3-Ways to Improve Collections Effectiveness with Customer Data



Paul Watters

Worldwide Credit and Treasury


[0:01] Host:
So here I have three ways to improve collections efficiencies with customer data of Paul Watters. So Paul moved to the US in 2015 to assume his current role as the director of Worldwide Credit and Treasury for Mercury Marine. Paul’s been involved in the design and build of online credit applications currently utilized by the land and sea distribution business here in the US. More recently, Mercury has also commenced the implementation of the HighRadius payment portal and deductions cloud module. Paul, you have the stage.

[0:36] Paul Watters:

Thank you. Good morning, everyone. There’s a reason why they say nothing good happens after midnight and I’m a testament to that this morning, but we will get along well. So what I want to talk to you about today are three ways that we can improve collection effectiveness with customer data. And you know, I think most of us will agree we’ve never been more awash with data than what we are today.

[1:07] Paul Watters:

The question is, how can we use that data to drive effective collections decisions and to make ourselves more efficient, and more effective. So today, we’re gonna walk through looking at required tailored collection strategies based on customer value based on customer payment performance, and have a look at risk class and how that impacts us. And also how AI products improve productivity within our team. We’re in a business as well and go into a little further shortly, that deals with common customers across a number of unique businesses. So I want to look at how that productivity will improve within our team, and then also have some brief Q&A.

[1:55] Paul Watters:

So not all of our customers are the same. We have high-risk customers. We have large customers, small customers within most businesses. And it’s important within those subsets of customer groups, that we have strategies that can effectively deal with each of those customer groups and give us the best outcome at the end of the day. So as we look today about how our collections today are structured and I imagine there’s a number of you here who range from somewhat automated to manual spreadsheets and so on. We are with a number of businesses in the latter part, but we’re moving towards more automation over time. So your collection strategy is customer-centric based on aging.

[2:44] Paul Watters:

Do you have any rules for customer segmentation that currently drive your collection strategy? Or is it one size fits all approach that you’re adopting today? How does your customer’s credit profile influence that treatment of your customers? Because we shouldn’t be trading them all the time. What are we doing to make paying your company frictionless? This is really important.

[3:08] Paul Watters:

I think a lot of businesses focus on the order to invoice the process. Is it easy to search for a product? Is it easy to order that product? But I think too often we forget about the payment portions. You know, Amazon is popular and successful in no small part through one-click ordering, and through the fact that they are easy to pay. People go there because it’s easy. And we have to make ourselves easy if we’re going to make ourselves the first in line to be paid. And other instances where multiple collectors are calling the same customer I mentioned at the outset we have a number of businesses that deal with common customers across those businesses. So do we have businesses or collectors on behalf of those businesses that are in fact calling assigned customers and is that the most efficient use of our resources?

[4:01] Paul Watters:

So our customers don’t treat all their suppliers equally. Multiple factors determine how they pay us. It’s the kind of product we sell that is important because we are within their business. If we’re selling unique products to them that they can only buy from us, then we are more important. If we’re selling commodity top products that 10 or 15 of our competitors might sell, then we need to be lower in the payment hierarchy.

[4:28] Paul Watters:

And so if you look across the hierarchy, I think we hear a lot about relationships and I do think relationships are important when a customer is in distress. For most customers who aren’t though, I don’t think relationships are particularly important. The need to access our product is important. This comes down again to “Are we selling a commoditized product? Are we already selling something that is unique, that our customer needs and cannot get from anywhere else?”.

[4:58] Paul Watters:

Again, as we look to distress customer’s personal guarantees, those who are in a distressed situation will quite often look to protect family homes and so on. And so they’ll look to pay those people who have personal guarantees first so that they’re not those people, or that they’re not in their family is not left exposed to potential repossession of their personal assets. And so, as I say, our customers are not equal, and we need to be looking at them individually, whether it be by the customer segment, or whether it be by the guarantees, and the collateral that we hold. And of course, there’s one time to be doing this. And that’s the time when we open the account.

