Genpact: More Data More Cash - Mark Wood

How can a company locate cash trapped within its accounts receivable portfolio? According to Mark Wood, vice-president and order-to-cash practice leader of Genpact, measuring lag indicators is not enough. It is analysing the data within lead indicators that is key.

Since the beginning of the US mortgage crisis, global financial meltdown and subsequent global market contraction, companies have run out of spending belts to tighten. With little-to-no revenue growth in sight, many CFOs are turning toward their accounts receivable area to help improve cash flow.

So how then, do you create more cash from your accounts receivable portfolio? In my travels, nearly every finance officer I meet tells me they would like to enforce shorter credit terms to achieve their cash goals but unfortunately, unless they own the market and their product is the next 'i-Something', this is largely an unrealistic endeavour.

Let's assume that you have had a year to focus on your balance sheet and have moved your DSO to levels above your industry's average by concentrating on performance within your credit and collections department. By now, you should have:

  • Standardised terms across your customer base and have enforced them aggressively
  • Measured critical indicators of your team's performance
  • Set and tracked continuously improving targets for the team

You have probably also reduced costs by cutting staff. So what next? The simple answer to this question is data. Data, data and more data. It is what you need to understand the health of your business processes and where to focus your attention to turn the dial on DSO and other cash metrics.

Without data it is impossible to be proactive and predict the likelihood that you will be paid. Most of your customers, even in difficult economic times, want to maintain good credit ratings and pay invoices on time. The main reason for late payment in any business is upstream process errors.

Most companies fix errors reactively while trying to collect their cash. Use what you already have There are several ways to get at your data and, while technology is always best, you do not need to spend millions to customise your ERP platforms. Much of the data you need may reside already in your existing systems but has not been aggregated, analysed and disseminated to key stakeholders of upstream processes.

Before beginning your data collection efforts you must define the boundaries of your order-to-cash (OTC) processes. Where does it start and end and what other business processes impact each step in the end-to-end OTC process?

Once you understand this end-to-end view, you must figure out what goes wrong or can go wrong in the process and determine if you can measure those defects. Herein lies the challenge – most companies are very good at measuring lag indicators, such as DSO, % past due and bad debt, but very few master the art of measuring lead indicators. Lead indicators focus on measuring the speed and accuracy of the level 2, 3 and 4 processes and include metrics like:

  • Turnaround time for customer set up
  • Billing accuracy
  • Pricing dispute resolution time, etc.

Measuring these cash flow levers can be costly and difficult without robust workflow tools. However, capturing this data represents a real opportunity to find the king we call cash.

Best-in-class companies and service providers leverage workflow to manage processes that are prone to defects and require handoffs to execute. Workflow tools must be business performance management systems to deliver real value and transformation for a company.

The Genpact method

At Genpact, we leverage 2,000+ associates in our analytics practice to develop insights and prioritise improvement opportunities for our clients. These are some examples of insights we have developed.

  • A 20% DSO improvement which can be realised by designing collection strategies based on a customer’s previous payment habits. Additionally, you can eliminate 'self-cure' customers (customers who pay on time without reminders) from the workload freeing up focus on riskier customers.
  • Offering your customers a self-serve invoice receipt and payment option will save €3.5-5 per invoice transaction and €18+ per disputed invoice while improving DSO and customer satisfaction.
  • 13% of an average company's invoices are disputed due to errors such as pricing, quantity and logistics. Time to resolve these disputes and collect monies owed ranges from 7 to 145 days.
  • Concealed shortages in the consumer products industry range from 0.5% to 2.0% of retail channel sales. Combining the right data and collection strategies can result in recovering 35-50% of these lost profits.

There is no sugar coating the fact that capturing data requires robust systems, typically more than the standard ERP implementation will deliver. The good news is that there are bolt-on tools that do not break the bank of your IT department. A typical €1.4 billion company with 25 resources in credit and collection can expect to spend €72,000-€108,000 on a robust deduction and dispute workflow platform and realistically be up and running in 3-4 months. The DSO and productivity benefits can easily deliver an ROI within a 12-month period.

Outsourcing with greater visibility

If your business lacks robust workflow systems and the budgets or IT experience to deploy them, then interestingly enough, outsourcing may be the way to go. When a customer chooses to outsource parts of its OTC process, a big concern is loss of control and visibility. To address this concern, a stable of service level agreements (SLAs) is established that revolves around speed and accuracy. In my experience, over 70% of SLA metrics we are asked to track have never been measured previously.

An outsourcing provider is forced to establish a performance tracking mechanism to capture metrics that not only tell the health of the outsourced process but also the health of the upstream business process. This can be an inexpensive way to capture the data needed to improve your shipping, service delivery and pricing processes. If you partner with the right provider and deploy a rigorous governance model, you can get at more data and gain better visibility to the lead indicators of your company’s cash flow.

In summary, if cash is your king, then data is the 'round table of the knights', without which your cash will always be at risk. Measuring the lag indicators is a given, but it is the data lying in the lead indicators that will enhance your company's cash coffers.

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Mark Wood, vice-president and order-to-cash practice leader of Genpact.