Graduate School of Business Administration

UVA-G-0548
University of Virginia

DELUXE CORPORATION (A)

THE STRATEGIC NEED FOR ACTIVITY-BASED COSTING

Our longer term challenge remains that of preparing for the day when check
writing in the United States begins to diminish and of augmenting our non-check
businesses in such a way that their own growth will more than offset the eventual
decline in check printing profitability.

J.A. Blanchard III, Chairman, President and Chief Executive

Officer

Background

The Deluxe Corporation (Deluxe) is the world’s largest printer of checks as well a
provider of electronic products and services to financial institutions and retail companies.
Founded in 1915, Deluxe was recently ranked by Fortune magazine as the 640th largest U.S.
company. Revenues in 1997 were close to $2 billion, with operating income of $155 million.1

Deluxe offered its customers many different types of checks and associated services.
Checks varied by design—such as a custom design for a particular bank, or the depiction of
various landscapes, recreational or historical designs—to appeal to different types of customer.
Services included designing forms and logos, preparing automated reports, training the customer,
collecting customer receivables, and providing conversion support. Customers included large
financial institutions, regional and community banks, credit unions, and individuals.

Prior to the 1990’s Deluxe could have been characterized as a generally stable, family-
oriented business. Check printing—the primary business in its first seventy years—was for the
most part predictable and profitable.

Fortune ranked Deluxe as one of the US’s top performers in the nineteen seventies.
Volume grew throughout this period, Deluxe typically raised list prices annually, and was
consistently number one in market share. Customers provided little price pressure at that time.

1
Source: 1997 Annual Report.

This case was prepared by Peter B. B. Turney, Adjunct Professor of Business Administration. This case was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright ã 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
 -2- UVA-G-0548

Change in the Competitive Situation

This relatively calm situation was unsettled in the nineteen eighties by deregulation of the
banking industry and changes in technology. Deregulation was accompanied by a wave of bank
mergers and acquisitions. Local banks began to be acquired by large regional and national
banks. Computer and telecommunications technology began to replace paper with electronic
commerce, threatening the growth and profitability of the company’s check printing business.
Some experts forecast that checks would gradually be replaced by credit cards, debit cards, smart
cards and other electronic-transaction systems.

These changes were accompanied by increasing pressure by banks on suppliers such as

Deluxe. Increased competitive discounting of check prices began about this time, as well as
attempts to cut cost.

By the mid to late eighties, management recognized the importance of these trends,
triggering changes in Deluxe’s business. These changes included the acquisition of non-check
printing businesses, and changes in the positioning and operation of the check printing business.

New Businesses

Check Printing continued to be a profitable business with a positive cash flow.

Reinvestment opportunities within Check Printing were few, however, and a low stock
price/earnings multiple reinforced the view that Deluxe was a mature business.

The question for management was what to do with the cash generated by selling checks.
In the late eighties the answer was to acquire other businesses. For example, Deluxe acquired
Chex Systems which provided closed-for-cause information to banks. Chex maintained
databases of individual account history, including check returns. Chex used the databases to help
banks with their new account-opening activities.

Initially these new businesses operated autonomously. Decision-making was

decentralized, with little emphasis on coordinating their sales to financial institutions or their
back-room operations. While some of these businesses focused on retail and business customers,
most of them sold their products to the same financial institutions as Check Printing.

Some of the acquired businesses were later deemed non-strategic to Deluxe’s business,
and were sold. In the late nineties Deluxe positioned the remaining companies into three lines of
business; Deluxe Paper Payment Systems, Deluxe Payment Protection Systems, and Deluxe
Electronic Payment Systems.

• Paper Payment remained the largest business line, and included Check Printing, Current
Checks, and Business Forms. Check Printing continued to sell checks primarily through
 -3- UVA-G-0548

financial institutions. Business Forms’ products included business checks and other
business-related forms and documents. Current Checks continued as the largest provider of
checks directly to the end customer.
• Payment Protection included Chex Systems, a debt collection agency, and a provider of
not-sufficient funds (NSF) data to retailers.
• Electronic Payments focused on electronic transactions such as those associated with
Automatic Teller Machines (ATM’s).

In addition, Deluxe formed a joint venture with HCL Corporation of India to provide
products and services to the India and U.S. financial services industry.

Despite the investment in new technologies and new products, Check Printing was still
the dominant business of Deluxe accounting for the majority of revenues and profits. At the
close of the millennium, the check-less society had not yet arrived; 85% of adults in the U.S.
maintained checking accounts, checks accounted for 74% of all payment transactions, and 63
billion checks were written in a single year.2

Check Printing

While management focused on creating new business opportunities, a program to update

the Check Printing business began in 1993. This program reflected the importance of Check
Printing as the major source of revenue of the company. It also reflected the difficulty of
replacing the revenue and profits from this business by investments in new technology and
businesses. It was perceived that Deluxe would be dependent on Check Printing for an extended
period of time.

Manufacturing. The first changes were made in check manufacturing. In 1993 there
were 60 plants located around the U.S. To meet the then existing needs of its banking customers
it had been the company’s strategy to locate small plants at many locations throughout the
country close to those banking customers.

Plant location was a reflection of the sales process. A salesperson acted as a consultant to
the bank. The salesperson identified the bank’s needs and then communicated those needs to the
local plant. The plant would typically agree to provide the products requested, and the
salesperson would complete the sale to the bank.

Each plant operated autonomously as its own profit center. Most were exceptionally
profitable, and cost management was given less emphasis than service to banking customers and
consumers. The plants ran one shift per day, five days per week.

2
Source: 1997 Annual Report
 -4- UVA-G-0548

By 1995 the number of plants had dropped to 40 through consolidation. This drop
reflected a desire to improve efficiency, and improve the profitability and cash flow from the
check printing business.

Consistent with the shifting demands of banking customers from service to reduced
prices, the consolidation of manufacturing continued between 1995 and 1999. The goal was to
establish a limited number of highly efficient plants located in each region of the country. The
number of plants was reduced to thirteen in 1999. Each plant typically operated six days a week
and two shifts per day.

The reduction in the number of plants required a significant change in the culture of the
business. This was because it conflicted with Deluxe’s historical approach to the check printing
business.

Servicing the Customer. In 1993, Check Printing manufactured tens of thousands of

different products and provided hundreds of different services. This represented a vast array of
different combinations of products and services available to customers.

This diversity reflected the company’s business philosophy, the number of its customers,
and their customers’ demands for unique products and services. Deluxe was proud of its high-
touch customer service, and was one of the success stories included in Tom Peters’ book “In
Search of Excellence.”

This type of service matched the service traditionally provided by the banking industry to
its customers. A banker maintained close relationships with his or her customers over an
extended period of time. In a similar way, a Deluxe salesperson had a close relationship with the
banker. However, both Deluxe and the banks found it costly to provide this type of service in the
face of technological and industry change.

The cost of maintaining multiple, underutilized facilities, and providing all these different
products and a high level of individualized service was very high. Reducing this cost was the
focus of the consolidation of manufacturing, but additional cost-cutting efforts were needed.

As a result of the shifting demands of its banking customers from high service and
individualized products to lower prices, an initiative was started in 1994 to standardize products
and services. This initiative substantially reduced product variety by eliminating minor
variations that did not add customer value.

About the same time, Deluxe began to automate the order management process. This
initiative was aimed at reducing an area of cost called cost-to-serve. Cost-to-serve included the
cost of service management, customer management, order capture, order fulfillment, and other
costs associated with providing service to customers. Its cost was virtually the same as
manufacturing cost, and was directly related to the high service and individualized products.
 -5- UVA-G-0548

These cost reduction efforts impacted the company’s high-service approach. The current
order management process relied on the skill of the employees in the plants and their intimate
knowledge of the customer’s needs. These employees were able to catch errors prior to
production as well as provide the data needed to complete the order. However, as the number of
plants were reduced, it was no longer possible to rely on personal knowledge of a customer’s
products and service needs. The automated order process further separated sales from
production.

Strategy

The arrival of a new Chief Executive Officer in 1994 was an additional impetus to
change. Blanchard was the first CEO from outside the company, and was soon joined by a new
Executive Vice-President, Chief Financial Officer, and other senior executives.

