article

Outsourcing Receivables Management

Posted: 11/1999

The Bottom Line

Outsourcing Receivables Management
By Keith Shaver and Brian Briggs

To survive and flourish, service providers mustfocus
on aggressive receivables management that helps the organization maximize customer
profitability.

It’s no secret that competition has transformed the telecommunications industry,
stimulating dramatic growth, innovation and the emergence of many new players–even
industry categories–that did not exist as recently as four years ago. Less well
publicized is the downside of the industry’s rapid change: the rise in credit risk.
Clearly, having the most phenomenally innovative service or application alone is no
guarantee of success for today’s carrier. To survive and flourish, organizations also must
focus on aggressive receivables management that helps the organization maximize customer
profitability. Because of the unique challenges presented in this area, some carriers are
outsourcing their collections management.

It is essential to be able to predict and control bad-debt expenses (both gross and net
bad debt), operating expenses (acquisitions and collections), accounts receivable carrying
cost (via reduced days outstanding) and customer service (providing the right service at
the right price at the right time to the right customer).

The mantra of today’s receivables management gurus is "everyone in the
organization influences risk." Recognizing this as a maxim for improving
profitability, carriers should begin following four fundamental "rules" and four
critical "best practices."

The Rules

  • There is an appropriate balance between risk and reward; maximizing profits is
    consistent with controlling losses.
  • Credit vigilance at the beginning of the customer life cycle minimizes problems at the
    end of the customer life cycle.
  • Statistical measurement and control techniques can be used to quantify the likelihood of
    both revenues and expenses.
  • Good customer information (both account and transaction-level) must be available, read,
    understood and used.

Best Practices

  • Manage the accounts-receivable process across the entire customer life cycle.
  • Optimize the cost of managing different segments of your account portfolio.
  • Create an environment of continuous learning through use of test-and-control
    methodologies.
  • Provide centralized coordination of policies, strategies and tactics.

The challenge to carriers is to run their businesses and at the same time endeavor to
handle the essential task of risk management. Faced with the task of analyzing the
effectiveness of internal receivables portfolios and the resource demands of developing
best practices–not to mention the problems of identifying appropriate customer
segmentation, automating the workflow process, establishing improvement processes and
applying consistent policies and tactics–many carriers are taking a new course: finding
an outsourcer with a core competency in collections.

Table 1 below outlines the strategic situations where collection outsourcing typically
is considered and the types of expected benefits that can be associated with each
outsource configuration.

Table 1: Strategic Application of Receivable
Collection Outsourcing

Anticipated Benefits Outsource Overflow
(Unpredictable Volumes)
Outsource Segments
(Segment Portfolio: Live, Final, Risk, Product, etc.)
Knowledge Builder
(Low Core Competency)
Total Outsource
(Entire Portfolio Collection, Recovery, etc.)
Reduced Operating Cost    
Support Volume Spikes    
Limit Internal Resource
Improved Cash Flow  
Challenge Performance    
Controlled Experimentation    
Disaster Recovery
Third-Party Validation    

Source: Compiled by authors

Using an outsourcer may present considerable opportunity for both tactical and
strategic collections improvements. The right outsourcer can apply its software,
consulting and operations expertise to meet the needs of any carrier, large or small.
Further, the value an outsourcer brings to the table can go far beyond immediately
perceived needs.

As Table 2 below illustrates, outsourcing can encompass a more global approach to
managing the entire customer life cycle.

Table 2: Strategic Application of Life-Cycle
Outsourcing

Life-Cycle Areas Outsource Overflow Outsource Segments Knowledge Builder Total Portfolio Support
Product Management
Marketing
Acquisition/Activation
Balance Management
Customer Care
Collection Operations
Loss Recognition
Recovery Management

Source: Compiled by authors

Though outsourcing offers obvious advantages, some carriers are understandably wary of
turning over their entire risk-management function to "an outsider." Among the
most commonly expressed concerns (and their solutions) are:

Negative outsourcer perception: Many outsourcers have long recognized the need
to operate as an extension of the clients they support. The solution is to establish a
trial period of operation to gauge the firm’s capabilities to work as part of your team.

Service-delivery quality: Erosion of customer satisfaction often is a by-product
of more efficient collections. A solution is to control how your outsourcer performs by
establishing standards of operation with requisite results reporting.

Integration with internal systems: A solution is to establish a service
bureau-built interface supported by internal client functional and technical resource.

Loss of direct control: A solution is to manage the outsourcer in much the same
way as any other internal center.

Core-competency erosion: Fear of a loss of experienced resource is a perceived
deterrent. A solution is to improve your core knowledge by leveraging the outsourcer’s
experience.

Additional reporting needs: A solution is to leverage the reports that track and
report on key performance indicators an outsourcer is likely to provide, in addition to
existing reporting currently being supported.

Added level of communication: A solution is to view the outsourcer as an
"internal center" in all appropriate management meetings and communications.

Confidentiality: As a solution, a nondisclosure agreement should be a standard
part of contractual negotiations. Outsourcers clearly recognize the need for ongoing
confidentiality of both work performed and customer information. Their credibility is
vitally important to them as it has a direct bearing on future opportunity not only with
the existing client, but also with new clients.

To determine if it makes sense to consider outsourcing some (or all) of your collection
effort, begin by identifying where you need help, checking out "internal
prohibitors" that might stop consideration, and implementing a plan to address these
prohibitors. Research outsourcers to determine what each does (and how well), ultimately
comparing your process to theirs. Then price out the servicing options, such as internal
vs. external fixed and variable cost and servicing objectives.

Don’t dive in before you test the waters. Consider starting slowly with a piece of the
work so you can gain mutual experience. Build to a strategic result through gradual
maturation–that is, implement and learn.

Leverage the opportunity through knowledge and experience-sharing, taking advantage of
the external outsourcer’s core competency. Establish performance standards, set
expectations and develop measurements. Carefully plan the implementation, with a keen eye
on system data integration and communication and process flows. Finally, don’t forget to
measure the results.

Still have questions about whether outsourcing is the right course of action for your
organization? Then take the "acid test" below.

  • Do I have peaks and valleys in account volumes?
  • Are my internal resources stretched to their maximum capacity?
  • Do I need to supplement internal staff with skilled collection professionals?
  • Is my delinquent account collection cash flow lower than it should be?
  • Is my current system inflexible and unable to support test and control and continuous
    improvement?
  • Do I have difficulty implementing new collection strategies due to systems and
    technology issues?
  • Do I keep losing good customers because I am not treating them correctly?
  • Is my net bad debt too high?
  • Are my operating expenses out of control?

If the answer to any of these questions is yes, then outsourcing may be the right
solution for you. Need further convincing? Then consider the benefits. Moving to a
best-practice environment can reduce operating costs by up to 50 percent, bad debt by up
to 40 percent, days sales outstanding (DSO) by up to 15 percent and revenue improved by up
to 10 percent.

Keith Shaver is principal with American Management System Inc.’s Telecommunic-ations
Risk Management Consulting practice, Fairfax, Va. He can be reached at keith_shaver@amsinc.com. Brian Briggs is
director of business initiatives of Anderson Financial Network Inc. (AFNI), Bloomington,
Ill. He can be reached at brianbriggs@afninet.com


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