WHITE PAPER RECEIVABLES

Transcription

1 WHITE PAPER RECEIVABLES FIS CREDIT & COLLECTIONS GLOBAL BENCHMARKING STUDY 2015

2 Contents 1 Introduction 1 Key Findings 2 Choosing the right structure In-house versus Third Party Degrees of centralization Scale of credit and collections function 5 Top challenges in credit & collections 6 Challenge 1: Managing business growth The scale of the challenge Prerequisites of success Progress towards automation 8 Challenge 2: Enhancing performance Prioritizing collections Portfolio scoring Processing credit claims 13 Challenge 3. A collaborative approach to dispute resolution 14 Transforming credit and collections for competitive advantage 15 Appendix. Participant profile

3 Credit & Collections Global Benchmarking Study INTRODUCTION In 2014, FIS launched the inaugural Global Benchmarking Study for Credit & Collections to reveal some of the ways in which best-in-class corporations were already optimizing credit & collection strategies and processes. A year later, the 2015 report explores some of the progress towards adopting best practices, and identifies scope for further improvement. Given that accounts receivable (A/R) is the largest current asset on most balance sheets, there is considerable incentive to maximize this asset and manage risk effectively. Over 400 finance professionals participated in the study, including those with both management and operational responsibility in credit and collections, and associated functions with involvement in this area, particularly treasury and IT. Experiences of credit and collection departments from a wide range of industries were reflected in the findings, with 52 percent representing manufacturing, financial services, construction & materials, non-financial services and technology. Similarly, both mid-cap and large corporations participated, with a strong response from companies with revenues up to $250m, $750m - $1bn, and $1bn - $3bn. Key findings In-house versus third party The large majority of corporations prefer to manage these activities in-house, primarily due to concerns that an outsourced partner would be unable to provide comparable levels of customer service or manage disputes and exceptions effectively. Centralization of credit and collections is a strong, ongoing trend While centralization into a single, global center is particularly challenging for large multinational corporations, a regional approach or a combination of regional/global centers with local centers managing collections in more complex countries, particularly emerging markets is often more realistic. The use of a common technology platform is key to aligning policies, processes and reporting across local, regional and global centers. Managing an increasing volume of collections with the same or fewer resources was once again identified as the greatest challenge for finance managers in 2015 This is a particular issue given that the majority (65 percent) of corporations have seen an increase in revenue over the past two years, 37 percent of which indicated that revenues have increased by more than 10 percent. Collaborating with other departments, such as sales, dealing with disputes and managing credit and collections in emerging markets are also important challenges that collection centers face. The majority of companies (56 percent) demonstrate below average days sales outstanding (DSO) performance or cannot measure relative performance A further 30 percent described their performance as average. These figures emphasize that there is considerable scope for improvement and potential for achieving competitive advantage. Only a small minority (less than five percent overall) consider their credit and collections processes to be fully automated This is linked closely to the ongoing use of spreadsheets, which are by their nature manual, and the inability to automate or achieve consistent processes in a complex ERP environment. Specifically, with 46 percent noting that they have more than one ERP or instance of an ERP, often with different versions, locations and formats, it is very difficult to combine data and processes in a consistent way.

4 2 Credit & Collections Global Benchmarking Study 2015 Twenty four percent of respondents have 6 10 percent of invoices paid late, but 6 percent have more than 21 percent of past-due invoices Not only are there difficulties at an absolute level, but corporations are currently struggling to achieve improvements. While nearly a third (29 percent) of corporations have managed to reduce DSO, about a fifth (19 percent) have seen an increase. Some organizations (38 percent) are performing at a similar level of performance as two years ago. Seventy one percent use invoice age and value to prioritize collections, a fall of 17 percent from 2014 Conversely, 16 percent of participating companies use risk grading as their primary collections criterion, an increase of over 100 percent since 2014, across departments of all sizes. Sixty five percent of corporations score their portfolio less than once a month Given that 30 day payment terms are most common (48 percent) scoring the portfolio less frequently making it impossible to monitor and manage credit risk effectively. 18 percent never perform credit scoring of their receivables portfolio, and a further 13 percent do so infrequently. Disputed invoices result in increased DSO, disruption to automated processes and negatively impact customer relationships for 89 percent of organizations This issue is exacerbated by 43 percent holding up the entire invoice in the event of a dispute, as opposed to segregating the disputed element of the invoice and pursuing the remainder for payment. Only 38 percent can monitor collection agency performance in real-time With just over half (54 percent) of the respondents sending claims electronically to credit reference agencies and fewer still able to monitor performance, it is difficult to achieve transparency and process efficiency or to encourage accountability. Choosing the right structure In-house versus third party Despite regular speculation about the potential to outsource credit and collections management, only a small proportion of respondents in the Global Benchmarking Study (8 percent) have done so to date. This may not reflect a full picture, however, given that organizations that manage these activities in-house are more likely, and in a better position, to respond to a survey of this kind. Respondents noted a variety of reasons for maintaining credit and collections in-house as opposed to outsourcing (figure 1), most commonly relating to the specific nature of the organization i.e. concerns that an outsourcer would be unable to provide comparable levels of customer service (48 percent) or dispute and exception management (46 percent). Lack of transparency (35 percent) and costeffectiveness (34 percent) were also cited as significant issues. Conversely, cost-effectiveness was the most common reason that some organizations had chosen to outsource credit and collections, with a reduction in DSO and bad debts the greatest benefits achieved. Given the limited appetite of respondents in this study for outsourcing, it appears that while it remains a valid means of handling collections for certain organizations, it is unlikely to become the norm for the foreseeable future. Fig 1. Reasons not to outsource credit and collections management Other Complexity of organization 25% Lack of control & visibility over performance Not cost effectiveness Concerns that extrernal resources would be unable to manage disputes/ queries exceptions effectively Concerns that performance levels (DSO, past due etc.) would decline Customers that customer servce would decline 35% 34% 46% 30% 48%

