Operational vs. Strategic Thinking in the Credit Function

By Dennis, Michael C.; Lowe, Frank | Business Credit, June 2003 | Go to article overview

Operational vs. Strategic Thinking in the Credit Function


Dennis, Michael C., Lowe, Frank, Business Credit


Operational or tactical level thinking and planning deals with how to make your systems, people and processes more efficient and effective. Strategic thinking and planning in the credit operation needs to address how the credit organization will need to be staffed, structured, trained and its operations coordinated in order Bar the department to be ready for the changes that will occur in the company and in the marketplace in the coming months and years.

The essential nature of credit risk management and commercial debt collection is operational. Add to this a built-in chaos factor, combined with the need for prompt action and quick decisions and you start to develop a recipe for chaos. A credit manager's job is often dominated by the need to manage the daily crises that arise. As a consequence, some credit professionals are "pigeon holed."They are so wrapped up in operational issues that they are oblivious to the bigger picture changes occurring around them. As a result, they do not spend enough time (and in some cases they do not spend any time) considering strategic decisions or the strategic planning process.The result is that many credit departments are almost entirely reactionary. They do not consider long-term forecasts; they do not measure and track trends; they do not observe changes in their own company or in their company's line of business; and they have no long-term goals or plans. This situation is a recipe for disaster!

What can the average credit manager do if they recognize some or all of these problems in their department?

Strategic thinking is the process in which a manager considers the challenges that the credit function will face, the type of competitive environment in which it will operate, and the demands the company may place on it. The department manager does so in order to make certain that the credit department helps rather than hinders the company's efforts to meet its short-term and long-term goals. Strategic planning will help the credit department to forecast changes in the business environment, as well as fundamental changes in customer demographics and buying patterns. These insights will enable the credit manager to be proactive rather than reactive to change.

Again, while tactical or operational credit management centers on the processes of credit risk management and debt collections, strategic thinking and strategic planning will allow the credit department to leverage its limited resources in order to meet or exceed management's expectations.

Absent the luxury of time to sit back and casually assess the larger role that the credit function could and should play in the company, a structured approach can be used to help credit professionals to jump from an operational to a strategic thinking mode. One proven technique involves starting out with operational level process mapping of the credit function. Fundamentally, the processes that are unique to credit would typically be tactical, while the processes that possess touch-points or interface with other functional groups, would generally lend themselves to strategic analysis.

Examples of strategic issues:

* Is the credit decision-making process a core competency of the business, or one the company could outsource?

* Is the department's risk management policy consistent with the overarching goals of the company? If not, is it currently under revision?

* Is the credit department, in general, and the credit manager, in particular, seen as active drivers in making the company a more efficient and profitable organization?

*Are the credit organization's interfaces or touch points with other functional groups as efficient as possible, devoid of redundancies and non-value adding tasks?

* Is credit management recognized as a key management function within the treasury or finance group, contributing to accelerated cash flow, reducing bank borrowing levels, controlled bad-debt expenses and minimized operating costs?

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