One of Blanchard’s initial efforts was to set up a task force to collect profitability
information about the company’s products, customers and business. He used a grid with red
cells and green cells. Red cells were those products, customers, segments and businesses that
were unprofitable, while the green cells were profitable.

This analysis was important because Check Printing served over 18,000 different
customers in several segments. The segments included mega banks, regional banks, community
banks and credit unions. Segments differed in type of customer, with different customer needs,
solutions and sales approaches. For example, a mega bank might request special billing services
that a credit union would not need.

The red cell/green cell study was difficult and time-consuming because of the lack of
measurements and the fragmentation of information systems (there were 18 different transactions
systems). However, the study helped identify unprofitable businesses, customers and market
segments, and influenced Deluxe’s strategies and business plan.

In the mid-nineties management redefined Deluxe as a market and customer-focused

company rather than a manufacturing company. This was a significant change, affecting the
direction and structure of the company, and its relationship with its customers.

Deluxe now called itself a “leading provider of integrated risk management, electronic
transactions, and paper payment services to the financial services and retail industries.” The
company’s vision was:

“To partner for prosperity with our customers and pioneer information and
payment solutions that enable them to be more profitable.”
 -6- UVA-G-0548

The company’s mission was:

“To be the recognized leader in providing integrated information, payment, and

related services that create value for our customers.”3

Business Alignment Model

A Business Alignment Model—was developed to implement the new customer-focused

strategy. This model included three strategic objectives: to improve operating profit, to develop
world-class people, and to improve customer satisfaction.

Each strategic objective was implemented via several management initiatives. Improving
customer satisfaction, for example, relied on initiatives to improve customer profitability,
increase reliability and quality, and create new products and value-added services (Figure 1).

Success in implementing the strategic objectives was measured by Deluxe Value Added
(DVA). DVA measured residual income (alternatively called Economic Value AddedÒ). The
intent of DVA was to incorporate profitability and the cost of money into all decisions made at
Deluxe:

Like any business, Deluxe wants to borrow at one rate, invest at a higher rate, and
pocket the difference.4

DVA is computed by subtracting a capital charge from profit. This capital charge is
computed as the weighted average cost of capital multiplied by the amount of funds borrowed in
the form of debt and equity. The amount of borrowed funds and profit amounts are adjusted to
ensure that they reflect economic rather than accounting quantities. For example, non-interest
bearing debt such as accounts payable may be deducted from the amount borrowed, and the cost
of research and development may be amortized rather than expensed (as required by accounting
standards).

3
The source of both the vision and mission statements was the 1997 Annual Report.
4
Understanding DVA: A Guide to the Deluxe Value Added Philosophy, Deluxe Corporation, 1998.
 -7- UVA-G-0548

Business Alignment Model

Develop Improve
Improve World Class Customer
Operating profit People Satisfaction

Optimize Leadership/ Improve

Segment Increase Create New
Order Implement Strategic Customer
the Market Reliability Products &
to Cash CI Skills Profitability
& Quality Value-Added
Development

Figure 1: The Business Alignment Model.

The idea behind DVA is that if Deluxe invests at a return that is below the weighted
average cost of capital (negative DVA), then economic value is destroyed, and the stock price
will fall. If the return exceeds the weighted average cost of capital (positive DVA), economic
value is created and the stock price will rise.

DVA could be created in three ways:

1. Generate more revenue. “Deluxe can generate revenue—the money that comes to the door
to keep our company healthy and strong—by offering superior products and superior
customer service. If we exceed a customer’s expectations, for example, that customer may
buy more products and services from us, or may make purchases more often.”
 -8- UVA-G-0548

2. Reduce Cost/Eliminate Waste. “We can all keep a lookout for wasteful costs that don’t add
value. Getting rid of costs (that don’t add value) makes Deluxe a stronger company.”

3. Use Assets More Efficiently. “Many employees have found ways to more efficiently use
the company’s assets, thus improving our DVA.”5

The intent of DVA was not just to measure corporate or business DVA, but also to
measure DVA by customer and customer segment. It would also be used to evaluate the
contribution of each business process to DVA, as well as employee performance.

Cost Management Systems

Implementation of the customer-focused strategy and the Business Alignment Model was
dependent on the availability of cost information. However, a review of cost management
systems in 1995 revealed little available cost information and a heavy dependence on special
studies. The check manufacturing plants relied on point-in-time cost studies to value inventory
for financial reporting purposes.

Special studies were also used to provide management with information, such as for the
red cell/green cell profitability studies. These studies were costly and time-consuming because
of the difficulty of pulling information from many different legacy systems, and the lack of a
cost system.

Cutting Cost of Goods Sold and Sales, General and Administrative expenses relied on a
traditional accounting approach. This involved targeting the largest functional areas and high
expense categories such as personnel and travel.

A study was performed in 1996 to determine the costs of printing different types of
checks. This study used the “number of customer orders” to assign costs to products. A cost
model was built on an Excel spreadsheet and was limited in scope to costs incurred in the plants
in the Check Printing business.

The model failed to provide accurate costs of products or customers, and did not properly
address the cost-to-serve issue. It was also a one-off study and unsustainable.

However, the cost study whetted the appetite for more and better cost information.
Marketing asked questions such as “What are the services we are providing, and what do they
cost?” for which there was no current answer.

5
Understanding DVA: A Guide to the Deluxe Value Added Philosophy, pp. 10-12.
 -9- UVA-G-0548

A first step towards building a sustainable cost management system was the decision to
create an integrated database using an Enterprise Resource Management (ERP) system from
SAP. This system was commissioned in 1995, and then implemented company-wide.

An Activity-Based Costing (ABC) system was implemented in conjunction with the SAP
system. ABC utilized data from the ERP system as well as remaining Legacy systems. ABC
was viewed as the best method available to provide accurate cost data, but it was not clear what
the scope, content, and form of the ABC system should be.

The urgent need for ABC was highlighted in 1998 by the loss of certain key accounts, a
decline in market share in the core check printing business, and the continued erosion of
margins. The customer defections and loss of market share were the result of heavy discounting
by Harland and Clarke-American, their closest competitors.

Margins were affected by discounting to counter the competitive threat from Harland and
Clarke-American as well as to accommodate pricing pressure from customers that had grown
larger through acquisition or merger. These customers were demanding volume discounts.

A review of Deluxe’s recent financial performance showed that margins and returns had
deteriorated (Figure 2). This put intense pressure on management to turn the business around.

1989 1990 1991 1992 1993 1994 1995 1996 1997

Gross Margin 49% 51% 52% 53% 53% 54% 56% 54% 58%
Operating Margin 22% 25% 25% 25% 22% 18% 18% 17% 20%
Net Profit Margin 12% 12% 12% 13% 9% 8% 5% 3% 2%
Return on Assets 18% 19% 17% 17% 11% 11% 7% 6% 4%
Return on Equity 24% 25% 24% 24% 18% 17% 11% 9% 7%

Figure 2: Ratio analysis for Deluxe Corporation.

The future, however, looked even more challenging. Industry forecasts for the year 2000
and beyond showed the revenue stream declining as paper checks were increasingly replaced by
electronic commerce. At the same time, the need to fund investments in replacement
technologies and businesses was significant.
Graduate Scho l of Busines Adminstration

Graduate School of Business Administration

UVA-G-0549
University of Virgina

University of Virginia

DELUXE CORPORATION (B): ACTIVITY-BASED COSTING

Like other manufacturing companies trying to make the transition from the Industrial Age to the
Information Age, Deluxe has sometimes been a victim of its own success. Deluxe’s 80 years of
prosperity gave the company no compelling reason to understand its costs in detail. The result
was an unwieldy organization and a just-say-yes service philosophy in which the company
provided customization to each of its thousands of bank customers.
Tom Kelly, Vice-President of Finance

Background

The Deluxe Corporation (Deluxe) is the world’s largest printer of checks as well as a
provider of electronic products and services to financial institutions and retail companies.
Founded in 1915, Deluxe was recently ranked by Fortune magazine as the 640th largest U.S.
company. Revenues in 1997 were close to $2 billion, with operating income of $155 million.

