Treasury & Risk's 6th Annual Alexander Hamilton Best Practices Summit — October 2 and 3, 2001
2001 — Credit Risk Management Winners: Gold—UOP LLC ; Silver: Providian Financial Corp.
COLLECTIBLES KING
UOP LLC wins gold in Credit Risk Management
GOLD CREDIT RISK MANAGEMENT WINNER—When UOP LLC, the leading provider of process technology for the refining industry, revamped its receivables process in 2000, it discovered that many of the obstacles to prompt payment originated from within UOP itself rather than with reluctant customers.
Certainly, there aren't many corporate clients rushing to pay their bills in the first 30 days. But we found a lot of defects in our own revenue chain, says Treasurer George Davidson. Among them: improper invoicing, systems problems related to the company's adoption of SAP software system and a company wide lack of appreciation for the time value of money.
UOP's receivables problems first surfaced in 1999 during the aftermath of the Asian financial crisis. Crude oil prices had been plummeting for the past year or so, and an over-built paraxylene market caused its customers to put projects on hold. The situation was exacerbated by the problems caused by the transition to the SAP system.
The $1 billion-revenue company, based in Des Plaines, Ill., decided to adopt Six Sigma, a set of tools for analyzing and improving processes made famous by legendary General Electric CEO Jack Welch. UOP applied the methodology in an examination of its entire billing process, from presale complications regarding such items as credit checks and decisions about letters of credit to late-stage hurdles, such as dispute resolutions.
Treasury worked on getting UOP's three business units to realize the importance of cash flow and take responsibility for collecting on outstanding bills. To keep the units focused, monthly meetings between the CFO and vice presidents of the business units were held, as were biweekly chats between the credit department and the units' sales directors. By the end of 2000, UOP had cut its outstanding receivables to 61 days from 77 in the first quarter.
In another plus, Davidson says, the receivables problem pushed treasury beyond its traditional focus on raising money and managing risk and got it involved in dealing with the revenue chain, an area in which it had once only been peripherally involved.
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SILVER CREDIT RISK MANAGEMENT WINNER—Providian Financial, a San Francisco credit card company that targets consumers with spotty credit, overcame a data shortfall to assess the outlook for collections in an economic slow down,a timely project given the third quarter credit losses it reported last month.
The prospect of a recession made it critical to check whether Providian's traditional method for estimating losses would hold if the economy weakened, says Treasurer Richard Laiderman. But Providian's credit card business is fairly young, and financial information on its 17 million customers goes back only 10 years too short a span to provide the data for the kind of analysis used to estimate future losses.
So Providian assembled a team that worked with consultants on ways to get enough data points from Providian's data to make a sound forecast. They assembled large, statistically reliable groups and used sampling techniques to get thousands of data points. The group then looked at Providian's experience with customers in areas that went through regional recessions in the 90s, such as Houston and Hartford, to measure how the rate of charge-offs was affected by weak economic conditions. With those results, it used nationwide post-war economic series to simulate how the portfolio would have performed during that period. The analysis showed that Providian had more than enough capital to cover losses.
—As seen in the November 2001 issue of Treasury & Risk magazine