Innovation in credit management

The Case for Innovation
We are living in the innovation era. Ever since John F Kennedy, President of the United States of America, catalysed a nation into achieving the unimaginable with his address to the US Congress on the 25th May, 1961 with these now immortalised words…

“First, I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to the earth.” 1 … humankind have been riding a tsunami of invention and development not previously realised. Not only did this single event epitomise the height to which human endeavour can reach but also provoked an accelerating rate of change akin to that experienced by those same pioneers; who broke free of the limiting constraints of gravity, atmosphere and doubting, defeatist attitudes and on 20th July, 1969, indeed landed on the moon and subsequently returned safely to earth.

Innovation is that ideal which captures the creative and pioneering spirit of humankind to conquer, overcome and bring to heel, the seemingly impossible, the unattainable and the inaccessible reaches of our physical world until we are convinced that our only limitation is that imposed by our lack of imagination.

It is reported that the Greek philosopher, Plato originated the concept that “necessity is the mother of invention.” 2 Yet this noble idea is further enhanced with Kennedy’s other famous quote regarding the space programme where, speaking at Rice University two days after his speech to Congress he enunciated:

“We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard…,” 3

From this we ideology, we deduce that innovation is not only about the creative step in and of itself but is realised because we strive for improvement and development. It is the confluence of those two appealing human qualities, the “creative spirit” together with the
“competitive spirit”. Innovation is linked to development, achievement, motivation and triumph.

Innovation is about success.
(Why businesses need to innovate.)
Success is that imperative in business that invokes in us a desire to remain ahead of the curve, to be different, to be first, and if not first then to be the best 4 . The response to this imperative is the drive and motivation to achieve what and where others have not and to claim a significant reward for this endeavour.

Successful businesses strive to achieve a uniqueness that differentiates them from the competition in terms of product, service and the value provided to their customers by leveraging off the fundamental building blocks of leadership, management process, technology and people. Innovation must be found in all of these disciplines in order to achieve the success that the business demands. The preference or the neglect of one, at the expense of others will lead to an imbalance in the business model that will ultimately lead to failure.
In their book, Making Innovation Work 2, Davila, Epstein and Shelton provide us with the following key insights on success in business.

“While achieving a leadership position in business is not easy, maintaining it has proven to be much more challenging….” (page 2)

“In the long run, the only reliable security for any for any company is the ability to innovate better and longer than competitors…..” (page 3)

They further quote James M. Kilts, then chairman and CEO of Gillette Company,

“…. is to remember that the opposite of success is not failure
but inertia.” 5

It follows that these authors are firmly convinced of the “innovation imperative” in terms of business being able to achieve a leadership position and in order for business to maintain such.

Their work goes on to explore the key concepts of making innovation work by means of following a process and approach to innovation which causes the business to prioritise, organise, manage and subsequently harness the rewards of where innovation will lead and leave them.

Perhaps (for the author) the single most relevant idea espoused in their work is that:
“Successful organisations combine technology and business process change to create innovation.” 6

Successful organisations are therefore not only embracing innovation in the fields of research and development around their products and value offerings but also in terms of the management processes and back-office functions where efficiencies and profitability are often bled dry due to their own stolid and inert structures, technology, processes and self-limiting human resources.

Innovation requires investment. Investment in terms of time, capital and human talent. This investment is required in all aspects of the business cycle in order to achieve that aspect of leadership to which the business aspires. Examples of this multi-disciplinary approach is clearly evident in the developments in the business world, of the last decade around Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) where significant resources were allocated to obtain back-office efficiencies necessary to unlock value to the business, its relationship to its suppliers and naturally, its
relationship with its customers.

With respect to those to whom this article is targeted this becomes an important development. Understanding the role of credit management in the customer life-cycle and in the profitability of the business places tremendous responsibility on the executive team. Particularly, in the executives’ consideration of the need to prioritise investment in innovation around credit management.

Fortuitous, perhaps, is the hype created around the credit management discipline as a result of recent tumultuous events in the world economy as we grapple with the aftermath of a misunderstood and mismanaged credit environment. Credit management, as a discipline and profession, has been thrust into focus as a business dependency in determining not only market leadership and customer value but also in realising strategic value through profitable customer management.