5 Credit & Collections Global Benchmarking Study Degrees of centralization The results of the Global Benchmarking Study demonstrate that corporations of all sizes recognize the benefits of a centralized approach to credit and collections and are taking active steps to achieve the maximum degree possible within the constraints of their business and the countries within which they operate. Thirty nine percent of organizations included in the survey have centralized credit and collections through a single, global shared service center (SSC) with a further 22 percent centralized regionally (figure 2). Only 14 percent take a decentralized approach to credit and collections, with nearly a quarter (23 percent) taking a combined approach i.e. centralizing credit and collections for some countries, either regionally or globally, and maintaining some in-country. In fact, 12 percent appears a high figure, which may be explained in part by the relatively small sample size at this level of corporation and that while an organization may have a single collections center (particularly to cover large domestic markets such as the United States), collections in other countries may be managed separately. In many cases, a regional or combined approach to credit and collections, with global or regional centers covering key markets, with some in-country functions, is more realistic than a single global center, reflecting the complexity and diversity of credit and collections internationally, particularly in emerging markets. In these situations, the use of a common technology platform can be instrumental in enforcing standardized policies and processes and enabling a global, consistent view of performance and risk information. Inevitably, centralization is more challenging for the largest corporations that operate across a large number of countries and regions, with diverse collection instruments, regulatory conditions and payment cultures. As figure 3 illustrates, only 12 percent of corporations with a turnover above $5bn indicated that they have achieved global centralization of credit and collections, although there were no corporations with a turnover above $40bn (i.e. the largest corporations in this study that had done so). Fig 2. Organization of credit and collections Fig 3. Centralization by size of corporation GLOBAL SSC REGIONAL SSCs DECENTRALIZED COMBINATION COMBINATION DECENTRALIZED REGIONAL GLOBAL OTHER 2% 20% 60% 23% 36% 52% 12% 48% 39% 4% 24% 28% 28% 48% 36% 156% 48% 22% 12% 36% >$5bn $1bn $5bn $500m $1bn <$500m

6 4 Credit & Collections Global Benchmarking Study 2015 Scale of credit and collections function Participating organizations reflect huge variety in the scale of their credit and collections function (figure 4), although the largest proportion, 37 percent, noted that they had between one and five people dedicated to these activities. While the size of corporation and invoice volume contribute to the number of collectors, the scope of the business for which a collections center is responsible (e.g. one country, regional or global center) the business model and industry are all important factors. Technology plays an important role in the successful functioning of a credit and collections center, irrespective of its size. For smaller functions e.g. those with fewer collectors, automated technology is essential in order to achieve scalability, prioritize collections appropriately, and enable collectors to maximize the value they add. For larger functions, and corporations with multiple centers, these advantages are further augmented by improved visibility and intelligence, enhanced reporting, and performance monitoring both for local managers and those based in other locations. Fig 4. Number of collectors 37% 22% 7% 7% 5% 1% 3% 20% >200 Not specified Fig 5. Greatest credit & collections challenge over past 12 months INCREASING COLLECTIONS VOLUME WITH SAME/FEWER STAFF INCREASE IN DSO AND PAST DUE A/R LACK OF PRIORITIZATION LACK OF RISK VISIBILTY CASH APPLICATION COLLABORATION WITH SALES ETC. INCREASING VOLUME OF DISPUTED INVOICES COLLECTION IN EMERGING MARKETS 13% 24% 18% 13% 5% 6% 11%

