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Case study: Credit Management – How to be a successful tightwad

“Credit management isn’t all geezers with broken noses, cauliflower ears and Dobermans. It’s to do with being a businessman first and a credit manager second.”

Bob Evans of Siemens plc has a persuasive way of making his point. Hell, he almost makes you feel sorry for Siemens.

After all, the UK subsidiary of the German electronics engineering multinational had #175m of unsecured exposure to 8,000 customers the day before we met.

While Siemens offers to supply the right goods at the right time at the right price, all they ask in return is that you’ll pay them on time. On the 28th of the month after invoice. Not the 30th, not the 29th. The 28th.

That averages out at 45 days’ credit, which also neatly meshes with standard German terms of credit – 45 days net.

At present, Evans’s average days’ sales outstanding (DSO) is 52 days – but even though he’s only a week adrift of his target “optimum”, he’s still gunning for 45 days.

“The benefit to the customer would be that it reduces our overhead and we can pass that reduction onto everybody by way of reduced prices, which makes us more competitive.” Evans adds: “Our duty is to the bulk of the people who understand the rules, have taken our goods and services and are prepared to pay for them on time. Why should they be penalised because some people don’t?”

Evans is keen not only to evangelise about the virtues of prompt payment, but to talk about his credit management system, a multi-faceted part of the Siemens organisation that has been gradually developed over 13 years with financial software house QSP. QSP is now selling the system to other clients.

The system takes feeds from all the usual data suppliers and other, less likely sources of information. The trick is the way all this information is used.

Using the company registered office number (CRO) as a key identifier for the master file, they get information from Equifax or Dun & Bradstreet to get basic facts and data such as: directors’ details, recent accounts, tangible net worth (typically Siemens allows a credit limit of 25% of tangible net worth: “That leaves a 75% margin for other suppliers to supply against, and I guess I’m comfortable with that,” Evans says) and so on.

Not exactly rocket science here, except for one thing: Siemens updates all this information every month.

“The traditional English company does that (credit check) once,” Evans says. “They’d go on based on accounts that are probably 13 to 18 months old, and they would trade along (quite happily). The next time they get a violent jerk is when the administrator or receiver says, ‘Excuse me, fellas, the CRO number is the same but the management has changed overnight because here’s the bank now administrating it.'”

Other information such as the SIC – Standard Industrial Classification – code also has its uses: “When the building problem came a few years ago, we’d already thought of our response to (that industry’s) particular problem, that they weren’t getting paid,” Evans says. “Maybe we’ve got to renegotiate the terms of the invoices. Maybe we can deliver just-in-time a bit more – all these sorts of things, which is a hell of a lot different to some cowboy phoning up with a bone through his nose saying, ‘Either you pay us or I send the boys round.’ The building industry’s problems are over now for this particular cycle, and they still hopefully remember that Siemens isn’t the strict, staunch Teutonic company that its perception is.”

But, perhaps, no real rocket science here either, though the shift from a pre-relationship check-up to an on-going, pre-emption capability is certainly more advanced than at some companies.

Other sources of information include payment details from Equifax, which gathers information from companies about how quickly each of their own customers is paying up. If Siemens finds that a customer is slow in paying, the credit controllers can cross-check to see if other suppliers are experiencing similar delays with that client. If things are going wrong with a customer who is having trouble paying his suppliers, then “we want to be in the queue first – it sounds pretty aggressive but this is business,” Evans says. “But if they pay everybody else in 45 days, why not us?”

Siemens also uses its in-house engineering people to advise on the technical risk that a customer may face. They consider questions such as whether the client is launching a new product: is it leading edge? Do they have a market for it? Are they selling to stock or are they making to order?

“If they’re making to order, who’s ordering it?” Evans says. “And I credit check them because ten-to-one I’ve got them on my database anyway. We try to put all of this together and predict what’s going to happen next.”

If all of this sounds a little like an MI5-style intelligence-gathering exercise, Evans adds that this information is shared with the customer.

“You’ve got to know a bit more about your customer – and one thing that good credit managers do is go out to their customers armed with all this information and say, ‘That’s what we’ve got. Which bit’s right?’ All of a sudden you’ve got their financial director’s attention.”

Just as interesting is the use of call centre technology driven by the credit management software to nudge, coax, cajole, urge or even pressure customers into paying up. Siemens has a bank of people each of whom calls 30 clients a day, every day. The call list is generated by the QSP system, which displays up-to-date payment information. The list can be generated in a number of ways: for example, it could be asked to display all accounts more than 30 days overdue where the sum outstanding is greater than 65% of the credit limit. “The machine takes about 20 seconds to process the day’s work, bringing up a list of 20 customers, say. Then they just work their way through the list.”

Moreover, every client can expect to be phoned twice during the course of a month. The first call, Evans says, is “to tell the customer ‘Thank you very much for the last payment which was on this day for this amount of money’ – you’re praising them for doing something quite right: performance of their obligations.”

The other call is a gentle reminder: “They ask whether they have any problems with the products that are on the sales ledger at that time. Obviously they follow the question up with, ‘Are you going to pay for them? Is there anything you need, any help you need from us to assist you to pay your bill?'”

If there are any disputes or delays – whether it’s mislaid invoices or a technical problem with a product – those invoices can be set to one side until the matter is resolved. The key is to ensure that the customer pays the rest of his bills.

“I’d much rather write off the #10 or deal with the #10 in a different way and collect a million pounds,” Evans says. “But the English culture is that, unless it (what you’ve sold them) works entirely satisfactorily, you don’t pay any of the bill. We need to get away from that: work’s been done, capital outlay has been made, so we’re 10% off? We’ll deal with that separately.”

Of course, once the technical problem has been resolved, the system prompts the credit managers to call the customer to ask, “Can you pay that bill now?”

One other feature of this system should be noted: it’s web-enabled. This allows people – salesmen in particular – within Siemens to access their clients’ files on the company intranet. “My salesmen dial in and look at the customer file before they go in, then they can talk about relevant financial matters to the purchasing people: ‘Your dividend’s gone up, your payment score is getting better. That query you had last week – that’s been solved.’ If you do that then you’re giving them some valuable conversation – all positive – and hopefully we’ll get a positive order.”

He adds that a salesman might, in return, tell Evans’s team that the client has a fleet of new Jaguars outside the head office. “I can look at whether they can afford that or not, either on lease or on full purchase.”

The intranet functionality also allows clients themselves to read their files. This has been developed because of client demand for this kind of service. “They can see their current indebtedness to us, or see how queries are progressing. It’s not a toy, it’s not something we’re experimenting with.

“The standard way of doing business is that you get 12 statements a year from your supplier and the cut-off line for those statements is the end of each calendar month. We did a survey a few years ago: 52% of those statements go straight in the bin,” Evans says. Moreover, “we’ve sent a statement dated the 7th, which covers the period from the 1st to the 30th of the previous month, so it’s already seven days late when we send it out.” The intranet, on the other hand, allows everyone to have completely up-to-date information.

Evans says that every credit manager should ask himself, Why is this customer coming to us? Is it because they’re insolvent and nobody else will sell to them, or is it because the company offers the right products and services? “It’s up to me to predict what that reason is,” he says.

The bottom line of all this is that, last year, one of Siemens’s divisions sold #888m-worth of products. Bad debt write-offs added up to just #14,000.

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