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Outsourcing and customer service: fact, fiction, or fad?

Are companies really "outsourcing" the credit function? Is the talk that companies are "teaming" up credit with other areas such as customer service and sales just more business hype, destined to be accepted, then rejected, when the next craze comes along?

These two questions have surfaced in meeting after meeting recently. Credit professionals are keenly aware of the business currents influencing their profession and company performance and want insight into the business ideas and structural arrangements affecting them.

According to those surveyed for this report, the answer is a fairly emphatic "no" to both questions. While companies have always handled some aspects of credit through outside vendors, the credit and collection function is vital to corporate survival. It is, however, taking on new forms.

In the prevailing new form, credit personnel are found within customer service units. Some large companies are maintaining a "centralized" credit department, but reorganizing large divisions as regional credit and customer service centers. A few are moving treasury and credit functions such as risk assessment and portfolio management within the business/finance unit, while establishing regional customer service centers which include credit personnel for day-to-day operations and pricing discrepancies.

Some smaller companies have always organized credit, customer service, and even sales, within the same group or department. This is also true among companies involved in international business, where credit/customer service/sales teams are organized by country or region to expedite communication and information exchange.

While the new organizational arrangements may have varying components and life cycles, what is quite clear is that they are not static but change as business needs dictate.

John H. Allen, sector head, BASF Corporation, Clifton, N.J., who frequently serves as moderator of FCIB-NACM open forums, has his finger on the pulse of the credit profession and what credit and finance professionals are talking about.

"Outsourcing" Is Fiction

"'Outsourcing,' along with 'reengineering,' is the latest buzz word," Allen says. "But in talking and listening to people, we aren't really coming up with too many companies that are outsourcing the credit function. For one thing, outside firms don't have access to the company's database. Companies understandably don't like to provide third-party access."

Roger Camlek, Union Carbide, Chemical/Plastics, Danbury, Conn., says, "Although one or two people looked into it, we decided not to outsource any collection activity. Cost is one consideration. Another is effectiveness. Employees are more knowledgeable about accounts."

Some companies reported hiring outside vendors for collections but later regretted the decision because the outside firms did not understand their customer base. The efforts failed, with the result that they brought the function back inhouse.

A more workable solution to both access and knowledge concerns is to hire help on a temporary basis when a collection crunch occurs. Temporaries can be brought in and trained to access inhouse systems.

What's in a Name?

And, of critical importance, is what is actually meant by "outsourcing."

"Companies have always outsourced some collection activity to third parties," according to Bruce H. Carr, Crosby Valve and Gage Company, Wrentham, Mass. "This does not indicate a major new trend."

"It depends on what is meant by 'outsourcing," asserts Norman A. Thompson, director, General Sales Finance, the Procter and Gamble Distributing Company, Cincinnati, Ohio. "Some companies have always used outside firms for lockbox and credit reporting services, and 'low value-added' work such as data entry."

"Many companies use third parties for such services as data entry and factoring," according to Lee E. Teigen, CCE, director, corporate credit, Oshkosh B'Gosh, Oshkosh, Wisc.

Credit Joins the Customer Service Team

So if the credit function is not being farmed out, what is going on? Quite a few companies are creating customer service teams which include a credit person to manage such areas as unauthorized deductions and pricing discrepancies, while moving credit and treasury functions to the financial services or business unit.

While credit maintains its close ties with sales, and in some cases sales administration may actually be part of the customer service team, working alongside credit, field sales and credit usually remain separate departments, reporting to different department heads. Sales incentives and bonuses, however, may be tied to collection performance.

At Nabisco, for example, 28 teams of 112 people are organized by customer and geography. Each team includes the credit risk, accounts receivable, deduction, and sales administration functions. Bill Burkhardt is director of customer financial services, central services, at the Wilksboro, Penn., location.

"Two years ago we put three to five people together on teams and organized groups by customer and geography," he explains. "Then we cross trained everyone in all four functions. Since our target is the customer, each individual should be able to handled all four functions."

While they are only "80 percent into the process," Burkhart reports a drastic reduction in account loads, compliments from the sales force, and a system that is working "fantastically." Also on the plus side, the arrangement has "broken down the functional silos, eliminated turf battles, and cut down on bureaucracy."

On the minus side, one-third of middle management positions were eliminated and coverage is sometimes a problem.

"If someone is out for a day or two, they are sorely missed," he says. Customer teams or "high performance work teams" which consist of order entry, collections, cash application, deductions, and promotional management have been in operation for three years at James River in Norwalk, Conn. Mike Rogers, director of credit, says everyone on the team can handle any of these functions, each order is handled from start to finish, and "the company has achieved great productivity gains." His company has served as a training site for scores of others.

Teigen says that while deductions, credit, and collections are currently on teams in his organization, he'd like to see the teams expanded even further to include customer service.

"We're organized by type of customer, but there are probably a hundred right ways," he says. "You have to determine what fits best into your type of business. What's great about it is that credit managers are now coaches, leading and training teams."

In what might be a unique arrangement, the credit administration and customer service manager reports to both a vice president of sales and a vice president of finance at Knape and Vott, Grand Rapids, Mich.

"It took us three years of training, but we're experiencing great success and resolving concerns much faster," according to John Knape, manager of credit administration and customer services for the $125 million company. "Our credit administration and customer service staff are making the complete effort to help customers and see that they are completely satisfied. This effort leads to customers who are willing to pay within terms.

"Under old line management systems the sales department would have nothing to do with credit and finance. That has changed and we think it is a big factor in our success. We conduct performance and receivable reviews and can immediately target accounts to sales. The field force can be notified by voice or E-mail if we can't resolve the matter directly."