7 Credit & Collections Global Benchmarking Study Top challenges in credit & collections In our 2014 study, managing an increasing volume of collections was identified as the greatest challenge for finance managers, exacerbated by the fact that they need to do so with the same or even fewer resources. This situation remains relatively unchanged in 2015 (figure 5), with a small fall from 28 percent (2014) to 24 percent (2015) citing this issue. Eighteen percent faced difficulties in collaborating with sales divisions and other related business functions, again a similar figure to the 2014 study. These challenges are common to organizations irrespective of the degree of centralization, with the exception of decentralized corporations for whom increasing volumes has a less material impact. Although in general the year on year figures between 2014 and 2015 are very similar, a growing challenge with which finance and SSC managers are faced is the increase in the number of disputed invoices, from seven percent in 2014 to 13 percent in Although this remains a relatively small proportion for whom this is their top challenge (with consistent findings across both centralized or decentralized collections functions), managing disputed invoices can be very complex and time-consuming, with the potential to impact substantially on DSO and other performance metrics, particularly if the organization is not in a position to collect on the non-disputed elements of the invoice. Another trend that is becoming more apparent in 2015 is the challenge of managing credit and collections in emerging markets, a new theme noted by 10 percent of respondents. Given the globalization trend amongst corporations of all sizes, with markets in Asia, South America and to some extent Africa becoming more significant, finance managers will increasingly need to review organizational and technology structures to maintain consistency, control and visibility over credit and collections globally whilst managing the specific requirements in complex local markets. Prior to introducing accounts receivables automation, HID Global was challenged by processes that were manual, time-consuming and paper-based. BONNIE MOREE, CICP, MANAGER OF CREDIT AND COLLECTIONS, HID GLOBAL. Fig 6. Greatest collection challenge by degree of centralization GLOBAL CENTER REGIONAL CENTERS COMBINATION DECENTRALIZED Risk visibility Collections in emerging markets 3% 8% 9% 11% 3% Prioritizing collections Increasing DSO and past A/R Increase in disputed invoices Increasing collections volume Collaborating with sales etc. Cash application 12% 30% 19% 3% 11% 13% 13% 7% 7% 15% 30% 3% 8% 20% 17% 22% 23% 7% 0% 20% 40% 60% 80% 100%

8 6 Credit & Collections Global Benchmarking Study 2015 Challenge 1: Managing business growth The scale of the challenge As we saw above, managing a growing number of collections with the same or fewer staff, is the biggest difficulty facing managers of credit and collection functions today. Figure 7 illustrates the scale of the challenge, as most respondents cited increased revenues, meaning increases in workload for collections staff. While 25 percent indicated that their revenues have either remained unchanged or declined over the past 2 years, a stronger trend is for increasing revenue, with 24 percent indicating that revenues have increased by more than 10 percent. Prerequisites of success Faced with this challenge, automating processes, controls and reporting is an essential means of managing growing volumes without the need to increase resources. Furthermore, treasurers, finance and SSC managers need to balance the need to do more with less with the equally compelling obligation to improve performance. Figure 8 emphasizes the wide range of key performance indicators (KPIs) that are routinely measured by participating organizations, most commonly past due accounts receivable (A/R) (83 percent), DSO (74 percent) and the level of bad debt write-offs (61 percent). Inevitably, it becomes increasingly difficult both to manage growing volumes, while improving performance, without achieving a high level of automation. Fig 7. Change to revenue over past 24 months 18% 16% 11% 7% 24% The results illustrate the difficulty that many finance managers are facing in achieving these apparently conflicting goals, shown in figure 9. While 14 percent of respondents had achieved above-average DSO performance for their industry, 56 percent were either below average or unsure, with the remaining 30 percent demonstrating average performance. Not only do these figures emphasize the scope for improvement, and likely demands from senior managers, but also the potential for achieving competitive advantage through enhanced working capital. Decreased Remained the same Increased by >3% Increased by >5% Increased by >8% Increased by > Not sure Fig 8. Credit & collection KPIs monitored Fig 9. DSO performance vs industry average Days sales outstanding Past due A/R 74% 83% NOT SURE BELOW INDUSTRY AVERAGE AVERAGE FOR INDUSTRY ABOVE INDUSTRY AVERAGE Collector effectiveness Average days to pay 32% 40% Deduction/dispute resolution Deduction/dispute volume 18% 26% 35% Bad debt write-offs 61% 30% Unapplied cash 28% Cash application hit rate 19% 21% Other 1%

