Redwood Analytics

It is not unusual today for companies to compete on analytics, as Thomas Davenport famously wrote about in the article "Competing on Analytics" for the Harvard Business Review in 2006.  There are companies in the non-legal space who have built their fortunes on their ability to capitalize on the data they collect.  Companies like Progressive Insurance, Marriott International, Proctor and Gamble, WalMart, and even sports franchises like the Oakland A's. 

And then there are companies like Advanta, recently profiled in Philadelphia magazine, who built their fortunes on analytics, and reinvented itself many times over using data and technology, and is now viewed as an epic fail, after shutting down its small business lending business, and paying $35 million in restitution for alleged violations of federal consumer-protection and banking laws. 

At Advanta, what started out as "branchless banking" for an underserved community of teachers who couldn't bank during normal banking hours evolved through the use of analytics in the late 80's into a $67 million credit card company.   Advanta gathered statistics about "college-educated customers aged 20 to 44, with hefty incomes, good credit, and a tendency to charge their expenses," and marketed plastic to them.  When the credit card market crumbled under the weight of bankruptcies in the late 90's, Advanta remade itself into a sub-prime mortgage lender, and subsequent to that fall, a small business lender via its old friend, plastic.  As reported by Matthew Teague in Philadelphia Magazine:

Owners of small businesses could use their personal histories to access much larger lines of credit, to purchase inventory, make payroll in a pinch, and so forth; the holder was the company, and so was responsible for payments.

Using the credit analytics that served Advanta so well in the plastic boom of the 80s to measure risk and marketability, business was once again booming - and lending rates skyrocketed to 39%.  If you read the Philly mag article, or follow banking news in the Delaware Valley, you know how this one ended.  Earlier this year, Advanta cut off new lending, and had a charge off rate of more than 50% of its $3.6 billion portfolio in June.  (Currently it's hovering around 20%.)

One of the points we stress in all of our consulting and training engagements is that BI is both an art and a science.  What Advanta failed to take into consideration was some of the art involved in analytics.  The science seemed infallible - the computer models that spit out data on marketable small business customers - but it could not consider outside factors involved in running the business.  How would this new B2B business model perform under different economic circumstances?  In an economic downturn, for example?

My former mentor once asked, is Business Intelligence an oxymoron?  I believed then, and still do now, that the answer is no.  But analytics without Human Intelligence is borderline unethical.   When Advanta, for example, raised rates from 7.99% t0 34.99% as they did for some customers, even the FDIC agreed that they were guilty of deceptive and unfair practices.  (To date, Advanta has not admitted liability.) It makes me wonder, who was making these decisions?  The Philly mag article seems to lay most of the blame on the company's founder, Dennis Alter, but I believe somewhere in between the computer models and Mr. Alter, focus was lost on the customer, the human element.

What's the lesson in this for law firms?  At Redwood we help law firms use business intelligence to make decisions and to drive their businesses.  If you add the human element, it's even more powerful.  For example, Redwood's Inventory analysis can determine when a client is likely to pay an invoice based on history, and can identify those collection opportunities.  Sure, you can then automate a process to send a reminder or a second bill at that time.  Or you could pick up the phone, call your client, remind them about the bill, and use this opportunity to inquire about their business or industry, and perhaps solicit some new business at the same time.  We call this combination of Business Intelligence, Competitive Intelligence, and Relationship Intelligence - "Business Development Intelligence."  You'll be hearing a lot more about this from us in the future!