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Cross Functional Collaboration and Specialized System Drive Improvements in
Deduction Processing
By Richard N. Lander
( As published in Strategic Finance Magazine, November 2001)
Payment
deductions are the black hole of receivables management.
If you are not careful, they can soak up staggering amounts of
corporate resources with little or no return for the effort.
But they must be professionally managed or significant opportunities
are foregone. Unfortunately,
many times the main goal of deduction management is simply to maximize cash
recoveries through collection of invalid deductions.
Clearly, optimizing cash flow is a key for any organization. However, it is a common misconception to think of deductions
management solely as a collection function.
To begin with, typically 90 percent (and sometimes more) of
deductions are self-inflicted wounds and most deductions are justified and
are resolved by a credit to the customer.
Making matters worse, deduction volumes have been exploding over the past
quarter century. Vendor
competition, retailer consolidation, and recently a weakened economy, are
clearly the cause. And because
payment deductions have tentacles that extend up and down the revenue cycle,
effective solutions have been hard to find.
This resolution process is time consuming and complex, and requires trained
specialists, collaboration with internal customers (resources outside of the
credit and collection department), and a specialized, world-class system
that will drive the process.
Many successful organizations have recognized the challenge and have
responded.
For starters, larger sophisticated operations often have dedicated
deduction management departments, and have extracted the function from the
corporate credit department.
This makes sense since the skill sets required for effective deduction
resolution - analytical, communication, accounting and cross functional
knowledge of the organization – are not necessarily the same skills that
facilitate the success of the traditional collection department.
There also must be recognition that deduction resolution requires
cross-functional involvement, in that much of the information and processes
required to close an issue resides outside of the credit or even the
dedicated deduction management department.
There are many reasons customers take deductions.
These reasons can be as arcane as not having the packing slip in the
first carton that was unloaded from the truck, to a claim for some projected
amount of future returns. However, at a higher level, deductions fall into the
following broad categories: product returns and related issues, shipping and
distribution issues including violations, price and discount issues and
advertising and promotional issues.
In all of these scenarios, resolution of the deduction requires
cross-functional communication and cooperation.
For example, returned product and other distribution related disputes
may require contact with the distribution center or the transportation
company. Resolution of
advertising and promotions involve potentially the sales department, sales
administration, outside sales reps or brokers, and accounting to check on
customer accruals. Price or
discount disputes commonly involve the order processing or customer service
departments. And, all cases
require customer contact at multiple levels.
This is where it all falls apart for the organization without a
collaborative process in place.
Because even where investments in staff and training have been significant,
if the upstream process owners are not successfully brought into the loop,
issues cannot be resolved on a timely basis, if at all. The reality in many
companies is that the upstream process owners have little vested interest in
putting precious time into deduction resolution if they have other
priorities and are not accountable.
Accountability can only exist if the deduction data can be tracked and
easily updated as it is identified and moves through the organization.
In essence, the value of the information
contained in the deduction process can be more valuable to an organization
in the long run than the actual monetary gain of a successful resolution.
Clearly, data extraction can define internal issues in the order to
cash process and additionally help define trending and forecasting data
(customer and industry specific).
From a financial perspective this will better define both internal cost to
the selling process and the associated effects to bottom line profitability.
This has proved to be a difficult task given the volumes of deductions faced
by organizations (some receive thousands every week) and the number of
internal process owners. Additionally, software solutions and quality
reporting have been limited, and the advances by the ERP systems has not
helped since they are generally not targeted to or specialized enough to
effectively manage deductions and related data.
Collaborative
Deduction Management
There are four key enablers to a collaborative deduction management process:
universal access to value added data, immediate access to documentation,
systems integration and workflow tools.
In a decentralized or global organization the process owners, customers and
deduction management team could potentially be spread across the country or
even the globe. Communication
and effective interaction has been constrained by distance, time zones and
conflicting priorities. Today, the Internet can bridge these gaps.
The Internet makes it possible to collaborate globally across the
entire revenue cycle. It provides a common computing platform that can be accessed
by anyone from anywhere – branch offices, international affiliates,
subsidiaries, sales reps, customers, suppliers, etc.
In effect it provides a shared, virtual workspace for all involved,
to view real time status of individual items, comprehensive reports and
critical customer information.
An Internet enabled system can eliminate the faxes, e-mails and distributed
reports that exist today.
Typically, a major deduction management inhibitor is lack of access to key
documents.
Because the “burden of proof” is always on the vendor, pulling
together required documentation can be laborious and difficult especially
where multiple locations are involved.
Plus paper can always be mishandled and lost.
Imaging is vital, because it eliminates the possibility of lost
documents and provides everyone in the revenue cycle real time access to any
required document at anytime.
Considered to be prohibitively expensive in the past, the technology today
is accessible and affordable.
Equally important to the data contained on critical documents is the data
stored in your company systems. The integration of internal and external
systems is viable and consolidates key data to enable process owners. Links
may be required to the ERP or legacy system as any trade funds
administration or customer relationship management software, collection
software, and any remittance processing software. Externally, any data exchange with your customers’ payables
or procurement systems is possible and is an improvement over EDI.
Additionally, it may also be possible to capture proof of delivery
and other shipping information from your common carriers as well as
remittance details from your bank.
When this data is consolidated onto a world-class deduction management
platform, the organization is empowered to resolve issues efficiently and to
report on deduction issues in ways that can add value.
Workflow tools tie the process together.
Generally, the objective is to facilitate the routing of open deductions and
their associated documentation to the appropriate handlers and to track the
resolution against a predetermined process and timeline.
The system is preprogrammed to notify interested parties when action
needs to be taken, exactly what the prescribed action is and to escalate the
matter to superiors when nothing has been done within a set amount of time.
The workflow process creates a record of actions taken and provides a
shared messaging service so that any authorized party can see what has
transpired to date. Without it,
high volume deduction processing will take place as a series of “one-offs”
and there can be no upstream accountability.
Workflow tools are therefore essential for effective communications
and facilitating the collaborative process.
The benefits of a collaborative and system supported deduction process are
substantial:
-
Key process
owners are empowered through access to information and imaged
documentation
-
Progress
across the revenue chain can be benchmarked and process owners held
accountable
-
The
organizational investment in deduction management will produce greater
return through information driven management systems and a better
decisioning process
-
Customer
satisfaction will improve as issues are cleared up more rapidly
-
Actionable
management information is produced including deduction root cause and
internal breakdowns preventing timely resolution
Role of
Outsourcing in Collaborative Deduction Processing
Implementing an internal collaborative deduction management process is a
major undertaking. It can
easily be beyond the means of a mid-sized firm, and may not be in the best
interests of larger enterprises either.
The alternative to doing it yourself is to align your company with a
receivables management outsourcing firm that can provide a collaborative
deduction management solution and world-class supporting systems.
Taking this tack not only eliminates any need to make a substantial
investment in technology, but it also ensures your deduction resolution
process will be managed according to best practices.
Most importantly, outsourcing deduction handling allows your company
to focus on its core strengths.
After all, the greatest negative impact of deductions is that they divert
you and your customer’s attention from more important things.
Richard N. Lander, Creditek Vice Chairman and Executive Vice President, has
been with Creditek since its inception in 1982.
Rich is responsible for sales nationwide, including consulting,
services and outsourcing. His experience includes all aspects of revenue
management and accounts receivable operations and consulting for Fortune 500
companies. He received his B.S. in Business Administration from Rutgers
University. He can be reached by calling 973/515-4900, ext. 358 or by e-mail
at rlander@creditek.com.
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