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Practical "best practices" to integrate benchmarking into the credit department.

After asking several corporate credit managers about whether they have had a positive experience with the integration of benchmarking into the credit function, I was reminded of a quote from a politician. Former Illinois Senator Everett Dirksen's response to a tough political question was phrased: "Some of my friends say yes, and some of my friends say no; me, I agree with my friends."

Benchmarking is one of the best tools available to identify focal points for improving credit department operations. But the practical obstacles of trying to integrate benchmarking into making improvements in the credit function can vary widely from company to company. Credit managers are simply not in agreement concerning how to delve into the use of benchmarking.

This article provides several suggestions from seasoned experts in the credit profession. Their long-running success in the credit profession generates a few "best practices" that can be potentially useful for credit practitioners.

The Rationale for Best Practices

In this issue of Business Credit, Terry Callahan, CCE, president of the Credit Research Foundation (CRF), provides a foundation of knowledge that can be used to better understand benchmarking in the article, "Benchmarking to Measure Your Performance." You will also be provided with information on how to participate in a benchmarking study. Once the data become available, the practical aspects of using the data become the focus. Benchmarking uses data drawn from external comparisons; then comparisons are used to pinpoint differences. Usually, the comparisons are made to companies in the same industry. It should be noted that benchmarking pinpoints specific focal points.

Operating managers are challenged to make improvements. Most companies look for revenue enhancement combined with cost containment, which can push credit managers to experiment with making operating changes. In order to clarify the potential to change, the leading companies in an industry often are used as targets to emulate.

Exceptional performance by an industry leader can be used to establish benchmarking targets. "Best practices" used by the industry leader can be used to achieve lofty goals set as benchmarking targets. However, best practices can become a challenge to emulate. Several pertinent suggestions from credit managers may prove to be useful to achieve benchmarking goals through the use of best practices.

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The Need for a Top Management Buy-in to a Process

Hank Hagerich is vice president of credit and collections at Medline Industries located in Mundelein, IL. Hagerich says that all credit departments go through changes and he has a helpful analogy for best practices considerations. Hagerich's experience as an infantry man in the First Infantry Division of the Seventh Air Cavalry in Vietnam can prove useful when benchmarking. During the war, landing zones (LZs) used to unload troops by helicopter were identified by Air Force reconnaissance pilots from the air. The LZs from 1,500 feet up all looked green and clear. Unfortunately, some had high elephant grasses that masked enemy punji spears. The results could be fatal.

In a business environment, Hagerich believes that the upper echelon management can too often fail to see the hidden dangers when making changes. Best practices require consultation with the credit personnel in the trenches who work with day-to-day obstacles. The troops in the trenches need to be incorporated into the benchmarking process.

For example, if cost containment simply leads to downsizing the credit department, then the credit department could become understaffed. Here too, the results could be fatal. Participatory planning is an essential best practice that contributes to effective benchmarking.

The Need to Identify Realities, Cultures and Industry Practices

Paul Brunner, CICP is the corporate credit manager at Mitsubishi Electric Automation Inc. located in Vernon Hills, IL. Brunner believes that credit managers must become aware of the realities, cultures and practices that shape policies and procedures when considering the use of benchmarking.

On the day Brunner discussed benchmarking, he was in a particularly good mood. He had just returned from an out of state visit with a large customer. The personal visit had allowed Brunner to iron out several operating issues with a valued customer. Both the customer and Brunner became more aware of the facts that influence their business relationship. Customer-specific realities and cultures are key components to best practices when using benchmarking.

According to Brunner, when using CRF benchmarking data, it is crucial to recognize industry practices. The need to compare apples to apples cannot be overemphasized. For example, a company that is more lenient in extending credit with a goal of capturing more of the market share would be expected to have a longer days sales outstanding (DSO) than a company that has a strict credit policy. When examining the benchmark data for the industry DSO, the realities and side effects of the corporate goals need to be considered.

Differences in risk assessment and risk tolerance are hitting only the tip of the iceberg in terms of the practical use of benchmarking. Best practices simply suggest that when benchmarking data are analyzed, a comprehensive review of all parameters should be taken into consideration.

The Need to Consider the Data Inputs in Benchmarking Analysis

Bill Weilemann is the corporate credit manager for Packaging Corporation of America in Naperville, IL. Weilemann is an active participator in the CRF benchmarking studies both as a data contributor to the CRF databank and as a user of the results in the CRF benchmarking reports. Weilemann is also an active member of the NACM-affiliated Paper Packaging Industry Credit Managers Group. The group meets quarterly to discuss common industry issues and concerns. Weilemann was able to pinpoint several focal points where it would be very difficult to rely exclusively upon CRF data. The data are quite useful but should be used with a measure of careful interpretation.

For example, when credit managers share payment history on accounts, only factual information is used. The process for reporting factual information concerning payment data can be different from company to company. More specifically, examples that pertain to the DSO data input could differ. Do unearned discounts age out in the reporting of DSO? Do late payment charges age out? Do deductions age out in the DSO? Each company may have slightly different parameters that make comparison to the benchmark data a challenge.

Weilemann commented that he had recently had a discussion with a group of credit managers concerning benchmarking for credit manager salaries. However, the duties and job descriptions for credit managers can vary widely. Some credit departments are centralized while others are decentralized. Even the titles for credit managers can vary: director of credit, vice president of credit, corporate credit manager, division credit manager, regional credit manager and many more. It could be a challenge to look at a salary and make a valid benchmark comparison.

Weilemann concluded that benchmarking can be quite helpful; however, he does not worry about the correlation of data from his company in comparison to a benchmark. He is happy if his management is satisfied with his work, and he knows that he is doing the best job possible. These are genuine words of wisdom or a best practice obtained through experience.

The Need for Continuing Professional Education

Buddy Baker of Atradius Trade Credit Insurance in Chicago, IL is an expert in the area of international trade finance. Baker is a frequent speaker at NACM conferences, often delving into the use of letters of credit and the new UCP 600.

When Baker was asked if he was aware of any way to benchmark the use of letters of credit, an interesting discussion ensued. Baker pointed out a few issues in trying to benchmark the use of letters of credit. For example, just identifying the appropriate benchmark to be used could be a challenge.

Baker asked relevant questions. Would the appropriate benchmark be the percentage of successful payments under a letter of credit? Would the appropriate benchmark be the number of letters of credit used? Would the appropriate benchmark be the number of different countries in which letters of credit are used?

Baker's questions pinpoint a best practices problem concerning benchmarking. Sometimes it can be very difficult to identify a benchmark measure to appropriately capture an important credit department focal point. This situation can create the opportunity for credit managers to keep skills current by attending NACM education-related activities. International norms change so rapidly that keeping current can be the best practice when it comes to international trade.

A Final Thought

The CRF benchmarking data provides almost 100 different benchmark focal points. As a best practice, consider focusing on just a few the first time to identify a potential need to make operating changes. Develop a comprehensive examination of the processes that relate to each benchmark focal point. Then try to form an approach to implement change that could improve operations and results. Additional focal points can be examined at a later date.

D. Charles Gahala, CCE

Dr. Gahala is a professor of finance at Benedictine University located in Lisle, IL. He can be reached at cgahala@ben.edu.
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Title Annotation:selected topic
Author:Gahala, Charles
Publication:Business Credit
Geographic Code:1USA
Date:Nov 1, 2007
Words:1496
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