Meeting Corporate Objectives Through Credit & Collections Automation

CFOs are counting on credit and collections managers to help them to improve performance against working capital goals, achieve sales targets, and improve the strength of internal controls. Many managers find that while the pressures they face are escalating, their resources remain limited. As a result, they find it increasingly difficult to meet these corporate goals and keep pace with sales growth. Proactive managers learn from the examples of world-class companies that use technology to make credit and collections processes as smooth and error-free as possible. Automation enables line professionals to achieve stronger results with fewer resources €“ and still have time left over that can be devoted to deeper analysis and the strengthening of customer relationships. To illustrate the impact of eCredit s automation technology on the efficiency of the credit and collections processes, we have developed a sample case study. The Return on Investment (ROI) analysis only quantifies the subset of benefits that can be most easily monitored and benchmarked, but even with this limited analysis it is apparent that in most circumstances the investment will quickly pay for itself. Companies interested in generating a customized ROI should contact eCredit directly.

Key Challenges Facing Credit Departments

Today s credit departments are stretched in three directions. They must guard credit quality and find ways to help the sales team to grow the business, but oftentimes they must achieve these goals with fewer resources.

Challenge 1: Doing more with less

Recent budget cuts and layoffs have increased the pressure on credit managers to get more done with fewer resources:

89.8% of credit managers say that do(ing) more with existing staff resources is a very or significant challenge, and 89.0% also worry about improving the turnaround time for new customer approvals.

 

• - Credit Research Foundation (CRF) - For decentralized firms as well as those in which mergers or acquisitions have recently taken place, unnecessary duplication and time zone delays are further drains on efficiency. There is often little time left over for responsibilities that are equally important, even if they are not so urgent. Examples of less time-sensitive activities include a) refining credit screens based on historical results, b) aggregating credit exposures across corporate hierarchies and geographies, c) maintaining a dialogue with executives at top accounts, and d) visiting customers on-site. However, companies using credit automation are achieving many more of these goals with fewer people €“ and also making time for their less urgent responsibilities: Without eCredit, we would need to add another three analysts to our ten-person credit group. We d need to hire even more if we wanted to continue to invest the time necessary to make high quality credit decisions.

• - Department Manager for Credit & Collections, Leading international food product manufacturer

Challenge 2: Maintaining credit quality within a tough economy

Not only are credit teams shrinking, but over the past few years the market has been riddled with landmines (e.g., Enron, Global Crossing, Kmart and WorldCom). Credit managers are faced with a situation where DSO and bad debt standards are becoming tougher to maintain. Side-stepping these mines involves focusing the periodic account reviews that can be viewed as optional during the boom times. Although resources are often too tight to conduct these reviews manually, credit managers find that they re able to achieve strong results by taking advantage of credit automation tools: 45% of respondents believe that credit scoring has a positive impact on DSOs, and 58% of them report a positive impact on bad debt €“ much higher than the 28.5% that sees a direct impact on resource allocation. - Credit Research Foundation (CRF)

Challenge 3: Help the company to grow profitably

These days, companies are fighting for every sale, and sales reps will not take no for an answer until they ve spent many hours arguing on behalf of a high-potential customer. Processes that enable credit managers to defend their decisions yield substantial time saving: If a sales person doesn t agree with a credit decision, we have an appeal process where it goes from credit manager to group manager to me. Before installing eCredit, I spent 5-6% of my time on these issues, and our credit manager spent 20-25% of his time on them. After installing eCredit, I spend less than a third as much time on credit appeal, and my credit manager spends one-fifth as much time on them. - Director of Credit & Collections, Leading industrial products distributor Credit managers must also take time away from their defensive role to join the offense. They must help sales reps to pre-qualify customers, identify opportunities to upsell to current customers, and develop payment structures that provide higher rewards in exchange for the higher risk levels associated with some customer relationships:

Key Challenges Facing Collections Departments

Collections departments face a daunting task: to improve DSOs and minimize write-offs with the same or fewer staff €“ despite the fact that customers are becoming more sophisticated in the art of payables evasion.