9 Credit & Collections Global Benchmarking Study WHAT IS ONE DAY OF DSO WORTH TO YOU? DSO (Days Sales Outstanding) is a measure of the average number of days that a company takes to collect revenue after a sale has been made. Companies with a high DSOare actually costing their companies. Let s take a look at an example. Let s say Company A has annual revenues of $365M. Company A s payment terms are on average 30 days. Thus their best possible DSO is 30. Over the past six months they have been averaging a DSO of 45 days. What if Company A could improve their DSO by reducing it even by one day down to a DSO of 44 days? What would this mean in terms of cash flow and P&L impact in terms of interest savings? Certainly cash flow improves by $1M for that one day improvement ($365M annual revenue / 365 days). Let s also say for Company A, their weighted average cost of capital (WACC) is 10 percent. That equates to a P&L impact of $100,000. Automating and incorporating workflow into the credit and collections processes can help reduce that DSO. It can help organizations aggregate data across multiple systems for a single view of collections risk. Then with embedded workflow and automation, the solution can build work queues and send notifications for accelerated collections. Fig 10. Degree of automation by level of centralization FULLY AUTOMATED PARTLY AUTOMATED MOSTLY AUTOMATED NOT AUTOMATED 2% Global center 6% Regional center 4% Combination 3% Decentralization 31% 20% 23% 28% 46% 63% 59% 45% 21% 24% Progress towards automation An essential means of achieving the operational, financial and credit objectives that treasurers, finance and SSC managers are seeking is to automate processes as far as possible. FIS 2015 Global Benchmarking Study shows that there is still considerable progress to be made in this area, across all sizes of organization and degrees of centralization. As figure 10 highlights, only a small minority consider their credit and collections processes to be fully automated, with most corporations indicating varying degrees of automation. Most concerning of all is the large proportion of companies, particularly amongst those with a global credit and collections center, that have not achieved any automation in managing these activities. This is linked closely to the ongoing use of spreadsheets for managing collections, as opposed to using either ERP or accounts receivable systems, or specialist credit and collections tools. As figure 11 demonstrates, the use of spreadsheets remains prevalent amongst both centralized and decentralized credit and collection functions, a major factor in companies inability to automate processes, leverage data to create business intelligence, and achieve effective controls. Figure 11 also shows that the most common means of managing credit and collections, across both decentralized and centralized functions, is via an ERP. In theory, while these tools support automated processes, there are obstacles relating to both functionality and deployment. For example, a large proportion (46 percent) note that they have more than one ERP or instance of an ERP, often with different versions, locations and formats. This makes it difficult to combine data and processes in a consistent way, a particular challenge amongst larger corporations. Furthermore, these tools typically lack the sophisticated analytics that specialist systems offer. These can be integrated with one, or more than one ERP or A/R system to achieve consistent processing and reporting irrespective of the complexity of the ERP environment. Consequently, corporations of all sizes are increasingly recognizing the value of these solutions, such as FIS GETPAID solution, whether on a standalone basis or integrated as part of a wider financial technology infrastructure, in order to achieve the automation, analytics and reporting required to enhance performance and scalability, and immunize the department from changes to the ERP environment. Fig 11. Use of technology by degree of centralizationn Decentralized Combination 13% 26% 47% 55% 2% 12% 3% 3% 3% 12% 5% COMBINATION ERP/A/R SYSTEM OUTSOURCED Regional Centers 11% 35% 4% 7% 18% 12% SPECIALIST SYSTEM (NOT FIS) FIS SYSTEM Global Center 15% 49% 2% 6% 7% 20% SPREADSHEETS NOT SPECIFIED

10 8 Credit & Collections Global Benchmarking Study 2015 Challenge 2: Enhancing performance Looking more closely at performance, the credit and collections function adds value in a variety of ways: managing risk, facilitating sales, and enhancing working capital. As outlined earlier, past due A/R is an important performance criterion for most organizations (83 percent, Figure 8) but this varies considerably across organizations as figure 12 highlights. While the industry and payments culture in the relevant country makes a difference to this, lax collection processes discourage prompt customer payment and exacerbate credit risk. Twenty four percent of respondents have an average of six ten percent of invoices paid late, but a notable 16 percent have more than 21 percent of invoices past-due, resulting in significant credit, working capital and cash flow forecasting difficulties. There is a close relationship between automation and performance against key metrics, so many corporations that have not yet automated their collections processes have found it difficult to achieve performance benchmarks, which typically increase year on year. Figure 13 outlines participants changes to DSO over the past two years. This suggests that while nearly a third (29 percent) of corporations have managed to reduce DSO, a fifth (19 percent) have seen an increase. Some organizations (38 percent) are achieving similar levels of performance as two years ago. It is perhaps surprising that such a high proportion (14 percent) are not able to track changes in performance over this period. Inability to measure and improve on performance is major element in the value proposition for automated technology and more sophisticated analytics. For the 66 percent of respondent corporations that have over 6 percent of invoices outstanding (and many significantly more) the business case for reviewing and enhancing credit and collections processes and analytics is compelling. Those with a lower percentage of past-due invoices cannot be complacent, however, particularly those managing high value invoices, or in industries or regions where credit to customers and distributors needs to be managed more carefully. Fig 12. Percentage of past-due invoices Fig 13. Changes to DSO over past 24 months 24% 11% 17% 9% 16% Not sure Remained the same Decreased 29% 38% Increased 19% Less than 1% 2-3% 4-5% % 16-20% More than 21%