Innovation in the South African Context
Further to the established notion of innovation as a key to business success is the requirement to understand the need to establish, motivate and manage leadership in business, in the local as well as the global context. South African businesses are challenged to remain “best of breed” as they seek to compete against other local entrants,
ward off global challenges to their local dominance and seek to grow and expand beyond their borders.

It is important to record that South Africa enjoys a respected position in the world in terms of “firsts” relating to progress and development. The examples of the advances in world medicine in terms of the first heart transplant and the mathematical theory leading to the invention of the CAT scan bear testimony to this. What is questionable however is South Africa’s ability to retain and maintain such examples of leadership. As previously quoted, innovation must result if not in a “first” then at least in a “best” position.

South African businesses are critically poised to make a case for innovation and to embrace its challenge. The complexities of competing as an emerging market whilst striving to create wealth and “a better life for all” underscore this all the more. The demands of our growing population may stress our limited resources but we are further constrained by our inability to achieve true economies of scale should we concentrate purely on our own needs. We must achieve competitive equilibrium, if not superiority, in the evolving continental and global economy, in order to continue in our quest to succeed.

The needs of the South African context are familiar even while they are peculiar.
• Skills shortages.
• Creating employment opportunities.
• Access to capital.
• Balancing demands for infrastructure with increasing social needs.
• Managing equitable redistribution of wealth and resources.

The “innovation imperative” seeks to balance the requirement to drive stakeholder value whilst beneficiating the community and those social aspects required to attain stability and to sustain development.

More specifically, South African businesses should seize the opportunity afforded in terms of the reasonably stable and positive medium term economic outlook to wisely secure a leadership position in terms of credit management solutions and business practice.

Partners in Innovation
Many growing businesses utilise the services of specialist concerns within specific areas of discipline to assist them in achieving their innovation agenda.

The role of specialist management consultants was particularly popular during the previous decade in assisting world-class businesses to transform in their quest to evolve to “best practice” status in the areas of finance, accounting, human resource management, productivity and efficiency, sales and marketing and now, more recently, credit management.

Utilising insight and experience gained in a specific area of discipline, specialist consultants are able to leverage off their experience and so assist their customers to “leapfrog” through the maze of technology, process and people difficulties and so arrive at the utopian

This idea is further developed in Davila, Epstein and Shelton’s previously mentioned work:
“Innovation is too important to outsource completely. Partial outsourcing, better termed partnering, is a solid, proven approach to enhancing innovation.” 7

“Partnering is a standard and potentially valuable part of the innovation toolbox. Reaching outside for additional resources, ideas, expertise, and different perspectives can be highly valuable when combined with the internal ability to understand and use what your partners bring.” 8

“Developing, maintaining and using strong relationships with partner organisations can be a key competitive advantage in innovation for your company.” 9

Of course identifying and building a sustainable relationship with the correct partner is as essential to business success as is the need to understand and establish an innovation strategy to start with.

Key Points in choosing an Innovation Partner 3

1. Established credentials as a market leader in the area of required expertise/discipline.
2. Proven ability to identify and understand your business fundamentals
3. Proven commitment to sustainable business models and practices.

Leadership in Credit Management. Solutions and Practices.
Whilst the notion of an article devoted to exposing the latest innovations in credit management solutions and practice is novel and appealing, it is also impractical. At the very core of their nature, innovators will wish to leverage off their investments to ensure that they hold the “first” or “best” position for as long as possible in order to realise a return on their investment. A more practical position is to invoke in the reader a sense of the principals of innovation and more specifically the opportunities available in terms of current positions so that the process of innovation is awakened and embraced by the South African credit management community. This article further seeks to explore these concepts so that the reader is positioned to begin their own journey of innovative development, ultimately arriving at a successful destination. We will identify a number of Key Focus Points on which Credit Managers would be well-served to focus their innovation-attention.

