Nichievo Project Background

Nichievo Inc. insures receivables by assessing qualifying credit transactions and, for a fee, guaranteeing some level of payment. This may seem like an odd business, but they provide a valuable service to companies whose client base is neither so diversified that a few customer defaults have little impact nor so concentrated that a single default or contract loss can wipe them out.

Consider, for example, a regional hospital operator facing a credit decision on a year long course of treatment expected to produce billings of around $325,000. Suppose, further, that the patient is fully covered by one of the three insurers who together make up about 90% of the hospital's billings.

If the insurer stops paying after the treatment starts, not only will a significant portion of the hospital's current receivables go into default, but the hospital will be forced to throw good money after bad by continuing to incur costs on the insured's behalf.

There usually are backstops in place to cover this contingency, including personal liability on the insured's part as well as both industry co-operative and government support, but all of these become captive to the legal system as soon as the first court document is filed and thus have all the strength and flexibility of icicles.

As a failsafe the hospital can ask Nichievo to insure the receivable. For a fee, Nichievo will guarantee on time payment of some proportion, up to 100%, of a receivable like this. The fees depend on Nichievo's beliefs about the extent of the risk, the duration of the risk, and the time distribution of the cash flows involved. In this case, for example, about half the $325,000 will come due within 45 days and is thus low risk but the last payment is more than a year away and correspondingly less certain.

In practice Nichievo seldom insures a single receivable like this but would, instead, offer the hospital a service package that insures all nominated receivables from an agreed list of payors but would have special provisions for pre-acceptance review of larger, or longer term, risks like this one.

Notice that Nichievo does not buy the receivable nor get directly involved in any collection activity; except, of course, to claim any recovered funds at the end of the process. Its contract with the client binds the client to "best efforts" collections - meaning by any legal means - and allows for Nichievo's staff lawyers and financial analysts to audit and advise the client's lawyers on the file. As a result the overwhelming majority of payouts are loans rather than losses - usually at reasonable interest rates and often with significant additional billables arising from staff work.

Nichievo maintains a highly diversified coverage portfolio, is itself re-insured, and posts trust funds equal to the sum of guarantees for 30 days in advance.

As a result the hospital gets near certainty both of collection, and -more importantly- of the timing of collection, without a significant loss of control over the billings and collections processes.

From Nichievo's perspective, the critical business piece is risk assessment and the consequent setting of both the fee charged, and the percentage coverage.

Nichievo is a partnership. Professional staff are encouraged to buy equity in the firm but become first junior, then senior, partners only "through personal contributions to the welfare of the firm" - a phrasing which usually means "sales." Head office, in Boston, has a staff of financial analysts whose job it is to rate major risks but most decision making authority on risk acceptance is devolved to the managing partners in the firm's operating offices. These people, in turn, usually delegate authority to junior partners for risks below some potential loss threshold such as half a million dollars.

At present the firm has around 140 junior partners; just under 1100 professional employees (more than 80% of whom own some equity in the firm); and, 34 operating offices around the country. On a typical business day in mid 2002 the firm had around nine billion in outstanding guarantees with about 80% running less than 90 days and more than 95% running less than a year. Average annualized equivalent rates are currently just over 3.2 percent and the company clears and writes an average of 3.8 billion in monthly business for around 3,000 customers.

Nichievo first made use of computers in 1974 when they rented time on an IBM 370 to record and summarize their risk portfolio. That was moved in-house using a custom developed package written for a MD Microdata in 1978 which ran well but was end-of-lifed by its vendor. In 1991 Nichievo transitioned to a custom package on a leased IBM AS/400 and, four years later, ported its software to Windows NT on Dec Alphas.

In March of 2000 they hired a very large international consulting and outsourcing firm which contracted to develop and implement an integrated operational management system including neural network based decision support in the Windows 2000 environment. Although that project had a ten month run-time it has yet, as of July, 2002, to produce a working system.

It is unhappiness with this project's cost and lack of progress that has prompted two of the firm's senior managers to bring us in. Our job is to establish their credibility as systems decision makers by delivering a small but vitally important piece of the overall systems support package as quickly and cost effectively as possible.

A key component in their overall IT strategy calls for reducing customer barriers, time taken, number of steps, and control risks associated with acceptance order processing. Our project will address part of that.

At present the order processing workflow is:

  1. A selling partner or professional gets information about a sales opportunity;

  2. The potential new business order is written up and key information about it is entered into the database system.

    Two reports are then generated:

    • The impact report cross-checks the players to calculate the effect the new order will have on Nichievo's total exposure to each company, industry, or individual involved; and,

    • The analyst data package consists of information about the players, applicable statistical and financial information, and pointers to applicable head office files and analysts.

  3. A local risk analyst then reviews the information, rates the risk level, and makes formal rate and go/no go recommendations for approval by a partner;

  4. The selling partner or professional notifies the client and asks for a decision;

  5. The customer decision is recorded and, if positive, a formal acceptance order is generated;

    Acceptance orders are currently written up as Microsoft Word documents, printed for signature, and faxed using traditional stand-alone fax machines.

  6. Once signed off by both the client and the partner responsible for the account, paper copies are faxed, couriered, or hand-delivered to the client;

  7. On blanket coverage agreements, the initial amounts, payors and due dates change continually. In these situations (which constitute a majority of the revenue base):

    • The client notifies Nichievo, often by fax, of each new risk it wants covered;

    • The selling partner authorizes acceptance -often by countersigning the client's fax and faxing it back; and,

    • The database is manually updated to include the new information.

In the next generation workflow as they now envisage it:

  1. A customer, or local office staffer, will use on-line tools to provide key information about a receivable to be insured;

  2. The automated system will determine if the request falls into a pre-approved category:

    • If so, it will update the file, directly issue the acceptance, and add the notification to the daily report for the partner responsible for the account;

    • If not, it will notify the local office responsible for the account (decided geographically if this is a potential new account), and update or create the customer file.

  3. Acceptance (or refusal) documentation is prepared in the local office and signed off by the partner, or partners (large risks require the approval of both a local partner and a head office risk manager), responsible; and,

  4. Appropriate documentation is delivered to the client by the local office and stored on a secure web server where it becomes accessible to the client and the firm's operating partners.

Our piece of this will involve setting up an order documents repository such that customers can use it to:

  1. Issue coverage update or change requests; and,

  2. Obtain digitally signed acceptance orders in lieu of faxed, couriered or hand delivered paper copies.

All desktops and servers run some Microsoft Windows brand operating system. About half of Nichievo's 34 offices have successfully installed Windows 2000 domain management services and thus upgraded all desktops to Windows 2000 with some XP implementations on newer desktops and laptops. The remaining offices are still using NT 4.0 at the server level and have a mix of NT 4.0 workstation, Windows 2000 professional, and XP professional on desktops and laptops.

The company standard is still officially Compaq but its acquisition by HP has caused some movement toward other suppliers, most notably Dell.

It is not known how many licenses, desktops, servers, laptops, palm tops, printers, or bits of networking gear the company has in actual use. Although they've been expensing purchase and licensing costs under section 179, they've been treating this stuff as three year depreciable assets internally and so know how many they've paid for, but not how many they have or use.


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