11 Credit & Collections Global Benchmarking Study Prioritizing collections Apart from achieving automation to reduce costs and improve efficiency, there is inevitably only a few ways in which credit managers can improve DSO performance: reducing payment terms, improving collection performance and/ or discounting receivables. Opportunities to reduce payment terms are typically limited in most industries, and while discounting receivables is an increasingly attractive option for many organizations as a means of financing working capital, the most successful programmes (i.e. where a high percentage of receivables can be discounted) are those that are underpinned by an efficient credit and collection process. Consequently, improving collection performance remains the primary driver in improving DSO. Every department has limited resources, so credit managers need to prioritize the invoices on which collectors will focus. Although figure 14 indicates that corporations adopt a wide range of criteria when prioritizing collections, the combination of invoice age and value was cited most commonly as the highest priority (38 percent) followed by invoice age at 27 percent. Fig 14. Drivers for prioritizing collections - weighted average AGE VALUE AGE & VALUE CUSTOMER TYPE RISK GRADE While there is clearly logic to this approach, by focusing on materiality and severity of past due AR, many organizations would benefit from a proactive rather than solely reactive approach to collections. The majority of respondent organizations track customer payment behavior only through the month-end aging process (figure 15) as opposed to looking at longer-term trends or combining this information with external credit reference data. By analyzing trends in customer behavior, and identifying invoices at greater risk, finance and SSC teams can be proactive, following up on invoices before they become due, while also leveraging this intelligence when setting or reviewing credit limits. Specifically, statistical scoring methods that predict the inherent risk to a customer, including risk of default, delinquency or bankruptcy, allow credit and collections teams to quantify the value of their credit risk, and therefore prioritize collections based on the probability of customer payment within a particular time period. Currently, only 16 percent of participating companies use risk grading as their primary collections criterion, but this reflects an increase of more than 100 percent since the 2014 Global Benchmarking Study. This is not a characteristic restricted to large departments, with 35 percent of participants that use risk grading as a primary criterion indicating that their credit and collections departments have fewer than five collectors. A slightly higher number, 22 percent of participants, currently use statistical modelling as one element of their collections process. The growth in statistical modelling is a trend we expect to continue. One of the most powerful elements of a statistical, as opposed to judgment-based approach to prioritizing collections is that it leverages data that already exists within the organization, in addition to external credit data. Given the volume and sophistication of data that many organizations have built up over many years, this data is a significant untapped resource that could be used to inform better decision-making, reduce risk and enhance working capital. 16% 23% Fig 15. Methods used to track customers payment habits 39% 23% 24% 25% 17% 12% 6% 3% ERP Month-end aging Payment activity Credit bureau data Statistical scoring No ability to monitor

12 10 Credit & Collections Global Benchmarking Study 2015 Portfolio scoring Fig 17. Frequency of scoring receivables portfolio While the use of statistical modelling may still be relatively limited at this stage, most participates indicate that measuring portfolio risk is a routine activity, particularly since the global financial crisis. The results of this study reveal, however, that there is often a disconnection between payment terms and the frequency of portfolio scoring. Figure 16 demonstrates that, 30 day payment terms are most common (48 percent) amongst participating corporations. However, figure 17 shows that 65 percent score their portfolio less often i.e. less than once per month, making it impossible to monitor and manage credit risk effectively. Eighteen percent never perform credit scoring of their receivables portfolio, and a further 13 percent do so infrequently, a clear area for attention given the importance of credit risk management for corporations of all sizes. NEVER INFREQUENTLY MONTHLY 15% 19% QUARTELY ANNUALLY 18% 13% Eighty five percent of respondents use external credit bureau information to apply risk grading to customers and distributors, most commonly Dun & Bradstreet (34 percent). Figure 18 shows that external credit reference information is used to set credit limits for new customers, and to monitor existing customer accounts. Currently, only 8 percent use this information to help set collection priorities, while a further 16 percent use this data to analyze their portfolios. 35% I used predictive analytics at a previous company and understand the value it brings to the credit risk and collections processes. ROSS GUTHRIE, VICE PRESIDENT, ORDER-TO-CASH, AT KEY ENERGY. Fig 16. Standard payment terms Fig 18. Use of credit reference information for credit management VARIOUS MOSTLY 45 DAYS NEW CUSTOMER INFORMATION PORTFOLIO ANALYSIS 1-10 DAYS MOSTLY 60 DAYS EXISITING CREDIT LINES OTHER INFORMATION DAYS MOSTLY 90 DAYS COLLECTION PRIORITIZATION MOSTLY 30 DAYS 11% 2% 12% 7% 16% 4% 8% 41% 48% 31%

