Dealing with Difficult Customers

As human beings we are all unique, so when organisations develop ‘scripts’ for telephone collections or a process for collections strategies we shouldn’t be surprised that things don’t always go to plan. Machine learning which determines outcomes and actions based on past experience and future probability is beginning to move organisations away from the set scripts and standard collections paths of 2 letters then a phone call.

Whilst many of the larger organisations, utilities, banks etc. are able to invest in these clever tools, let’s be honest for the mere mortals in the Credit Management world many of these tools are still some years away, so based on the experience and feedback from client organization in the UK and internationally we thought that it would be useful to put something together which may assist the vast majority of credit teams who rely on people rather than machines. Despite what many people may think organisations of between 5 and 15 credit controllers make up the majority of organisations. Many of these companies still manage credit through spreadsheets, make calls manually, sign-off credit notes etc. The world of automation and machine learning is still some time away. This article is aimed at them, the what I call traditional credit controllers, those whose automation has reached a workflow tool.

This article is also aimed at the credit controllers who manage large strategic accounts, or as most call them ‘National Accounts’ or ‘Major Accounts’. These sorts of accounts are tough to automate, require relationships not ‘interactions’, have complex disputes and queries and also challenge your standard terms, using 3rd party offshore accounts payable teams. I have also found that when working with international clients these principles also apply…so whilst everyone is different, people are the same the world over. These strategies have been used successfully in Far East, India, Africa, Middle East, Europe and USA.

So there are 2 places to start:

1. Financials…you would have determined with a reasonable degree of certainty that the customer can pay their bills, but don’t take the reports at face value, check with your sales people and your network. Remember we have had some surprisingly good credit reports which within weeks turn bad, Patisserie Valerie most recently and the dreaded Carillion from 2018. Keep checking payment data and beware of customers suddenly wanting 90+ terms and beyond. Liquidity issues in some parts of the world are proving difficult for suppliers so understand what you are getting into before you start. Government debt in some geographies at the moment is driving the payment trends in some countries, your international customers may be caught up in that.

2. Know your Customer…or as we prefer it ‘Know your customers payment process.’ This is something that few credit management teams truly understand, but we recommend that you spend some time up front understanding your customer’s payment process, who signs-off what, where in the organisation your invoice goes and how long it takes. The people in these process are your new best friends!

So with these 2 criteria fully understood we can move onto when the relationship develops and things start to get difficult...and with impending BREXIT you should prepare some strategies to ensure that you can deal with some difficult situations, understanding what to do with Can Pay vs. Can’t Pay and Will Pay vs. Won’t Pay will help. You can create a square chart with 4 quadrants to help you map your customers and then in each quandrant give them a ‘RAG’ status (Red, Amber, Green) and start to develop some strategies for each quadrant. Test them see if they work, if not change them, the key here is flexibility.

So as far as the ‘Strategies’ go let’s start with the easy one:

Can Pay / Will Pay (bottom left hand corner, RAG Status = GREEN)

As I said nice and simple to start with. As with all collections activity consistent and persistent collections activity. Just because they pay doesn’t mean they should be ignored. This action by the way is relevant for all customers regardless of the type or payment behaviour.

Can Pay / Won’t Pay (bottom right hand corner, RAG Status = AMBER)

So they have the money but are reluctant to part with it and as a result put obstacles in the way. Firstly by understanding the customer’s payment process you will be able to push the customer ‘So I understand that John signs of the invoices, when will he be back?’ or ‘So what has changed as this process only takes 3 days?’ This sort of customer also places obstacles like disputes in the way of payment. If this is the case come to agreements, written in emails, ‘If we resolve this dispute when can we expect payment?’ This is about almost bartering one thing for another. Checking invoices for these customers may also help to try and spot pricing issues or general invoicing errors before the customer does.  One international client had a customer who wanted to roll the outstanding debt into a new contract, which was fine but as a negotiating tactic you should always adjust the margin to cover the cost of credit, the same goes for extending payment terms. In short for this customer take away as many of the reasons for non-payment you can, agree strict terms and add cost of credit wherever possible to the price to ensure that they recognize that you are not a soft touch…word does get around to other customers in your industry if you are.

Can’t Pay / Will Pay (top left hand corner RAG Status = AMBER)

This is the customer who will pay but are financially strapped at the moment, so we are entering the world of payment plans and extended payment arrangements. The situation that the customer finds themselves in may be completely outside their control, they may be the victim of the Government liquidity issues mentioned above. So we should not penalize them for this and make it difficult, this may take away their willingness to pay. One CICMQ organization in the building trade during the credit crunch assisted their customers with financial arrangements, retention insurance, credit vetting their customers. In the long run this strategy helped to build a much more loyal customer base. So think about the future it is not always about the now. With all payment plans the main requirement is to document the agreement.

Can’t Pay / Won’t Pay (top right hand corner RAG Status = RED)

This is the customer who is in financial difficulty and also puts obstacles in the way of payment. Here you will need to ensure that everything is documented as before and also work on the payment arrangements. This sort of customer is a drain on your margins so you may want to consider whether this is the sort of customer that you want to deal with. Keep a very close watch on the cost of credit and if possible establish what the margins are for the products or service that they buy. As a Credit Manager it is also your responsibility to ensure that all customers are profitable and providing this information, good or bad, to sales and marketing.

These are just a few of the things to consider when developing strategies for difficult customers. As mentioned above one client provided a suite of ‘Credit Products’ to assist their customers, others provided their customers with joint deposit accounts, providing short term finance, invoice financing as well as providing extended credit through financial institutions whilst your organization gets paid to terms.

Flexibility is the key, the provision of credit as we enter an unknown period will become more important, those credit teams that bend and flex with customers to provide innovative solutions will once again be the ones who provide the greatest benefit to their organization.

We said in 2008 at the time of the Credit Crunch ‘Now is the time for Credit Managers to show their true value’ and the same is true today as we enter another period of uncertainty.

First Published:

• March 2019 Issue of ‘Credit Management’ the monthly journal of the Chartered Institute of Credit Management.

Sources and Acknowledgements

• The Chartered Institute of Credit Management’s Best Practice Network
• Clients of CICM and Kinetic Consulting.