Collections and AI

Paul Watters:

What I wanted to talk to you about today is Collections and artificial intelligence. As we heard yesterday what Sashi was talking about in his keynote address, ‘Artificial intelligence is absolutely going to change the way we collect money in the future and the way we run our credit departments’. So I think the nature of the credit or particularly the collections contact is one that is typically repetitive contact. And accordingly, I think it is right for artificial intelligence because the questions we’re asking regularly from our customers are the same questions throughout the day. Not completely design but they regulate design.

So I wanted to talk about my glass half-full. Maybe it is or maybe it isn’t the approach to why our customer isn’t paying us. What are the real reasons they aren’t paying us? And it’s probably as straightforward as what you’re thinking in your head now, how we call our customers and the importance of that communication. Also, for effective collections and the audience we need to be thinking about in terms of developing a robust collection strategy as well as customer profiling. We shouldn’t be trading all our customers to sign because the risk within our portfolio is not the same. We require a tailored approach and I’m going to allow us to do that in the future. So if we look first to why customers aren’t paying us, it’s fairly straightforward. I don’t have a belief that most of our customers are sitting on a really big pile of money and just not paying us because they don’t like to do that. For most customers, they’re not paying us because their funds don’t currently allow them to do that. However, from a collection call perspective, many of the collection calls that we make, though they are necessary will not result in immediate payment. And the reason it won’t is that our customer does not have the funds to pay. Therefore, to this point, I would say that relationships are really important. The relationship that I have with my customer over the 25+ years that I’ve been in credit, in a crisis situation has really been the difference between when I get paid and when I don’t. So it is sometimes important and it’s important in certain situations.

Paul Watters:

So, what influences your high-risk customers to pay? I think our low-risk customers typically are going to pay us anyway. Most of the time we need to be watching for those trends and what are the influences that you know will cause our higher-risk customers to pay us in times of crisis when they might be bordering on insolvency. And so in my view, certainly collateral or lien over real property, securitize your debt where you have the ability to a personal guarantee, I’d argue when a proprietor of an LLC has their business on the line. They’re clearly under a lot of pressure. And the threat of losing real personal property, I think is a big driver for companies paying prior to insolvency. You can have the argument later on about whether it’s a preference or not. The other thing is, how important it is in their supply chain because we regularly hear people saying and who is actually doing what they are paying other people before us because what we’re selling to them is not critical to them in times of crisis and in times of cash flow shortages. So they’re going to pay somebody else first and then when the time comes that they need your product, then they’re going to pay you. So we need to understand what our place is in their business. How important are we to their operations on a day to day basis. At times I do say relationships are important. But I also think that it depends on whether we’re talking about collection risk or not and sometimes that a collector is talking to somebody who they have a good relationship with, who is ultimately going to pay us anyway. Also, I think sometimes there are instances where relationships make a difference in the event of insolvency. I think it’s a little different again.

Paul Watters:

So if we look at a typical collection call, we will pick up the phone in this instance. It’s Ava from ABC Corp speaking with Ken. His payment was due for sixty thousand last week. His manager is out of office so he needs the approval to release a payment of that size. He’ll get it. He’s going to get back to you once he approves it but once he receives the approval. So this is day 5. On day 18 Ava was on the phone again to remind Ken about the commitment that he made. His manager is still out of the office. And he’s not in a position to settle that amount at the moment. Again, we’re down to 30 days past tenure. Ken’s cold, need to escalate. Getting close to the credit limit suggesting that this may create issues with blocked orders if that customer doesn’t have a plan to water in the foreseeable future then that threats have no value to us.

