Moving credit into the front office: how credit risk scoring drives revenues. (Selected Topic).

Introduction

Among the myriad of challenges facing credit organizations in 2002 and beyond, one stands above the rest: the seeming conflict passed down from upper management to increase top line revenues, while simultaneously cutting back the available pool of resources to manage the credit risk associated with such growth. According to a 2002 survey by the Credit Research Foundation, some 65 percent of credit managers said they will be forced to do more with fewer staff and resources, and 68 percent stated they are under pressure to deliver faster turnaround time for customer credit approvals. Yet, despite such heightened awareness of the need to use technology to help lower costs, approximately 85 percent of businesses indicated they had allocated $25,000 or less of their budget for automated scoring, credit evaluation and decisioning technology, as well as other technologies related to streamlining the workflow of credit policies and procedures, including scorecard development. Such low budget figures illustrate the up hill battle credit managers face when attempting to justify a technology investment. Under difficult economic conditions, champions of such initiatives have typically relied on ROI calculations demonstrating the ability to improve operational efficiencies to gain internal approval. But as resources become scarce, payback requirements become even more stringent. Even benefits such as the ability to improve credit risk across the entire customer portfolio have been put aside as "soft" factors that do not directly contribute to top line growth, thereby relegating credit automation projects to the "B" list on the corporate agenda. It is this mindset that contributes to the pervasive attitude that the credit function is a back office operation. However, when coupled with process change that moves credit risk scoring forward in the order-to-cash process, credit automation projects have proven dramatic revenue generating results. Automated credit risk scoring has the potential to move credit into the front office, t o drive revenues, and to generate top line growth, and champions of credit automation who understand these benefits will find it much easier to gain internal acceptance for their initiatives.

The Challenges of Today's Order-to-Cash

Traditionally, the order-to-cash process flow begins with the origination channel, either by direct sales contact, phone or web-based orders. The selling ritual then takes place, followed by a check of the inventory. Often times, inventory is held after the order is made in anticipation of the results from the subsequent steps: to check the status of the customer (balances or credit limit) or to establish a credit line. Obviously, if the customer's status is acceptable and there is sufficient credit, the product is shipped and finally, funds are collected. However; a problem occurs when the status causes the order to be rejected or if a credit line cannot be established. When this process occurs in this typical order, the challenges can be manifold and include the following:

* High-risk customers may be rejected after placing an order. Obviously, the company loses revenue in this scenario.

* New customers will have to wait for a credit line before the order can be confirmed. In this scenario, customers have an opportunity to shop elsewhere and may find credit more quickly or product at better prices.

* Orders for existing customers can be placed on credit hold. In this case, it will become evident that the company has a sub-optimal cash flow and inventory management process.