Deluxe’s core Check Printing business was a profitable—yet mature—business facing

rapid change in its customer base. Margins were eroding and revenues declining as the market
shifted from paper-based to electronic transactions.

These competitive pressures brought about many changes at Deluxe including a new
management team, a new strategy, and a strategy deployment program called the Business
Alignment Model. The centerpiece of the Business Alignment Model was the measurement of
economic value created—called Deluxe Value Added (DVA)—for its customers and customer
segments.

Measurement—and improvement—of customer DVA required accurate cost information.

However, at the time of adoption of DVA Deluxe’s costing system was used primarily to value
inventory for financial statement purposes. There had been periodic cost studies, but these were
time-consuming, costly, and unable to sustain the ongoing need for cost information.

In 1997 it was decided to implement an Activity-Based Costing (ABC) system to fill the
need for cost information and to provide measurements for DVA.1

1
For the complete background on Deluxe Corporation, see UVA-G-0548, “Deluxe Corporation (A): The
Strategic Need for Activity-Based Costing.”
This case was prepared by Peter B. B. Turney, Adjunct Professor of Business Administration. This case was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright ã 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
 -2- UVA-G-0549

Objectives for Activity-Based Costing

An ABC team was formed in 1997 under Rick Engels, the Director of Customer
Profitability. The first task of this team was to define and obtain approval for the purpose and
objectives of the ABC implementation.

The purpose of ABC was to support the company’s customer-focused strategy, and to
provide information for decisions that would increase DVA. ABC was viewed as an analytical
tool that would help improve customer satisfaction as well as both Deluxe and customer
profitability. Rick Engels, Director of Customer Profitability, commented on this purpose:

“For us, understanding customer profitability amid a maturing check market and an
intensely competitive pricing environment was essential. At the same time, we viewed ABC as a
means to improve relationships with our customers, by using ABC to identify costs along the
supply chain and help our customers reduce their costs and improve their profitability.”

In order to meet this purpose, the ABC team identified some questions that ABC would
have to answer:

• Who are our most profitable customers?

• Which practices should we adopt?
• What new products and services should we provide?
• How could we re-engineer customer relationships to be more efficient while lowering costs?
• What was our cost-to-serve and how did that cost affect customer profitability?2

Based on this analysis, management approved the following objectives:

1. Report Customer Profitability. Reporting customer profitability reflected the importance

of the customer relationship. The company was becoming increasingly customer-focused,
there were thousands of customers with widely different needs, and Deluxe was no longer
just manufacturing products. Most products were sold to customers in combination with
varying levels and types of services. It was also clear from earlier cost studies that many
customers were unprofitable.

2. Focus on Cost-to-Serve Activities. Cost-to-serve activities were those activities required to

provide services to customers. Cost-to-serve activities included customer management,
product management, product specification, order capture, and order fulfillment activities.
The high cost of these activities reflected the many different types of services offered to
customers. The cost was predominantly in the Sales, General and Administrative expense
item in the Income Statement. A conscious decision was made to exclude Cost-of-Goods
Sold (the cost-to-produce) until a later time.

2
Tom Kelly and Rick Engels, “Deluxe Checks Out ABC/M to Improve Customer Relationships,” As Easy
As ABC, Issue No. 35, Winter, 1999.
 -3- UVA-G-0549

3. Follow a Supply-Chain Approach. A supply-chain approach—one which viewed the

organization as a set of processes rather than a functional (vertical) organization—was seen
as integral to a customer-focused company. A supply-chain ABC model would help each
process evaluate the value it provided to its customers. It could be used to assess proposed
changes to the customer relationship based on the impact of these changes on profitability
(Figure 1).

Moving the Focus of the Organization

From Functions to Processes

Functional View
Product
Product Management
Management

VS.
Order
Order Management
Management

Data
Data Management
Management
FF M
M EE PP
ii aa nn rr
rr gg oo Customer
Customer Management
Management
nn
kk ii dd
aa ee nn uu
nn tt ee cc
cc
ee
ii
nn
ee
rr
tt
ii
Process View
gg ii oo
nn nn
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Figure 1: Functional versus supply-chain views of the organization.

Implementation of ABC

Deluxe implemented ABC initially in the Check Printing and Business Forms businesses.
These businesses had high customer, product and service diversity, as well as significant cost-to-
serve activities. They accounted for 18,000 customers, 8,700 employees, over $1 billion in sales,
and over $400 million in selling, general and administrative costs.

A comprehensive project structure was put into place. An executive sponsor provided
focus, resources, leadership, and reviewed performance. A steering committee approved the
project plan, established priorities, and approved on-going progress and results. There were two
 -4- UVA-G-0549

project managers who were responsible for quality control, problem resolution, leadership, and
training. Field teams consisting of full-time and part-time members were responsible for
executing the work plan. Rick Engels commented on this approach to implementation:
“Given that time was of the essence, a key point about the project staffing is that it was
not a “finance” project, developed for and by the bean counters and delivered to the masses with a
resounding: “Here. Implement. End of Story.” To avoid surprises, the project was set up to involve
the right people from all levels. It was an inclusive effort, with cross-functional teams consisting
of middle managers and others from across the process-driven organization who were challenged
to understand the business, develop a better way of operating it, and address the urgent business
need to define customer profitability.”

A multi-phased project was initiated with a time-line of six months. The phases of the
plan were:

1. Establishing a foundation. This phase involved forming a project team, and preparing a
detailed plan.
2. Activity analysis. In this phase all activities and processes were defined and an activity
dictionary prepared.
3. Activity Costs Linked to Cost Objects. Activity drivers were identified, and a model built
in which the cost of activities was assigned to services and customers.
4. Detailed Profitability Analysis. Profitability—including DVA—was computed and
analyzed.
5. System Deployment. The final phase included preparation of management
recommendations and completion of the ABC information system.

The ABC information system was designed as a sustainable system, one that could be
updated on a regular basis, rather than a one-time standalone model on a personal computer. The
ABC model was created using Oros software linked to the SAP R/3 system. The model was
initially updated quarterly, with a later change to monthly updates. The different components of
the system are shown in Exhibit 1.

The ABC Model

The ABC model was built to report customer profitability as well as to provide
information to support management analysis and decision making (Exhibit 2).
 -5- UVA-G-0549

• Resources. Resource costs were historical costs for each quarter. Salaries, wages, benefits
and other employee costs were combined in each work area into a single cost associated with
people. Other resources were the same as General Ledger expense accounts. Resources
were classified to show the time needed to increase or decrease resource spending in
response to a 5% change in workload. The time ranged from an immediate response to a
delay of three years.

• Activities. A dictionary of about 150 activities was created. This number of activities was
considered appropriate for the customer-related analyses that were envisioned. A conscious
decision was made not to cost the tasks that comprised each activity. Exhibit 3 is excerpted
from the Activity Dictionary.

• Processes. Activities were organized in a hierarchy by process and by sub-process. For

example, the activities “Create Order” and “Prepare Image” were part of the “Order
Creation” sub-process, which was part of the “Order Capture” process. The model also
distinguished between primary and secondary processes. Primary processes—cost-to-
serve—worked directly on customer services. Examples were Order Capture and Product
Management. Secondary processes—business support—provided support services to
Primary Processes. Examples were Accounting and Legal (Figure 2). The cost of the
activities in the secondary processes was assigned to primary activities.

Figure 2: Primary and secondary processes in the ABC model.

 -6- UVA-G-0549

• Resource Drivers. The cost of the employees was assigned to activities using time-by-
activity data from Work Distribution forms. The employees filled out the Work Distribution
forms quarterly. Resource drivers for other accounts included travel time, call time, and
orders per service.

• Services. Thirty-seven different types of services were included in the model. Examples
were Logo Design, Collect Receivables, Process Billing Corrections, Demand Cultivation,
and Train Customer.

