Reengineering the Credit Profession

By Kelley, Anthony | Business Credit, September 1994 | Go to article overview

Reengineering the Credit Profession


Kelley, Anthony, Business Credit


Reengineering the credit department has become the hot topic of the 1990s. We are being called upon to throw off our old ways of thinking and lead our organizations into the brave new world.

However, we must understand what reengineering truly means if we are to be on the cutting edge without allowing it to destroy our organizations. Credit professionals have always provided the balance needed in an organization through risk evaluation that has allowed profitable sales increases. This balance is still essential in a healthy organization.

The Roots of Reengineering

Reengineering has its roots in two movements. In the last 20 years, we have seen an effort to move credit decisions away from the traditional credit evaluation shrouded in mystique to a quantitative science. This movement comes as a result of management's and academia's desire to understand the method, the rise of personal computers, and the pressure to do more with less. Many new credit decison-making models have been developed.

We have also seen a rise in the TQM school that focuses on Japanese work group concepts to attain maximum employee productivity and customer satisfaction. This is the answer given by leading business schools to growing worker dissatisfaction and the success of the Japanese. This popular academic answer has been drilled into the M.B.A.s that run major companies and has been institutionalized in the Baldridge Award. Indeed, this has created a new consulting industry in TQM.

Credit Decision-Making Models

In my review of the major theories published in Business Credit in Dec. 1985 and Jan. 1986, I called for further development of credit evaluation methods based on statistical proof rather than ones based on "trust me, it works for me" proof. There has been an explosion of companies selling computer packages that will make your credit decisions; however, none provides a statistical way to prove that their model works.

Indeed, their major claim is that they are flexible enough to allow you to customize the decision-making package to the needs of your business. They do provide the advantage of allowing a computer program to make routine credit decisions based on rules that you establish. This allows you to concentrate the marginal customers. They also allow you to establish consistent risk categories for customers that can be used to evaluate your investment in receivables. However, these models are no substitute for a professional credit manager.

The danger with these packages is that you may oversell their advantages or your management may misunderstand their shortcomings. This misunderstanding combines with the downsizing of companies to produce another dangerous trend, the splitting of the credit and the collection functions. Many firms have decided that if the computer package can make credit decisions, then management can become more efficient by letting the "clerks" make collection calls. But not everyone can pick up a phone and ask for money nor should collection calls be equated with effective risk management.

Many firms do not understand that good credit decisions are based on feedback from collection activity and that good collections are founded on credit information about the customer. It is difficult to measure the effect of poor credit decisions, wasted collection efforts, and lost customer satisfaction if primary contact is not with a credit professional.

Keeping ahead of problem customers was one of the major reasons that NACM was formed. Trade-credit groups are the very life blood of most credit departments. These credit groups will become meaningless if the credit professional who knows both the credit and the collection story no longer exists. Greater industry losses will be the result.

We can learn a lesson from consumer credit. When I worked at Sears in the early 1970s, every store had a credit manager with a large department. The credit manager and staff approved every credit application and contacted the customers for payment. …

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