Is Your Credit Department
Nov 18, 2014
(This article was first written and prepared by Ian Lydiatt for an international credit organization in the Spring of 2011, and appeared as a feature article in their journal under the title, "A Team-Based Approach to an Effective Credit Department". That credit organization is one of the oldest credit organizations in the world with well over 1200 members in 19 countries.)
The culture of a credit department is driven by marketing. Think about it. At the beginning of our credit careers, we likely worked at companies where culture was just from sitting in a credit department located in a corner area; working on files and keeping them current. We learned that daily interaction came from e-mails, calls and deadlines we were all faced with. We became reactionary, and as such, that culture developed into impressions others applied to us. When credit advice was requested from us, it was typically prompted with little notice; therefore, we reacted as quickly as possible to give our feedback and provide our perspective. That is far from a bad thing, and in fact, it is exactly what marketing wanted from us. In many cases, we learned that getting results to marketing quickly also required us to understand the full scope of the credit request, properly assess all aspects, and offer a solution for the problem. While we gave great detail for the recommendations we provided, we were not sure if it met marketing’s requirements. If the credit review process continued to accelerate, it became like the joke: Why do ducks have webbed feet? . . . to stamp out fires . . . and why do elephants have flat feet? . . . to stamp out burning ducks! Let’s make sure credit people are not viewed as sitting ducks!
As we progressed along in time, either at that company in the credit department or at another company within our career path, we began to see that we often were brought in at the last minute to input. Either by time requirements, or by design, credit became involved normally once the details of a transaction had been initially developed. In many cases, marketing viewed credit as a requirement for their review process, and only secondary to their commercial needs. Credit saw marketing as 'tunnel-visioned' towards closing a deal, without identifying potential threats. As a result of each department working separately, failures occurred, and a greater appreciation for each other was evident. A mutual understanding then arose in many situations whereby the deal needed to get done in a timely manner, and credit input was unequivocally necessary.
ISOLATION – NOT BY DESIGN
Today, credit is not alone as a segmented department, as legal most often is another area that needs consulting, but again is brought in only when the project or requirement is already humming along. That is not necessarily a bad thing; just the way it often happens. The cause is normally from the fast paced atmosphere of marketing department requirements. The only problem with this scenario is that many of these requirements can hit you at the same time, and you do not have time to be creative and fully understand the logic of how the deal evolved, and as well, get to know the drivers behind it. Especially within complex deals, it not only takes time and focus to get up to speed, but it also requires coming up with ideas on how to resolve the opportunity with a solution. That does not consider other deals that are pending; leaving little time to be creative when you have to bring yourself up to speed.
The issue then becomes this: How do you get better involved at the start of a project or credit approval, at the time the deal is initially contemplated? How do you become an integral part of the marketing team so they see you as part of the solution rather than the problem? That does not happen overnight, nor does the credit department normally have the resources to change that process. However, as they say, you have to take time to save time – or in this case, to make life easier.
Marketing needs to accomplish their objectives, as a simple equation . . . reduced revenues equals reduced jobs. Marketing needs to be given something they can work with and chew on. The first solution is to offer credit’s involvement with marketing’s weekly or regular meetings. Within this meeting it is important to provide a credit presentation on what the credit department does, why you need a realistic credit limit set on each customer, what calculation criteria is included in a credit limit, the reasons for why you only establish certain limits, what goes into an evaluation, and anything you feel is relevant to assist marketing in understanding the credit department needs. This cuts both ways as marketing in turn can assist you with other criteria that allows you to understand their needs and be seen as part of the full disclosure. Ideas can then be exchanged, and friendships more easily developed between people in marketing and credit. We all have to realize that everyone is trying to get to the same place, at the same time.
When a two-way ‘infiltration’ process occurs between marketing and credit, strange things can happen. For example, in my experience over the years at Christmas, I have been given some fairly unexpected gifts in front of the marketing department, and in some cases even in front of the credit department, by marketing. This was designed to show their appreciation for the assistance and help over the years. If that doesn’t motivate you, nothing will . . . and I don’t mean the gift, I mean the appreciation, recognition and resulting camaraderie.
