Debt and the customer relationship Managing the customer lifecycle from customer acquisition to revenue recovery

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1 Debt and the customer relationship Managing the customer lifecycle from customer acquisition to revenue recovery By Martin Kochman Chief Strategy Officer Transcom

2 A joined up approach Few countries have escaped the ravages of the recent recession and, though green shoots are evident in some areas, it s clear that recovery will be both tentative and fragile. The number of individuals and businesses that have fallen into catastrophic debt (the point at which indebtedness exceeds ability to pay) continues to escalate. The sad truth is, many of those who are suffering most are good customers; customers you ve fought hard to win and, until these unprecedented times, have delivered value to your business. This presents your organization with a challenge: How to make sure its revenue stream is protected, but without compromising long term customer loyalty and relationships. It s an issue that impacts both the way you manage customers and the way you manage debt. In most organizations customer relationships and customer debt are managed very separately, within the clearly defined and rarely aligned management silos of the finance, customer service and sales departments. It s time for a change. This paper advocates the adoption of a joined up approach: an approach that manages customer relationships and customer debt in tandem, with close alignment between the teams that manage both functions. It outlines some of the challenges involved in achieving this approach, and how they can be overcome. This paper advocates the adoption of a joined up approach: an approach that manages customer relationships and customer debt in tandem.

3 Good customers and reluctant debtors Debt is something most customer management departments rarely think about. After all, they are targeted on their ability to win customers, retain them and maximize their spend. When things turn sour, responsibility passes to the credit department. But there s a problem. The credit department is motivated very differently, on its ability to recoup revenue and secure payment fast. And, because we re living in tough economic times, the pressure to keep cash flows stable is more intense than ever. The temptation to play hard ball to worry about the debt first and the customer relationship later can be almost overwhelming. All of this would be fine if we could be certain that all debtors were bad customers profligate individuals or organizations that, because of their behavior, can be of no possible value to our organizations. If only things were that simple. The sad truth is that, as long as our economies remain precarious, more and more good customers will, through no fault of their own, fall into catastrophic debt and default on their payments. They ll be customers you ve fought hard to win and who have rewarded you with loyalty. Far from being profligates, they re reluctant debtors, forced by circumstances they can t control into situations they can t easily remedy. You probably don t want to let them too lightly. The reluctant debtor two definitions Careful spenders on tight budgets whose ability to live within their means is challenged either by unprecedented rises in the cost of living or by sudden and dramatic loss of income through job loss, pay cuts or reduced working hours. Sophisticated spenders who manage credit (mortgages, credit cards and loans) responsibly. They meet their payments and move debt around to secure the best lending deals. But, with their asset values weakened and sources of consumer credit drying up, they ve lost the room for manoeuvre. At a time when the economic environment is making it tougher than ever to recruit new customers, you need to fight hard to keep the ones you have, even if that means helping them recover from debt. Increasingly, smart companies are learning to manage customer relationships and customer debt in tandem, creating closer links between credit control and customer service teams. The organizational challenge The organizational challenge mustn t be overestimated, but it can be overcome. Here are three steps you need to take: Step 1: Clarify the customer lifecycle Every customer relationship begins with a sale and ends with a payment. It makes sense, therefore, to think of sales and revenue recovery plus the support and service activities that occur in between as three stages within a single customer lifecycle. That doesn t necessarily mean that customer management and credit management departments need to merge. It simply means that their activities need to be aligned around a common set of objectives. 2

