Dynamic Credit and Collections to Slash Bad Debt
by Peter Jackson, Vice President, Finance - FP&A and M&A, and Randy Dacus, Director of Customer Financial Services, Lennox International, Inc.
The collapse of the United States property market in 2007-8 had major implications for Lennox, with a rapid decline in construction. Dealers selling to a mixed market quickly felt the pinch, following a number of benign years for the housing and construction market. Credit and collections had not been a major area of focus for us over this period, but we realised that to position the business successfully within a radically different economic climate, we needed to improve accounts receivable performance whilst also supporting our customers who were struggling to manage working capital.
An independent approach
We had met REL Consultancy, a division of the Hackett Group, at a conference, and discussed best practices in credit and collections. We liked REL’s structured, results-led approach, so we invited them to perform an independent assessment of our credit and collections process and identify opportunities for improvement. Their assessment concluded that we could make considerable improvements by standardising, simplifying and automating key credit and collections processes, but without compromising our ability to put in place bespoke arrangements for key clients. We therefore worked with REL to map out a project plan for rapid delivery given the challenging business environment we were facing, with a view to implementing best practices in a manner that was scalable, automated and would meet Lennox’s future needs.
Centralised, dynamic credit risk management
The most significant change we made was to build consistency, reliability and predictability in the way that credit and collections were managed. We replaced our previous, decentralised model with a standardised approach that could be applied to both new and existing customer accounts. While many companies review customer credit infrequently, our credit review process is now dynamic, with monthly credit grading for each customer based on a sophisticated algorithm that combines credit agency data with internal intelligence on past sales behaviour and payment performance. This allows us to identify specific customers who may require review or adjustment, either on the basis that they may be struggling to pay or those that demonstrate excellent payment performance.
Best practices in automation and control
Having configured our policies and processes, a key element in the success of the project was to achieve a high degree of process automation and transparency over key metrics by putting in place the right technology. It was critical, however, that we first designed efficient processes before trying to automate them. We reviewed various solutions and developed a scorecard based on a matrix of the relative importance of different elements of functionality in supporting our customers. Ultimately, we selected GetPaid (SunGard AvantGard Receivables) which we implemented very successfully. We also worked with a credit vendor to build up our credit scoring model.
As with any project that requires changes to people’s working practices, we knew that it would be important to manage any objections and make it easier for the team to make the transition to new processes and technology. Senior managers were engaged in the project from the start as they recognised the impact of poor accounts receivable performance on cash flow and working capital. It was particularly significant that our senior sales managers were supportive of the project, so their teams became part of the solution rather than the problem. We also made it clear that transforming and automating our credit and collections processes was not an isolated finance activity but a project that would increase fairness and transparency in the way that we work internally and how we treat our customers. Consequently, we are now in a position to partner the business in achieving its commercial objectives rather than creating obstacles.