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Reengineering

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Anthony Kelley

Reengineering the credit profession has become a major focus in the 1990s, as credit departments are called to modernize their practices. However, reengineering efforts must be implemented carefully to avoid losing the essential balance and risk evaluation that credit professionals provide. While tools like credit decision models, auto-cash applications, and document imaging can increase efficiency, they are not a replacement for experienced credit managers. TQM and business schools have also led some companies to misuse reengineering by eliminating credit experts, despite their importance to healthy organizations. For the credit profession to thrive, efforts must focus on research, education, and credentials to develop the next generation of professionals.

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Credit Career Reengineering the Credit Profession Business Credit * September 1994 Page 43 By Anthony Kelley, CCE Reengineering the credit department has become the hot topic of the 1990s. We are being called upon to throw off our old ways of thinking and lead our organizations into the brave new world. However, we must understand what reengineering truly means if we are to be on the cutting edge without allowing it to destroy our organizations. Credit professionals have always provided the balance needed in an organization through risk evaluation that has allowed profitable sales increases. This balance is still essential in a healthy organization. The Roots of Reengineering Reengineering has its roots in two movements. In the last 20 years, we have seen an effort to move credit decisions away from the traditional credit evaluation shrouded in mystique a quantitative science. This movement comes as a result of managements and academias desire to understand the method, the rise of personal computers, and the pressure to do more with less. Many new credit decision-making models have been developed. We have also seen a rise in the TQM school that focuses on Japanese work group concepts to attain maximum employee productivity and customer satisfaction. This is the answer given by leading business schools to growing worker dissatisfaction and the success of the Japanese. This popular academic answer has been drilled into M.B.A.s that run major companies and has been institutionalized in the Baldridge Award. Indeed, this has created a new consulting industry in TQM. Credit Decision-Making Models In my review of the major theories published in Business Credit in Dec. 1985 and Jan. 1986, I called for further development of credit evaluation methods based on statistical proof rather than ones based on trust me, it works for me proof. There has been an explosion of companies selling computer packages that will make your credit decisions; however, none provides a statistical way to prove that their model works. Indeed, their major claim is that they are flexible enough to allow you to customize the decision-making package to the needs of your business. They do provide the advantage of allowing a computer program to make routine credit decisions based on rules that you establish. This allows you to concentrate on the marginal customers. They also allow you to establish consistent risk categories for customers that can be used to evaluate your investment in receivables. However, these models are no substitute for a professional credit manager. The danger with these packages is that you may oversell their advantages or your management may misunderstand their shortcomings. This misunderstanding combines with the downsizing of companies to produce another dangerous trend, the splitting of the credit and collection functions. Many firms have decided that if the computer package can make the credit decicions, then management can become more efficient by letting the clerks make collection calls. But not everyone can pick up the phone and ask for money nor should collection calls be equated with effective risk management. Many firms do not understand that good credit decisions are based on feedback from collection activity and that good collections are founded on credit information about the customer. It is difficult to measure the effect of poor credit decisions, wasted collection efforts, and lost customer satisfaction if primary contact is not with a credit professional. Keeping ahead of problem customers was one of the major reasons that the NACM was formed. Trade-credit groups are the very life blood of most credit departments. These credit groups will become meaningless if the credit professional who knows both the credit and the collection story no longer exists. Greater industry losses will be the result. We can learn a lesson from consumer credit. When I worked at Sears in the early 1970s, every store had a credit manager with a large department. The credit manager and staff approved every credit application and contacted the customers for payment. Now, computer scoring models approve applications and determine the collection action based on behavioral scoring models. Collection calls are made by clerks in a massive phone center. The resulting losses are covered by the extremely high credit card interest rates. The consumer credit professional is a modern dinosaur. Auto-Cash and Document Imaging Automated cash application and document imaging are two technical innovations that every credit executive should consider using. Auto-cash is offered by many software vendors either as part of the basic accounts receivable package or as an add-on feature. Auto-cash uses the Federal Reserve System micro coding on the check document to capture your customers bank account numbers and automatically apply payments to your invoices using certain rules. These rules usually include whether the check amount equals amounts such as the account balance, the past due balance, and the last statement balance. Some systems also test combinations of invoices for a match.