[5:42] Paul Watters:

I think we all know if we’re doing periodic credit reviews from time to time, coming to ask a customer about providing a personal guarantee after they’ve had a good payment performance for five years is very difficult to ask. So looking at the customer data, what is this necessitate review of our collections process? So as I say, in a number of our businesses, we still use manual spreadsheets. What tends to happen in that process is those that fall to the bottom often don’t get called as often as what they should be called.

[6:21] Paul Watters:

Ad hoc and structured activities, are you in a stage of documented collection strategies? Or do you have something that is tailored best in class? Does it meet the risk profile of your customer? Does it make the kind of customer that they are? I could send a collection later to Amazon and that would make absolutely no difference to receiving payment from? So we have to be tailored in the way that we approach customers. And the way we use and do that is through harnessing the customer data that we have within our credit profile and within our customer master.

[6:56] Paul Watters:

So I want to talk about some of the ways, there are multiple ways within different businesses that you might target your customers for dunning activities. It may be the size of the customer, it may be the channel of the customer, whether they are a retailer, in our business, whether they are a boat builder, for example, or they are a dealership that sells boats. We can target and segment those customers to ensure that we achieve maximum effectiveness. So we’re gonna look at the strategic importance of the customer, the payment performance, and also the credit risk category.

[7:31] Paul Watters:

So here are some of the questions you might want to ask yourself if you look at the strategic importance of that customer. How much are they contributing to your revenue? And not only how much are they contributing to your revenue, but how much are we earning from them? What does it look like if we analyze the gross margin line for that customer? Do they add value to what we are selling in a unique way? We sell parts to a number of customers who add value to those parts and then provide them back to us and there aren’t many options for us in terms of looking for somebody else to conduct that activity for us. Do they have unique benefits? Are they located somewhere in the middle of Montana, where we don’t have a dealership within 200 miles?

[8:13] Paul Watters:

Because you know, we’re here to sell a product, we’re here to maximize our profitability. And to do that, we need to be part of that solution as well. What’s the profit margin you make on them? If I’m selling them commodity products in our business, for example, we sell a lot of oil because of course engines use oil, what’s the profit margin we make on them? Is it low through a commoditized product like oil? Or is it something more niche that only we sell, for example, a 450 horsepower engine where the margins are a lot stronger? How much we make on them is important as we look at how much risk we want to accept from that customer. And what did I buy from you, as I mentioned before, as it is captive parts that only we make? Or are they competitive parts that we have aftermarket people who are selling that part through many different locations?

[9:06] Paul Watters:

So looking to keep high-value customers closer and happier. Those who are identified to be strategically important. We want to negotiate with them to pay on acceptable terms. And again, you know, quite often we look within our own departments and you know, DSO metrics and risk metrics and so on. And we’ve got to be thinking, what is best overall for our business, what serves us best to maximize our profitability. Be mindful, of course, that our approach has got to be a flexible, personalized approach for communications to those customers. So we might have a group of customers that are A-class customers, and the kind of dining activity that we perform for those customers might be appropriate among what we would send to others. We want to send them communications through their preferred method.

[10:00] Paul Watters:

So I talked a little earlier about relationships and how important they are. I think as I said, I’m not convinced that relationships are particularly important in most instances. And so I think we can quite often substitute email communication, we can do that. And we can do that much more effectively, particularly in the earliest stages of dying than what we can a phone call. And then again, for the strategically important ones, if incentives are to be offered to these customers, let’s try and tie those incentives to early payment. Let’s not just make it a giveaway in terms of a discount that they might receive. Let’s tie that discount to early payment from that customer.
So if we look now in terms of low-risk customers, and I’ve defined those here as early on time, or consistent payers. Consistency indicates consistency in cash flow, and that’s why it’s important.

[10:44] Paul Watters:

So we want to analyze the cause for them. Not being able to make a payment, this may be a warning sign. If we have a trend of a customer who’s been paying consistently for five years, and then suddenly we see lumpiness in the payment performance, we need to be looking at that. And we need systems that help us to do that. Obviously, we want to make a promise to pay on the collection calls that we make, who have we spoken to? How much is it due and when will it be paid? And we don’t want to bombard those customers with multiple dunning letters. So we might start our dining activities for those customers a little later than what we might for our high-risk customers.

