The E-Volution Of Credit Management

The National Association of Credit Management

In June, 1896 at Toledo, Ohio, eighty-two delegates representing several local credit groups met to endorse a national movement for the exchange of credit information. Thus, was born the National Association of Credit Management (NACM).

Since that milestone meeting over one hundred four years ago, our profession has experienced and endured many changes. During my thirty years as an active credit professional, I have been witness to and involved in some of these changes. (And, despite some rumors, I was not present at the meeting in June, 1896.)

The first major change in which I was involved was the improvement in the relationship between credit and sales. Historically, the relationship between these two vital departments had always been adversarial, at best. Credit departments were run under the "command and control" concept. What limited communication existed between departments consisted primarily of credit telling sales which orders or accounts were on hold or being denied outright. I'm sure some of you can recall heated discussions within your own organizations and being tagged with names such as "order killer," "the order cancellation department," or "sales prevention department" to name a few which can be printed. Fortunately, during mid-to-late '70's, the relationship e-volved into one of mutual respect and cooperation. But, not without a great deal of effort from both parties. Also instrumental in the e-volution were the educational programs sponsored by NACM and its member Affiliates, at which many credit professionals learned how to work with "those sales people."

Another e-volution that took place within the credit profession occurred in the mid-to- late 70's: hardware and software became available that enabled credit departments to complete overnight "batch" processing and the ability to see the results of the previous day's activities. Invoices could be generated and mailed to customers the day following product shipment; account activities and accounts receivable aging reports became available to management. "Smart terminals" enabled remote offices to transmit data to a corporate mainframe computer for overnight processing with the results returned within a 6-8 hour period. These developments enabled credit professionals to reduce their DSO, past due accounts receivable, bad debt losses and to effectively manage customer credit limits.

Communication improvements continued with the mass production and availability of the facsimile machine. Although the "fax" was invented in the early 1920's, the technology was not used commercially until 1948 when Western Union introduced its "desk-fax" service. Some 50,000 units were built and used between 1948 and 1960 when the service was discontinued. Although there were many different manufacturers of fax machines in the mid-to-late 60's, it wasn't until 1974 that an international standard was adopted which permitted American fax machines to "talk" with those in Europe. I am sure many of you can recall the early days of dealing with "thermal fax paper" which curled up at the edges and whose images faded into oblivion after a few weeks of being received. While the fax machine was useful tool for credit professionals, it had one major drawback; unless the person to whom you wished to fax a message or documents had one, you had to resort to what we now call snail mail.

Personal computers were probably the next major e-volution that credit professionals experienced. The invention of the personal computer is attributed to Ed Roberts, founder of MITS, Micro Instrumentation Telemetry Systems. In 1974, Ed Roberts introduced his first machine, a kit for hobbyists, which included an Intel 8080 micro-processor, a 256 byte RAM card and a panel of switches. The price: $395. Microsoft founders Bill Gates and Paul Allen would later work for MITS for awhile before going off to earn their fortunes. As personal computers gained popularity within the business community, credit professionals began using a new tool, which would change many of their lives, forever. Personal or desktop computers have given the credit professional the ability to interface with legacy or main-frame computer systems, from which they can extract needed information upon demand. This information can then be "sliced and diced" in many different ways and used to communicate the status collections, accounts receivable balances, DSO etc.

Just when most credit professionals were getting comfortable with their personal computers, along comes the World Wide Web, or the Internet. The phenomenon of the "net" has turned the business world upside down for many credit professionals and their employers. Companies who previously were doing business on a regional or national basis now have a world wide customer base. And, many lack the in-house expertise to transact international business. They are unfamiliar with export regulations and international shipping; international terms of sales (INCOTERMS); international collections; in-country laws and/ or taxation, and their policies and procedures are suddenly inadequate.

The birth of E-Commerce has spawned new terminology. "Old economy" and "New Economy" are two of those heard most frequently. The "New Economy" has brought us customer demands for faster product availability - from fewer sources, faster service or information delivery and, all at a lower cost. The consumer is now the purchasing agent who is buying for his or her company via the "Net." They want the same "real time" service: online catalog, product availability, selection of shipping and payment method; order and shipment confirmation, shipment tracking, invoice selection and payment.

Credit professionals are challenged to keep up with the demands of doing business at "Net speed" by automating as much of their "Old economy" credit process as possible. Online credit applications have become common place on business web sites. Behind the credit application, more and more firms are putting credit decision making, or "scoring" software into place. Such software extracts the information supplied via the credit application, processes it against the macros or bench marks built into the scoring software and renders a "credit decision" within a matter of 25 seconds.