Paul Watters:

So we again need to understand how important that is. How important we are within a customer’s business. And at the end, I was told I’m sorry we’re just facing monetary issues now and I’m just not in a position where I can pay at the moment. So we need to develop through AI and whether it’s HighRadius solution or any other solution that might be out in the market there, we did develop targeted collection strategies that increase our process effectiveness and help us achieve our long term goals. We want to bring our money in and we want to bring it in as fast as we possibly can. In terms of developing the right applied approach for our current collection strategy, we want to, as I say, collect as much as possible. We want to collect that money as fast as we possibly can and we want to do it at the lowest cost. I’d say our credit areas and our collection areas are the service providers to the rest of the business. We need to be trying to do this at the lowest cost, you know. If there’s one platform that you would have to choose to compete on it’s going to be the lowest-cost platform. And that’s the service requirement we have to provide to all the businesses. But within our area, we have kind of three rules to the way I want to treat our people. I want to get good people. I want to pay them well and I want to have a few of them as I possibly can. That’s my strategy and I think with AI we’re going to see more and more of that into the future. Henceforth, collecting as much as possible, at the lowest cost and balancing our activities to maximize receipts and to minimize risk. We might be calling the customer who is at the very top of our list when we sort by past year balance, that customer may also be our lowest risk customer.

Paul Watters:

So how do we prioritize within our list as to whom we’re going to call first? And the answer is, everybody’s got a different approach. So we talked a little earlier about assessing our customers’ position in the payment hierarchy. Where do we sit there and what are the tools that we can use to influence our position that we want to send periodic emails. We want to ask for a personal guarantee at the account inception. We have one of our businesses land and sea where typically 80 percent of our customers were less than two and a half thousand dollars. Now if I were to go to that customer and ask them for a personal guarantee, some of them are going to say no. But a lot of them are also going to sign it because they believe that it’s a requirement for our camp. Ask for a personal guarantee beforehand, once you’ve opened the account it’s too late. Push the customers to pay us via electronic methods. We want real-time payments. We don’t know whether some of you saw the real-time payments session. For the moment, ACH is not a real-time credit card. See if you can get a customer to pay you real-time that reduces a lockbox cost too if you’re running a lockbox. Prioritize calls for the customer and where it’s necessary, offer discounts for early payments. So sometimes this makes sense and it all depends on the approach of your company at this time as well. Do I have a really strong balance sheet where cash is not so important? Well maybe that I want to give away the margin. Or are they in a growth phase?

Paul Watters:

So the strength of the balance sheet is important about how important cash is to us because at the moment cash by historical standards is fairly cheap so we need to balance you know, do we want the margin or do we want our money in it earlier. At the end of the day, everyone who works in business whether they be in IT or in a credit or in sales or in administration should be looking in its crudest sense how to maximize profit for the business. That’s what we’re here to do. Also, providing our service to the business at the lowest possible cost helps us maximize their profit. So again important criteria for collection strategies is to know your customer and your place in their business, where do you fit in on the payment hierarchy. And so the next slide here kind of details from the bottom. As we work our way up, you see if we get a basic credit application here from a customer. Then I’ll probably get a pair of eights in the game of poker. I’m not in a real good position. When we get to a position where a customer is nearing insolvency that’s the relationship that may make a difference because if we have a relationship with the accounts payable person in a crisis situation they are only going to pay what their boss is telling them to pay. So they don’t get that we have no flexibility to try and influence that relationship at that particular time. As I said I have a view in their business and availability of the product elsewhere. So we have in our Mercury business, the only place you can buy a Mercury engine or a Mercury genuine product really is from a dealer of ours or from us. In our land and sea business where we have a 25 percent share, that’s a commodity business. We’re selling products that many of our competitors are as well. So we have more leverage in our Mercury business than we do in our land and sea business because there are lots of suppliers out there.

Paul Watters:

And if our customers are stuck with us they’ll probably go somewhere else. So we need to understand the availability of our product elsewhere. The less available has greater leverage for which we have to exercise payment. Collateral, I talked about earlier. Security over real property that type of thing. Sometimes that’s going to be appropriate. In the case of land and sea where 80 percent of our customers, was less than two and a half thousand dollars, nobody is going to give us security. So all depends on the size and nature of your business in your portfolio. Do I need to trade with you in the future in the event of insolvency? So, I imagine most of you have had a situation where a customer’s business has failed. You are integral to what they do and perhaps you’ve received preference after that time, perhaps through a personal guarantee, perhaps through payment in the event that I can’t really supply you in the future with this hanging over my head. I know it’s an LLC but at the end of the day it is your business and you are the business side. So I think understanding the way you sit in an insolvency situation within their business is again important. And I’d argue the top one is probably a personal guarantee. So you’ll probably disagree with me, sort them out in your own ways but I think a personal guarantee at the time of insolvency is really important. So I think that causes people to pay you when they’re not going to pay somebody else because they have a fear of loss of their personal assets.