[11:33] Paul Watters:

If we look at those customers now and turn to the high-risk customers, and they are the seriously light payers, or they’re the ones that over time have demonstrated inconsistency in their payment performance, as I mentioned that it demonstrates inconsistency in their cash flow. I would rather have somebody who pays me 15 days late consistently than somebody who pays me early this month, 20 days late the following month, and then early again, the month after. Consistency is important. So for those customers early, frequent and consistent dining and correspondences, so we’re going to start that activity for those customers. And we’re going to use the data that we get from our systems to enable us to do that. And to segment those customers. We want to follow up on those broken promises to pay promptly.

[12:22] Paul Watters:

If the customer who is a high-risk customer and who has multiple delinquencies across several of their suppliers, is receiving inconsistent calls from you, they will take that as a sign that you’re not serious, and they’ll pay somebody else. So consistency in our follow up is important. Making them aware of how this might impact their future orders. So we can credit hold is a very emotional term for some customers. I think we’ve all been in that situation where we will refer to, to credit hold and so you know, we like to use terms to ensure the continuity of your supply.

[13:05] Paul Watters:

So that’s saying the same thing that if you don’t pay me, your account may well be on hold. So it’s important we let those customers know that. And critically, we take an elevated position in their payment hierarchy. Before we come into trading with those customers, we need to identify them at the start. And back to our slide we looked at before about the payment hierarchy, we need to seek to secure guarantees where we can, we need to be securing collateral and liens and other types of activities that will push us up that payment hierarchy and ensure that if that customer does turn out to be a bad customer in terms of their payment and their risk, that we have the appropriate steps in place to ensure that we’re paid first because we’re not going to get those after we start trading.

[13:54] Paul Watters:

So another method we can use out of our system is to measure our DSO for that customer and measure that against what the best DSO is. We’re so focused on DSO that we talk 45 days in 30 days. What really matters is the gap between what our best DSO is and we might otherwise call that our average weighted term for that customer, and what their payment performances. Because I could say to you here today, that our DSO is 30 days, and you might think that’s fantastic. But if I’m selling to everybody on seven days terms, then that’s not so good. So we need to measure the gap.

[14:34] Paul Watters:

That’s the part we can control. We can’t control the overall DSO number, but we can control a gap between what we sell on and how our customers pay us. Look at the average number of reminders sent before receiving payment systems will do that for us today. And also a history of honoring promises to pay. How reliable is the customer? When they tell me that they’re going to send me a payment tomorrow, can I have a law that’s going to be the case or not?

[15:05] Paul Watters:

Credit risk category. So the strategies need to be aligned with our customer’s credit data. Here’s another portion we can use to segment our customers. Are they low risk, those who will typically pay when the money arrives, the medium-risk those who are likely to pay? Or are they high risk those who may not pay because the dollars just don’t come in. I firmly believe that 99% of our customers want to pay for us. But they don’t have the ability to until the cash arrives. They’re not nice to them and sitting on a huge pile of cash just floating us because they can. Most of them don’t have the funds. And it’s important to be able to recognize those customers that are in that situation and to address those customers accordingly.

[15:51] Paul Watters:

So here are some strategies for low-risk customers that aren’t going to pay when the cash flow allows. So those customers typically will pay us they probably represented 80-90% of our portfolio, we want to empower them with self-service portals, we want to encourage them to automatically pay. Those customers who have consistent cash flows are much more likely to adopt an automated payment method than those who have lumpy cash flows. We want to enable better communication through the elimination of multiple touchpoints. And of course, a softer collection strategy is appropriate for those customers. We don’t want to be dumping them one day past you if they’ve just had an oversight. So we will commence that activity for example, at 14 days past year, but in every business that’s going to be different. For medium risk customers, those that will likely pay when the cash flow allows, we’re going to send automated pre reminders to those customers and I think about what the bank does to me with my credit card. They send me a reminder 10 days before my payment is due.

