Debts can pile up in any organization, but when your business is providing payroll services the red ink can pool and drown the bottom line. That's what happened to Paychex Inc., a leading national provider of payroll, human resource and employee benefits outsourcing solutions, in fiscal 2002. To stanch the flow, the company grabbed hold of Enterprise Risk Management (ERM).

Credit risk confronting payroll providers is somewhat unique when compared to other industries. Paychex utilizes the automated clearing house (ACH) network, a secure payment transfer system used to connect all U.S. financial systems, to electronically collect client funds prior to remitting these assets to third party entities like tax agencies, client employees or insurance carriers. Between the time funds are remitted to third parties and the subsequent notification of a returned item, significant credit exposures are realized. Soft credit exposures of $500 billion in unsecured funds collected by Paychex each year through the ACH network are not uncommon. The company, in fact, can experience millions of dollars in short term, soft credit exposure for just a single payroll.

In 2002, the cost of credit risk hit the bottom line, with bad debt rising to $10.4 million, up 142 percent from the previous year. To curb the flow, ERM was introduced the following year. All facets of the business were charged with embracing a risk discipline, beginning with the identification of financial exposures, their assessment, quantification and ultimate mitigation. With credit risk, the initial focus was rooting out fraud, which in 2007 had caused 22 percent of incurred losses. "We took fraud on first, knowing we could impact it to reduce loss," says Jody Allison, Paychex receivables and collections manager. "We created a systemic process to weed out fraudulent transactions on the front end, as opposed to chasing them after the fact."