To boost working capital and reduce costs, companies are earmarking receivables processes for transfer to third-party providers.

Managing credit and collections in-house is a tedious and complex task, and one that usually devours huge amounts of companies' resources and staff time. So when Richard Spotts, CFO for AmeriQuest Transportation & Logistics Resources Corp., examined his organization's interactions with its customers in this area, he opted for outsourcing. "The goal is to become more efficient and improve the bottom line," he explains.

The Cherry Hill, N.J.-based transportation management company turned over its credit evaluations, credit decision-making and e-commerce transaction processing to a third-party provider in 1999. It also outsourced its sales- and purchase-invoicing processes. By outsourcing these functions, the company reduced the number of credit-challenged customers it has to handle. "We need to deal with quality customers that not only pay but pay in a timely manner," explains Spotts.

As a result of the initiative, AmeriQuest's internal five-person accounting staff oversees the outsourced processing of some 150,000 invoices a year. The company's bad debt has plummeted to about 0.15 percent of its revenue, compared with an industry average of 4 percent to 5 percent. "In an industry that has gone through a lot of ups and downs, we've managed to remain stable," Spotts says. "Outsourcing has proven beneficial and allowed us to focus on the core aspects of our business."

A growing number of companies have reviewed their processes and decided that, like AmeriQuest, they need to streamline them and cut costs. To determine the best course of action for achieving these goals, they're asking themselves these questions:

  • Do we need new technology for these upgrades?
  • Are we prepared financially and logistically to implement and run new systems internally?
  • If our resources don't meet our needs, can we find competent third-party help that can save us money?
  • If appropriate services are available, which processes are the best candidates for outsourcing?

Lisa Stone, a vice president and research director at Gartner Inc. in Stamford, Conn., says that businesses are becoming "much more deliberate in their thinking. They're asking whether they want to own technology and if the process is central to their operations. In many cases, they can do better by turning to outside providers," she says. Although few organizations have outsourced all of their credit and collections, many are handing off selected processes.

Karen Ikeda is a partner at TPI, a Woodlands, Texas-based sourcing advisory firm specializing in back office functions. She notes that for many companies, the time is right for outsourcing. "Because of the enormous load of administrative and transactional processing associated with credit and collections, many organizations view outsourcing as an attractive solution," she reports. "The technology and business processes now exist to transform the concept into reality."

Is Technology the Answer?

Over the last decade, information technology has automated business processes and supply chains and ushered in an era of e-commerce and electronic transactions. Although these gains have helped many organizations slash costs and open up new business opportunities, credit and collections has too often remained time- and labor-intensive, with work handled much the same as it was a quarter century ago. Further, in many enterprises, the credit and collections functions are still divided by a virtual moat. Even when communication through basic electronic processes does take place, breakdowns may occur because systems aren't integrated.

That's changing. As organizations seek every competitive advantage, some are aiming to align their financial systems with the order-to-cash process. They're also looking at automating and integrating the complete revenue cycle, from order to collection. "With the right technology in place, a business can then do a much better job of serving its customers, making wise credit decisions and improving its debt-collection process," Stone says.

But some corporate functions that recognize the pressing need to improve their processes are balking at assuming the enormous cost and complexity associated with implementing new technology and acquiring the necessary expertise. Instead, they're seriously considering outsourcing as a viable option. Human resources and marketing have already jumped on this bandwagon, and finance is now eyeing the opportunities as well. Credit and collections is beginning to garner attention as a suitable candidate, particularly as businesses reevaluate how much money they're willing to write off as bad debt.

"Many companies don't realize the amount of expense and effort required to pursue a bad debt loss or evaluate the creditworthiness of a potential customer," says Joseph Ketzner, executive vice president and commercial director at Euler Hermes ACI in Owings Mills, Md. "Outsourcing these tasks ... frees up operating capital for other ventures, such as expansion into new markets or increasing the terms of sale."

One company that recognized those benefits is Lucent Technologies, a Murray Hill, N.J., manufacturer of telecommunications equipment. In 2002, the enterprise found itself struggling through an industry downturn. As business continued to deteriorate, management realized that it had to improve its financial processes significantly. One of the key areas of focus was A/R. The company needed a more flexible, scalable method for dealing with first-party collections and dispute management across its Europe, Middle East and Africa (EMEA) division.

Indeed, at that time, Lucent's processes were highly fragmented and inefficient, says Len R. Rinaldi, Bracknell, U.K.-based CFO and financial vice president, EMEA. What's more, the line of responsibility for various functions and actions was too often blurred, with numerous divisions uncertain about their exact roles. When company executives factored in disparate systems, inconsistent processes and a lack of resources, they realized that they had to make a major change.