[16:51] Paul Watters:

Now I can take that two ways. I could take that. I always pay my credit card on time. What are you bothering me for? Or I could take this as a customer service at the bank. He’s providing for me and I look at it from a lighter point of view. And so I think, setting the automated pre reminders and letting those customers know, that we’re thinking of them ensures that we will get our money earlier than others. And of course, we’re going to call when necessary, and it’s going to be early. And then for our low-risk customers. So now if we switch to our high-risk customers, those for whom the dollars may not just arrive for whatever reason, the characteristics there, those who play consistently, I think that’s important. Customers with weak financials as well.

[17:35] Paul Watters:

And that is typically those who have a negative net worth. That’s really important, but particularly whether I have negative working capital. If we’re looking at their financials and their working capital is negative, I’ll say in over 25 years, within credit, that typically most of the customers who fall over when you look at them later on, are those who have negative working capital. Customers who are making partial payments to us, they’re playing around numbers of their invoices. And customers with low margin and high leverage, those customers that notwithstanding, they might be in a cyclical industry, they might be earning 3-5% on the bottom line, that overtime does often not allow sufficient retained earnings within the balance sheet for them to ride out ups and downs within the market.

[18:24] Paul Watters:

So it’s important to look at those who have low margins and high borrowings. Obviously, putting maximum methods to follow up and with consistency, send the automated pre reminders. We want to be in the consideration set for those customers. We want them to be thinking about us and knowing that if they don’t pay us, we’re going to be calling them and we’re going to do that consistently. And of course, starting our calls early.

[18:49] Paul Watters:

So now if we look at a brief table there, low strategic importance customers of high strategic value, these are some efforts, actually across those various customer strategies, low, medium and high risk, about how we might want to address and deal with those customers. So looking at how I can improve productivity within our teams, I mentioned earlier that we’re in the Marine products business, we make affordable engines for boats. And we have also parts and accessories businesses as well within what we do. And so we have common customers across those businesses because that’s all we do. We sell marine products. And so we have boat builders who deal with us through a number of those businesses.

[19:39] Paul Watters:

So how can we use AI to help us improve productivity within our collection teams? We can certainly complete automation for low risk and low-value accounts in the land and sea business. We have 18,000 accounts, typically eight and a half thousand of those who owe us something at any point in time. So we can automate those customers, those low-value customers and we can hit them with dunning letters rather than calling every one of them. We can segment our customers according to their credit profile, we’ve already talked about that. This is going to improve our collections productivity and it’s also going to allow us with the right systems, which we’re looking to do now with the collections cloud, to bring together those common customers across those businesses into the one platform.

[20:25] Paul Watters:

Because at the moment, I have three people who might be calling a common customer across those three businesses. And that’s not obviously an effective use of resources. So as we look at how AI can make recommendations for different risk class customers, it can tell us when to call that customer. Wednesday, between four and six, is the best time when you get a strike right for that customer. So don’t go and call them on Monday morning because most of the time, they’re not there, they’re doing something else. So we can segment those into low, medium and high-risk activities. These are just examples of when you might connect to your dining activities. Every business is going to be different. But there are some examples of how we might choose to segregate those customers based on their risk profiles.

[21:12] Paul Watters:

So now what I want to do is just give a basic overview of how we can improve our productivity. As I mentioned, in our business, we have four or five marine businesses across North America, that sell to our customers and we share common customers across those businesses. So here, we have an example of Ava from ABC Marine making a call to a low-risk customer that is five days past due. So I want to demonstrate here about how we can use communication methods other than the standard phone call to allow us to improve our productivity to a low-risk customer.

[21:54] Paul Watters:

Now, keep in mind, this works on the premise that the can here is in fact to low risk customers and that he will pay us when the cash flow allows him to do so. So Ava from ABC Marine calls Ken, five days past due. She’s asking you to know you’ve got a payment that was due last week for 60,000. She wants to know when we’ll be able to pay. Ken replies to my managers out of office so I would need the approval to release your payments, it’s over my threshold. I’ll get back to you once he approves it.

