Fair Isaac emerges from shadows

SAN RAFAEL, Calif. -- When it comes to getting a mortgage, credit card or insurance policy, most consumers have no clue about the most important number affecting their application: their FICO scores, behind-the-scenes calculations drawn from credit reports.
Designed to predict future consumer behavior, FICO scores regularly make the difference between approval and rejection. And even after a loan or insurance policy is issued, FICO scores sway prices and credit lines, with the lowest rates going to consumers with the highest scores.
For decades, these scores have been kept hidden from the public by lenders and the creator -- and namesake -- of the FICO scores, Fair, Isaac and Co., a secretive technology company located in a nondescript office park in San Rafael, 20 miles north of San Francisco.
After 35 years, Fair Isaac is finally emerging from the shadows, trying to leverage its influence on household finances to become more of a household name through an online service that sells people their FICO scores at $12.95 per peek.
CEO Thomas Grudnowski envisions a day when the company's patented credit scores are as ubiquitous among consumers as SAT scores are among high school students.
Along the way, Grudnowski plans to transform Fair Isaac from a plodding idea factory to a profit-hungry dynamo.
"This company was sort of like the Bell Labs of analytics when I got here," said Grudnowski, who arrived nearly two years ago. "The employees just loved to figure out ways to take over the world, but didn't spend a lot of time figuring out how to make money out of it."
Grudnowski's approach has attracted the notice of Wall Street, where Fair Isaac is one of the year's few success stories. Although the stock has fallen sharply along with the rest of the market over the past week, it is down only about 7 percent for the year, compared with more than 20 percent in the Dow Jones industrials and Standard & Poor's 500.
Consumer activists, however, insist that Fair Isaac is too powerful to remain unregulated. They also say consumers shouldn't be charged for their own personal information.
And Grudnowski's style has alienated many Fair Isaac employees, who say the new CEO is ruining a cherished culture that company founders Bill Fair and Earl Isaac built in the populist style of Hewlett-Packard Co.
"I don't think the company will achieve long-term success as long as he is running the company because he only has a short-term focus," said Robert Sanderson, who ended a 32-year career with Fair Isaac in April when he resigned from the board in frustration with Grudnowski's strategy.
About 400 other employees have left the company since Grudnowski's arrival from Andersen Consulting, now known as Accenture. Many of the alienated employees worked in sales, where Grudnowski eliminated bonuses for renewing contracts with existing customers.
Grudnowski's incentive plan only pays extra money to sales representatives who bring in new business.
The CEO has also cut about 150 jobs, leaving the company with slightly under 1,500 employees.
"I was a very lonely person the first seven or eight months here, but ... I think people are starting to understand that there is a method to the madness," said Grudnowski, who splits his time between the company's headquarters and an office in the Minneapolis area, where his family lives.
Some employees remain unhappy, according to the executive Grudnowski replaced.
"Tom is a strong personality. He generates strong reactions in both directions and that is causing us to lose a lot of good people. There is no getting around that," said Larry Rosenberger, who spent nine years as Fair Isaac's CEO before stepping aside for Grudnowski.
Fair Isaac's board wanted to replace Rosenberger with an executive who could accelerate the company's growth, primarily by developing new online sales channels.
Rosenberger said he embraced the change because he is more interested in developing new technology than running the company. He is Fair Isaac's executive vice president of research and development.
Fair Isaac's most prized asset is its FICO formula, which grades consumer credit reports provided by the nation's three major credit bureaus -- Equifax, Experian and Trans Union -- and generates scores typically ranging from 300 to 850. The FICO formula and its credit card software applications influenced 12 billion financial decisions last year, the company estimates.
Fair Isaac closely guards the equations used to determine the score, but some factors include payment history, outstanding loan balances and the number of credit cards already issued to a consumer. FICO has become the industry standard and Fair Isaac collects a small royalty for each score generated under its equation.
Until recently, Fair Isaac downplayed its enormous clout, preferring to work quietly with banks and credit card lenders that generate the bulk of its revenue. The approach has fostered resentment among consumers who learned how the scores affected their pocketbooks.
"FICO was becoming a four-letter word," Rosenberger said.
Prodded by political pressure and Grudnowski's quest to develop new markets, Fair Isaac in March began to offer consumers a chance to review their personal FICO scores through an online service operated in partnership with Equifax.
Each FICO score and the Equifax report it's drawn from costs $12.95 through myfico.com.
Although pleased that Fair Isaac is finally allowing people to see their credit scores, consumer critics think the information should be available for free. They also blame FICO for not doing a better job of verifying the validity of the data in the credit reports.
"They have done a good job of convincing everyone that they are the high priests of a very sophisticated system when it's really not that sophisticated," said Ed Mierzwinski, a consumer advocate for the U.S. Public Interest Research Group in Washington, D.C.
Grudnowski said Fair Isaac is already helping consumers save money by providing tips on how to improve their FICO scores with each report ordered online.
"If you do just a few things that we recommend, you can lower your interest rates without waiting around for Alan Greenspan to do it for you," Grudnowski said.
On The Net:
http://www.myfico.com
http://www.fairisaac.com
http://www.equifax.com