Thwarting the Pressures of Credit Managements

Cash Flow Specialists, Inc.

Toll Free (800) 669-2700

Of all the places on earth, there is one where no one wants to go. Those who find themselves in that place feel the odds of getting out of its narrow confines are nearly insurmountable. Many executives in credit management are inhabitants of that place today. Its name is "Between a Rock and a Hard Place."

In that uncomfortable place, the inhabitants feel the pressure of two opposing forces, and it seems there are no good solutions. Governments, for example, increasingly come under pressure to add beneficial programs (usually costly and not in the budget) for their citizens; yet they also come under pressure to cut budgets and cut taxes. In credit management, there is now significant pressure both to maximize performance and to cut costs. This is the world in which credit management executives find themselves today. Those who do not believe they are now between a rock and a hard place will find themselves there in the very near future.

Fortunately, for those enlightened executives not burdened with tunnel vision, there is an excellent solution to the problem of the opposing pressure forces. Indeed, this solution thrives in such an environment and, in the process of solving the problem; it will also create new value for an organization. The solution is outsourcing.

In most organizations, credit management is an important competency, but it is not the key point by which the organization differentiates itself from its competitors. In today's competitive marketplace, senior management is forward-thinking organizations should seek ways to focus company resources - both people and money - on core competencies. Business functions increasingly come under scrutiny as to whether or not a company should continue performing all or some part of those functions, or whether to outsource the functions to suppliers with expertise and economies of scale. Thus, credit management functions are an ideal candidate for inevitable change. Where there is ongoing pressure to perform at a higher level yet at a lower cost, outsourcing, an important but non-core process, is a valuable business tool to meet company objectives.

Making Change

The phenomenon of outsourcing has existed within credit management for a number of years, within sub-functions such as collections and ratings. On the horizon, though we see credit management functions starting to be outsourcers in total. The entire discipline will be impacted, and outsourcers who supply the entire function of credit management are now entering the marketplace. There will be both niche solutions, and total solutions; outsourcing of credit management functions will be pervasive.

A new light also shines on the horizon. Though outsourcing to an application service provider (ASP), credit managers will be able to access world class technology, in effect renting applications by the seat or by the transaction, with out having to purchase, install or maintain the software. ASP's are now targeting the banking and retailing industries, among others, because they provide access to the best credit management software available.

Managing Change

It is incumbent upon credit management professionals to understand this implication how to manage the options. At a minimum, executives need to be able to utilize the point solutions. They also must be able to recognize when a total outsourcing solution is best for their company. One of the lessons that we at Everest Group and the Outsourcing Center have learned is marry in haste, repent at leisure. Executives must not rush into an outsourcing relationship without having a clear view of the value it provides for their companies. Every outsourcing relationship should be able to provide the customer better service at a lower cost.

Putting in place a structure that allows for effective management of the outsourcing relationship will be a key role for the credit management professional. Management starts upfront with the basic, yet essential, elements that make outsourcing relationships effective. The contract must be fair, it should be written from the customers prospective and protect the customer. It must clearly define the scope of the business processes to be outsourced. The process description must clearly define what the customer is buying.

Ralph Waldo Emerson wrote, "As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods, ignoring principles is sure to have trouble." Perhaps nowhere is this truer than in outsourcing, for entering an outsourcing relationship with out understanding the basic principles upon which it works is hazardous.

In outsourcing, the customer turns over the ownership of the process to the supplier and does not dictate how the supplier is to accomplish the results. Telling a supplier how to do the work will only rob the customer of its rights to hold the supplier accountable. Typically this will result in a bad situation where the customer does not receive the results it anticipated, and it may even pay a higher cost for the services.

For that reason, the contract must also include clear, objective, meaningful metrics to be used in measuring the results of the supplier's performance. These metrics must carry substantial penalties for less-than-satisfactory performance. The relationship is managed through the metrics, rather than telling the supplier how to do the work.

Another key element for success that credit managers need to understand is pricing. It should be structured around results. Where results cannot be adequately defined, it should be structured according to cost drivers. It is essential to structure an effective charge back mechanism to the various departments within the buyer's organization that use the suppliers services and products. In this manner, the departmental end users will understand that if they want more services, the price will go up. Allocation back to the users will also create accountability.

The principles of outsourcing are discussed in more detail and are illustrated with success stories each month in the Outsourcing Journal, a publication for the outsourcing industry. Credit Management professionals should seek to understand the mysteries behind crafting successful outsourcing relationships.