Credit Career Reengineering the Credit Profession Business Credit * September 1994 Page 44 The accuracy of auto-cash will increase dramatically if you have your bank key invoice numbers listed on your customers remittance advice. Auto-cash can be a time saver and reduce application errors although it may not work in certain environments. Document imaging reduces needed storage space and makes retrieval more efficient. Documents are stored for a period of time on a computer file and are then downloaded to optical diskettes for long term storage. Documents can be indexed on the computer for instant retrieval. For example, the credit department can retrieve a freight bill from the accounts payable system in order to provide proof of delivery to the customer because the freight bill is indexed in the computer. Imaging technology is rapidly developing and therefore has many variations. The cost of these systems is dropping quickly and storage devices vary from computer-drive storage to optical diskette drives linked to the CPU by a controller. The major question concerning optical storage remains the use of those images in court. However, you can still retain the original documents as a backup in inexpensive public warehouses. TQM and the Business School TQM has become the business school panacea of the 1990s. Managers are convinced that this is the answer to all business problems. Focus on the customer and involve the employees in decision-making and you will have a more efficient operation that serves all of your customers needs. This idea has been misused by many firms to eliminate the need for experts such as the credit professional. Business management schools have never been comfortable with credit management. Credit management does not fit neatly into the traditional courses of marketing, accounting, business law, finance, and the like. Credit managers must be experts in all but do not belong to any of these professions. The subject of credit management is never taught to business majors or M.B.A.s. Thus credit management is poorly understood by senior managers, and because credit managers are not state licensed like CPAs, they are poorly understood by the public. Most people think of credit management in terms of things that are familiar, such as credit cards and mortgage loans. The other long-term issue is the lack of training for credit management. Where will the new credit professionals be developed? Management can use the old credit professionals until they die out. But, then what? The Way of the Dinosaur Is the credit professional going the way of the dinosaur? Look around the country. You will see more and more credit professionals disappearing. Anheuser-Busch, Coca Cola, Ralston Purina, AT&T, Levi Strauss, Pioneer, and Proctor & Gamble are just some of the firms that have reduced their staff in the last year through reengineering. One of my close friends remarked recently that he was appalled by the apparent lack of knowledge demonstrated by some of the questions asked by credit people representing top companies at credit meetings. Reengineering in the 1990s Indeed, we must implement needed changes in our organizations. However, we must change without allowing the latest craze to be a cover-up for allowing the sales side of the business to completely conquer the credit side. The credit professional is an essential part of any viable business. Many credit and collection departments are being merged into customer service groups. The only goal is serving the customer by furnishing the requested goods or services as quickly as possible. This means that holding orders to encourage the customer to pay may border on sacrilege. One credit manager, recently reengineered, told me that he not only faces this problem but that his credit and collection people are too busy entering orders to make any collection contacts because the organization was also downsized to be more efficient. He feels that he cannot object or he will be branded a reactionary. Trade-credit groups have been the backbone of the credit profession for over a hundred years. However, times are changing. The new service industry firms o not belong to credit groups. Therefore, the value of the NACM has changed for these firms. Todays NACM must concentrate on research, education, and professional credentials. We must expand on the recent movement of the national association to enhance the Credit Research Foundation and improve credit education. We should also move credentials beyond the realm of an organization designation and into the realm of state licensing. The alternative is the way of the dinosaur. Anthony Kelley, CCE is Manager Accounts Receivable, Express Scripts Inc., Maryland Heights, MO.