13 Credit & Collections Global Benchmarking Study Processing credit claims Although efficient, targeted risk-based collections processes can be instrumental in avoiding bad debts, more than half of companies included in this study need to refer certain unpaid invoices to a collection agency as a last resort. Very often, credit managers will appoint more than one agency, which creates difficulties in managing these relationships with a consistent level of efficiency and transparency. Consequently, a growing number of companies are using portals to communicate more effectively and share consistent information with collection agencies. This is resulting in significant increases in claims recovery, as well as reducing internal costs and improving visibility. Corporations are understandably reluctant to appoint collection agencies until all possible efforts at recovery through the usual collections process have been exhausted, partly to avoid agency costs on top of the costs of goods and services, financing and collection processes that they have already absorbed. However, by working more efficiently with collection agencies, and placing debtors with an agency at the appropriate time, debt recovery can be far higher. Receivables rapidly deteriorate in collectability once they reach 60 days past due (and even more so at 90 and 120 days), so there is value in placing claims sooner rather than later. Consequently, the earlier that claims are placed e.g. at 90 or 120 days once all internal collection efforts have been exhausted, the higher the collection rate. Prompt placement of claims with credit reference agencies requires an efficient process; however, only 54 percent respondents to the Global Benchmarking Study currently have the ability to send claims electronically to credit reference agencies. Inevitably, however, sending claims manually creates delays, increases costs and depresses the collection rate. In addition, only 38 percent can monitor agency performance in real-time, making it difficult to encourage accountability and benchmark collection agencies appropriately.

14 12 Credit & Collections Global Benchmarking Study 2015 CREDIT RISK VERSUS COLLECTIONS RISK Credit risk In the world of credit and collections management, credit risk is the concept companies are most familiar with. This is essentially a customer s creditworthiness, or the risk that the customer will default on their payment. The credit risk of any new customer needs to be assessed before the company can grant payment terms to that customer. Key questions to ask are: how good are the customer s financials? Is the customer an ongoing entity? Is there a question mark over its ability to stay in business in the future? Evaluating collection risk The best method of assessing collection risk is to study and understand the customer s paying habits. The best indicator of how customers are going to pay in the future is how they paid in the past. In particular, companies should look for any changes in behavioral patterns which might result in a significant delinquent account. By using statistical analysis and studying payment trends over the last two decades, we have created statistical models focusing on payment behavior. These models can identify invoices which have a strong probability of becoming past due. Typically, credit risk is determined using data from credit bureaus as well as financial statements, trade references and bank references. The company may use scorecards to assess credit risk and decide whether it wants to do business with the customer in question. As well as asking whether a customer should be given a credit line, companies also need to determine how large that credit line should be. But that s not the end of the story. Once a relationship is in place, the company needs to monitor and mitigate that customer s credit risk on an ongoing basis. By taking the proper precautions and by subscribing to alerts and credit bureau data companies can make sure that their credit lines continue to match their customers creditworthiness. Collections Risk Credit risk focuses on the customer s creditworthiness, but collection risk relates to invoices that have already been issued. The collection risk of a particular invoice is the risk that the invoice will be paid late or not at all. Companies understand all too well that some invoices may become delinquent. But while they can mitigate this risk by using automated solutions and standard collection strategies, credit and collection departments can only make so many calls in a day. As a result, predictive analytics are increasingly being used to make the most effective use of the team s time. Being selective The reality is that many customers don t pay based on the agreed payment terms they pay when they receive a call chasing payment. But not all companies have a large enough collections team to chase every customer. There s a risk that some of the invoices which are not chased may become significantly overdue. So which invoices should companies focus their efforts on? Often companies decide to concentrate on invoices which are already overdue. However, many of these may be only slightly overdue. In many cases, the companies in question might be likely to pay their invoices within a couple of days, regardless of whether or not they receive a call. If companies can determine the risk that particular invoices will become severely delinquent in the future, they can adjust their collection habits early on and adopt a more aggressive collection strategy for those invoices. Instead of chasing by , this might mean picking up the phone and making sure that the relevant invoices are in customers payment processes. By doing this, companies can significantly increase the likelihood that invoices which would otherwise have become overdue will be paid on time. Companies can gain the most from predictive analytics when they combine this approach with an automated credit and collections management solution which can bring the high-risk accounts to the top of the work queue. An automated solution prioritizes and properly assigns the right collection activity to customers based on collection risk. Using such a solution, companies have the potential to reduce their overdue receivables by 25 percent or more. This has clear benefits for the company s collection team and can also have wider repercussions throughout the organization. By focusing on the invoices which are most likely to become significantly overdue, companies can significantly increase their meaningful collection activities without hiring a single person. Let s say 20 percent of a company s portfolio has the potential to be significantly delinquent in 60 days time. If the company has no way of identifying these specific invoices, they will need to call 100 percent of their customers to make sure that they have reached all of the invoices which may become delinquent. By using statistical analysis, on the other hand, companies can identify the invoices that are likely to go past due and concentrate on phoning those customers. There s no longer a need to call every single customer, because calling someone who is going to pay you anyway is an unnecessary use of the team s time. This can free up time for the collection team and lead to a much more streamlined collections management process.