• Channels. Eight of the services in the ABC model were different ways of taking a customer
order. Deluxe designated these eight services as channels. These channels were:

• Mail. The customer filled out a form and sent the form and payment by mail.
• Electronic. This involved the customer accessing the Deluxe or Bank website, filling out
an electronic form, and sending the order by email.
• Voice Recognition Unit (VRU). In this case, the customer called a telephone number
and placed the order by selecting from various menu choices given by the VRU.
• Telephone. The customer called a number and an operator took the order over the
phone.

Each of these four channels used Deluxe’s old Legacy system or the new order entry system
(CI). The four Legacy channels would disappear by the end of 1999.

• Customers. The model included over 18,000 different customers. Examples were Bank of
America, Wells Fargo, NationsBank, and other financial and non-financial customers.
• Activity Drivers. The cost of activities was assigned to services and then from services to
customers, using activity drivers. Activity drivers included the number of invoice pages, the
number of total orders, the number of exclusives, and the number of migrations. Actual
quarterly data were used for each activity driver.
• Customer Segments. An attribute was attached to each customer signifying the customer
segment to which that customer belonged. The six segments were mega banks, regional
banks, community banks, credit unions, micro banks, and non-financial institutions. This
permitted reports to be prepared by segment.
• Profitability. Additional financial information was included in the model to allow customer
profitability analysis in addition to full cost analysis (Figure 3). This information was:
• Sales revenue per customer. This information was input from the current financial
system.
• Cost of Goods Sold (COGS). This information was input from the current financial
system.
 -7- UVA-G-0549

• Corporate overhead. Corporate overhead was allocated using COGS.

• Capital charge. The capital charge was computed by assigning assets to each
customer and multiplying this amount by the weighted average cost of capital. The
asset assignment was done initially using COGS, although it was later refined to
reflect specific variations between customers. For example, a customer that belonged
to the American Clearing House (ACH) provided immediate electronic settlement of
customer receivables, and therefore received no assignment of Accounts Receivable.

Corporate Revenue
Allocation
Customer
Profitability
Capital Charge Cost of Goods
Sold

Customer Product/ Customer/ Order Order

Management Service Product Capture Fulfillment
Services Management Specification Services Services
Services Management
Services

Figure 3: Service and customer profitability.

Business Customer Prod/Serv Cust/Prod Order Order

Support Management Management Specification Capture Fulfillment
Activities Activities Activities Management Activities Activities
Activities
 -9- UVA-G-0549

Exhibit 1

DELUXE CORPORATION (B) ACTIVITY-BASED COSTING

Deluxe’s ABC System

.

L is t o f
Empl oyees
Fi le by
Responsibil ity
Fe e d b a c k/
C o r re c ti on o n
imp r o p e r
R e s o u rc e to A c ti vit y
Emp lo y e e s Emp lo y e e /G r o u p
Ea c h Em p lo y e e
a s s ig me n ts Sa l a ry - W e i g h ted A v e ra g e
a s s ig n e d
to a G r o u p W o r k Di s tri b u tio n s Ca l c u la te d
Pa y ro l l D o w n lo a d
Existi ng Groupassi gnment G e n e r a te W D s Work
(if applicabl e) and rel evant ( o n e f or e a c h Distribution
cost center information Templates OR OS
(changes, new, etc.) Emp lo y e e in
In d i v id u a l G r o u p s L a b o r R e s o u rc e
C en tr a l Em pl o y e e s Ce n tr a l Emp lo y e e s
a n d o n e fo r e a c h D r iv e r Da ta &
L o o k a t Emp lo y e e s b y Da ta b a s e D a ta b a s e
Sh a r e d G r o u p ) A s s ig n me n ts ;
C o s t Ce n te r to d e te rm in e
FTE in f o rm a tio n
groups needed
In di v id u a l v s .
L is t o f S h a r ed d e s i g n ati o n FTE d r iv e r d a ta
Ce n tr a l Emp lo y e e s
Es ta b lis h e d
D a ta b a s e
Gr o u p s b y
C o s t Ce n te r
Employee
Group Fi le by OR OS
Re s o u r c e Hi e ra r c h y
Responsibil ity Ex p en s e
A c ti v ity Di c tio n a r y Re s o u r c e Dr iv e r
D a ta &
Fe ed b a c k / A s s i g nm e n ts
C o rr e c tio n o n
imp r o p e r Ex p e n s e
a s s ig m e n ts

L i st o f W o rk G ro u p s
f or FTE a s s ig n me n t

$
N o n -L a b o r Ex p e n s e In fo r ma ti on Ex p en s e
C e n tr al Ex p e n se
$ Di s tri bu ti o n OR OS
D ata b a s e
Te mp la te R e s o ur c e $
S A P Do w n lo a d

M o d if ic a tio n s f or S a le s
& Ma r ke tin g A s s e s s me n ts

C oste d A cti vi ti e s by
Lo ca ti on

C oste d S e r vi c e s
(En te rpr ise -W ide ) A c tiv i ty to Se r v ic e
Te mp l a te
A ct iv ity to S e r vic e

S e rv ic e to C o s t O b je c t C o ste d C u sto me rs &

S e r vi c e to
C u s to me r/C h a n n e l
C ha n ne l s
Te mp l a te
 -10- UVA-G-0549

Exhibit 2:
DELUXE CORPORATION (B) ACTIVITY-BASED COSTING
Deluxe’s ABC Model

Resources

Process Process

Sub-Process Sub-Process

Cost-to-Serve Business Support

Activities Activities

Services
(Channels)

Segments Sales Revenue

Customers COGS

Capital Charge

Customer Segment
DVA DVA
Reports Reports
 -11- UVA-G-0549

Exhibit 3:

DELUXE CORPORATION (B) ACTIVITY-BASED COSTING

Dictionary of Activities

Process: Order Capture Sub Process: Order Creation

ID Activity Name Definition Tasks Source
75 BF Create Order – DO NOT USE SGA
Electronic (ONE)
Convert customer pricing requirements
into precise manufacturing
specifications.

73 Create Order – Mail Convert customer requirements into Ø Open mail SGA
precise manufacturing specifications. Ø Determine customer channel
Ø Verify billing and shipping information
Ø Determine product or service needs
Ø Contact customer, if necessary, to clarify
information
Ø Input information on CFS
Ø Release order for fulfillment

373 Create Order – Convert customer requirements into Ø Determine customer channel SGA
Teleservice precise manufacturing specifications. Ø Verify customer information
Ø Verify billing and shipping information
Ø Determine product or service needs
Ø Contact customer, if necessary, to clarify
information
Ø Input information on CFS
Ø Release order for fulfillment

74 Create Order – VRU Convert customer requirements into Ø Create an order in the CDF system SGA
precise manufacturing specifications. through customer use of the Voice
Response Unit (VRU) without the direct
involvement of a Deluxe employee.

429 Develop/ The development and maintenance of CFS Ø SGA

Maintain CFS includes all expense items (labor and non-
Infrastructure labor) that are required to ensure the
operation of CFS on an on-going basis and
any potential expensable upgrades. The
depreciation of the capitalized portion of
the software is included as part of this
activity.
 Graduate School of Business Administration
UVA-G-0551
University of Virginia DRAFT

DELUXE CORPORATION (C):

ANALYSIS OF ACTIVITY-BASED COSTING DATA

In 1997 Deluxe Corporation (Deluxe) implemented an Activity-Based Costing (ABC) System.

The purpose of ABC was to support the company’ strategy by measuring customer profitability.1

Once the ABC system was completed in mid-1998, management turned its attention to analysis
of the data. This was a difficult task because of the vast quantity of data and the need for
managers top gain experience in analyzing ABC data.

Reports

The ABC team prepared several reports to aid management analysis of the ABC data. These
reports are described in the following section. Illustrative excerpts from the reports are included
in the Exhibits at the end of the case, and are available for review and analysis in electronic form.
These reports are not accurate or complete and all data have been modified to disguise actual
company costs and results. These reports are shown for illustrative purposes only and are not to
be relied upon as accurate or complete.

• Process Quarterly Report. The Process Quarterly Report summarized quarterly costs by
Process and Sub-Process. It provided a summary view of the overall cost of each process
and its constituent sub-processes (Exhibit 1).

