,880
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Step 2:
The Total Economic Impact of iovation ReputationManager
Project management and integration
$16,000
$16,000
$16,000
100%
$16,000
Internal legal costs
$15,000
$15,000
$15,000
100%
$15,000
Project management and tracking
$80,000
$80,000
$80,000
100%
$80,000
Internal telecom costs
$20,000
$20,000
$20,000
100%
$20,000
Fraud monitoring and support
$375,000
$375,000
$375,000
100%
$375,000
iovation licensing costs
$882,000
$1,134,000
$882,000
110%
$966,000
Source: Forrester Research, Inc.
Table 16: Total Benefits — Risk-Adjusted
Benefit
Step 1: Original estimate
Step 2: High
Low
Risk adjustment % value
Reducing potential fraud exposure
$7,362,600
$7,362,600
$4,141,463
84%
$6,186,629
Improved process efficiency
$557,773
$557,773
$464,811
94%
$526,785
Source: Forrester Research, Inc.
Flexibility Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business benefit for some future additional investment. Flexibility would also be quantified when evaluated as part of a specific project (described in more detail in Appendix A). The interviewed organization noted that the use of iovation can potentially enable future benefits in other areas of the organization to identify fraudulent activity. These included: •
Identifying good customers and using the information from the iovation device print to market to these good customers and offer them more services. The organization noted that this ability to identify good customers as a byproduct of the iovation device print can also possibly be used to replace out-of-wallet questions with user-transparent verification through iovation.
•
Using iovation within other areas of the organization such as with monitoring specific eservices as well as using the solution at the individual transaction level to identify and monitor potentially at-risk transactions.
•
Partnering with existing clients that are also using the iovation solution in sharing device reputation information.
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The Total Economic Impact of iovation ReputationManager
While Forrester believes that organizations purchasing iovation can take advantage of these flexibility options, quantification (using the financial industry standard Black-Scholes or the binomial option pricing models) of the additional value associated with these options for this customer would require scenario development and forward-looking analysis that is not available at this time. The value of flexibility is unique to each organization, and the willingness to measure its value varies from company to company (see Appendix A for additional information regarding the flexibility calculation).
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 investment, net present value, and payback period. Table 17 shows the consolidation of the numbers for the composite organization. Table 17: Return On Investment — Risk-Adjusted Ref.
Metric
Initial
Year 1
Year 2
Total
NPV
H1
Total costs
$135,880
$840,000
$601,000
$1,576,880
$1,396,211
L1
Total benefits
$0
$3,235,746
$3,559,320
$6,795,066
$5,883,174
P1
Total
($135,880)
$2,395,746
$2,958,320
$5,218,186
$4,486,964
P2
Return on investment
321%
P3
Payback period
6 months
Source: Forrester Research, Inc.
It is important to note that values used throughout the TEI Framework are based on in-depth interviews with an existing iovation customer and the resulting representative organization built by Forrester. 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 ReputationManager.
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The Total Economic Impact of iovation ReputationManager
Study Conclusions Forrester’s in-depth interviews with an iovation customer yielded several important observations: •
Based on information collected in interviews with a current ReputationManager customer, Forrester found that organizations can realize benefits in the form of reduction in the exposure of potential losses due to fraudulent applications as well as to an improvement in the efficiency of the fraud detection process.
•
Several factors drove the impact on ROI. These factors included the number of device prints processed, the level of fraudulent applications, the number of resources devoted to detecting and investigating possible fraud cases, and the growth of application demand.
The financial analysis provided in this study illustrates the potential way an organization can evaluate the value proposition of iovation ReputationManager. Based on information collected in the in-depth customer interviews, Forrester calculated a two-year risk-adjusted ROI of 321% for the representative organization with a payback period of less than 12 months. All final estimates are risk-adjusted to incorporate potential uncertainty in the calculation of costs and benefits. Based on these findings, companies looking to implement ReputationManager can see gains around the benefits of fraud identification and discovery. Using the TEI framework, many companies may find the potential for a compelling business case to make such an investment.
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The Total Economic Impact of iovation ReputationManager
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.
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The Total Economic Impact of iovation ReputationManager
Appendix B: Glossary Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, companies often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their organization to determine the most appropriate discount rate to use in their own environment. Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs. Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows. Payback period: The breakeven point for an investment; the point in time at which net benefits (benefits minus costs) equal initial investment or cost. Return on investment (ROI): A measure of a project’s expected return in percentage terms. ROI is calculated by dividing net benefits (benefits minus costs) by costs.
iovation/Industry Terminology Device: Any Internet enabled machine such as Windows PCs, Macintosh Computers, Linux Machines, Virtual Machines or Mobile Devices such as a BlackBerry or iPhone. Device printing: The process of assigning a unique identifier to a device to recognize or rerecognize a device in case it returns. iovation has a spectrum of device printing capabilities that include downloadable software and a wide range of transparent identifiers that do not impact the user’s experience and run purely on the Web browser. Application fraud: A scam in which a criminal applies for a card with another person’s personal financial information. By using stolen or false documents, including utility bills, banks statements, and passports or driving licenses, the thief can usually pass the credit card application. This scam is a particularly damaging form of identity theft. There are two types of application fraud, true and synthetic. True application fraud uses real data from identity fraud. Synthetic application fraud uses fabricated information. Device reputation inquiry: A subscriber queries the ReputationManagerTM to determine whether a device-account pair should be “Allowed” or “Denied” from conducting a transaction with that subscriber. Reputation sharing: iovation’s subscribers share the unique device reputations that are managed in its Device Reputation AuthorityTM (DRA) database. Fraud managers can use this device intelligence to determine what actions they will take against a particular device based on evidence placed by its peers. Sharing of device reputation is optional, but if a customer wants to benefit from the data of other customers, they are required to share.
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The Total Economic Impact of iovation ReputationManager
A Note On Cash Flow Tables The following is a note on the cash flow tables used in this study (see the example table below). The initial investment column contains costs incurred at “time 0” or at the beginning of Year 1. Those costs are not discounted. All other cash flows in Years 1 through 2 are discounted using the discount rate shown in Table 2 at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year. Example Table Ref.
Category
Calculation
Initial cost
Source: Forrester Research, Inc.
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Year 1
Year 2
Total
The Total Economic Impact of iovation ReputationManager
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