In addition, if you do not already have a list of priorities you give marketing on some kind of regular basis, make one for distribution within your regular meeting that includes their priorities in order - as directed by them. The listing needs to specify the contracted legal entity as you know it, the value of the 60 day exposure, commodity, currency, length of deal, status details and marketing person with the deal responsibility. Marketing should love you for this information if they are not used to receiving it.
Another motivator for both credit and marketing is to have someone from credit accepted as an attendee in those marketing meetings. This person is then looked at as someone who has been involved from day one on a complex deal, and who understands what different priorities are pressing from one meeting to the next. Credit will need to continue to suggest ways to assist marketing in these meetings so you then become fully immersed in giving potential solutions. If that works and credit becomes part of these meetings, then subsequently, credit can further suggest that legal attend where and when other complex deals are being formulated. From comments I have heard from various legal people at various companies, they are excited to be involved at day one so they do not have to scramble with overtime, in order to simply bring themselves up to speed.
This article also helps to better understand how all departments fit into the equation and how credit needs to be part of that process, as just one of the critical links.
THE ‘SANDBOX’ PHILOSOPHY
Another way to be seen as part of the solution, not the problem, is to have marketing be given enough flexibility to override your credit input. Note: if a written override form is used, then credit still gets kudos for providing their recommendation. You or your top credit person can then work with senior management and establish a separate ‘sandbox’ [dollar amount] that marketing can work in. This sandbox would contain the annual aggregated amount for credit overrides. For example, try to get a company’s Chief Financial Officer and/or President to establish an amount that they know they can lose within a year, while still maintaining their job(s). Try to get them to accept that same amount for the ‘sandbox’ pool and pro-rata share it with all revenue-related departments, relative to annual revenues. Each department’s pro-rata share would then be reduced by current credit overrides. When or if that sandbox ever gets filled up, then one account has to come out before another goes in.
Depending on your ability to sell this concept to senior management, I suggest that two further things be considered. First, have this put in your Credit and/or Risk Management Policy. Secondly, and ideally, recommend that any of these ‘sandbox’ accounts that fail should logically be written off against marketing’s expenses, instead of bad debt. That is because you did not govern or approve it, nor should you be judged by it. However, this sandbox philosophy helps everyone accomplish their objectives with eyes wide open.
WHAT A CREDIT DEPARTMENT IS NOT
All too often, credit people sometimes feel they have to side with marketing because it makes sense from a commercial point of view or they do not want to be seen or viewed as a ‘nay-sayer’. However, pleasing the marketing department is not always the right way to go if there are no ways to make the deal work from a financial perspective. In those cases, I have always said to marketing management, “If credit and marketing should ever agree, one of us is not doing their job.” Credit needs to input, as that is why we are employed. The CFO ultimately has to say that credit’s input was involved with each and every review to be sure that the notes within your company's annual report are correct and that the company’s risk policies are not only in place, but followed.
In the fall of 2007 I was asked by the executive of this same credit organisation to present at a conference in Florida by providing some innovations for different credit approaches that helped solve problems. Those slides are still on the their web site under: Library/Resource Categories/Presentations/Fall 2007-Credit Proofing Fundamentals. Included within this presentation was the TriParti Agreement concept that is used as a tool to help bridge the financial gap when a parental guarantee will not be given. Other ideas are given within that presentation and should be used as only a stepping stone to those that you will come up with in time.
Do not forget to use your industry credit contacts and other credit granters to educate yourself on different ways to solve different problems. Remember, you are not alone. Your contacts may also provide you with unsolicited examples of how they have dealt with similar problems, so don’t be embarrassed to ask. Those credit contacts may need your help one day. Contacting these individuals is also a great way to affirm your position; if your peers relay a similar position to take, you can expect that you are not far off base. Going to conferences is logical, as you have an opportunity to share ideas with as many as 300-500 attendees. With the cost of one trip, a huge advantage can be seen to marketing. You are able to find out how others operate and how that can play a small but important part in your own unique credit policy and decision process.
Keeping informed and aware becomes a valuable asset, as it helps the marketing department see you as a benefit, not a cost or barrier in doing effective business. Above all, the satisfaction of doing everything you can to benefit the greater good of the organization helps you to become seen as not only a problem solver, but a team player! The feeling is awesome.
InRisk Solutions Inc.