Paul Watters:

So you know the relationship piece can be important. But I’d argue the pieces above are more important. So as we think about where we sit within their business the other issues that we need to address to ensure that we’re at the top of the payment hierarchy, is that we need to consider customer profiling as well. Much like suppliers, customers aren’t all equal and risk is not created equal. But on the left-hand side, we have a low-risk bucket. I’m going to pay you when the money arrives. If I’m delinquent I’m going to pay you when the money arrives and you can be fairly certain with that customer that when the money comes in you’re going to get your money. The medium risk customers – are likely to pay when the money arrives. I’m not in the low-risk bucket but most times I’m going to pay it.

Paul Watters:

Then the high-risk customers really come down to the dollars and the cash, in the end, may not arrive. And I’m sure I’ve heard this many, many times as a collector and so on in my earlier days, with customers saying’ “I’ve always paid you to haven’t I?”. “I’ve always paid you, have I ever let you down?”. Every customer that has ever filed always play this until they didn’t. So, so that’s kind of a bit of a lame line. So in the case of the high-risk customers, the dollars may not arrive. So our exposure in your portfolio is not all created equal and we should not treat it that way either. So analyzing trends across those buckets of customers is crucial as well. In our business, now we’re based in Wisconsin. I can tell there’s not a lot of bloating out that’s going on in Wisconsin at the moment. So we can expect at this time of the year the cash flow may be a little tight. And you know we need to allow that for the customers. We’ve had customers who are involved in this business, some who will close their business over the winter. And they’ve done that for 20 years and they always open the doors again come to Memorial Day and they pay us. So we need to be conscious of that in a seasonal business. And so again I think consistency, I would rather have somebody pay me 15 days late every month than have somebody pay me to take a discount sixty days later where they’re two months overdue. I’d rather have consistency across that because that demonstrates to me that they have consistency in their cash flow.

Paul Watters:

So you know in our business and I suspect it’s the same in many others not necessarily all, 20 percent of our customers account for about 80 percent of the dollars in the portfolio. So in our high-risk bucket, you can see to the right, customers who are paying late or are inconsistent. If some of this with higher exposure accounts will be asking as part of the review process to get financials each year and also customers who are making partial payments they’re making round payments they don’t quite have the $10000 but instead that they’ll send you $5000. That has to be a warning sign about the strength of their cash flow. So we shouldn’t be treating all of these buckets, the same. So this is just a poll question and I’m just going to put it out to you and you can raise your hands, who should you call first and why should you call them? And I don’t pretend there’s any right answer here. I’m just interested in sharing your perspective, sir. Customer A currently owes twenty-five thousand dollars. They’re 30 days past due but they’re in a low-risk bucket. Customer B, on the other hand, owes us fifteen thousand dollars and is less than 30 days past due. They’ve been a problem for a while and they’re in a high-risk bucket. So from a collections point of view, I want to bring in customer A first. I want my twenty-five thousand dollars. I want to go where the money is. From a credit risk standpoint, I want to go with customer B because there’s not as much money there but I have concerns about customer B. So raise your hands if you think customer A? You should call first? And customer B? And so why would you suggest Customer B? I’m not saying there’s a right or a wrong answer, I’m just interested in your thinking.

You’re prepared to wait. Yeah. Sure. Okay. Yeah.

Audience:

It’s a high risk. I also want to make sure that I get that.

Paul Watters:

Right. Yeah absolutely. And so sorry.

Audience:

We have some businesses where people are collecting from an Excel spreadsheet or a notepad document.

Paul Watters:

It’s a balance, isn’t it? But what this slide demonstrates is that we are not going to treat them the same. We have a number of antiquated systems across businesses. We have businesses where people are collecting from excel sheets and notepad documents. What tends to happen in those situations is that you get to the top customers first because you’re sorting bypassed your balance. If that’s the way you do it, the ones at the bottom don’t get a call very often. Because the collector doesn’t always have time to call those customers and because they’re lower value. So how can we cover all of the customers, deal with them according to their risk profile and try and ensure we get paid the medium of contact is not important.