[22:26] Paul Watters:

I then called again at 18 days past due. This is a low-risk customer and that aligns with the collection strategy for Ken’s profile. Credit utilization is already at 83%, when can you make the payment for us? Well, sorry, I can’t authorize the pilot. My manager is still out of the office. Give me a few more days. So we come to 25 days past due. Do you have an update there on when you’ll be making payment for that posture balance? My manager returned yesterday, Ken said she informed me we’re waiting on a large payment to come in. So Ken’s not sitting on a wheelbarrow full of cash. He’s just waiting for the money to come in. On the 27 days past due. Ken pays. Sorry about the delay. Ava says we’ve received your payment Ken, thank you.

[23:14] Paul Watters:

So we’ve made three phone calls to a low-risk customer who potentially we could have dealt with just as effectively and perhaps more efficiently as well. So our current state is, Ken is a low-risk customer, we’ve made three calls with a tailored collection strategy. Ava could have been spending more time on our high-risk accounts, those that are more delinquent, those that present her risk of loss for her business. future studies that ABC marine can send automated emails at day five an ad and the strategy will dictate that on day 25, once that customer becomes considerably delinquent, then we will make that call. So instead of making those three calls, in this instance, with a low-risk customer and assuming that the data we’re using is accurate, then we could have done that with just one call. And I even would have been able to spend our time on more productive things.

[24:13] Paul Watters:

So I talked just earlier about payments and how important offering a range of payment options through an easy portal type situation or product. There is a written article, I don’t know whether any of you follow our Credit Intel at all. We use that for our retailer customers like Amazon, and then an article the other day that talked about Black Friday shopping. It talked about millennials where they were conducting most of their business now on the mobile, and that those people would abandon the customer that they were the supplier that they wanted to use if they weren’t giving the right payment method to them. Because they don’t want to have to sign in. They want to be able to go to Amazon, they want to be able to use their saved payment method and they want to be able to do that quickly and seamlessly.

[25:02] Paul Watters:

So now as we’ve been focused in the past, typically on the order to invoice process, we should really be looking at what can I do to make these payments easy for my customers, because particularly in our business way we deal with a lot of small mom and pop type operations. They’re wearing multiple hats. They’re going to pick the kids up from school, they’re going to do things on the weekend, take kids to sports, and so on. And so their time is important. And if we can make ourselves easier to pay, we will ensure that we’re getting paid earlier than what the others were. We’re in a time-constrained environment.

[25:44] Paul Watters:

So of course, we’re seeing this trend at the moment in the B2C e-commerce space, whether it be through Walmart.com, Amazon, Dick’s Sporting Goods, anyone you like might like to mention, but it will be more applicable to the B2B community over time. And so this is important. So here’s the question that I guess I wanted to leave you with is as our front office functions evolved to deliver more and more value to customers today, and we can measure value by the benefits that deliver less the cost that it takes us to conduct that transaction, we want to maximize that value.

[26:18] Paul Watters:

As we look to provide more value to customers, how should we be thinking about the purchase to pay systems within credit, within collections, and within payments and presentment? What do we do? What do we need to do to change that to ensure that we’re at the front of the queue in terms of the payment hierarchy, and not left doing practices that we might have been doing for 20 or 25 years? And so that is it. So thank you very much for listening.

[26:56] Paul Watters:

I think we still have a couple of minutes for the Q&A. So if there are any questions? Yes, I think there’s a microphone running around somewhere so that everybody can hear. Or maybe there’s not. Oh no, there is.

[27:27] Maria:

Maria from Anheuser Busch, I have two questions. Do you take into consideration the amount of the invoice which needs to be paid in your classification and prioritization? And the second, do you take into account also the time of the month? For example, are you targeting the end of the month as the peak time to collect the biggest amount of money and then you’re adopting your strategies accordingly, or it doesn’t make any impact on you, you’re just looking into the due date?