• Activity Quarterly Report. The Activity Quarterly Report included the detailed activity
costs for the processes listed in the Process Quarterly Report. High-cost processes identified
in the Process Quarterly Report were analyzed further using this report (Exhibit 2).

• Dictionary of Activities. The Activity dictionary contained a list of applicable activities,

description of activities, and their constituent tasks. Managers used the Dictionary of
Activities during the analysis to find out the meaning of activities.

1
For the case-study background on Deluxe Corporation and its Activity-Based Costing System, see UVA-
G-0548, “Deluxe Corporation (A), and UVA-G-0549, “Deluxe Corporation (B).”

This case was prepared by Peter B. B. Turney, Adjunct Professor of Business Administration. This case was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright ã 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
 -2- UVA-G-0551

• Service Quarterly Report. The Service Quarterly Report listed applicable services
associated with Check Printing. Managers used the report to identify high-cost services
(Exhibit 3).
• Activities-Within-Services Report. The Activities-Within-Services Report showed the
activities and associated costs for each of the services listed in the Services Quarterly
Comparison Report. This report revealed the high-cost activities contained in each service
(Exhibit 4).

• Order Cost Comparison Report. The Order Cost Comparison Report showed the costs per
order for each order-capture service. The cost per order data highlighted cost differences
between each channel of order capture. Information in the report included the costs of
activities associated with building the infrastructure for the new order entry system. These
costs were included in the cost of each order (Exhibit 5).

• The Variability Report. The Variability Report included estimates of the variability of the
costs of each order capture service listed in the Order Cost Comparison Report. The report
showed how much cost could be removed if the quantity of orders was reduced. For
example, it showed that reducing the number of orders captured via mail would have little
immediate impact on cost, but a significant amount could be removed after one quarter
(Exhibit 6).

• Segment Profitability Report. The Segment Profitability Report summarized the

profitability of each customer segment. Differences between segments reflected different
revenue and cost-to-serve opportunities. Low profit segments were candidates for further
analysis (Exhibit 7).

• Customers-Within-Segment Profitability Report. The Customers-Within-Segment

Profitability Report provided summary profit data for each customer within a segment.
There was one report for each segment. The report identified candidates—unprofitable
customers—for further analysis (Exhibit 8).

• Customer Profitability Report. The Customer Profitability Report included a summary of

a customer’s profitability and the customer’s contribution to Deluxe Value Added (DVA). It
also included a detailed list of the cost-to-serve activities and costs associated with the
products and services delivered to the customer. The Report was used to assess the
customer’s contribution to Deluxe Value Added, as well as to identify opportunities to
increase customer profitability (Exhibit 9).
 Graduate School of Business Administration
UVA-G-0553
University of Virginia DRAFT

DELUXE CORPORATION (D): VALUE-BASED MANAGEMENT

Based on our experience, the results an ABC team can achieve with the proper focus, support,
partners, and motivation in a short time frame are amazing. As with mission control bringing
Apollo 13 home safely, we had no choice but to succeed. Having accomplished our objectives, we
are now reaping the benefits that a sustainable ABC system can deliver to the organization and its
customers. Tom Kelly, Vice-President of Finance

Background

In 1997 Deluxe Corporation (Deluxe) implemented an Activity-Based Costing (ABC)

System. ABC was a tool used to analyze and improve Deluxe and customer profitability. Its
purpose was to support the company’s customer-focused strategy by measuring the impact of
this strategy on profitability. Profitability was computed using Deluxe Value Added (DVA), a
measure of shareholder value.

By mid-1998, Deluxe had achieved its initial ABC objective of understanding profitability
and DVA by customer and customer segment.1 The next step was to implement a Value-Based
Management (VBM) Program through which shareholder value would be improved.

Value-Based Management

Value-Based Management used ABC to identify opportunities to improve shareholder value.

It also involved sales, marketing, and other initiatives to develop these opportunities and capture
the increase in DVA.

Channel Profitability
The ABC model revealed significant cost differences in the cost of processing a customer
order for checks depending on the order channel used. For example, paper orders submitted via
mail were labor-intensive and costly compared to orders submitted via Deluxe’s electronic order
channel (Figure 1).

These cost differences prompted a program to migrate customers to the electronic order
channel. This program involved using ABC to identify the cost savings that would accrue to

1
For the complete background on Deluxe Corporation and its Activity-Based Costing System, see UVA-
G-0548, UVA-G-0549, and UVA-G-0551.

This case was prepared by Peter B. B. Turney, Adjunct Professor of Business Administration. This case was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright ã 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
 -2- UVA-G-0551

both Deluxe and the financial institution, and communicating these benefits to the customer via
the sales force.
Cost Per Order by Channel

$20.00

$15.00

$10.00 Qu

$5.00

$-
Electronic (incl Mail Phone
VRU)

Figure 1: Cost per order by channel (data are disguised)

It was so successful that the percent of orders processed electronically increased by over 50%
in the first year of the program. Tom Kelly, Vice-President of Finance, commented on the benefit
to both Deluxe and its customers:

Encouraging the customer to go electronic has upside both for Deluxe (lowers Deluxe internal
cost) and the customer (improves bank customer satisfaction). It has been proven that electronic
orders are almost error free. This results in satisfied bank customers. With the significant
merger/acquisition activity going on the banks are sensitive to the run-off that occurs as a result of
a merger/acquisition. We have been able to craft an important message to the bank: a higher
electronic order mix results in a lower run-off rate experience.

Bids and Contracts Negotiations

ABC information was used to leverage Deluxe’s position in customer bidding and contract
negotiations. This was important because of increasing customer pressure to reduce prices.

In some cases ABC helped justify a price that was higher than the competition. In other
cases, ABC helped Deluxe reconsider its price based on changing the level of service provided to
the customer. Rick Engels, Director of Customer Profitability, explained:

In some cases our price would be higher than what the bank was willing to pay. Before we had
ABC we did not have the ability to explain to the bank the value it received from Deluxe in the
form of checks and services. Now we can communicate the value received, and work with the
bank to balance price and value.

ABC was used initially in two customer segments to formulate bids and negotiate contracts.
Rick Engels described the impact:

In 1997 we were losing market share in these two customer segments. However, since we started
using ABC in contract negotiations we have not lost a bid, and have acquired new business. We
are losing business in the other segments, but expect to turn this around once we apply ABC to
negotiations with these customers.
 -3- UVA-G-0551

Customer Profitability
The ABC analysis revealed that a substantial number of customers were unprofitable (Figure
2). This revelation prompted an analysis of the one hundred most profitable customers. What
was the reason these customers were so profitable? How did their activity and service profiles
differ from those of unprofitable customers?

This analysis prompted a further series of questions relating to the unprofitable customers.
Should Deluxe retain the customers? If the answer were yes, what changes in the services
offered would make the customer profitable?

Customer Segment 3
600%

500%

Cumulative
Profits 400%
(percent of
total profits)
300%

200%

100%

0%
0% 20% 40% 60% 80% 100%
Most Profitable Less
Customers Profitable

Figure 2: Profit cliff for customer segment 3.

Standardization of services
ABC was used to help standardize Deluxe’s services and eliminate those of little or no value
to its customers that added to the cost structure. Custom services were still offered but at prices
that covered the cost of providing them—including the cost of capital.

The standardization of services improved DVA, but also customer satisfaction. Surveys of
customer satisfaction surveys showed that service levels were improving.
 -4- UVA-G-0551

Segment Profitability
The ABC analysis showed that customer segments differed quite significantly in profitability
(Figure 3). Three of the segments were breakeven or unprofitable. However, segment 3 stood
out because it accounted for 36% of check orders (Figure 4).

DVA per Order by Segment

3
2
2
1
1
DVA

0
-1 1 2 3 4 5 6 7
-1
-2
-2
Segment

Figure 3: DVA per order by segment (data are disguised)

Percent Orders by Segment 7

1% 1
6
21%
23%

2
5
5%
0%

4
13%

3
37%
Figure 4: Percent orders by segment (data are disguised)
 -5- UVA-G-0551

This analysis prompted an initiative to deploy marketing resources to the segment that would
result in the greatest increase in DVA. Marketing resources could be used to increase the
profitability of the customers in segment 3, thereby increasing the overall profitability of this
segment. This option was supported by further analysis that showed that the cost-to-serve varied
from customer-to-customer within segment 3 (Figure 5).

