Managed services is a hot topic in the technology space. We are seeing increasing demand for customers looking to leverage managed upgrade services in particular to help them stay current on their credit and collections software. Software vendors these days need to be more than technology providers. They need to be managed service providers who can offer an array of managed application services including managed upgrades. Here is an article from my colleague Paul Bramwell, svp of treasury solutions at SunGard, who explains three ways to always stay compliant and de-risk your upgrades. Read article.
According to a recent article posted by my colleague, Mike Kresse, EVP of Growth Markets at SunGard, Business Process as a Service (BPaaS) can help software vendors meet the demands of their customers, who are looking to vendors to be more than just software providers. I see this in the credit and collections industry as well. Often companies are being asked to do more with less. Companies are looking for vendors to not only offer credit and collections solutions but wrapped around them cloud based services and managed application services.
Read more about how a BPaaS model can help bridge the gap between customers and their software vendors.
I attended the Credit Research Foundation’s Credit Forum this week in Denver. I always have great discussions with credit professionals at these forums about how they are managing their credit and collections efforts. One of the topics that seems to always be of interest is measuring collector effectiveness. A recent SunGard market study states that 44% of companies are using the Collections Effectiveness Index to measure performance. According to the Credit Research Foundation, the Collections Effectiveness Index expresses the overall effectiveness of the credit and collections operation over time. The closer to 100 percent, the more effective the efforts. How does it work? Here is the equation:
(Beginning Receivables + (Credit Sales/n*) – Ending Trade Receivables
Beginning Receivables + (Credit Sales/n*) – Ending Current Receivables (x 100) = CEI
n = number of months
While the use of this specific metric has never been as widely adopted as Days Sales Outstanding (DSO), it is worth considering adding it to your metrics if it is not already being monitored within your credit and collections department; essentially it speaks to the quality of the operation.
Do you use the Collections Effectiveness Index to measure your collectors? I’d like to hear from you.
We recently undertook a study to look at global credit and collections practices. We found that 61% of the participants report that they are either not at all or only somewhat automated. Automation and workflow can actually minimize manual processing and improve productivity by helping to prioritize activity while also helping to allocate resources most prudently to the highest risk accounts. Areas in which automation are typically used most effectively are around prioritizing collections activities, dunning efforts and routing / managing disputes.
Download the market study so you can read how even small steps toward automating your credit and collections processes can lead to improved productivity, reductions in past-due A/R, lower days sales outstanding (DSO), reduced dispute cycle times and ultimately increased cash flow.
We recently conducted a comprehensive market study to benchmark global credit and collections practices. Our study showed that 55% of companies hold up the entire invoice once there is a dispute recorded, rather than splitting the remainder off and entering the disputed portion into a workflow process. So basically, more than half of the companies we surveyed (with revenues over $1 billion) are leaving money on the table by not segregating out the disputed portion of an invoice and collecting on the remainder.
Deduction management remains a time consuming challenge for most credit departments. Resolving a dispute almost always involves at least one other group outside of collections, with the two most prevalent being sales and customer service. However, one of the biggest challenges is often communicating across these groups and with the customer. For this reason, most companies institute some level of workflow automation that contemplates a centralized point of access for all parties.
Any deviation from a clean transaction can impact the cash settlement process, so segregating out the disputed portion of the invoice is a critical step in helping to reduce days sales outstanding (DSO) and bad debt expense associated with invoice exceptions.
Download the study to read about how changing your deduction management process could lead to dramatic changes in your company’s DSO.
Are you leaving money on the table? I’d like to hear from you.
We recently undertook a comprehensive credit & collections study to better understand how corporations are optimizing what is often the largest current asset on their balance sheets, the accounts receivable (A/R) portfolio. The study showed that 88% of companies are using outdated methods to drive their collections activities. I often see this in practice – without an effective alternative, companies continue to rely on age or invoice value to drive their efforts, simply because it’s the way they’ve always done it. However, this widespread practice leads to unworked current high-risk receivables rolling into past due buckets in the short term future and can have a wider effect on credit management. But the emergence of risk-based collections offers a more effective method that is not yet widely-adopted – statistical scoring models designed to predict the inherent collections risk of a customer.
