Our job is to advise clients about credit management technology and best practice. We are independent and we have been doing it for a long time. The key issue is that through experience we know what works, and we also know what doesn’t work. This means that our clients get a much better outcome because we know which solutions and vendors to steer them towards.
Some of you may be interested in automation because you want greater efficiency but I suspect most of you can see that our world of credit risk management has changed – and that automation will be a part of the solution. It is not just about Covid, though. Coming behind it, other global change events will continue to disrupt supply chains for a long time. Prime examples include Sustainability, Global Climate, and the ongoing destabilisation of what was once the Global Consensus
Disruption to supply chains means that the insolvencies will come at you from all directions, and there will probably be surprises, perhaps some large ones. Credit risk management has to operate in real-time to spot what is coming.
The Framework
In this article, I discuss the framework you need to operate within, the three routes you can take, and the best way you can put yourself in control of events.
Within my company, we talk about The Three Pillars of Credit Risk Management all the time. They are:
Pillar 1:
Historic information – This includes financials, credit reports and non-financials. Using best/most appropriate sources is important and this may vary by region or other factor.
Pillar 2:
Big data – This can be internal big data or external big data. A good example of internal big data is payment performance. Once you have captured it in real time you can automate your decisioning and monitoring – and if you are credit insured you can ensure
compliance because you can calculate DCL limits in real time and you can ensure that reportable events are flagged.
With external big data, Co-pilot has a range of tools available which deploy Artificial Intelligence, Machine Learning and Robotic Process Automation to give powerful real time risk insights. Some of these tools suit particular industries, or trading characteristics.
Paradoxically, we also have some rather analogue tools, but they are all doing the same thing – giving you the red flags you need to be fleet of foot.
Pillar 3:
Market intelligence – This can be derived through some of the external tools (what is happening out there that we can’t see?) but at its peak it is you and the team doing your job. However, it now becomes better focused because all the intelligence you have available (the red flags) has told you which customers you need to talk to and what you want to talk to them about. Efficient credit risk management requires that you are able to operate flexibly within and between the three pillars. This is the framework for automation – it should enable rather than restrain this freedom of movement.
The three routes to automation I’m going to describe them in order of most expensive to cheapest:
Route 1:
Over the years we have seen a growing recognition by credit professionals that ERP is not the optimum route, especially now that there is a need for real time credit risk management. ERP is by far the most expensive route and it is a lengthy process, even when it gets to the top of the ERP project list.
Usually, the first thing IT asks is “tell us about your processes” – and you end up in a series of project meetings where the direction of travel ends up more or less reinventing what you had before. To avoid this, you need an experienced external view which knows what is possible. Critically, once you have gone live you cannot move around within or between the three pillars – to change anything requires another project to be signed off.
So, beware these words from IT: “We can build that for you”. Which is why, if you have the opportunity, you need to get in first and to be on the front foot. I have suggested how in the conclusion below.
Route 2:
With a bought-in platform you can configure from a huge range of tried and tested functionality. It is quick to implement (typically four months, a recent one was five weeks) and it is much less expensive than ERP (tens or hundreds of thousands compared to millions – eight is a typical multiple).
You can work with multiple information sources and deploy multiple tools from the get-go. The key is to get the optimum combination. Most importantly, afterwards you can change almost anything you want: workflows; information sources; scorecards;
risk appetite – overnight. But remember, you will never take the complexity out of credit risk management. It involves all sorts of company or industry practices and multiple interfaces.
Only a few platform vendors truly understand this and can deliver and configure what is required – it has typically taken them 20 years to get to that point.
Route 3: Existing service provider – typically a Credit Reference Agency (CRA)
CRAs are doing a good job to respond to Covid, for example coming up with Covid Scores – there is a genuine desire to support their customers. This route is cheaper because they are selling you their core service and also because they value having your payment data. So there are some real pluses here.
The key disadvantages are that not having your own (independent) platform restricts you from using available tools and it also makes it difficult to use other credit reference agencies. And it could be difficult to leave your vendor, because you might lose your history.
Putting yourself in control of events
If you want to achieve best possible real time credit risk management, you need to be able to operate effectively and flexibly within the three pillars. By far the best route is to have your own independent platform.
Normally we recommend that you get stakeholders involved at an early stage, but not too early. You can suddenly find that you are into a procurement process and “beauty parades” before you have nailed down exactly what it is you want to do. A standard
procurement process is good for contract, legal and technical issues but it is not ideal for identifying how to structure the solution, nor for knowing which vendors to partner – you need to do this first.
As a very first step you are better off finding some budget to investigate the possibilities yourself. Get the stakeholders involved quickly but only after you have investigated and decided what you want to do.
If you have clearly articulated what you need, then in most companies, stakeholders should want to support you. If not, the onus is for them to come up with something better.
Switching on the fan
We all anticipate it, we’re not sure when and we’re not sure what number the fan will be switched to. When things go wrong, fingers get pointed. Better that you are in a position to demonstrate that you had clearly articulated, ahead of time, what tools you needed to get the job done.
If you would like to know more, please give me a call:
Simon Marshall FCICM
CEO, Co-pilot
+44 7785 990588
simon.marshall@co-pilot.co.uk