November 13, 2009

Metric Definition
A hallmark of recessionary times is the slowing of customer payments, as evidenced in days sales outstanding (DSO). However, DSO is a lagging indicator; slowing payments become evident sooner in the percentage of current receivables and in the average days delinquent (ADD). ADD is defined as the difference between DSO and best possible DSO. Top performers not only have virtually 100% current receivables, but an ADD that is significantly lower than that of the peer group (Fig. 1).

Why It's Important
Top performers with leading ADD positions also are likely to have formal, well-defined collections strategies and higher investments in technology tools that help them optimize collector productivity and effectiveness. Also, they have developed and communicated a clear collections strategy, differentiated by customer segment. For example, a strategy for a very large, strategically important customer may call for personal, direct contact involving the sales department, whereas small, one-time customers may receive only electronic contacts; collections activity for this segment could even be outsourced.

From a technology perspective, top-performing collections organizations have invested in tools that maintain all essential customer-related data (e.g., customer orders, AR balances, payments, disputes) and can perform many basic data collection, analysis and reporting activities automatically. This allows collectors to spend the majority of their time executing collections activities rather than figuring out whom to contact and in what order (Fig. 2). When a collector logs into the tool, he or she is instantly provided with a prioritized list of customers to contact according to the defined collections strategy.

Strategic Implications
In today's uncertain economic environment, it's important that finance have a well-defined and executed collections strategy that minimizes ADD. Irrespective of whether it faces an revenue downturn, industry shock or deterioration in customer creditworthiness, peer-group companies have a significant ADD gap to close relative to world-class companies.

Some of the best practices associated with effective collections that could directly or indirectly lead to lower ADD include the following:

• Regular reviews of top accounts payment performance and strategy with sales, executive management and finance.
• Utilization of automated collection tools to support prioritized customer collection activities based on customer segmentation and strategy by size, strategic value of account, and/or risk class.
• Tracking and reporting of DSO by product line and major businesses to identify systemic payment trends.
• Implementation of incentives for collections personnel consistent with corporate and customer relationship management goals.
• Establishment of a cooperative relationship among sales, customer service, and credit and collections to share insights that facilitate effective accounts receivable (AR) management.

About The Hackett Group
The Hackett Group, a global strategic advisory firm, is a leader in best practice implementation, advisory, benchmarking, and transformation consulting services, including shared services, offshoring and outsourcing advice. Utilizing best practices and implementation insights from more than 4,000 benchmarking engagements, executives use Hackett's empirically based approach to quickly define and prioritize initiatives to enable world-class performance. Through its REL brand, Hackett offers working capital solutions focused on delivering significant cash flow improvements. Through its Hackett Technology Solutions group, Hackett offers business application consulting services that helps maximize returns on IT investments. Hackett has worked with 2,700 major corporations and government agencies, including 97% of the Dow Jones Industrials, 73% of the Fortune 100, 73% of the DAX 30 and 45% of the FTSE 100.

Founded in 1991, The Hackett Group was acquired by Answerthink, which was renamed The Hackett Group in 2008. The Hackett Group has global offices in the United States, Europe, Australia and India and is publicly traded on the NASDAQ as HCKT.

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·  The Best Practice Series: Installment VII--Prioritize Collections ·  Month-End Credit Reporting Could Use a Makeover ·  Solving Collection Problems Before They Happen ·  Making Collections a Core Competency ·  Calculating DSO ·  Formula for Forecasting A/R ·  DSO In the Seventies? What's to be Done? Tighten Internal Partnerships and Keep Close Tabs on Documentation and Information ·  The Best Ways to Track Performance of Collectors