Challenge 1: Reducing DSOs

As payables departments receive pressure to push out payment timelines, collections professionals achieve mixed results: According to the CRF, the median for average days delinquent is currently 11.42 €“ significantly higher than the figure for the top 25% (5.29) or top 10% (1.77). - Credit Research Foundation (CRF) Best-of-breed collections departments strive to work both harder (by making more calls) and smarter (by prioritizing the calls that will have the most impact). eCredit customers testify that the technology offers them an advantage in the race to reign in receivables: Before using eCredit, there was an opportunity to improve DSOs by 5-7 days. We then achieved a 4-4.6 day improvement, narrowing the gap to about 1.5 days. - Department Manager for Credit & Collections, Leading international food product manufacturer

Challenge 2: Minimizing write-offs

Companies that identify problem accounts when they are one month past due have a distinct advantage over those that identify issues 30 days later: The percent of commercial debt deemed collectable falls from 93.8% (when one month past due) to 85.2% (when two months past due). - Commercial Law League of America However, collectors rarely have the time to track company payment patterns and start making calls early to the companies whose payments seem to be unusually late. Also, after a collector has identified a problem account, it takes time for him to gain approval for a course of action. eCredit software automates the identification of problem accounts and notification of relevant managers, placing its users one step ahead of the competition in the payment pecking order: The data which eCredit provides on a company s payment history as well as related comparables allows us to identify problem accounts at least two weeks earlier than we had been. We are now flagging watch accounts at closer to 30-60 days past due rather than 50- 70 days past due, and we re having a 20-40% impact on that category. - Department Manager for Credit & Collections, Leading international food product manufacturer

Challenge 3: Keeping costs in line

Collections departments are working toward tougher goals and applying fewer resources to the task. This is a major challenge, given that there is a direct relationship between the number of full-time employees in a department and the DSOs and recovery rate results that they can achieve. The best practice is to find a way to allow collections professionals to spend a higher percentage of their time on the phone. eCredit clients testify that the technology helps their people to accomplish this goal: Without eCredit, we would need to add another 8 analysts to our 15-person collections group. - Department Manager for Credit & Collections, Leading international food product manufacturer

The eCredit Solution The eCredit solution is designed to address the key pain points of the credit and collections departments. The automated credit module enables companies to apply a single set of approved rules and procedures to every credit decision €“ thereby improving the efficiency and consistency of the decision-making process. Also, credit managers throughout the organization can store all information relevant to a credit decision in a centralized database €“ and draw on this database to improve the effectiveness of the credit process (e.g., improving granularity of credit screens, prequalifying customers). The automated collections module also helps collectors to get more done with fewer resources. Administrative and work re-balancing tools allow collectors to maximize the amount of time that they spend on the phone. Similarly, performance management and analytical tools enable collectors to identify problem accounts more quickly, reign in DSOs, and minimize bad debt. When automated credit processes are combined with automated collections processes, the power of each is magnified. Collectors benefit from the insight of creditors when deciding which accounts require close scrutiny, credit limits are voided as soon as an account is deemed to be a problem , and credit and collections personnel can more effectively assist one another with job responsibilities during down time. The sales team also wins, since the database that will be used to identify new sales opportunities (e.g., pre-qualification, upselling) will become more robust. From a CFO s perspective, the eCredit solution enables management by exception . Managers can take advantage of automated dashboards and advanced reporting features to ensure that they re notified of problem accounts as soon as they exhibit predefined characteristics. An eCredit investment is an important step along the path of continuous improvement. Return on Investment (ROI) Case Study The return on investment of eCredit is immediate and demonstrable. The following example focuses on a representative profile of the typical eCredit customer, which we ll call the XYZ Corporation. XYZ Corporation XYZ Corporation is a highly decentralized organization generating $2 billion in global revenues and a 20% gross margin. Its 6-person credit department approves 175 applications per month, 75 of which are for new credits with average annual sales of $150,000. The credit function is also decentralized, and half of all credit analyses are duplicated throughout the organization. On the collections side, the company s team includes 12 full-time professionals. Two of these professionals serve as managers, and they spend half of their time monitoring the performance of the other ten. The pie chart detailed in Figure 1 (see next page) visually conveys the breadth of the eCredit value proposition as well as the approximate weighting of each of the key benefit areas that eCredit provides. eCredit Sources of Value: Credit Department Our model indicates that use of eCredit s automated credit module would enable a company like the XYZ Corporation to achieve benefits in the following areas: Source of Value Specific Benefits Improve performance against working capital metrics €¢ Reduce DSOs €¢ Reduce bad debt Close more sales €¢ Prequalification €¢ Increased approvals €¢ Reduced abandonment €¢ Increased upselling Improve Productivity €¢ Reduced bureau report costs €¢ Supervision of credit analysts Headcount Avoidance {img comparative-value-drivers.png} Source 1: Improve Performance Against Working Capital Metrics Credit automation enables companies to more effectively manage risk €“ yielding a significant impact on DSOs and bad debt. The technology allows credit managers to gain faster insight into the creditworthiness of companies, better understand the nature of their aggregated risk exposure, and more flexibly respond to environmental changes. Credit automation tools also have a significant impact on bad debt; the eCredit system provides the firm with more detailed and frequent information that offers additional insight into the magnitude of a particular credit risk. Based on eCredit customer results, it s reasonable to expect a reduction in bad debt by 5%. Given that the XYZ Corporation has bad debt of $3 million, this translates into a $150,000 reduction. The impact on bad debt reserves is $7,500 ($150,000/2*10%). €¢ Reduce DS0s: 0.68 days ?? $370,959 in cost savings €¢ Reduce bad debt: 1/20 (5%) ?? $157,500 in cost savings Source 2: Close More Sales eCredit makes it easier for credit managers to become a part of the sales solution. For the XYZ Corporation, this translates into four distinct benefits related to:

