Dave: In our last edition we ran an article about outsourcing the functions of the credit department. We received many comments. One of those was from Pam Krank, President of The Credit Department Inc., an outsourcing firm. We think the letter is representative of many concerns by both management and credit professionals and believe it is beneficial. So we have decided to reprint it in this edition. We have added our comments where we felt necessary. Thank you Pam for taking the time to respond and share your insights.

Pam: I can provide a perspective on your "Are We Headed Toward Extinction?" as a previous internal credit manager of 13 years in a Fortune 500 company and now as a consultant and outsourcer for the past 15 years.

1) Performance and results:  While some of the companies we study have both strong results AND efficient cost-effective departments, most do not.  We're constantly surprised at how few credit departments have high-performing,  state-of-the art, best-in-class departments.  Results can be misleading in a strong economy. Also, if results are just compared to past results, that's not all that impressive (with $10 trillion a year sent to collection agencies for bad credit decisions).   While credit managers complain about not having enough resources, we still see internal departments with dozens of redundant, inefficient, manual processes and WAY too many people not getting enough done (we generally replace 1 FTE with .3 outsourcing people).

Dave: Credit professionals should be evaluating both personnel and processes to promote and provide efficiency. This can be accomplished through training and goal setting. Those employees who are not meeting or exceeding goals should be terminated or transferred to areas where their skills and work ethic can contribute to company objectives. Processes should be evaluated for efficiency and modernization and should be implemented or budgeted for.


Pam: 2) Your reference to Southwest Airlines is absolutely correct.  We make it a practice to NOT hire experienced collectors.  It just takes too long to retrain them to "unlearn" bad habits.  I prefer to hire enthusiastic,  positive people with good telephone and technology skills and then teach them the rest.  I see what a "typical" credit department has with all the duplicate skill set and no specialists.  They can't compete with a specialized department when it comes to efficiency and production.  Also,  most of their "generalists" are way overpaid for the work they do.  Only our true credit analysts--those who can analyze financial statements (beyond reading them), utilize/create specific scorecards, and predict defaults are highly paid.  The rest are clerical workers paid much less.

Dave:  A true credit professional requires more than the ability to analyze financial statements. How many financial statements are actually requested or received from customers? We support the theory of not hiring “experienced” credit people but rather train them to our requirements. We do not however believe that anyone who cannot interpret a financial statement falls into a clerical classification.

Pam: 3) You’d be surprised how outsourcers can be taught "company culture".  We mesh very well with our clients' businesses and are invisible to their customers.  We're quick studies and find it a huge advantage to not be sitting physically onsite at our client's locations.

4) There’s a huge disconnect between how internal credit people see themselves and how top management sees the function. The function is becoming "commoditized" to a great degree.  The value that credit managers can bring is in managing the best resources--internal and external--to meet company goals.  We see way too many credit managers focused on "building kingdoms" rather than meeting company goals. These bloated costs make the department an easy target for outsourcing.

Dave:  We agree and credit professional’s need to focus more on company objectives and goals and less on department politics. Credit professionals need to be mindful that the function of credit is a support position.

Pam:  5) Relationships with customers are critical.  Credit managers need to realize, though, that outsourcers can create these relationships too.  Our collectors don't move between clients any more often than internal credit people.  They develop the same types of relationships with our clients' customers.  

Dave:  We do not agree with this comment. Just like non-employee sales reps the primary emphasis for any employee are the goals and objectives of their respective organization.

Pam:  6)  "Collections is more than sitting in front of a computer screen eight hours a day dialing for dollars. It involves gathering and updating information, understanding the customers' business, customer visits, when to contact the customer for payment and knowing the key personnel."  Actually, MOST of collection activity is dialing for dollars--and knowing "when to contact the customer" should be automated by risk.  Credit managers need to separate out those key accounts needing personal attention and work to create efficiencies in their "dialing for dollars" collection activity if they don't want to outsource it (although many of our clients hire us to do key account work as well).

Dave:  The reality is that credit has taken a back seat to collections and the majority of accounts require personnel attention due to the fact that customers today have more debt than capacity or capital. Risk is Inherent in all credit transactions, contacting the customer should be determined by when they have the money. Furthermore, more attention needs to be addressed to the establishment and enforcement of credit limits.

Pam:  7)  "However, one of the significant differences is that commercial credit departments, in spite of technology and legislation, continues to maintain a relationship with the customer that assists the sales department in obtaining new customers and maintaining a profitable customer base."  You are correct here.  This, however, can be outsourced as well with the right group that understands credit risk as well as account management.

Bottom line is that credit managers need to do a better job of creating value within the company. When we see a credit department that still manually makes credit decisions (without scorecards/electronic scorecards), can't easily identify and track the portfolio by risk category, uses no/little automation for collection activity (leaving it up to individuals to prioritize the work), and that doesn't track metrics including costs (cost per credit analysis, collection activity cost per account, etc), they are extremely vulnerable to outsourcing.  CFO's, CEO's and BOD members that contact us to help better manage receivables want to see if we can 1) obtain better results and 2) do it for less cost.  Sadly for most credit departments, we almost always can.

Dave:  We don’t agree that an automated department can be more efficient or productive than one that is well organized with a trained staff. However, we believe that better results and less cost are achieved by the outsourcing firm because all they are required do handle are credit and collection related functions. The  majority of credit professionals today handle a variety of functions that are not credit  related but rather “dumped” upon the credit department because no one else wants to handle the task or the organization tries to minimize cost and the credit department is handicapped with the additional work.

Pam:  It's not too late for credit managers to prevent extinction, but they can't be afraid of implementing drastic changes to compete with the outsourcers providing superior quality and less expensive alternatives.  For those companies wanting to seriously upgrade their departments, we're happy to show them how!!!

Dave:  We agree wholeheartedly, that the credit professional must identify the changes necessary, not only to compete, but to produce the results management is seeking and speak up for themselves. All too often, the credit professional has failed to properly communicate with management as to what resources are necessary to meet company objectives. In some cases, credit personnel don’t even know company objectives. Change is a constant and if changes are not made then credit professionals will find themselves among the ranks of the unemployed.

I wish you well.  

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.