Posted: 12/1998

Avoid Overexposure with Credit Risk Management

By Dave Nestler and Liz Titan

In North America, unparalleled choice in telecommunications services has caused
bad-debt rates to soar to between $5 billion to $6 billion annually. Increased credit risk
exposure looms for many firms as bundling ever more services creates the potential to
double, triple or even quadruple today’s average monthly "phone" bill.

The good news is that a host of proven credit risk management tools and techniques are
addressing this challenge and more. In fact, when applied throughout the customer life
cycle–as opposed to just at the collections stage– effective risk management helps firms
reduce their bad debt, get the right products to the right customers, improve customer
satisfaction and maximize profit from the start.

For many years, the discipline of credit risk management was about cutting losses and
dunning deadbeats. Today, best-in-class organizations recognize that acquiring and
retaining profitable customers requires a systematic focus on customer relationship
management. A comprehensive approach must coordinate customer decisions and touch points
on an enterprise-wide basis, and also must incorporate the principles of credit risk
management, beginning with product development (see Figure 1).

Image: Risk Management and the Customer Life Cycle

Here are some examples of the ways risk management can be leveraged at each stage of
the telecommunications customer life cycle:

Proven Solutions Deliver Bottom-Line Results

Credit risk management solutions originally developed and tested in the banking and
credit card industries are maximizing profits for many telecommunications firms. These
solutions include decision analytics, test and control design, automated collections,
best-practice processes and organizational design.

Decision Analytics. Predictive models can enable companies to
realize the full potential of their customer data. Using statistical techniques to analyze
historical performance, these models can predict future behavior and empower firms to:

Test and Control Design. The champion/challenger method of test
and control design forms the basis for continuous strategy improvement in a changing
environment (see Figure 2).

Image: The Champion/Challenger Approach

Once customer management approaches (i.e., acquisition programs, marketing promotions,
pricing plans or collections treatments) are developed, they should be evaluated in a
controlled environment. First, a "champion" approach must be determined for each
customer segment; and then "challenger" approaches should be tested to ensure
the best approaches keep pace and evolve over time.

Streamlining and Automation. Advanced technologies are boosting
productivity in many customer- facing functions. Automated collections and decision
analysis systems are delivering superior bottom-line results. In American Management
Systems Inc.’s work with telecommunications firms, these solutions have helped clients
reduce delinquencies and write-offs by as much as 25 percent and decrease collections
operations costs by up to 50 percent. By automating critical functions and tapping
industry best practices, collections teams are reaching more accounts, bringing in more
revenue and focusing on retaining valuable customers. An important consideration in this
era of bundling and convergence is that today’s collections management solutions must
encompass multiple products and services and link multiple accounts to reflect the entire
breadth of a customer’s relationship with and value to the organization.

Organization and Process. A company’s organization structure,
incentives and corporate ethic all can conspire to create unintended obstacles to
profitability. One of the greatest barriers to effective risk management is a stovepipe
structure. Tackling this problem head-on, many best-in-class enterprises have created
strategic corporate risk functions to ensure risk assessment is integrated into all
aspects of the decision chain. (See "Integrating Risk Management to Achieve
Profitable Growth," PHONE+, December 1997.)

In addition, traditional approaches to customer segmentation, for example, have been
one-dimensional: The credit department may segment by risk of payment default; marketing
might use demographics, size of account or type of service; and customer care may
determine segments by the level of account support required. These criteria must be
brought together in a comprehensive approach.

An Integrated Approach

Improving overall customer profitability is a critical business objective. To attain
this goal, customer relationships must be managed in a way that maximizes the value of
each customer to the enterprise. Best-in-class firms have recognized that the entire
organization must be aligned around a common measure: namely, customer value. Effective
credit risk management is pivotal to such an approach and must be integrated throughout
every aspect of the business–starting at the very beginning of the customer life cycle,
not when the payment is overdue.

Dave Nestler is vice president and Liz Titan is senior principal of American
Management Systems Inc.’s Telecommunications Risk Management practice, which provides
customer life-cycle consulting around the concepts of customer risk management and
profitability to all segments of the telecommunications market. Titan can be reached at +1
212 908 5865.