What is important is the consistency, timing, and frequency of our contacts within our collection strategy. That’s what’s important. A lot of customers aren’t going to like the fact that we’re calling them all the time but over time they will respect us as a business that has a process in place that has a robust collection strategy and over time will ensure that we get paid earlier than the person who is calling it 45 days past due when they need the money.

So we’ve got to provide a consistent approach. We need that person to be thinking it’s Tuesday and Bob’s going to be calling me today. That’s what we need them to be thinking. So I suggest the recommended actions for different customers. So for low-risk customers, we may choose to send them emails. First, on the due date, we may choose to send them one after 7 days past due & another one 10 days past due. We want to be following the trends within the customer base because not all our customers are gonna be a low risk all the time either. Circumstances change for customers.

Paul Watters:

For High-risk customers, we might be wanting to send them a pretty reminder. You know we might be wanting them, let’s call them at 9 days past you. We want to make sure that they can’t ignore our emails. These are the customers that we need to be calling in my view. For the balance of our customers. I think you know again it’s the frequency and the timing that will matter for the balance of our customers. We can, providing we’re communicating with them regularly and consistently. That’s the important thing. So yeah in marketing you know we want to stay front and center of the customer’s mind. When the money comes in, when the cash comes in the door we want to make sure they’re thinking of us. We want to make sure they’re thinking of Mercury Marine in our case. And so you know in a marketing sense they call this the consideration set right. We want to make sure we’re in the consideration set. Not only do we want to make sure we’re in that but we want to make sure we’re at the top of it because we’ve consistently and frequently contacted people and I know that’s what they can expect from us if they don’t pay. So staying in front and center of the customers’ mind and predicting when customers will pay based on past payment trends. This is variable but somewhat limited because trends change over time. So it’s not always that our customers that file has always been slow in paying, as some of them were in the low-risk bucket a year ago before they filed.

So payment dates being predicted based on past trends are useful but are not always relevant in the times of changing risk. So, low and high-risk accounts are identified and prioritized. We talked about low, medium, high. We want to make sure that our processes deal with accounts in the best way that we think they should maximize our collections and to minimize their risk. That’s what we want to be doing.

Paul Watters:

It doesn’t matter which process you come up with. We could have a hundred different opinions in this room. The important thing is that it’s consistent and that we do it across buckets because not all risk is created equal. We want to obviously start reaching out to customers at a time and we want to strategize dunning for each open invoice. We can do this through emails. We can do this through faxes or sending a letter if we choose to. But the point is that our communication does not need to be a call. In most instances until the debt gets more delinquent and the other point aside from that is you know we’re back to the lowest cost possible argument again. So I want to employ good people. I want to pay them well. I want to employ as few as I possibly can because I want to be a low-cost provider to the rest of the business because it’s in my interest. So in the summary here, between optimizing relationships, communications and risk, I think that the takeaways from are what that most customers want to pay us. I don’t believe most customers are sitting on a big bucket of money just so that we can call them and they can say a lot. Relationships may influence payment but less so in insolvency and I think those relationships in an insolvency situation or where a company is bordering on insolvency need to be at the senior level because the accounts payable person is likely to have little control over who’s being paid in that scenario.

Paul Watters:

The nature in what we supply and its availability elsewhere will influence our priority or our position on the payment hierarchy. So we have to understand where we sit within our customer’s business. Collateral and personal guarantees from creditworthy individuals is really important where the individual pays for all. There’s no point in having a guarantee from someone who has not signed anything. For credit where the individuals will substantially improve your position in the event of non-payment or insolvent collection activity should be balanced between risk and exposure.

We talk to customer A and customer B. I don’t know what the right answer is but we need to have a balance within our strategy to ensure that we’re collecting the money as fast as we can and we’re collecting it from the right places. Exposure, customer risk profile and, frequency of communication are the key inputs for which you will develop a strategy as you will use AI in the future to collect your money. You know whether this is through an email or whether it is a call like it was demonstrated the other day in the autonomous collections module & their key inputs, it’s gotta be consistent in most instances of customer’s default.

