Hidden ROI: Why Labor Arbitrage in Accounts Receivable isn’t the Only Savings to Consider

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As an O2C Solutions Architect, my responsibility is to support our Business Development team with designing effective methods of managing AR, Invoicing, Cash Application and Dispute resolution. During the review process and solution development, I am often asked about the ROI of transitioning a portfolio from internal management to a BPO engagement.  Typically clients look […]

As an O2C Solutions Architect, my responsibility is to support our Business Development team with designing effective methods of managing AR, Invoicing, Cash Application and Dispute resolution. During the review process and solution development, I am often asked about the ROI of transitioning a portfolio from internal management to a BPO engagement.  Typically clients look at hard costs like the number of heads they can cut, but the reality is that many more costs exist that they seem to ignore, but make a big impact.  For now, I’m only concerned with one of these factors; late payments.

O2C outsource projects are measured in various ways. Days sales outstanding (DSO), collector effectiveness (CEI), percentage current, etc.  The list goes on, but in the end, they all tie back to the same metric; how often does a customer exceed their agreed upon terms?  I came across a statistic published by Cortera, a B2B credit reporting agency. Using the data they receive from companies that contribute payment history of their customers, Cortera showed that as of April 2012, the national average past due rating is 17.98%.  That means that more than 17% of all customers don’t pay their bills on time.  Further, companies in nearly 20 out of the 50 states, such as Florida, New York and Washington report greater than 20% past due.

In an economy when getting paid on time is more crucial than ever, letting 17-20% of the customer population pay late is simply ridiculous. For each day that an invoice goes unpaid, less working capital is available for companies to make financial transactions from investing or expansion through acquisition.  Once an invoice goes past due, the likelihood of collecting the invoice decreases 20% by day 90, and almost 50% by day 180. In the event the invoice goes to a third party collection agency, the recoverability drops to about 20% of invoice value, and if the customer actually does pay, swipe 20-30% right off the top for the agency.  So, in terms of ROI, what’s the true value of collecting money earlier? More working capital? Free funds to acquire new businesses? New product development? What does it mean to you?

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