Credit and Collections – Staying Ahead of the Curve

Over the past 12 months, we have witnessed a dramatic increase in technology-based opportunities to improve credit and collection programmes. Access to new technology has traditionally only been available to large corporations with large revenue streams and complex structures that required a solution to consolidate all of their disparate systems into one interface. New delivery models including companies being able to self-host licensed software, leveraging hosted licensed software, or software-as-a-service (SaaS) broadens the availability of the technology to growing organisations.  

During the same time, we have witnessed unprecedented volatility and unpredictability, with financial markets and the wider economy.  Consequently, credit and collection managers need to be able to keep a close watch on credit risk, with the potential for higher defaults and less predictable payments.

FIS commissioned a study exploring some of the trends amongst corporations globally.  This study consisted of 264 corporations across all major industry groups.  The results of the study demonstrate current and emerging trends within the credit and collection function that hold true regardless of the industry serviced.  

Centralising processes and data

Centralising credit and collections can mean a few things – centralising a team into a shared service centre environment and standardising processes as well as centralising data into a single solution to improve visibility into cash and risk.  The two can happen together or separately.  Centralisation is a challenging task for any organisation, but especially for larger corporations.  Centralising processes allows corporations to create synergistic power.  The reduction in resources that are required to complete tasks can save an organisation thousands, if not more, each year.  Adherence to policy and procedures is easier to maintain in a shared service organisation.  Maintaining one organisational head responsible for companywide results prevents business units from serving only their own best interests.  However, the practical application of centralising operations that have been operating independently for any given amount of time is quite complex.  

Processes must be documented, modified, and re-established.  Physical centralisation throws in another wrinkle of potentially dealing with relocation and/or hiring of new resources at the centralised location.  Two of the most difficult factors for corporations to overcome on their own when creating shared service centres are change management and technical system consolidation.  To overcome these factors, corporations turn to change experts and a strategic solution partner.   Change experts are great at designing a methodology to maximise employee buy-in.  A strategic solution partner offers a single user interface that consolidates data from all of the numerous systems that a shared service centre must support.  This interface becomes the user’s hallowed tool.  This technology is the single most important success factor for credit and collections shared service centres.  

The level of centralisation varies across organisations (figure 1).  Some of the study participants centralised into a global centre (36%), some found it more appropriate to centralise into regional centres (24%).  A smaller portion (15%) used a combination of approaches.  The remaining portion (25%)  either indicated they continued to be decentralised or simply responded with ‘other’ as a form of a combined approach.  

Once a shared service environment is established, how do teams achieve the cost savings and results improvements that are necessary to claim success?    

Leveraging automation technology to optimise shared service centres

Leveraging automation technology can help credit and collections teams that operate in a shared service centre to optimise their results and provide more value to their organisations. Credit and collections teams operating in a decentralised model can also utilise automation technology to help standardise their processes, consolidate data into a single system that is accessible by the whole team, and deliver greater value to their organisations.  Surprisingly, many corporations have still not fully automated their credit and collections processes.  According to study participants, only 5% have achieved full order-to-cash automation. The biggest group of participants (56%) considered that they had achieved only partial automation, demonstrating the scale of opportunity for improvement (Figure 2).

By automating and driving workflow across these processes, corporations can take control of increasing their cash flow.  Robotic Process Automation (RPA) is one of the latest industry buzzwords but how does it apply to the credit and collections process?  

RPA removes people from tedious, repetitive tasks and allows them to be re-allocated to high value-added tasks.  Any task that is repeated more than once by an individual, or group of individuals, is a candidate for RPA.   Rule-based logic is applied to everyday tasks to produce the desired outcome without human intervention.  RPA can be useful during the credit review process in applying appropriate credit limits up to a point that requires approval.  It can also be applied during the cash application process when handling deductions or initiating workflow steps.  The collection process benefits from RPA through automated customer contact for lower value, less strategic accounts. 

 Solutions that are on the developing edge of this technology, are not limited by the number or complexity of the scenarios that are to be handled by RPA.  Whether it is one variable or one hundred variables, RPA follows the applicable process consistently, with every transaction freeing up teams to focus on customer-centric and relationship oriented tasks.  The customer relationship is a differentiator between a good credit and collection organisation and a great one.  Leveraging RPA frees teams to cultivate relationships rather than being just another email or phone call.  

Leveraging Artificial Intelligence 

Artificial Intelligence (AI) could be the most powerful tool available to any credit and collections organisation.  AI offers the ability for a machine to learn and adapt to changing business scenarios.  RPA is a fairly static environment.  Tasks are executed exactly as the rules indicate.  However, when combining RPA with AI, the administrative functions of monitoring and adjusting rules can be completed automatically and in virtually real time.  Typically, human decisions in this area are made only after some major event warrants a review.  AI monitors all activity as it happens and makes necessary adjustments to maintain a specified level of results.  For example, it can be applied to monitor credit and collections risk.  For credit, customers are monitored to determine appropriate credit limits and potentially alert team members when there are sudden shifts in credit indicators, or when certain thresholds are exceeded.  