Alternatively, the analysis showed that segments 1, 2 and 4 were very profitable. Should
marketing efforts be used to build on this profitability by retaining and expanding market share
in these segments?

Marketing Initiatives
ABC was used to evaluate marketing initiatives and to deploy marketing resource to the best
use. In 1999, for example, eleven different marketing initiatives were evaluated using ABC to
determine their likely impact on DVA. One of these initiatives would offer customers a “secure
mail” option whereby Deluxe would re-route returned mail at no cost to the bank. Would the
additional DVA justify the use of marketing resources to implement this initiative rather than a
different initiative?

Cost to serve per order for customers in Segment 3

70
60
50
40
Cost

30
20
10
0
0 5 10 15 20
HC

Figure 5: Cost to serve per order for customers in segment 3 (data are disquised)
 -6- UVA-G-0551

Revenue Growth
An initiative—called Acquisition Penetration and Retention (APR)—was launched to halt the
loss of market share and to acquire new customers. Part of this initiative was a review of
marketing and selling activities to assess the degree to which existing activities were adequate, or
where activities should be refocused or supplemented, to meet the goals of the APR program.

The importance of APR was highlighted by a mid-1999 change to the design of the ABC
model. Surveys of personnel were modified to provide specific information about the purpose of
activities in each customer segment. Tags were then attached to each activity in the model to
indicate whether their purpose was Acquisition, Penetration, or Retention.

Cost Savings
Deluxe followed up on each new initiative to make sure that the forecast cost savings were
achieved. Deluxe recognized that cost savings computed using ABC would not be realized
automatically. Action to remove the surplus resources was required. Rick Engels commented on
the importance of this action:

We had a customer that typed orders for checks using a customer-specific form. When we
received these forms we had to retype them before we could process them. ABC demonstrated
how costly this was for us, and also for the customer. We shared our analysis with the customer,
who agreed to change the process. This allowed us to eliminate multiple activities and the
equivalent of thirty full-time positions. However, I found that the field office had re-deployed
these people to other activities leaving costs at the same level. We had to follow-up with the field
office to make sure that the cost savings were realized.

Education
Deluxe believed that ABC would have maximum impact if it were used widely across the
company. Accordingly, a training program was implemented to help employees understand
ABC and to use the ABC information to help accomplish their goals. Rick Engels commented
on the value of this education:

We will educate every account manager in the field and place ABC information on their desktop
so they can identify cost and revenue opportunities on a daily basis. We want the salespeople to
ask different questions and zero in on the areas they can influence.

The ABC training program fit well with Deluxe’s corporate philosophy of personal
accountability for the company’s success. Tom Kelly commented on this fit:

The ABC project has blended well with the overall corporate goal (called the Deluxe Way) of
transforming the culture into one of person accountability. Using formal and informal training,
ABC is being incorporated into everyday thinking at Deluxe Paper Payment Systems. Employees
now clearly understand that time is money—what an employee does counts toward the company’s
costs, DVA, and bottom line. “We can’t charge for that” is a catch phrase understood to be part of
an outdated just-say-yes service philosophy that Deluxe can no longer afford, given market and
industry conditions.
 Graduate School of Business Administration
UVA-G-0551
University of Virginia DRAFT

DELUXE CORPORATION (E):

SUPPLY-CHAIN MANAGEMENT

Our goal with DeluxePartners is to understand the mutual profitability generated by our
relationship with our Financial Institutions, partner with them to find ways to improve the overall
value we bring each other as partners, and implement mutually beneficial changes in products,
service and process across the entire supply chain.
Jeff VanDeVelde, Marketing Segment Manager

The Deluxe Corporation (Deluxe) is the world’s largest printer of checks as well as a
provider of electronic products and services to financial institutions and retail companies.
Founded in 1915, Deluxe was recently ranked by Fortune magazine as the 640th largest U.S.
company. Revenues in 1997 were close to $2 billion, with operating income of $155 million.

Deluxe’s core Check Printing business was a profitable—yet mature—business facing

rapid change in its customer base. Margins were eroding and revenues declining as banks
consolidated and the market shifted from paper-based to electronic transactions.

These competitive pressures led to the adoption of a new strategy—creating value by

offering integrated payment and related services to Deluxe’s customers. This strategy required
major changes in the way Deluxe operated as a business, including the rationalization of
manufacturing, and a new performance measurement system.1

These changes, however, were accompanied by a loss of market share in the mega and
regional bank customer segments. This was because of the continued erosion of margins and
severe competitive price trends.

Deluxe responded to the loss of market share by introducing a new marketing and sales
program for the mega and regional segments. This program—a supply-chain approach called
DeluxePartners—was designed to increase profitable market share.

1
For the complete background see Deluxe Corporation (A), UVA-G-0548.

This case was prepared by Peter B. B. Turney, Adjunct Professor of Business Administration. This case was written
as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation.
Copyright ã 1999 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights
reserved. To order copies, send an e-mail to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
 -2- UVA-G-0553

DeluxePartners

The purpose of DeluxePartners was to demonstrate to the customer the superior value
associated with Deluxe as the supplier. If successful, both Deluxe and the customer would
benefit from increased profitability and a long-term relationship.

Underlying DeluxePartners was the belief that better business decisions could be made by
expanding the focus of the supplier relationship from just price to overall stakeholder value.
Historically, banks negotiated with check suppliers primarily on the basis of price. The lowest
price was the best value in a supplier, and the supplier with the lowest price generally won the
contract.

However, focusing exclusively on price ignored opportunities to increase the customer’s

revenues and reduce the cost of associated customer processes. Once the customer understood
the profit potential of focusing on Customer Value Added (CVA), then Deluxe could deliver an
array of products and services that maximized CVA.

Stakeholders

In the past, when Deluxe positioned itself with a bank as the low-cost provider, it would
deal exclusively with one customer stakeholder—typically the procurement department. This
department focused primarily on price or cost-of-goods sold.

The DeluxePartners program viewed three primary customer stakeholders as

beneficiaries of the customer-supplier relationship, and participants in the sales process. These
were procurement, retail banking, and bank operations:
• Procurement was interested in the price of the checks. They asked the question “what
is the lowest price we can get for our checks?”
• Retail banking was mostly interested in product features. They asked the question
“which features do our customers want and will generate the most revenue?”
• Operations were interested in the cost of the processes that supported the selling and
ordering of checks. They asked the question “can the check orders be processed to
provide quality, timely and cost/effective service?”

Jeff VanDeVelde explained why it was important to involve multiple stakeholders in the
sales process:

“We don’t want to be stuck in any one of these stakeholder silos. If the procurement people look
only at price, or if operations looks only at processing cost, they may compromise product
features. If retail banking goes after new features, this may increase the bank’s processing costs.
The idea is to get the three stakeholders to work together to create a holistic solution for the bank.”
 -3- UVA-G-0553

Sales Process

Selling CVA to the banks was a lengthy multiple-step process involving a cross-
functional sales team. The sales process typically lasted from twelve to eighteen months.

The initial goal of the sales team was to persuade the bank of the revenue potential of the
relationship with Deluxe, and move it away from its focus on price. The sales team, for
example, might offer the bank a product called “new account scores.” This measured the
propensity of the bank’s customer to buy other products when opening a checking account. New
account scores would model the customer’s buying profile showing the products the customer
was most likely to buy. The bank could then formulate a sales program for this customer.

Once the bank was convinced of the revenue potential of working with Deluxe, the sales
team moved its focus to cost. This involved an assessment of the bank’s check-support
processes using a tool called Order Flow Analysis.

The purpose of Order Flow Analysis was to understand the bank’s cost of supporting
Deluxe and its products. It involved going into the bank and using Activity-Based Costing
(ABC) methods to understand and cost the bank’s processes (Figure 1).