[27:59] Paul Watters:

Yeah, so I’ll answer the second question first. We’re happy to collect at any time throughout the month. And, so we have cashed rods on quite often the end of years and so on to help us drive cash flow performance for the group. So, we don’t segment across that. In terms of invoice variance and so on. I think that’s a good question about if we have a customer who was $50,000, that is low risk, and 14 days past due, do we call that customer first before we call a high-risk customer that owes us five? And that’s a decision for every business for me. If we look at what we just talked about, I’m going to target that high-risk customer first because they’re the customer that’s ultimately going to present a loss for me, the low-risk customer who is like just this month, is a customer that might damage my DSO for example for this month, but it’s not somebody who I who believe that I’m going to lose money off, but I could be wrong. So maybe they’re not paying me this month because they’re having cash flow problems that might pertain to something that’s more serious.

[29:16] Manta:

Good morning, I am Manta from Medtronic. I have more of a business strategy caution rather than the collection strategy caution. You briefly mentioned offering them an early payment discount. So whether you give an early payment discount or they give you a 60 days term? It’s a hit at the bottom line. Which one, is there any quick formula or any industry-leading towards what is better out of the two for the higher revenue segment?

[29:44] Paul Watters:

Yeah, so I think that depends largely on where your businesses are in the cycle. For our business, we are with Brunswick Corporation, and you know 2009 and 2010, we were this far away from declaring bankruptcy. So cash was extremely important to us at that time. Cash is always important, of course, but we go through cycles where cash becomes more important. And we want to incentivize that. And we’re prepared to sacrifice some earnings to do that. And we go through other times, where we will say, “Well, it’s the earnings that are more important in the current low-interest-rate environment, the cost of capital for companies is quite low.” And to answer your question, we typically use our cost of capital, let’s say it is 8 or 9%. We will divide that by 12. And for a month, we will take that numbers to what we believe it’s going to cost us but it is different in every business. Thank you.

[30:45] Brian:

Hi, I am Brian from Starbucks. Is there a place where we can download this presentation and get a copy of it?

[30:51] Paul Watters:

That’ll be a question for Vin.

[30:53] Host:

All the presentations will be available within the next two weeks. You’ll be able to download them. Feel free. Of course, you can take pictures too but all will be made available. Thank you and have a good day.

[0:01] Host: So here I have three ways to improve collections efficiencies with customer data of Paul Watters. So Paul moved to the US in 2015 to assume his current role as the director of Worldwide Credit and Treasury for Mercury Marine. Paul’s been involved in the design and build of online credit applications currently utilized by the land and sea distribution business here in the US. More recently, Mercury has also commenced the implementation of the HighRadius payment portal and deductions cloud module. Paul, you have the stage. [0:36] Paul Watters: Thank you. Good morning, everyone. There’s a reason why they say nothing good happens after midnight and I’m a testament to that this morning, but we will get along well. So what I want to talk to you about today are three ways that we can improve collection effectiveness with customer data. And you know, I think most of us will agree we’ve never been more awash with data than what we are today. [1:07] Paul Watters: The question is, how can we use that data to drive effective collections decisions and to make ourselves more efficient, and more effective. So today, we’re gonna walk through looking at…

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  • 3 basic levers of a best-in-class collections strategy formed solely with customer data
  • Use case: 200% improvement in collections productivity with AI and machine learning

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HighRadius Collections Software automates and optimizes the credit & collections management process to improve collector efficiency, minimize bad debt write-offs, improve customer relationships, and reduce DSO. It provides a complete set of tools to optimize and automate the credit collections management process and enable the better prioritization of credit collections activities All the information you need (invoices, dispute information, POD, claims, tracking info, etc.) on each case is automatically presented in a collections work-space and is ready for use. Apart from the wide variety of benefits that it has, it also comes with some amazing features like CADE (Collection Agency Data Exchange), collector’s dashboard which has prioritized collections worklist, automated dunning & correspondence, dispute management, centralized tracking of notes, call logs & payment commitments along with cash forecasting functionalities. The result is a more efficient collections team that contributes to enhanced cash flow and reduced DSO.