Another challenge for the credit professional that has been created by the "New Economy" is dealing with "start-ups." The Internet created many new companies that were formed specifically to conduct commerce via the "Net." For the most part, these companies have been funded by Venture Capitalists (VCs). Many VCs have made (and in some cases lost) fortunes through staking the start-ups, backed by an equity position. If the start-up is successful and survives beyond the IPO (Initial Public Offering) stage, the VCs may see a huge return on their investments. The difficulty for the credit professional is trying to use "tried and true" methods of analyzing the credit worthiness of the start-ups. While the typical start-up is cash rich, it ordinarily will have few, if any other assets. The credit professional then must determine such information as: the start-up's "burn rate" - how much cash does it take for them to operate each month, how many months supply do they have; what round of funding they are in - 1st, 2nd or 3rd; when is their next round of funding; who are their VCs - what is their track record; what is their window of opportunity for bringing their product or service to market; who is their competition - what share of the marketplace do they hold; what makes their product unique compared to competitors; what is the track record of the company's founders - what company(ies) have they successfully run in the past; and what is their business plan - when does it show the company turning a profit?

Doing business via the "Net" or within the "New Economy" has raised some interesting, if not thorny legal issues with which the credit professional must deal. A few of these issues are: collections by email; exchange of confidential information via email; negotiation of terms via email; use of an electronic or encrypted signature for credit applications and/or contracts; billings online; online payment via credit card, debit card; and payment by fax-check. For many credit professionals, the challenge of dealing with customers within the "New Economy" can be overwhelming. Unfortunately, many credit professionals around the country have awakened to the fact that they are already behind the learning curve. I recently spoke with two credit professionals for whom I have a great deal of respect and asked them for some sage words of advise for those of us toiling within the "New Economy" credit community:

Mike Meerman, CCE, Executive Director, Creditors Service Corp. (a former working credit executive): "I really don't have a clear and communicable vision for the professions direction, but do emphasize to everyone the absolute need to anticipate, plan for, and accommodate the unknown. You see, the trouble with the future is that it usually arrives before we are ready for it!"

Don Mosher, CAE, CCE, Chief Operating Officer, NACM-North Central (a former working credit executive): "The internet has made information much more liquid. Used efficiently, it will allow decisional information to be positioned at the point of sale to improve speeds and reduces friction (inconveniences) with 80-90 percent or more of the customers. Credit's future value proposition needs to give more focus to every company's goal of "getting customers and keeping them". Current credit managers need to recognize that the credit function has become horizontally integrated into the order to cash process. Hence they have to be more cross-functional and plan to spend much more of their time working on corporate teams to see how the function of credit impacts customers (both internally and externally). This will require both skills of high tech and high touch. It is not too late to get a head start on the behavioral skills training. Now let's see how many of us take the initiative to find out what those skills are versus getting more information on high tech."

Working within the new "New Economy" arena is exciting and challenging, if nothing else. The internet spawned commerce has been described as being much like that which grew out of the California gold rush. Between the time gold was discovered at Sutter's Mill in 1848 through 1852, an estimated $2 billion in gold was taken from the earth in the central portion of California's Eastern Sierra foothills known as the Mother Lode country. While that may seem like a tremendous amount of money for that era, consider that the first millionaires of the gold rush were not the miners, but the suppliers who provisioned the miners with tents, shovels, pick axes, clothing, bedding, food, liquor, etc.

Remember that we are only three years into the commercial use of the "Net." These are the "very early days" of a web-based business model; a model that will continue to be redefined. When you read or hear of another "dot.com" failure, check to see if the company's customers were consumers or other commercial businesses. The majority of all "dot.com" failures to date have been those who relied on consumer customers. These were not B2B, or business-to- business companies.

The gold miners were for the most part, unprepared for the challenges of digging for gold, while attempting to protect their claims. We credit professionals are similarly unprepared for the challenge of protecting our employer's investment in accounts receivable assets while conducting business within the "New Economy." However, by seeking new information through educational events, reading credit and financial periodicals, attending industry credit meetings and maintaining your credit professional network, you are taking the steps necessary to meet the challenge of the "New Economy." You are at the center of the "E-volution" of credit management. Plan for the unknown. The only thing certain about the future of our credit profession is change.