As a credit risk management professional, I’m often requested by clients to share my thoughts on various credit risk management issues. One topic that recently came up was whether the company should centralize each global credit operation into one very large hub in the U.S. that will manage all the credit making decisions and related collection activities.

The client is a multinational corporation with sales offices in 15 states and in 30 countries on every continent. Almost every overseas office has its own credit person or team with its own activities and standards, which can be quite diverse from how the credit function is performed in the U.S.

In thinking about their current credit risk management system, we first discussed the advantages of keeping the present decentralized system in place that included:

  • Deeper understanding of the local culture and ways of doing business
  • Clearer communication, especially with customers in non-English speaking countries
  • Faster response times to customer complaints and disputes that are impeding payment
  • Smoother implementation of regional business goals
  • Effective support to local sales representatives
  • Greater familiarity with local laws and regulations

We then discussed the advantages for centralizing the credit function which included:

  • Standardization of policies and procedures
  • Reducing operating costs and economies of scale
  • Consistency for making credit decisions across all business lines
  • Preventing overseas offices from making decisions that do not adhere to company compliance standards
  • Having more control over the monitoring and resolution of past due accounts
  • Having more timely and direct communication between staff and  management
  • Implementing updates to policies and procedures more timely
  • Reducing the number of lockboxes and other payment routes
  • Maintaining consistent customer service
  • Minimizing costs of travel for training and meetings

As our discussions progressed, we realized that some of the items/attributes in the centralized advantage list were more of a priority than others. For example, in their office in Thailand, having someone who is a native Thai speaker and can communicate with sales and customers timely is absolutely imperative. Even if you had a native Thai speaker at the headquarter office, due to the time difference between the U.S. and Thailand, the response time would take at least a day. In particular, we felt that for some of the more sensitive accounts, if a customer called back and the Thai credit/collection manager was operating from the U.S., there would be a missed opportunity to respond timely.

Furthermore, whether to leave the overseas credit team decentralized or rope it more into the centralized hub depended upon; their credit risk management ability, the complexity of the product being sold at that location, and the local credit information available.

If for example, the professional in charge of credit was not as experienced about proper credit risk management standards, then it might be more prudent to take over and centralize this function at the main headquarter office until further training could be provided. Along the same lines, if local credit information was neither available nor reliable, then using a centralized credit information gathering platform from the U.S. may be more effective.

Eventually, it became clearer that rather than thinking in terms of a binary decision to centralize or decentralize, it was more important to consider each credit risk management function at each location separately, since each one may have unique advantages or disadvantages. This conclusion led us to feel that in the end a hybrid of centralization and decentralization is probably what was going to work best for each overseas credit location respectively. 

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This article has been edited by Steven Gan.

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