Rob Olsen, CCE, vice president, Customer Financial Services, Franklin Quest Company, Salt Lake City, Utah, says their corporate account specialists are trained to work in both customer service and credit and collections. Both groups belong to the Customer Sales and Service Department.

"It's like one stop shopping. Customers can go to one person to resolve difficulties which eliminates a whole lot of frustration," he says.

And on a management level, Olsen can devote more time to reviewing contracts, legal filings, banking relationships, and financing. And by performing the finance function, credit executives are gaining more authority.

"I don't have to go to a controller, for example, but can get together with any salesperson to complete the deal," Olsen explains.

Kraft maintains both a centralized and decentralized structure. The Kraft General Foods group, for example, is in the process of organizing credit within regional service centers. Order entry, deduction clearing, and collection staff report directly to customer service managers.

"Credit managers can check and resolve pricing and other discrepancies quickly when following up on invoice collection," reports Sandra Schirmang, director of credit, Kraft General Foods, Northfield, Ill.

"With everyone under one roof we are able to communicate more quickly; we share common goals; and everyone is responsible for making sure the process runs smoothly," she says.

Other companies, such as Mead's Zellerbach Division and Ashland Chemical's Valvaline Division, are organizing their largest divisions along similar lines. This type of reorganization, incidently, does not necessary mean that positions must be eliminated. Valvaline, for example, has combined credit and order entry staff without eliminating jobs.

Total Emersion

At the far end of the spectrum are companies like Dupont Canada, which no longer have a credit department at all, but have absorbed financial analysts and collection personnel within the business and customer service units. Seventy-five percent of positions were absorbed within these two areas.

Bill Cunningham, director of treasury, says the reorganization has enabled him to concentrate more on treasury functions such as the company's investment portfolio and banking and foreign exchange needs. In talking about it, one also gets the impression that it has enabled him to experience a kind of professional renaissance.

"Today's customer service representatives also does collection work which gives them a more holistic view of the business and enables financial analysts in the business unit to spend more time on this function," he says. "Everyone is more focused on the external customer than they were under the old centralized system. We've got great teamwork and as a company we've done a remarkable job of lowering fixed costs and made enormous improvements in our operation. And we've made the customers happy. I think we all need to focus on serving customers."

Cunningham also says the internal climate of the company has to change to accomplish this and that leaders must set the tone.

"If customers are the focus, they will feel better served, which really is a win-win situation for everyone."

And the reduction in staff has not proven to be a problem since "the new job design forces everyone to deal with the mass of work to be done and the flow of information more efficiently."

Customer Visits and More

When working with sales, credit managers may not be in the same department, but they are certainly on the same wavelength, much more so than they were five years ago.

"I think a lot of companies are trying to eliminate 'functional silos,'" says Norm Thompson. "Not in terms of combining areas but in looking at the total process and improving linkages. People are getting smarter in working with sales and other areas."

In many companies, sales and credit are visiting customers together, calling on accounts payable and purchasing.

Ed Curtis, R.E. Michael Company, Baltimore, Md., for example, describes his ongoing working relationship with sales throughout the process:

"At the front end, we canvas the market and check credit reports to help sales pare down their list. Of 100 potential customers, we might determine we have 30 or 40 quality customers; people we know we can put on open accounts. In this way, the sales force doesn't waste time calling on restrictive accounts.

"Credit managers have budgets to visit customers. We have an annual trip for our top 300 customers, for example, which credit attends. Credit establishes relationships with owners that could be beneficial should the situation get tense later. In this way, credit develops a rapport with customers and isn't just involved in the bad situations."

Should a bad situation develop, however, company policy requires credit to notify sales representatives and branch managers before any negative action is taken. And because sales incentives are based on collectibility, credit and sales have goals which are mutually beneficial.

Education and training are another way in which sales and credit work and learn from one another.

Andrea Ellison, credit manager, Seabrook Medical Systems, Cincinnati, Ohio, for example, says she meets with new regional sales managers to teach them to know what to look for in new accounts and to understand what receivables management entails.

Jean Andrews, credit manager, Monroe Auto Equipment, Monroe, Mich., outlines a number of training projects at her company.

In August 1993, her department gave a training class for some of their field salespeople. The topics were all selected by the sales force from a list of credit and finance items provided by her department including, credit approval of new customers, costs of terms/value of dating, understanding financial statements, and warning signs of troubled customers.

"The class received the highest rating from participants on their internal evaluation forms. We feel this is due in large part to the fact that we allowed the attendees to choose the areas of focus," Andrews says.

Andrews' Credit Department used the series on TQM and the credit department which appeared in Business Credit last year to develop their own client survey of sales, customer service, and finance personnel on services provided by the credit department. Based on the responses, they listed the top five areas for improvement and formed teams to develop action plans in these areas. In February, 1994 they resurveyed the same "customers" to ask if these areas had improved or to determine what else they needed to do. They plan to repeat the survey annually to ensure they are fulfilling their commitment to internal customers.

Monroe also started an ongoing team of sales, credit, and customer service to deal with payment problems on customer accounts.

"As the team progressed, we found many of the nonpayment issues were created by our own internal procedures and lack of communication," Andrews says. "Working through these issues led to a dramatic reduction in past due accounts and greater trust between the functional areas. Our attitude in the Credit Department is that we are a service function and our product is information. Because our sales people are key to our success, we consider them equal in importance to our external customers in providing information."

By the time you read this article, even more companies will adopt some of the organizational structures and team building measures presented here to improve their performance and provide better service to customers.

Cindy Tursman is director of communications for NACM.
COPYRIGHT 1994 National Association of Credit Management
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994 Gale, Cengage Learning. All rights reserved.

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Author:Tursman, Cindy
Publication:Business Credit
Date:Apr 1, 1994
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