The Future of Decisioning in the A/R Process.(credit scoring)

Credit scoring can be defined as a method of evaluating the credit worthiness of your customers through the implementation of a formula or set of rules. Testing the credit worthiness of your customer base via a credit scoring model is by no means a new science, but it is a methodology that has evolved over the last quarter of a century. Today credit scoring is set to be the corner stone of the credit granting process for the future.

A recent study conducted by the Credit Research Foundation identified forces influencing the need for credit scoring. The study revealed that the impact of current technological change in today's business arena will change what credit functions are performed and how they will be fulfilled; margin pressure will affect credit function size and value; economic pressures will force the need to harness sophisticated technology to fill the void of fewer people doing the same job; and there will be a reduced emphasis on the role of the traditional credit manager and more emphasis given to management of the revenue chain process.

The primary driver affecting the need to adopt credit scoring in the credit granting process is the effect of e-commerce on the traditional role of credit management.

As we examine the various components and relate them to procedures that we are familiar with, we acquire a sense of timing for a manual order process versus an electronic order process. Identifying the time required to accomplish each step manually, we can assume that it would take a sales representative 1 to 2 days to show the product to his new customer, take the order, have the new account application filled out, submit the order to order entry and the new account application to the credit department for processing. Once the new account application is submitted to the credit department, it will generally take the credit department 3 to 4 days to draw the credit reports, check references, gather public information, analyze the data and assign a credit line. Another 1 to 2 days should be added to the process for picking, packing and shipping of product. The net effect is a 5 to 8 day turnaround in the order to ship process for a new account under a manual scenario.

In a web-based scenario, the new customer accesses product information online and places their order in a matter of minutes, thereby, streamlining the process by 1 to 2 days on the front end. A problem still exists, however, because the new account still has to wait 3 to 4 days for the credit department to process the account application and another 1 to 2 days for the order to pick, pack and ship. This reduces the process from a 5 to 8 day procedure to a 4 to 6 day procedure.

It becomes apparent that in a web-based environment, a real bottleneck occurs at the credit decision-making level. The challenge to the credit professional, therefore, becomes that of eliminating the bottleneck and providing the organization a competitive advantage in its ability to respond to customer needs in a more timely fashion. The answer to accelerating the process is credit scoring. It provides a tool to the credit department, which facilitates a credit decision in a matter of minutes, and can effectively and accurately assign a line of credit for 85 percent of all new account applicants. Application of credit scoring to the order process reduces the turnaround time in a web-based environment from 4 to 6 days to 1 to 2 days for as many as 85 percent of all new customers who do not require additional credit scrutiny after the credit scoring model has analyzed their credit worthiness.

It is inevitable that as the web begins to play a greater role in the order process, businesses will be required to adopt credit scoring methodology to remain competitive in their ability to meet customer needs and expectations.