Paul Watters:

I don’t remember too many times in my credit career where the relationship ultimately made a difference to me getting paid prior to bankruptcy. So I think there is a collection risk. The risk that somebody is not going to pay me on time. But in the situation of credit risk, a situation where I might lose the money altogether, I just don’t think, what the relationship is. I think we should be focusing on more important things. We should be using the software and tools that we have access to, to ensure that we’re contacting the right customers but calling them is not the most important thing. I think it’s the frequency of communication and not the medium. So with that, that’s the end of my talking. So does anybody have any questions about the presentation? Any opinions?

Audience:

Thanks, Paul. Just a quick one. When you’re talking about and reviewing your AI, how frequently are you revisiting that, and adjusting the strategies in there? Is it a seasonal base? Is it quarterly annually?

Paul Watters:

I think that to me it depends a little more on the economic environment. Sure, a little about how you might do that also depends a bit on the nature of your business too. So if you’re in a cyclical business like we are, we had a really difficult time at the end of 2010, our parent company was about as far away from going broke. So yeah, we were in boating and engines. Nobody needs a boat. I mean it probably doesn’t get a lot more discretionary than a boat in our market. So the answer to your question, I think it depends on the nature of your business. But I think once you have a strategy in place and assuming that you are wanting to grow over the business cycle or to keep that the same. You don’t have the requirement for growth here and so I don’t think there’s a whole lot of need to review it too often. So yeah. I think the important thing is that we’re doing the right things for the right risk groups.

Audience:

You’ve mentioned several times that your preference is to employ very qualified people and pay them well and have a few of them as possible. So what are some of the characteristics that you look for? I’m sure that you made some sort of transformation over time where you had like a really entry-level clerical team doing a lot of disorganized collecting and you move towards this model where you had more skilled team members. So can you talk about that a little bit?

Paul Watters:

Yes, I don’t think experience is always necessarily important. We’ve had some really good young people that have come into the business and have collected well and have been put in territories. One of our most difficult territories in Florida. And the reason is that you boat all year round in Florida, it’s always busy. That’s not the case. And if you’re looking after the Wisconsin territory or the New York territory. So I think that’s an element. Another thing for me, there is a correlation between growing up on a farm and being a hard worker. So I did not grow up on a farm by the way. But all of the people locally that we’ve had that have come off farms have been really good. Now if you live in New York City. That’s probably not gonna be a great metric for you but I think about employing people who you think will fit in your culture as well. I think we can’t teach people passion. They either care or they don’t. We can teach them most of the things that we do within our department. And if they’re more experienced, then it comes down to and we assume they have the skills already. How do they fit culturally within the rest of the team? Nobody likes people that are difficult to deal with and who won’t fit in with the rest of the team because they’re just not the right cultural fit. So there are three things and I think the cultural fit is really really important.

Audience:

Hi my name’s Don. I am with Builder’s Firstsource. Can you talk about relationships with sales and credit, your experience and how you may have developed those situations to where it’s benefited you and the customer?

Paul Watters:

I think it depends on what our bosses are like sometimes. So I mean our report to my CFO, I would argue that it sees a balance between the need for growth and the need for cash. But as I mentioned while we were talking that if we’re in a position like we were in 2010, cash was absolute king then. It wasn’t about growth. We were in the middle of the worst recession we’ve seen since we’ve been in business. And so you know I think different times call for different approaches. But in our situation at the moment our company was growing well and you know so money was historically cheap for the company. You know by historical standards, money is still fairly cheap, it’s a bit more expensive than it was a year or two ago but it’s still fairly cheap. So if we are a company with a strong balance sheet, we should be looking to where we can drive our calculated growth with the right customers. And if we need to do that with a little longer term. Sometimes that’s just necessary because at the end of the day you know none of us to get paid. Well some of us may get paid based on our data. So you know if you’re on some kind of a bonus structure that’s usually tied to earnings and that’s usually tied to cash. It’s not tied to DSO not that often that I’ve seen. So I and my business might be different from yours. So I think we need to balance a way out. Our priority is to maximize profit and the way we can do that differs depending on different times in the cycle. Okay. Thanks for listening.