The results of the 2023 Credit Research Foundation’s Deductions Metric Survey1, in which Carixa played a key sponsor role, confirm not only what we have been hearing from existing clients, but Order-to-Cash practitioners in general: Customer payment deductions are trending upward.
The effects of rising inflationary costs coupled with continuing supply chain constraints are leaving profit margins strained for wholesalers and retailers alike and companies are seeking ways to enhance their profitability – but how?
Opportunities in Deductions Automation
- Results of the survey indicate the number of companies experiencing increased deductions rose by 38% when compared to 2021. Does your team have the capacity to handle the additional volume of disputes without increased automation?
- In general, 90+% of deductions are ultimately deemed valid. However, the typical process to research and validate these claims require analysts to go to multiple portals and sites manually to make that determination, escalate the claims to appropriate stakeholders for final approval and then prioritize invalid claims for recovery. What if this process could be automated?
- Respondents indicate that on average 50% of invalid claims are never repaid. What if automation could help support your team speed up the dispute process back to customers in order to recover more cash while reducing the likelihood of future invalid claims from occurring?
So why automate?
Bottom line: Automation helps improve customer engagement by removing barriers to profitable business.
Customer’s expectations regarding supplier performance are high. Quickly identifying and rectifying sources of disputes allows suppliers and their customers to focus on real value-added activities. Automation reduces manual workload and increases productive communications between disparate systems, internal teams, and external parties. Focusing on where automation can be implemented and where continuous process improvement can be applied can address this expectation.
Reporting
Automation in reporting helps organize the details of individual deductions to quickly approve valid claims or identify and highlight the root cause of disputes. Valid deductions can be routinely addressed, properly recorded and expensed. Likewise, invalid deductions can be rapidly identified, communicated, escalated to key stakeholders, and resolved between parties – all while helping spotlight the actual root causes of the disputes. Unfortunately, results from the survey indicate that only 36% of respondents track Days Deductions Outstanding (DDO) and as low as 38% track their overall recovery rates. The ability to track these and pinpoint very specific patterns, trends or issues is key to a trade deduction competency. These types of reports are fuel to rally an organization around these issues.
Additionally, most invalid claims tend to be the result of poor communication between parties or internal process defects. Reporting Automation enhances communication between stakeholders while highlighting the sources of repetitive disputes requiring attention.
Crucial to management, reporting can be tailored using self-service tools with deep drill down capability into the offending line items – by customer, age, type, amount, status, stakeholders, validity, etc.
Workflow
Automation can allow companies to customize and prioritize how deductions are routinely processed – increasing productivity, profitability, and cash flow. More importantly, however, is the removal of “waste”: time, manpower, repetitive tasks, unproductive internal and external communications, and ultimately write-offs.
Critical to success is having autonomous workflows that robotically extract documents and data from customers, auto-validate line items that are legitimate, and create exceptions for invalids to be handled through human intervention. Assisted workflow helps foster cross-organizational collaboration by placing the supporting case and documents in front of the appropriate stakeholder through triggers and escalations in a timely manner. Properly designed workflows support repeatable, sustainable results managing deductions and reducing ongoing costs. However, survey results indicate that 44% of the responding companies do not have time limits on aging deductions. Tracking each stage, in days of aging, and ensuring there are set of owners and actions is key to ensuring timely resolution. This means directing the request for attention to the appropriate stakeholder with all the supporting documents attached.
Governance
Automation must ensure that deductions are expensed both timely and accurately – this includes batching, splitting, merging, adjusting, and deeply integrating with cash application and the general ledger. It’s crucial that debit-credit offsets are run daily and reconciliation differences are supported by full transparency. Receivables reserve analysis can be more precisely determined and reviewed for adequacy. Historical data regarding write-offs and recoveries can be retained and easily researched when required. This allows suppliers to track true customer profitability on a consistent basis within proper time periods. Audit capabilities are enhanced for compliance purposes and for future forecasting capabilities. This information provides for a more strategic analysis of overall profit and loss for the organization.
Transformative Power of Automation
Automation technology, especially regarding Deduction Automation, can be transformative for organizations in the ongoing management of order-to cash activities. While 73% of respondents with revenues >$500M indicated they used third-party technology to solve this issue, the number for mid-market companies (<$500M revenue) witnessed an increase from 35% to 45%. It is clear from the survey that the benefits of third-party technology are believed to assist with portal data extraction, validation processes, invalid recovery workflows, and reporting of root causes. Rather than simply focusing on reconciling daily transactional activities, applying automation tools can:
- Speed the process of clearing routine, valid customer claims and ensuring that the related expenses are charged to appropriate accounts in a timely manner. Manual activities are reduced thus freeing valuable manpower to address more value-added activities.
- Identify, document and escalate the root causes of invalid claims to appropriate stakeholders so that sources of repetitive disputes can be removed and profit leakage stemmed.
- Reduce the amount of time and effort wasted on nonproductive internal and external communications that can distract from profitable relationships.
- Help ensure that deliveries are meeting customer expectations relative to vendor compliance commitments such as shipping complete, on-time and in-full orders. Help improve customer satisfaction and increase vendor ratings.
- Assist suppliers with critical details when measuring total cost of doing business with customers.
- Provide management with increased, real-time reporting capability to automatically monitor and track productivity in the management of deductions.
How do I get started?
Automation and digitization of the process helps quantify the outcomes across four critical vectors: capital, collaboration, revenue leakage, and insights. When preparing for automation, be clear on these end objectives, quantify their benefits, and form a strong cross-functional project team that takes responsibility all the way up to the C-suite. This team must bring a technical understanding of each of the cross-functional disciplines within an organization that impact on revenue generation (sales, credit, logistics, accounting, treasury, IT etc.). These team skills go beyond strong project management competencies and need to include the ability to:
- address executive stakeholder buy-in and obtain alignment with all key stakeholders
- navigate in an ERP environment and understand inter-dependencies within the organization
- fully understand the internal cash application system & processes
- document and facilitate the authorized approval processes for all sales promotions & accruals ensuring that all automated processes conform with existing delegations of authority
- baseline approval processes for generations of logistics credits (shortages, returns, defectives, vendor performance, etc.)
- thoroughly understand how customer portals operate & how to navigate them effectively
- design reporting that maintains accurate historical records for forecasting, research and audit purposes
Conclusion: Profit from Deductions Automation
It is important to remember that planned or unplanned deductions or claims will require other departments’ active involvement in order to ultimately resolve disputes. Automating processes in your organization can drive faster recoveries that increase customer satisfaction, free up staff for value-added activity, remove process waste, and consistently support increased profitability and repeatable, sustainable results.
Ready to turn your data into dollars? Schedule a consultation with our team today.
1 Credit Research Foundation Deductions Metric Survey
