Published: May 01, 2014
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.
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.
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.
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.[[[PAGE]]]
We engaged with stakeholders across the business throughout the project, with cross-functional steering committees, enabling people with different concerns and performance measures to input into shared, simplified processes. A key asset to the project was Randy Dacus, who joined the company just as we were completing the assessment with REL. By having a key individual who could draw together the various strands of the project and act as its ‘heart and soul’ we had a public face for our credit and collections team who could collaborate effectively both internally and with our customers. By adopting a far more personal and direct presence than we have been able to achieve in the past, we can work more closely with our customers to understand their working capital issues and be a more proactive partner to them.
Our credit and collections transformation project produced immediate and material improvements to key performance indicators (KPI). Furthermore, as figure 1 illustrates, not only did we see significant results during the first two years after implementation but we continue to see year-on-year improvements.
In addition to KPI improvements for credit and collections, automating processes and freeing up resources allows us to focus more on improving our internal and external dialogue. The credit team can respond within 24 hours to sales requests to check new customers and set up accounts, compared with up to 12 days in the past. This means that our sales team can start to do new business more quickly, whilst also improving our customers’ experience of working with Lennox.
As we now have a consistent process for credit decision-making, our credit team is better supported and can focus less on routine tasks and more on customer collaboration. For example, dynamic credit risk grading has enabled us to reduce the number of orders placed on hold for low-risk customers. Conversely, now that we have better visibility of payment issues and developed a closer dialogue with higher-risk customers, we have achieved rapid resolution and protected valued customer relationships. We have even received handwritten thank you notes from customers we’ve assisted through difficult situations using this process which is just as rewarding as the quantitative results.
Looking ahead, we continue to be proactive in seeking new opportunities to enhance customer relationships, so we are currently implementing an automated dispute resolution management tool which will enable us to reduce the amount of time taken to resolve disputes dramatically. A growing demand from our customers is EIPP (electronic invoice payment and presentment) to allow self-directed payments. Around 70% of our customers pay electronically, so we are working to enable these customers to self-direct payments and manage disputes electronically. Finally, having proven the value of financial shared services, we are also seeking to expand our business model across a broader footprint.
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