Lucent turned to Equitant's O2C software and services to streamline its invoice-to-cash process. By the end of 2002, the company had outsourced its cash collection, dispute management and executive oversight processes to Equitant (which has since been acquired by IBM). The move quickly began paying dividends as it integrated those functions and made key A/R data reportable and actionable.

The company has reduced the value of its past-due accounts by $96 million, increased the proportion of invoices collected within terms from 20 percent to 73 percent, and boosted the percentage of accounts receivable in a current state from 55 percent to 92 percent.

In addition, Lucent's customer service rating rose from 5.5 to 7.1 during the first year. "Expectations have been exceeded by the cost-effective service, balance sheet improvements and increased customer satisfaction levels," says Rinaldi.

Beyond the Bottom Line

AmeriQuest Transportation & Logistics Resources represents more than 50 vendors and matches their services with 400-plus end users. It relies on Euler Hermes to handle A/R credit-approval processes and evaluate customers' creditworthiness. That has helped AmeriQuest protect its cash flow, expand sales to new customers without increasing risk, and enhance its relationship with vendors.

Cost savings and greater efficiency are important reasons for outsourcing, but Spotts says that AmeriQuest, like Lucent, has realized other gains. For one, outsourcing has also aided in-house collection efforts. "With potential new customers, if we are unable to obtain [credit insurance], we can say that it's not our decision. We tell customers that we rely solely upon [Euler Hermes'] capabilities to make our credit decisions." AmeriQuest can therefore deny services without making the decision personal, he explains.

In addition, AmeriQuest representatives typically point out to slow-paying and delinquent customers that the company is required to report all credit activity to Euler Hermes and that their failure to make timely payment could have a negative impact on their credit history -- and, ultimately, on their relationship with vendors. "The approach usually provides a real incentive," Spotts says. "It has produced consistently positive results."

For many companies, the end goal of credit and collections outsourcing is to see the forest rather than just the trees, Ikeda says. It's about stepping beyond individual processes and mapping data in new and useful ways to understand revenue cycles, core and noncore activities, and methods of boosting bottom-line results as well as customer satisfaction levels. "Armed with more complete information, an organization can make better decisions and come up with more innovative ways to deal with customers," she says.

An added bonus: Outsourcing can simplify the task of tapping into legacy data and systems. Although years of customer records showing purchasing patterns, trends and histories can be a gold mine for refining credit and collections decisions, that data is often locked deep within mainframes and seldom-used databases. However, outsourcing providers can apply their consulting and integration expertise to combine systems on a single platform to help an organization expand the use of its credit and collections data.

Top Billing

The shift to outsourcing goes beyond passing select, discrete processes to third-party providers. Businesses need to get their arms around the entire range of processes that comprise credit and collections, including order capture, credit management, dispute resolution, billing, collections, and financial reporting and analysis. But without the right tools in place, it's next to impossible for enterprises to gain that visibility. Are there outsourcing services available to accommodate the full complement of processes?

The answer is yes. Business process outsourcing giants such as IBM, Accenture and ACS are attempting to create an integrated framework for managing customers' financial processes. They are also simplifying integration while boosting reporting capabilities and business intelligence. "With the right approach, it is possible to get a handle on the entire revenue cycle. It's possible to greatly reduce noncore, administrative-intensive tasks," Ikeda says.

She adds that it's important for a company that is considering the feasibility of outsourcing to determine exactly what it is trying to achieve and then conduct the necessary due diligence on outsourcing providers. Companies should take a holistic view and examine the entire revenue cycle.

"The reality is that these processes cut across numerous departments and involve many parts of a company," Ikeda explains. Ultimately, a CFO must ensure that all departments have input into the decision and that needs and requirements are balanced throughout the organization. It's also paramount for finance executives to manage work flow and communicate with the outsourcing provider about how the software and systems will work.

When a company gets credit and collections right, Ikeda says, it can achieve vast improvements in working capital as days sales outstanding drops and delinquencies shrivel. Instead of achieving only the incremental gains associated with outsourcing a particular task to a specialized provider -- such as a credit bureau or collections agency -- a business can generate enormous synergy and stellar results.

Says Gartner's Stone: "With a diminishing margin for error and less acceptance of bad debt, businesses must address the entire spectrum of credit and collections issues. It's clear that many companies are not willing to invest in developing all the required competencies in-house." In that case, outsourcing becomes an attractive option.