15 Credit & Collections Global Benchmarking Study Challenge 3. A collaborative approach to dispute resolution Fig 19. Collection of disputed invoices Disputed invoices are a major cause of increased DSO and disruption to automated processes for most organizations (89 percent, figure 19), whilst also having a negative impact on customer relationships. Disputes create problems in three key areas: NO DISPUTES/DEDUCTIONS ENTIRE INVOICE IS HELD UP SEGREGATE DISPUTED ELEMENT Firstly, the time taken to manage disputed invoices is problematic. This involves credit and collection resources, but other departments too, particularly sales and customer services (figure 20). As disputes are, by their nature, exceptions to a standardized process, it can be a daunting task to create appropriate resolution workflows for each type of dispute, particularly as these will have different approval requirements and reporting lines. Nearly half of respondents (44 percent) highlighted the complexity of dispute approval processes in their organizations. 51% 11% 38% Secondly, given the number of touch points in commercial relationships with customers, there needs to be collaboration between different departments to make sure that disputes are handled efficiently. In many organizations, sales and customer services departments are apprehensive about the role of collections departments and SSCs as they may fear that sensitive customer relationships may be disrupted or diverted. In addition, some departments see disputed invoices as a criticism of their performance so they are not keen for disputes to be highlighted. Consequently, there may be a lack of inclination towards collaboration and communication on disputed invoices. Thirdly, there is a significant working capital issue. Amongst those that need to manage disputes (figure 19), 43 percent hold up the entire invoice in the event of a dispute, as opposed to segregating the disputed element of the invoice and pursuing the remainder for payment, a small fall from Fig 20. Departments with dispute resolution responsibility (in addition to credit & collections) Sales Customer services Accounting 53% 32% 74% The use of centralized, rule-based technology with the ability to set protocols for each type of exception, is key to achieving and enforcing transparent and disciplined dispute resolution procedures, and to prompting collaboration across the business. By sharing information, clarifying customer contact responsibilities and procedures and emphasising the role of collections as an ally rather than an adversary to the business, collections departments can build trust while ensuring efficient dispute resolution processes. This has major implications on performance metrics, working capital and predictability of collections, so creating a process to allow this segregation should be a priority for many organizations. Fulfillment Logistics 3rd party transporter 3rd party suppier Other N/A 12% 21% 7% 4% 6% 4%

16 14 Credit & Collections Global Benchmarking Study 2015 Transforming credit and collections for competitive advantage Credit and collections departments and SSCs have a vital role in facilitating business success by ensuring that sales are converted to revenues, enhancing working capital and mitigating risk. As corporations continue to expand, and become more international in their business activities, these responsibilities become more challenging but also more important. Similarly, the optimum organizational model for credit and collections to support this growth comes under scrutiny as companies see the value of centralized services on one hand to support increasing volumes and complexity, whilst recognizing the need to accommodate local cultural and regulatory conditions on the other. In this environment, technology plays an essential role in enabling treasury, finance departments and SSCs to support growth without adding resources, whilst also improving performance. While process automation is one area in which technology contributes to achieving these objectives, specialist solutions also offer the ability to apply risk-based collection methods, perform sophisticated, statistical-based analysis and facilitate collaboration across the business. Given the complexity of many organizations ERP environment, these solutions enable treasurers and finance managers to connect into these systems to exchange information on receivables without being affected by lengthy upgrade projects. One of the most significant challenges for many credit and collection departments and SSCs is to encourage support and therefore collaboration with other parts of the business, particularly sales and customer services. While the use of centralized tools to facilitate a consistent view of invoice status, and prompt appropriate action from the right individuals and teams, this in itself will not guarantee co-operation. Just as significantly, credit and collections teams need to prove the value they add and be proactive in partnering the business and facilitating its success. This means that finance managers and treasurers need to become closer to the business, understand the challenges in detail and find creative ways of addressing them, as opposed to operating as a parallel and potentially antagonistic business function. Organizational structures play a role in this, by ensuring the right degree of proximity as well as efficiency (which may be enabled through technology as well as physical proximity to sales and customer service teams) but behavior, business culture and the ability to prove success are just as significant. By building trust, implementing an appropriate organizational structure for the business and leveraging the right technology, finance managers with responsibility for credit and collections have the potential to create a virtuous cycle of scalability, performance improvement and collaboration, with substantial revenue, risk and working capital advantages to the business.