DELUXE

Bank Deluxe
Processes Processes

Account Demand Order Order Order Payment

Verification Creation Submission Fulfillment Delivery Fulfillment

Payment
Processing

Customer Support and Maintenance ( Shared Processes)

Account Account Loss

Cross-sell Closure Recovery

DELUXE FINANCIAL SERVICES

Figure 1: The customer and supplier processes involved in selling, processing and fulfilling
an order for checks.
 -4- UVA-G-0553

The ABC analysis was done for two bank processes: demand creation, and order
submission. Demand creation was the process of identifying the customer’s needs, matching the
products to those needs, and then completing the sale.

Order submission was the processing of the order. This process varied depending on the
way the order was placed. Orders were placed electronically, by phone to an operator, by phone
to a Voice Recognition Unit (VRU), or via mail.

In addition to these primary processes, Deluxe also analyzed exception processing. This
was the processing of exceptions such as orders that were rejected because of data errors. In this
case, exception processing involved correcting and re-running the order.

Once the analysis was completed, the sales team was able to quantify the bank’s potential
savings. These savings resulted from improving the process, fixing the quality problems, or by
changing the method of order entry. In the case of changing from mail to web-based entry of
orders, the savings to the bank could be as much as 90% of the cost of processing the order.

The bank’s potential cost savings were directly linked to revenue potential. For example,
the bank would be unable to use the product “new account scores” unless it was connected to
Deluxe electronically. So the total value of using electronic order entry included the cost savings
plus the additional revenues earned.

Once the revenue and cost analysis was complete, the sales team quantified the
incremental CVA available to the bank, and showed the bank how to capture the additional
revenues and cost savings. CVA was computed using the Deluxe Partner Index (Figure 2).

DELUXE
DeluxePartners:
Shift in Measurement Approach

Today’s Measurement
REVENUE

CTP
(Value = Price Paid)
= Deluxe
Partner Index
CTP CTS

• “Lowest Price = Best

Value
• Price is the single point
for evaluation
Deluxe Partners broadens the area of influence and
evaluation beyond price by showing the total value
of the relationship

DELUXE FINANCIAL SERVICES

Figure 2: Deluxe Partner Index

 -5- UVA-G-0553

The Deluxe Partner Index had three components: Cost-to-Produce (CTP), Cost-to-Serve
(CTS), and Revenues. CTP was the price paid by the bank to Deluxe to cover the manufacturing
costs associated with the check order. CTS was the bank’s cost of the processes required to sell
the checks to the its customers, and to submit, process, and fulfill the orders. Revenue was the
revenue derived by the customer from checks and from other products and services acquired
from (or enabled by) Deluxe.

Figure 3 shows how the index is computed. In this example, a million orders are up for
bid. The competitor attempts to win the bid based on price and offers a discount of 25 cents per
order. In contrast, Deluxe does not match this bid, rather it offers a lesser discount of 10 cents
per order based on estimated manufacturing cost savings.

The smaller discount was acceptable because of positive changes to the other two
components of the index. First, Deluxe took cost out of the bank’s processes by recommending a
different ordering channel, showing the bank how to improve quality, and documenting
improvements to the bank’s process. This reduced the bank’s Cost-to-Serve (CTS). Second,
Deluxe computed the additional revenues that could be earned by the bank using the new
electronic connection. The overall index showed that it was more profitable for the bank to
accept the higher bid from Deluxe.

XYZ Bank

Bid order quantity: 1 million

Competitor bid:

Cost-to-Produce discount 25 cents per order

Deluxe bid:

Cost-to-Produce discount 10 cents per order

Cost-to-Serve savings 50 cents per order
Additional Revenue 25 cents per order
Total DeluxePartners Index 85 cents per order

Benefit of Competitor bid: 1,000,000 X $.25 = $250,000

Benefit of Deluxe bid: 1,000,000 X $.85 = $850,000

Figure 3: Hypothetical example showing the computation of the Deluxe Partner Index.
 -6- UVA-G-0553

Deluxe Value Added

The computations of customer CVA paralleled similar calculations of the profit impact
on Deluxe. The analysis was done using ABC and the overall measure of impact was Deluxe
Value Added (DVA). DVA was the shareholder value created by the overall customer
relationship.2

Deluxe used ABC to prepare pro-forma profitability statements for the customer for each
of five years. These statements computed the impact of the CVA program on profitability.
Included in the ABC analysis were any changes in Deluxe manufacturing cost, cost-to-serve
expenses, revenues from the customer, and assets required (Exhibit 1).

Cost-to-serve expenses included savings from a change in order mix to electronic orders,
from reduced exception processing because of more efficient bank processing, and from the
elimination of unwanted services. Revenues were adjusted for incremental volume, changes in
discounts, and revenues from additional products and services. The customer’s capital charge
was adjusted for changes in receivables and other customer-specific assets.

Once this analysis was complete, a revised customer DVA was computed for each year.
The results of the analysis were used in the sales process to identify profitable customer sales
strategies. For example, ABC showed that the cost to Deluxe of supporting an electronic order
was far less than the cost of a mail order. This data encouraged the sales team to help the
customer take advantage of similar cost savings in the bank’s processes.

2
See Deluxe Corporation (B) UVA-G-0549 for a complete description of Activity-Based Costing and
Deluxe Value Added.
 -7- UVA-G-0553

Exhibit 1

DELUXE CORPORATION (E): SUPPLY-CHAIN MANAGEMENT

Pro Forma Customer Profit and Loss Statement

Annual Units 861,277 1,752,412 2,825,000 2,762,850 2,702,067 2,642,622 12,684,951

Account Run Off 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EFT effect 0.0% 0.0% 0.0% -2.2% -2.2% -2.2%

Percent change 103.5% 61.2% -2.2% -2.2% -2.2%

1998 1999 2000 2001 2002 2003 Total**

Gross Revenue 11,730,593 24,583,881 40,819,719 41,119,336 41,421,152 41,725,183 189,669,270

Less:

Product Discounts (3,465,251) (12,291,941) (21,004,321) (21,158,493) (21,899,448) (22,060,189) (98,414,392)

Amortization Expense - (138,149) (222,705) (217,805) (213,014) (208,327) (1,000,000)

Product Rebates - - - - - - -

Channel Rebate - (100,000) (200,000) (300,000) (500,000) (1,000,000) (2,100,000)

Price Increase - - 594,462 - 585,651 - 1,180,113

Net Revenue 8,265,342 12,053,792 19,987,155 19,443,037 19,394,341 18,456,666 89,334,991

Estimated Discount 29.54% 50.97% 51.04% 52.72% 53.18% 55.77% 52.90%

Cost of Goods Sold

Material -

Paper 429,979 820,493 1,318,600 1,268,940 1,241,023 1,213,720 5,862,776

Other 219,046 441,804 665,461 634,470 620,511 606,860 2,969,107

Total Material 649,026 1,262,297 1,984,061 1,903,410 1,861,534 1,820,581 8,831,883

Labor/Fringe 981,651 1,893,446 2,982,253 2,928,322 2,863,899 2,800,893 13,468,814

Postage 835,621 1,719,880 2,760,433 2,684,295 2,625,241 2,567,486 12,357,335

Other Overhead

Variable (Maint., Supplies, Utilities, T&E) 421,867 757,378 1,133,749 1,073,718 1,050,096 1,026,994 5,041,936

Fixed (Depreciation, Taxes, Rent) 186,595 284,017 443,641 439,248 429,585 420,134 2,016,625

Total Overhead 608,462 1,041,395 1,577,390 1,512,967 1,479,681 1,447,128 7,058,561

Total Cost of Goods Sold 3,074,759 5,917,018 9,304,138 9,028,994 8,830,356 8,636,088 41,716,593

% of Net Revenue 37.2% 49.1% 46.6% 46.4% 45.5% 46.8% 46.7%

Gross Profit 5,190,583 6,136,774 10,683,017 10,414,043 10,563,986 9,820,578 47,618,398

% of Net Revenue 62.8% 50.9% 53.4% 53.6% 54.5% 53.2% 53.3%

Operating Expense 2,866,035 2,754,028 3,413,306 2,978,463 2,563,985 1,620,076 13,329,858

% of Net Revenue 34.7% 22.8% 17.1% 15.3% 13.2% 8.8% 14.9%

Operating Income 2,324,548 3,382,746 7,269,711 7,435,580 8,000,000 8,200,502 34,288,539

