Outsourcing Your Credit Department

Economies move in cycles, so it is not surprising that fads in business move in cycles. When the economy is in trouble, one word that often comes up is “outsourcing”, which is simply farming out one of the company’s business functions to a third party.

When is outsourcing good idea?

I read one blog where the small business owner outsourced almost everything, because, he said, once the “interesting work” of building up the company is done, he did not want to do any of the mundane day-to-day work. He refers to the process as “business automation”, and it seems to work for him.

Another reason might be the abundance of third party suppliers to do the work, like having a delivery service handle shipments rather than your own shipping department. There are some services so common that they are not thought of as outsourcing at all (legal, insurance, accounting & audit services for instance).

Ultimately you can outsource anything, and if it came to cutting back, it is a lot easier to get rid of a vendor than to get rid of an employee.

There is a reasonable limit to outsourcing. While it allows you to focus on the core competencies that will help your business succeed, it can eat up your profits, and you don’t want to outsource too much so that your eyes are off the ball. Entrepreneur Magazine suggests that businesses maintain direct control over their cash flow and on customer interactions (see the article at http://www.entrepreneur.com/article/49616).

So what about the credit department? Collection agencies and companies that specialize in those annoying securitization methods (GSAs, PMSIs, L/Cs, etc) are quite common, leaving the credit manager and a small staff to handle the credit evaluation & adjudication, some reporting, and writing letters to customers in hopes you won’t need to send them to collections (and pay that 30% fee).

Can the credit department be outsourced?

Companies such as MortonSmith (www.mortonsmith.com) would love to give it a go. They offer a range of services, including “Global Credit Control” which is promised to act as an “extension of your credit department” working with overseas customers. Essentially, MortonSmith will use your credit policies and apply them to your customer base, and help you adjudicate new customers, all in the customer’s own language. They will either set up a live feed from your ERP system, or receive a formatted report from you in order to have the data necessary to track your customers and perform the entire credit and collections function.

Should the credit department be outsourced?

I would expect the credit managers in the room to stand up and shout “NO!” But shouting won’t help; when the company’s bottom line is the real topic, you have to make a case that speaks to that bottom line. Every situation is different and every company is different, so there is no one silver bullet that will make the case. Here are some broad categories to consider when formulating you argument:

–          Customer interaction: If your company or industry (like agriculture) is more weighted to personal interactions and relationships, will the customer be happy to know that when they are late that they will be dealing with a different company, likely a foreign company? Core question: how integrated is your sales-force and credit team with the customer?

–          Sales force interaction: Does the sales force pick up the phone to discuss an issue with you, or occasionally to vent? Are those relationships and interactions productive, and would outsourcing help or hurt? Core question: how integrated are you and your team with the sales-force?

–          Home team advantage: If you attend sales meetings and be part of the sales team from the start, would an outsource company be able to fill that void? Core question: are you considered a part of the sales team?

–          Credit flexibility: as an in-house credit manager, can you react with speed and use personal connections (internal and external) with the customer to negotiate a solution? Core question: do your company’s credit policies change from tight to loose (and back again) frequently?

But the best argument against outsourcing is you, the credit manager. Credit Managers work hard to make sure that problems don’t happen in the first place, and that seems like a great place to start when it comes to responding to the possibility of outsourcing the credit department. With a professional designation like a CCP (!) and hard work, you will do such a good job that the idea of outsourcing will not even cross your bosses mind.

Read more about outsourcing from National’s “To Your Credit” April 2012 issue – HERE!

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