17 Credit & Collections Global Benchmarking Study Appendix. Participant profile Fig 1a. Company Turnover The survey on which these findings were based was conducted in April May There were 400 respondents representing organizations of all sizes, as demonstrated in Figure 1a. Smaller and mid-cap companies with a turnover less than $1bn (45 percent) were largely represented but the biggest single group represented companies with a turnover of $1bn - $3bn (28 percent). Similarly, a wide range of industries was represented (figure 22) particularly manufacturing. While the largest single group of respondents were based in North America (51 percent), all major regions were included (figure 3). The large proportion of participants based in Asia (24 percent), with respondents also based in Middle East and Africa, is important, reflecting the geographic expansion of multinationals headquartered in North America and Europe into these regions, but also vice versa. $250M - $500M $500M - $750M $750M - $1BN $1BN - $3BN $3BN - $5BN 0% 7% 7% 5% 8% $5BN - $10BN $10BN - $25BN $25BN - $40BN > $40BN 21% 8% Individual participants balanced management and operational responsibilities (figure 4). The 12 percent that indicated that they worked for another department were typically part of treasury or cash management. 28% 16%

18 16 Credit & Collections Global Benchmarking Study 2015 Fig 2a. Industry profile of participant organizations Real estate 0.6% Insurance 0.6% Transportation 1.2% Telecommunications 1.2% Personal & household goods 1.2% Industrial goods & services 1.2% Automobiles & parts 1.2% Utilities 1.9% Travel & leisure 1.9% Textiles & apparel 1.9% Metals & mining 1.9% Agriculture & fisheries 1.9% Retail 2.5% Phermaceuticals & biotech 3.1% Healthcare 3.1% Oil & gas 4.3% Food & beverage 4.3% Chemicals 5% Media 5% Technology 5.6% Services- non-financial 7.4% Construction & materials 8.6% Financial services 10.5% Manufacturing 19.8%

19 Credit & Collections Global Benchmarking Study While the largest single group of respondents were based in North America (51 percent), all major regions were included (figure 3a). The large proportion of participants based in Asia (24 percent), with respondents also based in Middle East and Africa, is important, reflecting the geographic expansion of multinationals headquartered in North America and Europe into these regions, but also vice versa. Fig 3a. Location of respondents NORTH AMERICA ASIA EUROPE AFRICA MIDDLE EAST LATIN AMERICA Individual participants balanced management and operational responsibilities (figure 4a). The 12 percent that indicated that they worked for another department were typically part of treasury or cash management. 18% 3% 1% 3% 51% 24% Fig 4a. Job profile of respondents EXECUTIVE MANAGEMENT MANAGEMENT/OPERATIONAL - CREDIT & COLLECTIONS MANAGEMENT/OPERATIONAL - OTHER DEPARTMENT END USER/COLLECTOR IT 4% 4% 12% 21% 59%

20 About FIS Corporate Solutions FIS offers a leading liquidity and risk management solution for corporations, insurance companies and the public sector. The solution suite includes credit risk modeling, collections management, treasury risk analysis, cash management, payments system integration, and payments execution delivered directly to corporations or via banking partners. The solutions help consolidate data from multiple in-house systems, drive workflow and provide connectivity to a broad range of trading partners including banks, SWIFT, credit data providers, FX platforms, money markets, and market data. The technology is supported by a full range of services delivered by domain experts, including managed cloud services, treasury operations management, SWIFT administration, managed bank connectivity, bank onboarding, and vendor enrollment. For more information, visit About FIS FIS is a global leader in financial services technology, with a focus on retail and institutional banking, payments, asset and wealth management, risk and compliance, consulting and outsourcing solutions. Through the depth and breadth of our solutions portfolio, global capabilities and domain expertise, FIS serves more than 20,000 clients in over 130 countries. Headquartered in Jacksonville, Florida, FIS employs more than 55,000 people worldwide and holds leadership positions in payment processing, financial software and banking solutions. Providing software, services and outsourcing of the technology that empowers the financial world, FIS is a Fortune 500 company and is a member of Standard & Poor s 500 Index. For more information about FIS, visit twitter.com/fisglobal getinfo@fisglobal.com linkedin.com/company/fisglobal 2016 FIS FIS and the FIS logo are trademarks or registered trademarks of FIS or its subsidiaries in the U.S. and/or other countries. Other parties marks are the property of their respective owners. 1101