% of Net Revenue 28.1% 28.1% 36.4% 38.2% 41.2% 44.4% 38.4%

DVA 1,049,106 1,250,401 3,283,440 3,442,730 3,821,700 3,978,996 15,777,266

DVA (without corporate allocation) 1,314,549 1,515,844 3,522,338 3,657,738 4,015,207 4,153,153 16,864,280

**Totals do not include data from 1998

 -8- UVA-G-0553

Exhibit 1 (continued)

Assumptions:

Revenue
3% price increase in 2000 and 2002

Cost of Goods
Cost of goods applied on a per unit basis in the following manner:

COGS
1998 3.57
1999 3.38
2000 3.29
2001 3.27
2002 3.27
2003 3.27

Cost to Serve
Corporate allocation reduced 10% per year starting in 1999
Electronic Channel mix of 90% by 2003
CI cost not factored in to p&l

DVA Assumptions
WACC is 12%
Tax rate of 40%
Unamortized cash payments, if any, added to balance sheet and subject to a capital charge of 12%
Check Printing capital base reduced 3%in 1999, 2% each subsequent year

DVA Calculations 1998 1999 2000 2001 2002 2003 Total**

NOPAT Tax Rate = ## 1,394,729 2,029,648 4,361,826 4,461,348 4,800,000 4,920,301 20,573,124

Total Check Printing Capital 355,472,000 344,807,840 337,911,683 331,153,450 324,530,381 318,039,773
Annual Cost of Goods Estimate 379,486,000 362,266,000 376,641,000 370,637,000 360,732,000 350,146,000
Capital allocation 2,880,187 5,631,867 8,347,410 8,067,145 7,944,177 7,844,212
Remaining capitalized cash rebate - 861,851 639,146 421,341 208,327 -
Total capital for account 2,880,187 6,493,719 8,986,556 8,488,486 8,152,504 7,844,212
Capital charge (12%) 345,622 779,246 1,078,387 1,018,618 978,300 941,305 4,795,857
WACC = ##
Deluxe Value Add 1,049,106 1,250,401 3,283,440 3,442,730 3,821,700 3,978,996 15,777,266
 -9- UVA-G-0553

Exhibit 1 (continued)
Cost to Serve Detail
Prepared By: Steve Nelson

Billed Units (Business & Personal) 861,277 1,752,412 2,825,000 2,762,850 2,702,067 2,642,622 12,684,951
Billed Orders (1.2 factor to units) 717,731 1,460,343 2,354,167 2,302,375 2,251,723 2,202,185 10,570,792

Per Order Fixed Cost 1999 2000 2001 2002 2003 Cum

Channel Usage Current

Electronic channel 5.8% 50.0% 60.0% 70.0% 80.0% 90.0%
Mail 61.9% 40.0% 30.0% 20.0% 10.0% 6.0%
Teleservice Legacy 26.2% 8.6% 8.0% 7.5% 7.0% 1.0%
Teleservice VRU 6.0% 1.4% 2.0% 2.5% 3.0% 3.0%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Channel Charges Charge

Electronic channel 0.00 - - - - - -
Mail 0.00 - - - - - -
Teleservice Legacy 0.00 - - - - - -
Teleservice VRU 0.00 - - - - - -

Total Channel Revenue - - - - - -

Annual Channel Rebate 100,000 200,000 300,000 500,000 1,000,000 2,100,000

Services

FI Thru 1,072 4,288 4,288 4,288 4,288 4,288 21,440

Demand Cultivation 24,586 98,344 98,344 98,344 98,344 98,344 491,720
Maint/Rep ONE Order Processing - 0 0 0 0 0 0
Prep/Del FI Sales/Mktg Materials 15,214 60,856 60,856 60,856 60,856 60,856 304,280
Train Cust on Prod/Order Channel - 0 0 0 0 0 0
Prepare Ad Hoc Reports for Customer 7,641
Prepare Automated Reports forCustomer 1,722 6,888 6,888 6,888 6,888 6,888 34,440
Production Support - 0 0 0 0 0 0
Product /Service Management 72,114 288,456 288,456 288,456 288,456 288,456 1,442,280
Manage Exclusives Projects 46 185 185 185 185 185 923
Set Up Modify Billing Requirements 526 2,104 2,104 2,104 2,104 2,104 10,520
Set Up Modify AOE/ONE Req's 91 364 364 364 364 364 1,822
Set Up Modify Customer Pricing Req's 788 3,152 3,152 3,152 3,152 3,152 15,760
Set Up Modify Customer Reporting 220 879 879 879 879 879 4,396
Set Up Modify Printing Req's-CI 18,002 72,008 72,008 72,008 72,008 72,008 360,040
Set Up Modify Printing Req's-Legacy 4,558 18,232 18,232 18,232 18,232 18,232 91,160
Set Up Modify Exclusive Products Pricing - 0 0 0 0 0 0
Set Up Modify Exclusive Products Req's 614 2,456 2,456 2,456 2,456 2,456 12,282
Apply Rules & Exec Inv 263 1,054 1,054 1,054 1,054 1,054 5,269
Process Billing Corrections 1,312 8,499 13,701 13,400 13,105 12,817 61,523
Process Credits 699 2,796 2,796 2,796 2,796 2,796 13,980
Legacy - Closed Location Costs 586 2,344 2,344 2,344 2,344 2,344 11,720
Purchasing 1,032 4,128 4,128 4,128 4,128 4,128 20,640
Set Up Modify General Customer Info Req's 577 2,308 2,308 2,308 2,308 2,308 11,540
Train Customer - Electronic Channel - 0 0 0 0 0 0
Collect Receivables (3,221) 4,638 7,691 7,481 7,463 7,102 34,374
Corporate Allocations 122,890 442,404 398,164 358,347 322,513 290,261 1,811,689

Order Creation Cost

Electronic channel 0.20 8,382 146,034 282,500 322,333 360,276 396,393 1,507,536
Mail 1.40 622,005 817,792 988,750 644,665 315,241 184,984 2,951,432
Teleservice Legacy 6.02 1,133,911 756,049 1,133,767 1,039,522 948,876 132,572 4,010,785
Teleservice VRU 0.38 16,405 7,769 17,892 21,873 25,670 25,105 98,308
 -10- UVA-G-0553

Exhibit 1 (continued)

Assumption Page
Prepared By: Steve Nelson

Total Cash Rebate 1,000,000 Annual Rebate % 2000-2003 0%

Product Expense Credit - Gross Rev 2000-2003 165,085,389
IT Programming Expense Credit - Price Increases 2000-2003 1,180,113
Total Amortized Cash 1,000,000 Channel Revenue 2000-2003 (2,000,000)
Discounts 2000-2003 (86,122,451)
Years on Contract Extension 5 Total Incentive Rebate 2000-2003 -
One-Time Rebate 1,000,000
Total Rebate 1,000,000

Unit Analysis

Runoff due to merger 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EFT decline 0.0% 0.0% 0.0% 2.2% 2.2% 2.2%

Amortization Schedule

Cash Rebate
Rate 0.0% 13.8% 22.3% 21.8% 21.3% 20.8% 100.0%
Amount - 138,149 222,705 217,805 213,014 208,327 1,000,000

Price Adjustments

Gross Revenue 0.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Net Revenue 0.0% 0.0% 3.0% 0.0% 3.0% 0.0%

1998 1999 2000 2001 2002 2003 Total**

Gross Revenue 11,730,593 24,583,881 40,819,719 41,119,336 41,421,152 41,725,183 189,669,270

Net Revenue 8,265,342 12,053,792 19,987,155 19,443,037 19,394,341 18,456,666 89,334,991

Concession Rate 29.54% 50.97% 51.04% 52.72% 53.18% 55.77% 52.90%

Incremental Wachovia Units - 891,135 1,072,588 - - - 1,963,723

Total Units 861,277 1,752,412 2,825,000 2,762,850 2,702,067 2,642,622 12,684,951

Gross Revenue per Unit 13.62 14.03 14.45 14.88 15.33 15.79 14.95

**Totals do not include information from 1998