THE OUTSOURCING ALTERNATIVE
Part I
By: Scott Jefferson – General Counsel
Newton & Associates, LLC
3001 Division Street
Metairie, LA 70002
Phone: (504) 469-9545
Fax: (504) 465-5306
Outsourcing is a business practice that can yield process improvement in support of company’s drive to focus on its market, its people, and its capabilities. While outsourcing can be an effective tool in many areas of a business, this article will focus on outsourcing as a way to better manage accounts receivable.
Successful outsourcing assists a company in focusing on full utilization of its core competencies. Accounts receivable management, while essential, is usually not considered a core competency, as it does not define a company’s business or create the revenue stream. However, management of accounts receivable maintains the revenue stream. Partnership with an experienced outsourcing company helps maintain that important revenue stream by reducing DSO and improving cash flow.
Is Your Company a Candidate for Outsourcing?
Outsourcing of accounts receivable management gives your company the flexibility to maintain control of the accounts receivable process by engaging an outsourcing specialist to handle receivables as an “in-house” contact with your customer base. That is, your outsourcing vendor will contact your customer base in the name of your company. Payments are directed to your company’s address. The outsourcing vendor resolves customer disputes, keeps accounts current, and maintains goodwill with your customer base.
Outsourcing of some portion of the accounts receivable function is usually beneficial to companies in the following situations:
Companies that are experiencing rapid growth usually find the collection process cannot keep up with growth.
Companies, who through acquisition or merger, have an influx of new accounts receivables often utilize outsourcing. Coordination and hiring new staff does not result in accounts being worked in a timely manner and outsourcing provides the immediate solution to making sure accounts are given the necessary attention.
Companies who want to reduce fixed operating expenses without sacrificing cash flow frequently look to outsourcing as a solution. An outsourcing vendor covers the costs of salary, benefits, administrative overhead, software and hardware requirements, mailing costs and telephone costs.
Companies with seasonal sales benefit from outsourcing because of the high volume of business seasonal sales creates. It is difficult to temporally staff internally for seasonal businesses and outsourcing provides that staffing at a reduced cost.
Companies whose receivables are not producing adequate cash flow can improve their financial picture dramatically with outsourcing.
Companies that are too small to have a collection specialist in house are candidates for outsourcing as well. The benefits of outsourcing are not limited to large companies with extensive in-house collectors and customer service representatives.
Sales driven companies that don’t necessarily focus on credit worthiness need to have an aggressive accounts receivable process in place. Outsourcing ensures that customers are contacted early in the collection process thereby separating customers from debtors.
Perhaps the best barometer as to whether your company is a candidate for outsourcing is this: Does your company have the internal resources to contact by telephone every customer within 5 days of that customer being over due? Controlling accounts receivable and maintaining cash flow requires early contact with your customer base. If customers are contacted early in the collection process, the call is more of a customer service call than a collection call. Problems are resolved and customers are educated about your credit terms in a positive way.
Advantages of Outsourcing
Each company’s needs and specific goals are different. The flexibility offered by outsourcing has compelling cost savings and cash flow benefits. Some of the many benefits of outsourcing are as follows:
Improving cash flow by reducing DSO.
Dealing with customer problems in a timely manner.
Keeping your customers from becoming debtors by early handling of customer accounts.
Eliminating the cost of hiring and training of new employees and avoiding the cost of salary, benefits, and other overhead costs.
Outsourcing means that your customers are contacted in your company’s name and they are contacted early in the process.
Improved customer communication serves to reveal and solve potential problems before they occur.
Your customer base is educated on your company’s payment procedures.
Summary
Outsourcing can offer your company the benefits of improved cash flow, lower DSO, higher profits, reduced bad debt, lower receivables management costs, and better customer communication. Outsourcing provides your company with trained collection professionals who are specialists in customer service; all at a significantly reduced cost to your company. You can realize these benefits while still maintaining control over one of your company’s most important assets; it’s customer base. Maintaining the customer base is the most important functions of the credit department. If outsourcing helps you improve communication with customers, it is an option worth considering.
The second article in this series is how to choose an outsourcing partner that can work for and with you in maintaining customer relations and improving cash flow.
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