Calculating the Age of Open Deductions With Days Deductions Outstanding

What is Days Deductions Outstanding (DDO)?

Unlike wine, customer disputes do not age well with time. With age, customer disputes are hard to track, research and resolve. According to a survey, for a firm with more than €1 billion revenue, Deductions leak anywhere between €0.75 million to €1 million. Days Deductions Outstanding(DDO) or Deductions Days Outstanding calculates how efficiently an organisation is able to resolve its open deductions. The formula used to arrive at DDO is:

Days Deductions Outstanding = Amount of open deductions/Average amount of deductions occurred within X
where X = period.

How to Interpret DDO?

A lower value of DDO is always preferable which indicates that the Deductions Management team is performing efficiently or more precisely speaking, resolving every open deduction in optimal time.

A higher value, on the other hand, is indicative of an inefficient deductions resolution process that requires better streamlining. A higher volume of unresolved deductions is not profitable to any organization, and it points towards lacunae in deduction coding, collaboration, research, and resolution.
The following could be the roadblocks causing a higher DDO:

Lack of communication within internal teams

Due to the inadequate information exchange within internal teams such as Sales and Dispute Management, it becomes difficult to track the trade deductions. Negligible documentation of deal sheets acts as a fuel to the fire in this case, and this increases the Deductions resolution time. Due to lack of documentation, some Deductions could not be validated, and they are left as open deductions.
A central document repository would be easier to track down the documents and deal sheets related to any Deductions.  

Insufficient quality checks by the logistics & compliance teams

Some organizations fail to collaborate properly with their inventory, shipping and logistics-related partners resulting in a lack of documentation. Customers often raise claims against shortages, damages, and poor quality products; due to lack of documentation such as POD, BOL, freight bills, these Deductions remain as open Deductions. Moreover, due to discrepancies from the logistics or compliance teams’ side, the Deductions team faces a lot of issues in resolving the open deductions.

Regular quality checks should be conducted and electronic workflows should be enabled to add visibility in the order management process.

Invoicing discrepancy

Imagine a customer has short-payed you because their invoice copy states an incorrect invoice amount! The Deductions Management team reaching out to the customers in such cases would appear as a bad example of customer experience.

There should be proper coordination between the Deductions team and the Billing and Invoicing team to make sure that the customer is not victimized due to internal discrepancies and communication gaps.

Unconventional Customer Practices

Often, the Deductions team has to handle a huge number of disputes which are a result of aberrations in customer norms. The following examples would help you understand this concept better:

1. Downloading claims from portals

The Deductions team has to manually login to thousands of customer portals to download the claims. Due to a huge spread of portals even for a single customer, it becomes difficult to track and resolve disputes one by one.

2. Different dispute codes

Internal mapping of deduction codes becomes difficult as it is difficult to handle the multiple customer standards for deduction coding and then converting it to the internal ones. The customer having multiple BUs and subsidiaries acts as a fuel to the fire. Moreover, certain customers have different reason coding for their various portals, in that case, confusion is created.

3. Confusion around deduction numbers, POD nos, BOL nos

Internal mapping of deduction codes becomes difficult as it is difficult to handle the multiple customer standards for deduction coding and then converting it to the internal ones. The customer having multiple BUs and subsidiaries acts as a fuel to the fire. Moreover, certain customers have different reason coding for their various portals, in that case, confusion is created.

Organisations typically calculate DDO on a regular basis to analyse the efficiency of their Deductions resolution process. This metric indicates how fast the Deductions team is doing their work; the senior management could also dig deeper into the reason code analysis, workflow modifications, resolution strategies to minimise their DDO.

Difference Between DSO and DDO

DSO and DDO are quite similar KPIs in terms of what they are trying to convey. Both the metrics are trying to convey the number of days, however, the only difference lies in the fact that DSO indicates how many days it takes to collect an organisation’s receivables while DDO indicates how many days an organisation takes to efficiently resolve an open Deduction.
Usually, the senior management evaluates and analyses DSO and DDO together to get a bigger picture of their A/R processes.

Best Practices to Reduce DDO

DDO is easy to understand and analyse. DDO is usually calculated quarterly or annually or based on ad-hoc requests. Here is a tip which you should adopt to get a clearer picture.

DDO Calculation Account-Wise or Industry-Wise

Calculation of DDO on an account-level would give you more clarity on which customers are frequently raising disputes, and an analysis of their deduction root-causes and validity would be helpful for ensuring proactive Deductions Management.

Calculating DDO industry-wise is also a wise decision if you are habituated with an industrially segmented customer base. According to a survey, the median value of DDO across all industries is 38 days. However, you can deep dive to find out the industry-level best possible DDO in this survey.
Apart from this, the following best practices can help you to reduce the DDO significantly:

Central Data Repository

A central repository of information consisting of deduction backup documents such as deal sheets, proof of delivery, bill of lading, shipping documents would make it easier for the Deductions and other teams to find out what they need. This single source of truth would also ease out internal collaboration to a great extent.  

Electronic Workflows for Internal Communication

A standardised workflow would add more visibility to internal communication between A/R and other teams. This would reduce the need for random emails throughout the internal teams.

Auto-Correspondence for Smooth Communication

Imagine having pre-defined templates for communication email scenarios such as missing backup documents, missing invoice number. This would reduce the analyst’s efforts on common tasks and they could focus on high-value decision making and deduction root-cause analysis.

Automatic Reason Coding

How much time does your Deductions team spend on matching customer reason codes with internal reason codes? While you are calculating, imagine if this entire process gets automated. Then the Deductions team could focus more on Deductions pattern analysis.

Deduction Validity Predictor & Tracker

Segregating invalid deductions from the valid ones takes up most of the analyst’s time. How about having a Deduction validity predictor in place which would automatically validate the Deductions and provide the necessary output?  
For further reading, download this ebook on Faster Deductions Resolutions for a more in-depth understanding of what was just discussed in this blog.