According to figure 3, age (41%) and value (35%) are the most common priorities when determining which invoices the collections team should focus on.  While this is common, it is not best practice and is not helping the collections team optimise its ability to increase cash flow into the organisation. AI however, is an area that can help a collections team optimise their results and move to a risk-based collections model.  By utilising AI within the collections process, customer behaviour is monitored and compared with past successful and unsuccessful techniques.  The best appropriate action is determined by taking into consideration all other pending and future activities across an entire portfolio. 

As humans, we attempt to prioritise and determine the most appropriate action, however it is not possible for us to comprehend the impact across the entire portfolio.  AI uses very complex algorithms to calculate the most effective and best action across the entire portfolio in a matter of seconds.   The industry is just starting to scratch the surface of the capabilities of AI.  In the very near future, it will be able to determine the probability of a customer disputing an invoice even before they receive it.  Teams will be alerted to the potential issue immediately, allowing them to take proactive measures to resolve any issue well before the due date.   

Optimising the deductions/dispute management and cash application processes 

Whether they are valid claims or not, a factor common to all corporations is the existence of disputes and deductions.  Some companies are better equipped to handle them than others, but they still must deal with them.  

First, let’s define the difference between deductions and disputes.  Deductions are short payments by customers.  These can be the result of short shipments, where the customer ordered ten units, but only received nine.  Rather than refuse to pay for everything, they may pay for the nine they received.  Customers may also choose to deduct for past credits, tax discrepancies (handling tax exemption certificates is a whole other article on its own), discounts, and more.  

Disputes are defined as customers disagreeing with a portion or all of an invoice and generally refusing payment.  The terms deduction and dispute are often used interchangeably.  A good rule of thumb is that deductions are smaller in nature and almost always found during the cash application process.  Disputes are generally larger in nature and can be identified through the collection process or the cash application process.  Regardless of how they are identified, disputes have major implications on DSO.  Generally, many people from outside of the credit and collections organisation need to be engaged to resolve a dispute.  Corporations are now aware of the need to have an integrated dispute resolution management tool to achieve efficiency and a true root cause/prevention mindset.  Automatic coding and routing of disputes to those who have the knowledge and authority to resolve them is paramount in taking chunks out of needlessly inflated DSO figures.

A best practice to combat the degradation of DSO is just now starting to be incorporated by the majority of corporations.  As shown in figure 4, 57% of corporations segregate the disputed portion of invoices to encourage the customer to pay the non-disputed portion.  On a single invoice, the effort doesn’t move the needle much.  However, as an institutionalised effort, this seemingly simple process has a considerable impact on DSO figures.  A side benefit of segregating disputed invoices is the release of available credit for the sales team to make use of  the portion that is paid.  

Deduction management leads into the next hot button for corporations, straight-through cash application.  Most companies (73%) still use their ERP system to allocate payments to clear invoices.  While some have created processes to alleviate some of the manual work, only 17% of those are achieving a straight-through success rate greater than 90% (Figure 5).  The speciality technology providers that are leading the way to improve straight-through hit rates have incorporated some form of Optical Character Recognition (OCR).  OCR is not new; however, the older technology used by some providers relies on static templates to be successful.  Rarely will customers use the exact same format for sending remittance information which limits the ability of this dated OCR technology.  The leading-edge OCR technology, however, can recognise key text, images, characters, and numbers to learn the format used by customers.  This ability to learn allows the cash application system to continuously improve the straight-through hit rate.  Having a cash application solution that is fully integrated into your credit, collections and dispute management processes speeds up the ROI and overall results obtained by corporations.  

Summary

As mentioned during the opening, all of this technology is becoming increasingly available to all sizes of businesses.  In fact, it is becoming a competitive imperative for businesses not only to survive, but to flourish.  While instituting the individual components of credit, collections, cash application, deduction and dispute management, and reporting can have a positive impact on any organisation, especially within a shared service centre, the results realised by using one comprehensive solution are enormous.  Everything is documented and maintained in one place without requiring multiple manual bolt-on processes.  The trends that we continue to see and those that are beginning to emerge are being driven by technological advances and demanding CFOs who are pushing their organisations to achieve more.  To stay ahead of the curve, corporations need to take an inventory of where they are now and compare it withwhere they want to be.  Given that accounts receivable is the most important asset on a corporation’s balance sheet, optimising credit and collections processes should be at the forefront of every corporation.

Note
All charts and statistics in this article are from  FIS Market Study: Managing Credit and Collections Risk Through Unpredictable Times