The study showed that only 7% of companies were using a credit scoring risk grade generated by statistical models as their top driver for their collections efforts. The risk grade has been proven to be a more effective tool. Our study actually showed that, of the companies that used risk grade as their primary driver, half had fewer than five collectors, and they also reported having lower past due rates than the other respondents.
Download the study to read more about how statistical scoring could help your company improve its collections effectiveness.
I recently attended our annual Americas client summit in Chicago, bringing together our customer community across our Treasury, Receivables, and Payments solutions to share best practices, network, and to participate in user groups and product training.
As I reflect on the many discussions I had with credit and collections professionals and the customer presentations that were delivered, I noticed a common theme amongst the customers who have been using our solutions for many years and our newer customers – leveraging vendors as a trusted partner and partnering for growth is essential to their success.
Credit and collections departments not only require, but should be demanding, the latest and greatest that technology has to offer and the services that go along with it. Their trusted partner should not only have the expertise and experience around the product but the ability to deliver services around those products. Hosting solutions via the cloud and managed upgrade services help keep our customers on that growth path. Subscribing to a managed upgrade service actually increases the return on the customer’s investment by ensuring they are taking advantage of the latest features and technology. Also, since the managed upgrade service includes consultation and training services, customers are able to maintain best practices. Credit and collections departments no longer need or should be held back by internal IT or budget challenges.
What does being a trusted partner mean to you? I’d like to hear from you.
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.
What is required to collect cash on time? The answer is both simple and complex. To collect on time, a customer needs to pay on time (the simple); encouraging them to do so is rather more problematic (the complex). In the past, companies encouraged their customers to pay on time, or even early, using early payment discounts. While this may still be valid for some companies, every company is seeking to maximize its working capital, so early payment may be less attractive. So what processes should a collections manager alter to ensure that they get paid and on time?
Firstly, companies are increasingly conscious of counterparty risk, and in many cases, the process of assessing potential customers and establishing appropriate exposure limits is being reviewed, resulting in more conservative policies and lower limits. One of the issues with a decentralized approach to credit and collections management is that it is difficult to ensure that a standardized approach to customer acquisition, monitoring and limit setting is being adopted across the business. Furthermore, if different sales departments or business entities are conducting business with the same customer groups, it may be almost impossible to identify and monitor overall group exposure.
Secondly, companies need to make it as easy as possible for their customers to pay. To enhance collections convenience, it may be desirable to insist that customers pay using electronic credit transfers or direct debits, but this policy may be detrimental to customer relationships and be at odds with local payment cultures in different countries of operation. A centralized approach to collections does not mean that local payment cultures cannot be respected; in fact, by using an automated workflow solution, invoices and customer correspondence can be produced in different languages with bespoke content according to the culture in each country or the nature of individual entities. Furthermore, by using a combination of processes, technology and banking services, companies can collect cash in a variety of ways, including manual forms of collection such as checks, without compromising efficiency.
Thirdly, companies need to be proactive in seeking prompt payment. Sending an invoice and expecting it to be paid is not enough. Invoice disputes and queries need to be dealt with quickly to avoid payment delays. In many companies, this is managed by a customer service team or even the sales team, and there is no central visibility or accountability over the query resolution process. Making use of technology that enables a single view of each customer, invoice and status, with automated follow-up actions facilitates the process, ensures personal accountability and central visibility. Another element of collections proactiveness is the ability to remind customers that an invoice is due or better yet coming due. Often, particularly in a decentralized environment, this involves a call from the finance team to sales, who then chase payment. This often takes place long after the collection was due, and gives a negative impression to customers. In contrast, establishing a centralized, automated process for sending customized payment reminders before due date, as well as afterwards, can be an important way of ensuring that collections are on time. Furthermore, a professional impression is created with customers.
Are your credit and collections processes centralized or decentralized? I’d like to hear from you…
I often get asked to share best practices from companies who have automated their credit and collections processes. I thought I would share with you results from a well-known beverage distributor, The Heineken Group. The Heineken Group operates in 170 countries and sells more than 250 brands of beer.
In January 2010, The Heineken Group set up a Group Credit Management team and also implemented automation technology and workflow to improve its credit and collections processes. After two and a half years, late payments declined by half, days sales outstanding (DSO) improved by 21 percent, and litigation decreased by 65%.
You can read more about their project here.
Are you looking to automate your credit and collections processes? I’d like to hear from you.