From the November 2005 issue of Treasury & Risk magazine

Credit Risk Management


Sprint Nextel Corp.

A few years ago, Nextel Communications Inc. saw its level of bad debt rising--a problem that reflected the largely manual methods Nextel used to enforce its credit policies and an increase in fraudulent activations of its wireless phones. In 2001, Nextel's bad debt hit 4.7% and in 2002, its chargebacks with VISA peaked at a level "significantly higher" than the 1% level at which VISA puts companies on probation. It was time to take action, and from the start it was clear that had to involve better enforcement and automation.

The first step for Nextel, which merged with Sprint in August of this year to create Sprint Nextel Corp., was to stem the rising tide of fraud. To accomplish this, the customer finance services (CFS) department of the $13 billion wireless phone provider targeted credit card fraudsters with a policy that required two identifiers for transactions in which a credit card can't be checked physically. "That dropped our credit card fraud like a rock in five months," says Marci Carris, vice president and assistant treasurer.

Next, Nextel's CFS worked with the IT department to put in place an automated billing and collection system with the functionality it needed. It also added an identity screening routine from credit data vendor RiskWise so that the new system would spot fraudulent customers.

Although there were stricter tests and a new system, Carris notes that Nextel wasn't really changing its credit policy, although that was a fear among the sales staff. To make sure the new system would be effective, buy-in was needed from sales, and CFS took pains to explain what it was doing every step of the way.

Employees from the three units that make up CFS--credit, collections and cash receipts--were involved in designing the system. And to win workers' support for the new system, Nextel formed an action team made up of employees and supervisors. Team members helped test the software, volunteering to be the first to use it and then giving feedback on the training and the system's interface. They also kept co-workers up to date on the project's progress during the year and a half that the system was being put in place. "You have to keep people apprised of what's happening," Carris says. "When the launch [of the system] comes, you want [workers] to be excited and ready to use it, instead of afraid of change."

The new billing and collection software eliminated a lot of the clerical work that collections workers had to trudge through in the past. For example, workers previously had to use three different systems during a single customer call; with the new system, workers can get all the information they need to handle the call in one place. "We took a lot of the redundancy out of each contact task," Carris says. Productivity gains exceeded 30% as measured by the number of calls handled per collector and the time spent on the phone with customers. Workers were also happier.

Once the new system was in place, Nextel introduced a program that encourages workers to take care of customer problems in a single call. "We wanted to resolve issues that might be causing the customer not to pay," Carris says. Despite that emphasis on solving problems, "we still achieve our goals of keeping our collection rates very high," she says.

"Within three to four months of our last conversion, we started seeing a dramatic decrease in our bad debt," Carris says. By the end of last year, the company had reduced its bad debt to the low 1% range, down from that 4.7% level in 2001. "As we started to work through this improvement in the collections process, we were improving our overall cost structure in the business and our overall capital structure," Carris says, noting that Nextel reduced its days sales outstanding by 10 days.

In the wake of Nextel's August merger with Sprint Corp., the combined company is considering whether to go with Sprint's or Nextel's credit collections software. Either way, half of the organization will have to convert, Carris says. "So we will use some of the same processes that we used for that [billing system] transformation to get the organization onto one software or another."


Lucent Technologies Inc.

When the telecom bubble burst in 2001, Lucent Technologies Inc. found that its balance sheet was saddled with $8 billion of financing that it had provided to its customers. A significant portion of that debt was non-performing, and the company's credit ratings declined as a result. The $9 billion telecom equipment provider decided that it needed to restructure its global credit management process and improve the way that it evaluated and decided credit and vendor finance questions.

Until that point, Lucent's credit process frequently produced competitive tensions between various parts of the company and ate up too much of the time of senior executives. Treasury, which was charged with reworking the company's credit processes, set up a new governance structure. A regional review committee in each major geographic area included representatives from sales, treasury, controller, legal and product units. The regional committees' assessments of potential transactions were fed to a corporate credit committee that is chaired by Lucent's treasurer. Under the new structure, only the treasurer, CFO or CEO is authorized to make decisions about credit and vendor finance.

At the same time, Lucent decided to get out of the business of providing financing for its customers and instead arrange for customers to get financing through alternative funding sources, such as banks or leasing companies. "While we still provide some vendor financing, we view it as a scarce resource and we use it only where it makes good sense," says Frank DelCore, a member of the customer finance and credit solutions group in Lucent's treasury. As of June 30, 2005, the company's balance sheet showed just $104 million of vendor financing. Lucent also rewrote its commercial agreements to include appropriate credit protection provisions.

Implementing the new model took the company about eight months, DelCore says. "We had to ensure that we had the right people and processes in place," he says, adding that the biggest challenge was getting other parts of the company to support the changes. "It had to be sold internally, because transitioning from provider- to arranger-based was a cultural shift," he says. "From a sales perspective, we needed to understand that."


Honeywell International Inc.

The airline industry's shaky condition in the wake of the Sept. 11 terrorist attacks raised red flags at Honeywell Aerospace, a $9 billion unit of Honeywell International Inc. that sells airplane components to the major carriers as well as to airplane manufacturers. In September 2001, Honeywell Aerospace had tens of millions of dollars in receivables due from the 11 major U.S. airlines. To maneuver through the turmoil in the airline industry, the company established a credit risk management committee that determined credit limits and set strategy for dealing with airline customers. By 2004, the group had managed to cut the company's exposure to the airlines by more than half while taking only minimal credit losses.

Besides 9/11, other pressures on the airline industry included rising oil prices, the slowing economy and the SARS outbreak in Asia. The first victims of those pressures surfaced in the second half of 2002: U.S. Airways filed for bankruptcy in August 2002 and United followed suit that December. In the first quarter of 2003, Honeywell Aerospace decided that the speed at which the situation in the airline industry was changing required a change in its operating model as well. The company added software, Dun & Bradstreet's eRAM, that provides automated credit scoring of receivables. It also set up a group called the airline bankruptcy and credit council to develop ways to mitigate Honeywell's risks and make the important credit decisions. The group considered not only the airlines' current profitability, but also forward-looking measures like pension obligations and loan covenants. Its goal was to achieve consensus on maintaining or revising credit limits for the airlines and working out plans for dealing with each airline customer.

While Honeywell worried about the airline industry's problems and the credit risk entailed, the carriers were also major customers that it didn't want to alienate. In fact, in many cases the company had contracts with the airlines that required it to deliver products. Mike Granda, director of global aerospace credit and risk management, says the council used various tactics, including becoming more aggressive on collections and offering discounts to encourage early payment. "We basically halved the exposure, and basically it's by getting [airlines] to pay faster," he says.


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