Tuesday, June 26, 2007

I Feel Lucky…. Hit Me!

Many would argue that I am very lucky; so far this year I have spent 3 weeks in Las Vegas, Nevada, one of the gaming capitals of the world. Oddly enough, two major world gaming centers lie between the 36th and 39th North Parallels; Las Vegas, Nevada and Atlantic City, New Jersey. Was that by chance or was it intended? I wondered the probability of these two cities separated by 2500 East-West miles and only 200 North-South miles. Odd isn’t it?

As I walked through the casinos I wondered, what is it about gaming that manages to fill these cities. As Maslow wrote about human needs, Barrett Miller, in his paper Support Groups that Work, wrote about Human Hungers. One such Human Hunger is Contact Hunger; the need for rituals and pastimes (games). As I watched people satisfy their Contact Hunger, I realized that gaming is such a part of our daily lives – our collections lives!

In experiencing the tables of Vegas I came to realize how people play these games is often similar to how we manage our accounts receivable and work-in-progress, for that matter. There are essentially two types of games, those requiring skill and those of chance. The games of skill encompass games like poker, where the player has to work with what they have and make decisions regarding the behavior of the other players. Whereas games like roulette and craps require luck.

Bringing this home, so many firms manage their AR and WIP like they play a game of luck. I will put 50 on red, black and evens and away I will go, essentially having a firm standard AR and WIP management process. That is synonymous with having a WIP/AR strategy of treating all the clients the same. Which, for anyone who has been to my seminars, knows that this is the first taboo in managing the most valuable asset of the firm? Today’s firm must begin to manage their client portfolio as a skill; weighing the odds, making educated decisions and thereby becoming most effective.

The first question that must come to mind now is, how is this done? For the last 12-18 months I have professed the need to move to a risk based model for managing WIP/AR; a strategic approach. This approach is a growing trend in the corporate world, according to a 2006 Dun & Bradstreet study, where 30% of commercial firms have adopted a risked based collections model, which will grow to 60-70% by 2008! Becoming strategic at managing the most valuable asset of the firm will: reduce bad debt, increase cash flow, build strong client relationships and almost obliterate time wasting activities!

Using a risk-based WIP/AR management process uses statistical-based credit scoring to determine the inherent risk of the client. This score, along with the firm’s affinity for risk becomes the primary driver for determining how WIP/AR strategies manifest themselves within the portfolio. This isn’t hocus-pocus, research has shown that the age of an account and the amount due are the wrong criteria to use to optimize collections efficiency, DSO and reduce write-offs.

Remember, your ability to get paid is based on the client’s risk model. From my presentation, Collections Above and Beyond Technology, clients bring two types of risk to the organization, and it is that risk that determines the probability of the timeliness of payment. To demonstrate this with a simplified example, given two clients that require attention; Client A and Client B. Client A owes the firm €100,000 and is 30 days past due and is a low risk account with a 1.1% expected bad risk rate. Client B, owes the firm €10,000 and is only 10 days past due, but is an extreme risk account with a 65% expected bad risk rate. Working through the joint probabilities of default, it becomes apparent that Client B poses the greatest risk of default.

The question now is… how do I stop playing roulette with my firm’s largest asset and change it from a game of luck, to one of skill. The answer resides in your time and billing system! The most valuable weapon you have to build the foundation of a risk based plan of WIP/AR management is the payment experience you have with your clients! It has proven to be, by far, the most predictive data that is available. Because it screams of the inherent risk the client brings to the firm. Keep in mind, the best predictor of future client payment performance is client history, and you already have it, and it is free!

With all of that, you must ask yourself – do I feel lucky? And the answer should be…hit me – I am skilled!

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