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Reengineering

  • 1. Credit Career Reengineering the Credit Profession Business Credit * September 1994 Page 43 By Anthony Kelley, CCE Reengineering the credit department has become the hot topic of the 1990s. We are being called upon to throw off our old ways of thinking and lead our organizations into the brave new world. However, we must understand what reengineering truly means if we are to be on the cutting edge without allowing it to destroy our organizations. Credit professionals have always provided the balance needed in an organization through risk evaluation that has allowed profitable sales increases. This balance is still essential in a healthy organization. The Roots of Reengineering Reengineering has its roots in two movements. In the last 20 years, we have seen an effort to move credit decisions away from the traditional credit evaluation shrouded in mystique a quantitative science. This movement comes as a result of managements and academias desire to understand the method, the rise of personal computers, and the pressure to do more with less. Many new credit decision-making models have been developed. We have also seen a rise in the TQM school that focuses on Japanese work group concepts to attain maximum employee productivity and customer satisfaction. This is the answer given by leading business schools to growing worker dissatisfaction and the success of the Japanese. This popular academic answer has been drilled into M.B.A.s that run major companies and has been institutionalized in the Baldridge Award. Indeed, this has created a new consulting industry in TQM. Credit Decision-Making Models In my review of the major theories published in Business Credit in Dec. 1985 and Jan. 1986, I called for further development of credit evaluation methods based on statistical proof rather than ones based on trust me, it works for me proof. There has been an explosion of companies selling computer packages that will make your credit decisions; however, none provides a statistical way to prove that their model works. Indeed, their major claim is that they are flexible enough to allow you to customize the decision-making package to the needs of your business. They do provide the advantage of allowing a computer program to make routine credit decisions based on rules that you establish. This allows you to concentrate on the marginal customers. They also allow you to establish consistent risk categories for customers that can be used to evaluate your investment in receivables. However, these models are no substitute for a professional credit manager. The danger with these packages is that you may oversell their advantages or your management may misunderstand their shortcomings. This misunderstanding combines with the downsizing of companies to produce another dangerous trend, the splitting of the credit and collection functions. Many firms have decided that if the computer package can make the credit decicions, then management can become more efficient by letting the clerks make collection calls. But not everyone can pick up the phone and ask for money nor should collection calls be equated with effective risk management. Many firms do not understand that good credit decisions are based on feedback from collection activity and that good collections are founded on credit information about the customer. It is difficult to measure the effect of poor credit decisions, wasted collection efforts, and lost customer satisfaction if primary contact is not with a credit professional. Keeping ahead of problem customers was one of the major reasons that the NACM was formed. Trade-credit groups are the very life blood of most credit departments. These credit groups will become meaningless if the credit professional who knows both the credit and the collection story no longer exists. Greater industry losses will be the result. We can learn a lesson from consumer credit. When I worked at Sears in the early 1970s, every store had a credit manager with a large department. The credit manager and staff approved every credit application and contacted the customers for payment. Now, computer scoring models approve applications and determine the collection action based on behavioral scoring models. Collection calls are made by clerks in a massive phone center. The resulting losses are covered by the extremely high credit card interest rates. The consumer credit professional is a modern dinosaur. Auto-Cash and Document Imaging Automated cash application and document imaging are two technical innovations that every credit executive should consider using. Auto-cash is offered by many software vendors either as part of the basic accounts receivable package or as an add-on feature. Auto-cash uses the Federal Reserve System micro coding on the check document to capture your customers bank account numbers and automatically apply payments to your invoices using certain rules. These rules usually include whether the check amount equals amounts such as the account balance, the past due balance, and the last statement balance. Some systems also test combinations of invoices for a match.
  • 2. Credit Career Reengineering the Credit Profession Business Credit * September 1994 Page 44 The accuracy of auto-cash will increase dramatically if you have your bank key invoice numbers listed on your customers remittance advice. Auto-cash can be a time saver and reduce application errors although it may not work in certain environments. Document imaging reduces needed storage space and makes retrieval more efficient. Documents are stored for a period of time on a computer file and are then downloaded to optical diskettes for long term storage. Documents can be indexed on the computer for instant retrieval. For example, the credit department can retrieve a freight bill from the accounts payable system in order to provide proof of delivery to the customer because the freight bill is indexed in the computer. Imaging technology is rapidly developing and therefore has many variations. The cost of these systems is dropping quickly and storage devices vary from computer-drive storage to optical diskette drives linked to the CPU by a controller. The major question concerning optical storage remains the use of those images in court. However, you can still retain the original documents as a backup in inexpensive public warehouses. TQM and the Business School TQM has become the business school panacea of the 1990s. Managers are convinced that this is the answer to all business problems. Focus on the customer and involve the employees in decision-making and you will have a more efficient operation that serves all of your customers needs. This idea has been misused by many firms to eliminate the need for experts such as the credit professional. Business management schools have never been comfortable with credit management. Credit management does not fit neatly into the traditional courses of marketing, accounting, business law, finance, and the like. Credit managers must be experts in all but do not belong to any of these professions. The subject of credit management is never taught to business majors or M.B.A.s. Thus credit management is poorly understood by senior managers, and because credit managers are not state licensed like CPAs, they are poorly understood by the public. Most people think of credit management in terms of things that are familiar, such as credit cards and mortgage loans. The other long-term issue is the lack of training for credit management. Where will the new credit professionals be developed? Management can use the old credit professionals until they die out. But, then what? The Way of the Dinosaur Is the credit professional going the way of the dinosaur? Look around the country. You will see more and more credit professionals disappearing. Anheuser-Busch, Coca Cola, Ralston Purina, AT&T, Levi Strauss, Pioneer, and Proctor & Gamble are just some of the firms that have reduced their staff in the last year through reengineering. One of my close friends remarked recently that he was appalled by the apparent lack of knowledge demonstrated by some of the questions asked by credit people representing top companies at credit meetings. Reengineering in the 1990s Indeed, we must implement needed changes in our organizations. However, we must change without allowing the latest craze to be a cover-up for allowing the sales side of the business to completely conquer the credit side. The credit professional is an essential part of any viable business. Many credit and collection departments are being merged into customer service groups. The only goal is serving the customer by furnishing the requested goods or services as quickly as possible. This means that holding orders to encourage the customer to pay may border on sacrilege. One credit manager, recently reengineered, told me that he not only faces this problem but that his credit and collection people are too busy entering orders to make any collection contacts because the organization was also downsized to be more efficient. He feels that he cannot object or he will be branded a reactionary. Trade-credit groups have been the backbone of the credit profession for over a hundred years. However, times are changing. The new service industry firms o not belong to credit groups. Therefore, the value of the NACM has changed for these firms. Todays NACM must concentrate on research, education, and professional credentials. We must expand on the recent movement of the national association to enhance the Credit Research Foundation and improve credit education. We should also move credentials beyond the realm of an organization designation and into the realm of state licensing. The alternative is the way of the dinosaur. Anthony Kelley, CCE is Manager Accounts Receivable, Express Scripts Inc., Maryland Heights, MO.