Centralizing and optimizing credit and collections management delivers benefits that extend well beyond the immediate confines of the credit or collections departments. Achieving greater predictability of cash flow is vital for liquidity planning and enables borrowing and investment decisions to be taken with more confidence, with the potential to reduce borrowing cost and increase investment yield. In an environment where credit is more constrained, more difficult to obtain and more expensive to maintain than during pre-crisis days, with no guarantees of continuous market access, I feel this is an important consideration and should be a top priority for corporations.
The business case for centralizing collections can be compelling: significantly reduce overdue receivables and increase cash flows. Reduce days sales outstanding (DSO) and bad debt; increase efficiency, control and standardization of business processes, and enhance both internal and external customer relationships. Ensure compliance to internal policies. However, the challenges can often seem insurmountable, and frequently thwart plans to centralize collections. Some of the most common include the following:
Lack of Management Support
In companies where decision-making is divested to local management, major business change requires senior management sponsorship to help clear internal roadblocks and incentivise local management to co-operate and assist in centralization. The benefits of centralized collections are often not apparent to local management and sales teams until the new arrangements are in place, so strong sponsorship and commitment is essential. Over communication is key to driving support and gaining consensus and commitment.
High Initial Investment
The cost of establishing a new shared service center (SSC) or migrating major activities into it can be considerable, and companies with budget constraints may find it difficult to justify major upfront investment. However, the potential advantages in reducing DSO and bad debt, and enhancing the company’s liquidity position can be considerable, and the payback period for such a period is frequently less than six months. Additionally, the investment in technology is essential for success and to overachieve on the ROI projections.
Frequent Business Change
Companies which frequently undertake M&A activities tend to believe that the ongoing costs of migrating new businesses into a centralized credit and collections unit may be not be justifiable. However, in reality, companies that have introduced shared services for collections have found that by introducing a structured approach to migration of new businesses, particularly when using a specialist collections system as opposed to an ERP, where the implications of migration are typically greater. Furthermore, companies that divest businesses have found that the value of divested assets is increased when collections are centralized, as potential purchasers have full visibility over the debtor position and confidence in credit procedures that are undertaken. Ensuring compliance to existing company standards becomes a byproduct of centralized credit and collections management.
Differences in Payment Culture, Methods and Formats
Multinational companies in particular face the challenge that collection processes in each country can differ considerably. For example, even though paper-based checks are on the decline in the United States, they are still popular. In contrast, countries in Europe have highly efficient, electronic payment mechanisms. Furthermore, the clearing systems and formats required in each country differ substantially, and the business culture for collecting cash can vary.
Maintaining a decentralized approach to collections may initially appear beneficial to address local regulatory, clearing and cultural requirements. However, with costs replicated across each collection location, and the lack of control and automation that typically results, disparate collection methods can be managed in a single system while successfully addressing the diversity of local needs. In some cases, it makes sense to retain some functions locally, such as invoicing in the case of highly specialist companies with complex orders; however, centralization does not always require all individuals engaged in the process to be in a single location. Instead, we are seeing a growing trend towards virtual, as well as physical SSCs, facilitated using central technology to ensure that global processes, controls and reporting are achieved, while still respecting the culture of the company
The use of a single technology platform can facilitate a centralization strategy that is specific to each company, that could involve one SSC, but equally could include regional or country centers, a ‘virtual’ approach or a combination. Providing a proper technology solution that allows for collaboration and visibility in and out of the SSC operation is key.
Are you thinking of centralizing our credit and collections processes or already have? I’d like to hear about your concerns or experiences.