4 However, traditionally credit and customer management objectives have not been aligned. If, working together, they can identify the early indicators that signal that a customer is likely to experience financial difficulty, and adjust their management strategies accordingly, then the likelihood of debt can be reduced. Maximize debt recovery Protect cash flow Similarly, if they can identify the reluctant debtors in the credit management department s portfolio and develop ways of rehabilitating them, then customer retention can be maximized. Traditional credit management objectives Maximize customer acquisition Grow customer spend Secure loyalty Traditional customer management objectives In and of themselves these traditional customer management and credit management objectives are fine and appropriate. The problem comes when they are in conflict. For example, there is little value to the organization if, in the rush to acquire new customers, customer management teams take on customers that represent a bad debt risk. Similarly, the business is damaged if, in their determination to recover sums owed by reluctant debtors, credit management departments alienate customers who could have been rehabilitated and could continue to add value to the business as their economic circumstances improve. In general terms, both customer and credit management teams embrace a common objective to acquire, build and maintain a loyal customer base that represents a minimal credit risk. Step 2: Prioritize service skills in credit management departments Disciplines and skills vital to good customer management can be applied within credit management environments to help rehabilitate reluctant debtors. Customer management departments, typically, have fine tuned their ability to influence customer behaviour with diplomacy and personal empathy. The same skills are required when managing reluctant debtors, whose ability rather than willingness to pay is in question. Investigating their circumstances with sensitivity, offering constructive advice and presenting flexible payment plans can present a way forward that delivers results for both parties. For example, if a reluctant debtor simply can t afford the minimum monthly payment on their credit card, it probably makes sense to accept a lower payment, providing they agree to cease all spending on the card until the total debt has been reduced to an agreed level. This at least keeps some funds coming in and the two parties still talking. After all, what s the alternative? If an impasse is reached and no payment made, the debt will escalate. Once debt is more than 90 days old most organizations pass responsibility for it from their credit control department to their debt recovery operation. This usually marks a profound change in mindset. Assuming that the customer relationship is all but lost, the focus shifts to only recovering as much of the debt as possible an expensive damage limitation exercise with a narrow focus. 3

5 The imperative must be to ensure that reluctant debtors don t fall into the post 90 day debt recovery trap. The trick to achieving this is to take an approach that favors conciliation and arbitration, and is delivered by an operation that s targeted on retention and rehabilitation as well as debt recovery. Step 3: Apply analytics to predict likelihood to default in customer management departments Customer management departments are adept at using analytics to predict customer behaviour of all kinds including their propensity to buy a particular product or to respond to a particular campaign. They are unlikely to be aware that the same processes can be used to predict customers likelihood to default. It s a process that needs to begin the minute the customer comes onboard. An analysis of an organization s historical customer data will reveal the commonly shared characteristics of those customers that have defaulted on payment. This, coupled with established geo-demographic profiling standards, are the foundation upon which an ability to predict and forecast an individual s likelihood to default or encounter financial difficulty can be built. An appropriate risk score can then be applied that will govern the way that customer is managed, the payment terms agreed with them, the extent to which credit will be extended and the approach that will be taken when late payments occur. For example, a credit card company might take a cautious approach when extending credit to a customer with a high risk score. By the same token, a mobile phone operator might choose not to proactively market a contract option to a high risk customer, but opt instead for a less risky pay as you go deal. Most obviously, companies can choose to scrutinize high risk accounts more carefully and take pre-emptive action when the first signs of difficulty arise. Again, an analysis of customer data will help identify those signals, so that business rules can be built to govern appropriate responses. For example, on behalf of an internet service provider for whom we work, we use risk scores to determine our response when a client exceeds their credit limit or their typical daily usage increases uncharacteristically. A low risk customer is sent a gentle customer care message as a first measure and the escalation process that follows is both measured and soft touch. A high risk customer will receive an immediate phone call, followed by a much more assertive process. This stratified approach, which matches organizational response to customer risk, helps ensure that reluctant debtors those who wouldn t typically fall into a high risk category, are dealt with sensitively but proactively, with offers of help at an early stage. Irrefutable facts Speculation about the future state of our economies how long recovery will take and how sustainable it will be is unreliable. But, amidst the uncertainty lie a few irrefutable facts. First, when winning new customers is tough, you can t afford to lose those you have, even if that means you must help them through tough times. Second, you ll only be able to do that if you intervene early with a let s fix this approach. Third, by creating joined up thinking between customer and credit management operations, you ll do this more effectively and at lower cost. 4

6 About Transcom Transcom is a global outsourced service provider entirely focused on customers, the service they experience and the revenue they generate. Our customer and credit management services are designed to strengthen our clients customer relationships and secure their revenue streams. Our broad service portfolio supports every stage of the customer lifecycle, from acquisition, through service, retention, cross and upsell, then on through early and contingent collections to legal recovery. Expert at managing both customers and debt, we make a positive contribution to our clients profitability by helping them win customers, grow business and secure their payments. And, while our services are designed to maximize revenue, our delivery operations are built to drive efficiency. Through our global network we can provide service in any country where our clients have customers, accessing the most appropriate skills and deploying the best communication channels in the most cost-effective locations. Every day we handle over 600,000 customer contacts in 33 languages for more than 350 clients, including brand leaders in some of today s most challenging and competitive industry sectors. The experience we gain is used to constantly refine our service portfolio, processes and delivery, allowing us to respond quickly to changing market conditions and client requirements. 5

7 Find out how working with Transcom could transform your customer and credit management performance.