1. 1. Prequalification: Automated credit technology can be used to screen potential prospects. By

identifying which prospects will not meet credit standards before sales professionals waste time cultivating them, eCredit enables sales to redirect its energies toward closing deals with customers that are more likely to meet credit analysts criteria. Sales reps at the XYZ Corporation waste 1% of their time on sales credits that are ultimately declined, and it s reasonable to expect that prequalification efforts will reduce the rejection rate by 0.4%.

1. 2. Refined risk analysis and credit structuring: eCredit provides companies with data that allows them

to analyze credits at a more granular level, developing a better understanding of the specific nature of a company s risk. By structuring a contract that will control for specific risks (e.g., requiring payments sooner and apply penalties earlier), an eCredit client can approve credits that it would otherwise have declined. These efforts would be expected to improve the rejection rate by an additional 0.2%, bringing it down to 0.4% (1.0% - 0.4% impact of prequalification efforts €“ 0.2% impact of refined risk analysis and credit structuring)

1. 3. Reduced abandonment: For businesses in relatively fast-paced and competitive markets, every

additional hour spent on the credit review process has a significant impact on sales abandonment rates. eCredit customers are able to turn around credits especially quickly, since they use credit scoring methodologies to approve credits in real-time. Although some credit applications will require a more in-depth review, the reduced backlog in the back office will allow credit analysts to turn these applications around more quickly.

1. 4. Increased upsells: Many credit departments approve a standard limit and don t consider offering

more unless asked. Consequently, sales professionals aren t alerted to the opportunity to proactively upsell. Enter eCredit, which helps credit managers establish more accurate (i.e., possibly higher) credit limits. The automated solution also makes it easier to periodically monitor customer credit-worthiness and proactively recommend increases in credit limits €“ paving the way for upsells. The impact on sales is as follows:

• €¢ Prequalification: 0.4% increase in approvals ?? $216,000 in revenue gains

• €¢ Increased approvals: 0.2% increase in approvals ?? $162,000 in revenue gains

• €¢ Reduced abandonment: 0.5% decrease ?? $135,000 in revenue gains

• €¢ Upselling: 1.0% increase in avg. deal values ?? $70,000 in revenue gains

Source 3: Improve Productivity

eCredit enables credit teams to get more done with less by reducing data bureau costs, the time spent supervising junior analysts, and even the need for new hires in Years 2 through 5. Many companies see quick bottom-line results in the form of lower data bureau costs, since eCredit helps them identify opportunities to request less detailed reports. Use of eCredit enables the XYZ Corporation to realize a 35% reduction in data bureau costs. Credit departments can expect to save time as well as money. By configuring eCredit to automatically implement the best practices, managers can ensure that junior analysts will apply proven methodologies consistently without additional oversight. The typical organization can expect senior professionals to spend 5% less time overseeing credit analysts. Clearly, automated credit approval makes the junior analyst s job much more efficient. Analysts find that electronic credit files, integrated tools for financial and portfolio analysis, and links to external information enable them to rapidly assemble account information, credit scores, and financial information for customers that require manual approval. Also, eCredit s systematic approach to credit reduces the chance that sales professionals will choose to contest credit professionals decision. Decentralized organizations like the XYZ Corporation realize an even stronger benefit, since use of a centralized electronic storage system eliminates the duplication of credit efforts for customers that have separate relationships with various divisions of the company. Its 6-person credit team finds that eCredit enables it to reduce the amount of time required to complete its pre-eCredit responsibilities by 67%. Found time is redirected toward higher value activities (e.g., talking with customers, assessing corporate risk exposure, headcount avoidance in the out years, and/or collections activities). Also, the team is able to avoid hiring one additional FTE in Year 2 and an additional one in Year 3.