IDC’s Research Specialist on the A/R Teams’ Golden Opportunity To Drive Strategic Impact

[KEVIN]: 2020 was an unprecedented time; an unprecedented year in so many different ways. What I think was one of the bigger outcomes is that we’ve all taken a new look and new energy towards the idea of cash management. As a result of that, A/R as a function and A/R software as a category is really elevated or has been highlighted in different ways. Especially as it relates to data-intensive areas of A/R, and that’s credit and collections, right? It’s these two areas that we’ve found to be the two biggest challenges. When we do our outreach or surveys over the past years, credit and collections have consistently been two of the biggest pain points within the A/R space. What’s really important to see here, as I mentioned earlier – is that these two are very data-intensive areas and not only data-intensive but also data-forward, meaning the data needs to be there right at the point of execution. We’re also finding that is the biggest desire when we talk to potential customers of A/R solutions. So, data-driven processes are required to handle the two biggest problems for them, which tend to be credit and collections. [TIM]: I agree, Kevin. There’s heightened sensitivity around managing risks as well as effectively communicating with customers, so we’ve gone beyond just simple automation. It’s having access to data, real-time data and enabling artificial intelligence to provide our clients with the ability to make accelerated decisions in allowing credit and working with existing customers. Considering the effects of the pandemic, how are you managing the relationship with the customer while mitigating the risks of the firm? Right from the collection’s perspective, especially for people working from home - how do you enable folks to work effectively within a singular platform with real-time data? And how do you provide the ability for leadership to continue monitoring success and provide directions to those folks as they’re interacting with customers? Also, reporting has always been an area of focus for our clients and when talking about credit and collection - having access to financial data in order to make credit decisions as well as having trend analysis on how a customer is paying makes the collector that much more effective when they’re contacting their customers. Mark, do you agree? [MARK]:  Sure, if you think specifically about collections, one of the things we saw last year was a significant increase in the number of bankruptcy filings. And what this is a sign of is, obviously, the economic disruption that happened last year which created challenges for a number of companies in making payments. Some of the data that we saw from last year compared to 2019 was the increase in the average days to pay (7%), some decrease in the number of unique customers making payments each month of about 15%, and an additional decrease in honoring payment commitments (around 21%). What this has done for collections teams specifically is it increased the focus on making sure that you’re getting paid faster. It’s also that you’re more aggressive with your collections in specifically looking to identify problems before they happen in terms of receivables being paid. This really highlights the need for having access to data and technology such as AI to perform more sophisticated analysis of economic data and trends and payment history with your customers. You can then translate that into specific strategies that you can pursue with your customers to identify problems before they happen and then collect on those receivables in a timely way. [KEVIN]:  I want to throw something out there, Mark, onto what you’re saying. You know, the idea of anticipating problems and moving towards being more proactive in accounts receivable instead of being reactive. I think that’s an incredible shift and it’s a shift not everybody can make if they’re leaning on legacy solutions. I think you’re spot on there, but I also think there’s this idea of how you start getting proactive, how you start looking forward to anticipating issues in accounts receivable, and really the way forward there is modern (A/R) tooling.