At the Core – The Customer
Credit Management is intricately tied to the management of the customer life-cycle. Various vendors will highlight and label these concepts differently but for the sake of simplicity and brevity we will refer to the following model.

Figure 1: Relationship between the Customer Life Cycle and the Credit Management Process

In their article on Credit Management, Senior Business Consultants at credit reference agency, CallCredit, note the following:
”Credit information is not only important in credit decisioning. Mike Nalder and Mick Ellender consider the importance of credit data throughout the customer relationship, from marketing to collections and recovery.
“Credit data is used extensively in the financial services industry and throughout the customer lifecycle. From the identification and selection of prospective customers, to acquiring and managing accounts and the collection and recovery of bad debts.

Terabytes of data are processed and held by lenders, suppliers and third parties alike. Widen the subject to data analytics and decision science and the subject of credit data rapidly becomes a vast one.” 10

Their point also introduces a vital concept to the credit management process, namely:

• Credit Data

Access to reliable, researched or verified information is a cornerstone of any credit decision or management system.
Nalder and Ellender conclude their article with the following summary: “We have reviewed at a high level, the areas in which credit data is a powerful factor in achieving strong business results. From the targeting and selection of new customers to the management of ‘good’ and ‘bad’ debts we have assessed the many uses of data.

However, data is only as good as the people that own it, so a continual focus should constantly be given to ensure that data is optimised and a clear strategy formulated as to its ongoing use within the organisation into which it is deployed.”

Key Focus Points
1. Acquire and Manage Credit (Customer) Data.

•     Acquire data
– Identify reliable partners in the areas of customer data. Partners must be able to display leadership in core competencies of research, verification and analysis.
•     Manage data
– Store and retrieve credit data on business fundamentals such as risk, value, geographical and sectoral differentiators.

2. Screen and Target Potential Customers.
•     Scoring and Benchmarking

– Behavioural scoring and analytics are now established and accepted as industry standard best practice.
– Marketing efforts are targeted to those most likely to respond and to those most likely to engage profitably with the supplier.
– Credit Policies are quickly adapted to changes in macro and micro environments.

3. Customer Acquisition
•     Automate decisions

– Apply application and behavioural score-cards.
– Facilitate complex business rules and decisions.
– Store and record credit data and decisions or future evaluation.

4. Account Management
•     Anticipate Customer Buying and Payment Behaviour

– Identify cross-sell and up-sell capacity.
– Structure additional marketing efforts.
– Adapt credit policies and terms according to macro & microcriteria.
– Manage Fraud.

5. Collections / Disengagement
•     Adapt collection strategies to risk imperatives.

– Select customer relevant payment terms.
– Maximise account profitability while reducing risk.
– End customer relationships relative to risk of loss.

South African businesses across the spectrum of consumer-focused retail, financial services, manufacturing, wholesale/retail distribution and business services are afforded an opportunity to invest in their future growth and success by employing best practice in regards to innovating both at the product and value offering level but also to improve and leverage returns off the systems, processes and people used to deliver the same products and services.

This imperative is required in order to attain and maintain a leadership position by being either “first” or “best” in a defined market or field leading to a competitive advantage ultimately resolving in reward to the various business stakeholders.

Identifying opportunities for innovation in credit management solutions and business practice will also afford South African businesses opportunity to achieve competitive advantage in respect to achieving higher returns on their capital employed, improved customer service and improved margins of profit.

Choosing suitable and sustainable innovation partners can assist the credit manager and business to achieve significant results within a shorter time scale and with less impact on available resources.

In conclusion readers will be well-served to remember another popular myth concerning the space-race. America’s quest to achieve excellence in its quest to the moon caused the development of the “space-pen”. A pen designed with a pressurised ink cartridge enabling the writer to use it in zero gravity, upside down, underwater and other extreme conditions. The design necessitated investments in time, finance and human endeavour. The less well financed but no less resourceful Soviet space pioneers were confronted with similar problems. Their solution was to use a pencil. Research reveals that the truth of the matter was a little less romanticised but it makes for a good story none the less. All good stories have a moral and the moral of this one is Keep It Simple, Stupid.

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