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
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
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
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
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
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