[TIM]: I think primarily, it’s again leveraging data to make decisions. If I think from a collections perspective, Mark, I guess you tuned it up well: it’s leveraging data to be more proactive in your decision-making. How you work with your customers related to payment arrangements, or how you [encourage] them to continue to buy, potentially above their line of credit considering you want to continue developing or maintaining those relationships. I also think, there’s another component to this: how do you work with your existing customers to grow with the business. The thing is that when they talk to clients, the importance of collaborating and having technology that everyone can access in real-time (helps) when they’re making decisions. How do they improve their DSO and how are they improving their productivity? Another [challenge] is just improving the level of transparency with their stakeholders. I think it’s really important to leverage information and to do so in such a manner that it’s easily understood and absorbable by stakeholders. It’s also important to drive accelerated decisions that impact the firm which include improving revenue, reducing risk and bad debt, and also improving the customer experience. [KEVIN]:  Yeah, I completely agree here [about] data management. And it’s really a two-sided coin, right? You started talking about the role of data in A/R or the order-to-cash process; there’s data that needs to be consumed by the credit and collections team. Some of that is internal and some is external. But I’d also like to make sure that one of the takeaways for the order-to-cash (O2C) process, one of the things that O2C teams should focus on, is the idea that the A/R solution and the A/R process are also connected to a lot of the other internal processes. So, share the collections data and make that a part of the budgeting and planning process, the cash forecasting process, liquidity management, and treasury process. Bringing all of that collected data and ensuring it’s available to all the internal streams adds to the business’s agility. One of the things we now know with the uncertainty that’s still in front of us in many ways is that companies are going to be able to share that data and consume that data. Those are the [companies] that are going to be agile and flexible as the market demands. [TIM]: Yeah, and I think a great example is Sales - driving Sales with the visibility of the risks associated with A/R [like past-dues].  Since they interact so much with customers, they know how to have that dialogue and I have found that the more information they share with sales, the more effective [they get] which drives additional revenue. This also enables our jobs as collectors to be more effective because now we have that relationship with the customer. I think we‘d all agree that maintaining that relationship enables us to be more effective when engaging with those customers [in the long run]. [MARK]:  Yeah, and I’ll just add one thing to that. One of the things you typically see is the communication problem between collections and Sales. The data isn’t shared effectively so one group often doesn’t know what the correspondence history has been by [the other] group. Having a data strategy and sharing the data and communications history across the two groups can help both works effectively in building additional business and managing receivables.

[KEVIN]:  Yeah, I don’t think enough is said about the role that accounts receivable plays in driving new initiatives and changing business models. As companies are looking to adjust to these rapidly changing business dynamics, many of them are looking to add digital services or digitally transform themselves as well. Many companies are switching over to more of a recurring revenue model, and all of that takes funding (laughs), okay? All of that takes money. If you’re looking to open up a new branch or you’re looking to launch a new initiative, all of that takes funding.

One of the hidden pockets of funding for innovation, R&D, sales expansion, market expansion, and product expansion is the A/R and collections pool of resources. Doing that efficiently and having more visibility into that process can turn them into a driver.  It can turn them into an engine for innovation, help drive R&D, drive market expansion, and turn [A/R] into an engine for the company to compete, especially in these uncertain times.

[MARK]:  Yeah, and I would like to add to that, if you think about A/R teams, there are only two goals: one is to drive improvements in working capital by bringing cash through the door and managing risks to the business. But there’s this second goal – maintaining good relationships with your customers. So you have to remember that A/R teams have to communicate back and forth with customers.

This means in collections it’s essential to have the right communication and correspondence strategies and to ensure that you’re sharing them in the right way, at the right time, with the right people. Part of that involves aligning on the data – you have to understand the right strategy because everything that collections teams are doing particularly affects the overall business and business growth potential. So, I just want to add that having the strategy for doing that and leveraging the data to make that happen is one of the key items going forward.

[TIM]:  Yeah, and I also think automation plays a huge role in this because there’s so much focus on reducing operating costs. Collections teams have to do more with fewer resources. So it’s essential to leverage the strategies and automate dunning process effectively. As you know, we’ve expanded our approach in contacting customers through web portals and electronic mails which is based upon strategies or schedules and on customers and their behavior. I think the importance of the A/R team is to drive the improvement of working capital and what we’ve been discussing so far – effectively managing operating costs.

I think the other component I would add is collaborating with other internal teams because I think the roles of collectors are starting to change. It’s not only about collecting A/R; it’s also managing relationships, collaborating with sales and the supply chain function. When orders are coming in and being released timely or if there are any delays in orders, we’ve found that the folks in collections take up the dialogue with the customers [rather than] the folks responsible for shipping the products. I think we are finding that it’s more of an integration of the end-to-end process within order-to-cash and the role of the A/R collector. Whether it’s managing disputes or even credit – it really depends upon an integrated solution with tight collaboration with stakeholders.

Market disruptions have indeed intensified the CFO’s emphasis on the accounts receivable function. Even the hackett group concurs with the IDC view that A/R automation has become a strategic priority for CFOs in 2020 to improve the working capital and cash flow. The latest Hackett study about the CFO priorities shows that CFOs from 75% of organizations took measures to optimize working capital practices, and 79% intend to make these changes permanent to bolster cash flow.